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...
The Big Build will test the industry’s access to Wall Street.
The U.S. power and gas industries are—in common with the rest of the world—witnessing the most revolutionary period of change since the first utility systems were built. The era of easily available, affordable energy rapidly is ending and our society is realizing that our energy infrastructure is severely inadequate to supply the energy demands of the future. The major issue facing the sector today is how to fund and deliver this new climate-friendly infrastructure, which is currently estimated will cost almost $2 trillion 1 between now and 2030.
To be successful, the energy stakeholders in the United States must collaborate to bring affordable power to everyone. A successful end result will require creative financing structures and techniques; tax incentives; enabling legislation for new nuclear facilities, renewable and environmental requirements; and new grid technologies to lower and shape the system load, improve reliability and deliver more of the power produced.
In recent years, U.S. utilities have deferred major infrastructure investments because many of them were locked into multi-year tariff freezes and were working off so-called excess capacity. Some companies cut back discretionary capital spending, choosing to focus resources instead on reducing debt and restoring their financial strength. However, the years since 2005 have seen a period of accelerated investment in capital expenditures (cap-ex). Influential factors encouraging higher investment in infrastructure spending have included policy concerns about energy reliability and diversity of sources; the introduction of tighter environmental rules; and of course the heavy strain of aging generation, transmission and distribution systems.
This leaves utility CEOs facing major questions that affect the long term, but need answers today:
• Where is the money going to come from for the increased infrastructure—and are utilities’ balance sheets strong enough to finance these massive investments?
• How can management teams be sure they are making the right investment decisions?
• What are the financial implications—especially in terms of impact on revenues?
• How are they to fill the critical people skills gaps facing the industry?
So where will the capital come from to fund this big infrastructure buildout, and what are the barriers to ensuring recovery of costs?
Despite the current U.S. credit crunch, the general consensus is that capital still is (and will continue to be) available. Well-prepared utilities with strong balance sheets shouldn’t face major problems in finding banks to lend them money, or in raising cash through traditional routes like mortgage bonds and equity offerings. However, many companies that are less financially fit will experience a more challenging time raising capital and can expect higher financing costs.