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Interesting Times

Utilities stay the course in a volatile market.

Fortnightly Magazine - October 2011
“Some coal plants that are available for purchase ultimately might be worth more than people have considered.” – George Bilicic, Lazard

the equity side. There have been hardly any equity offers, except for deal-related capital. Because of bonus depreciation, companies have been able to defer issuing capital.

Hempstead, Moody’s: Utilities’ financial metrics have been surprisingly steady over the last couple of years despite recessionary pressures. The capital markets remain open and welcoming, and utilities have been very successful in accessing the capital they need for low prices and attractive maturities. The focus now is on capital expenditures. Some companies are planning very high cap-ex over the next couple of years. We saw during the recession how utilities can ramp down cap-ex somewhat in a scenario where they can’t make spending commitments, and that’s a good tool. In the face of rising rates and a slow economic recovery, we see a more contentious regulatory environment building, and that could lead to political intervention in some situations.


“If regulators want to facilitate development of new, cleaner energy projects, there are ways of getting it done.” – Larry Eisenstat, Dickstein Shapiro

Fortnightly: New air quality rules are expected to drive investments in scrubbers and coal plant shutdowns. How do you see that driving cap-ex investments and generating resource plans?

Haggerty, Moody’s: The Clean Air Act ‘Transport’ [renamed ‘Cross-State’] rules have been manageable and utilities should be prepared for them. But the EPA has the MACT [maximum achievable control technology] rules coming out in November, and they could have a more significant impact on costs, particularly for coal-based utilities. Some utilities have been quite vocal about the impact on rates and jobs if these rules unfold as the EPA currently envisions. But one could argue there were pressures on coal-fired generators already. There was talk a few years ago about putting a price on carbon emissions, and many people thought that would be here by 2012. So the pressure has been around for a while, and utilities that were watching from the sidelines are now becoming more aggressive in their opposition to EPA mandates.

We’re not concerned yet from a ratings standpoint, especially for companies that are operating in a regulatory environment that allows them to pass through costs. But there could be credit implications for companies that have more contentious relationships with regulators. We’ll see how the costs are incurred and passed on.

“Utilities aren’t immune to volatility, but they’ve been among the first to recover.” – Tim Kingston, Goldman Sachs

Kingston, Goldman Sachs: What’s challenging for utilities is the pressure of required large capital expenditures on the one hand and the uncertainty on the other.

Holmstead, Bracewell & Giuliani: This is the interesting irony of the whole situation. If EPA had produced reasonable regulations on a reasonable deadline, there would be much more certainty. Utilities would begin to look seriously at their schedule for closing down some older coal-fired plants. We’ve already seen some of that, with turnover in large part caused by low natural gas prices. But because EPA has been so aggressive, much more attention has been focused on fighting EPA because companies don’t see a reasonable path forward to implement the new rules. When you have public utility commissions and independent system operators saying, ‘Hold on, we need to keep the lights on, and we can’t afford dramatic increases in rates,’ it creates a lot of political pressure. There’s been a big