When a capital-intensive industry enters an asset-building cycle, many companies will operate in the red for a few years or more. That’s not necessarily a bad thing, as cap-ex investments...
Five Years Later
Wall Street is back in business. What’s next for utility finance?
When the storied investment bank Lehman Brothers declared bankruptcy on Sept. 15, 2008, it marked the official beginning of the worst financial crisis in recent history.
The fact is, however, that by the time Lehman went bankrupt, a crisis already had been brewing for at least 18 months. The subprime lending meltdown began in early 2007, when median home sales prices in the United States began sharply declining from their January peak. By the end of 2007, the subprime mortgage crisis was looking like a debt crisis generally, and we were already talking about a recession and its possible effect on utilities.
Specifically, in our October 2007 financial report, we wrote: “the industry’s financial health arguably has nowhere to go but downward in the months and years to come.
“Utility companies are bringing monumental capital expenditure plans before rate regulators just as they’re dealing with a barrage of rising costs – for fuel and other commodities, as well as labor, pension-fund obligations, and interest payments. Additionally, with the threat of greenhouse-gas (GHG) regulation looming in the 2009 to 2013 time frame, utilities face unpredictable environmental-compliance costs.
“Many utility companies and their investors expect regulators will support utilities’ capital requirements with progressive rate structures, including accelerated rate-recovery for cap-ex spending. But as costs escalate, utilities’ rate demands seem certain to test the limits of regulators’ support.” ( See “ 2007 Finance Roundtable: Pricing Regulatory Risk ,” October 2007. )
Those predictions – a full year before the official start of the financial crisis – were mostly accurate. But as it turns out, we missed some things. For one thing, we didn’t predict that the debt markets would actually freeze up in the depths of the crisis. We didn’t imagine the financial meltdown would pull down Lehman Brothers, and drag some other banks so close to the brink that Congress would step in with the $700 billion Wall Street bailout. And we didn’t know that the ensuing economic decline would get its very own proper noun: the Great Recession.
Moreover, we didn’t know that natural gas prices would plunge and stay down in the low single digits per million Btu, driven by a slow economy and a boom in shale development. We did guess that interest rates would decline, but we didn’t understand just how far the Federal Reserve would go to pump money into the economy. As Treasury rates flirted with the number zero, utilities began refinancing their bonds to free up cash flow. Then, Congress passed an economic stimulus bill that provided bonus depreciation for capital investments, which in many cases allowed utilities to invest without raising much debt or equity capital.
These factors brought remarkable results in the electric and gas industry. Utilities plowed money into infrastructure all through the Great Recession ( see Figure 1 ) – a trend that we actually did predict in October 2008, as we saw investment costs declining and