Energy and Utility Holding Company Decides Where to Place its Bets

Situation Analysis:

In the early 2000s, a U.S.-based energy and utility holding company was facing a push from investors to explore its growth strategy despite overall strong performance. As a result, the CEO was looking for guidance on how to best restructure its business portfolio in order to capture growth opportunities and allocate the company’s limited resources. The three primary businesses units—Unregulated Generation, Regulated Transmission and Distribution, and Trading & Marketing—each had a different point of view about where the company should place its bets for growth. Further, the company faced a number of external uncertainties, including the economy’s growth and potential energy-related regulations.

Discovery & Solutions

Working with a team from each business unit, Strategic Decisions Group facilitated the portfolio strategy process. SDG conducted multiple layers of portfolio analysis for each of the three distinct business units—as well as the overall organization—to determine the unique risk profile of each. For instance, the Generation business analyzed the decision to invest in nuclear energy, renewable energy, or continue with its legacy business, fossil assets. The strategy recommendation from each business unit lead was accounted for, as well.

Then, all of the business units’ positions were quantified on a common basis, combined with scenario assumptions about the future of the business overall (i.e. economic growth, regulations, and market prices). These factors were quantified and structured, and then developed into a valuation model which reflected key uncertainties and decision strategies of each business unit, along with the overall company. This allowed SDG to analyze the various options individually and understand what combination was realistic for the business as a whole.

Given the high level of uncertainty in the business, SDG proceeded to create a dynamic option model so the company could quickly shift its chosen strategy, should certain events occur. The model included a number of distinct scenarios based on external factors—i.e. the price of natural gas, environmental regulations—along with one base level scenario, which was to be used for the current environment and “business as usual.”

Results & Impact:

The dynamic option model allowed for a quick response to market changes, which positioned the company well when gas prices dropped dramatically in 2009. As one of the chosen scenarios (low commodity prices), the model called for a focus on the company’s regulated business instead of investing in a nuclear plant, a decision that positioned the company well in the coming economic downturn.