Money may be difficult to come by for Wall Street financiers in these dark days, but apparently not for electric transmission construction—at least so far. A rash of recent orders from FERC shows...
Utilities place billion-dollar bets on infrastructure, but the deck may be stacked against them.
Energy Holdings, owned by Berkshire Hathaway Inc. and other investors, would contribute cash. The companies said up to $1 billion of projects could be included in the new JV over the next several years.
• The Buzz. Many utility CEOs are concerned that they will not be able to raise enough capital to meet their infrastructure-development demands. A partnership with a deep-pocketed investor like Warren Buffett is seen as a shrewd move, but given that Buffett might have been doing some branding recently in keynoting the National Association of Regulatory Utility Commissioners annual conference in November, his company, MidAmerican, may be using the JV to position for a major utility acquisition. Watch out, AEP!
Deal Number 2
• The Players. Duke Energy, Spectra Energy Corp.
• The Project. Duke is to spin off its natural-gas business, which will be named Spectra Energy Corp., by Jan. 1, 2007. When the separation is complete, Spectra will consist of Duke Energy Gas Transmission and Duke’s 50 percent stake in Duke Energy Field Services. The new company will operate in three main sectors of the natural-gas industry: transmission and storage, distribution, and processing.
• The Buzz. Some debate remains in the industry as to whether the “pure-play” model is best. In fact, a debate continues to rage over the ideal business model. Some say Duke’s favorable reaction from Wall Street on its gas spin-off announcement contributed to Dominion’s plan to exit from its exploration and production business. At the EEI Finance conference, Dominion CEO Tom Farrell showed clearly how his company’s E&P business was not being viewed as highly as other E&Ps in the sector. Utility executives have called such a move a “paring down” of the business to be more transparent to investors. But as interest rates rise, the question many utilities executives asked was whether pure electric utility growth is still enough for investors.
Deal Number 3—Not
At the conference, TXU’s John Wilder said he had thought about spinning off his company’s transmission assets at one time (as many infrastructure and pension funds are advocating). However, he admitted that doing so would be impossible because TXU would lose the credit metrics and balance sheet to shoulder the needed power-plant buildout. In fact, Wilder reiterated many times that today’s utilities are simply not large enough by market capitalization requirements to undertake the size of the buildouts they are pursuing.
To paraphrase Wilder, a $6 billion market capitalization company attempting to undertake a $6 billion buildout simply is not ideal, particularly if you compare these with the cost of infrastructure buildouts in other industries.
Out of the Money?
Could the industry’s business model be broken? This provocative idea was discussed and debated at Accenture’s International Utilities and Energy Conference in late October, in Boca Raton, Fla.
The moderator of the “Utility Transformation” panel reminded us of recent failures in the U.S. airline and automobile manufacturing businesses. But panelists such as Phillip G. Harris, president and CEO, PJM Interconnection LLC, believe a company’s survival depends on its understanding of the source of its value, or core competency.