The time-honored discounted cash flow method for determining appropriate utility returns falls short when interest rates are low. Inadequate ROEs ultimately increase cost of capital and wipe away...
Interest Rates and Fiscal Armageddon
How to prepare for killer capital costs on future power-plant builds.
agree with the strategy of selling equity.
“That is a hard thing to ask utility executives to do, for two reasons. One, it is a very dilutive deal from an earnings standpoint. Even with very high valuations, you are still above after-tax cost of debt. Immediately you are asking everyone to do a dilutive deal. If you are a public company, it just wouldn’t be feasible,” Baliff says.
Furthermore, the strategy is an expensive way to raise capital in today’s market. “Many companies are creating a tremendous amount of cash from now until 2008. So, the operating cash that they create provides a lot of the equity that could go into these plants,” he says.
Baliff believes there are many lower-cost options than selling equity to raise capital, such as convertible bonds, convertible equity, or convertible preferred. “Even though the underlying interest rate is going up and stocks have come off, there is still a lot of cash waiting to be invested by pension funds, insurance companies, and hedge funds,” he says.
Utility executives: Take note. It sounds like this banker just might be offering his umbrella.