Finance

It seems history does repeat itself all too often. In the late1990s, a common complaint by utility CEOs was that utility price-to-earnings (P/E) multiples did not take into account whether a com- pany was a pure-play regulated utility, a diversified utility with a merchant subsidiary, or something else. Many say investors at the time just didn’t understand the different business models that were emerging after electric restructuring.

The total hedge-fund universe currently approaches $1.1 trillion, about 5 percent of which is dedicated exclusively to energy. These numbers for energy hedge funds are likely to grow at unprecedented rates. How can your company benefit?

“Mysterium tremendum et fascinans”: The Latin phrase, coined by German theologian Rudolf Otto, which characterizes humans as being overwhelmed and fascinated by experiences that are totally different from ordinary life.¹

“Hedge funds … are unregistered private investment partnerships, funds, or pools that may invest and trade in many different markets, strategies, and instruments (including securities, non-securities, and derivatives) and are NOT subject to the same regulatory requirements as mutual funds, including mutual fund requirements to provide certain periodic and standardized pricing and valuation information to investors. There are substantial risks in investing in Hedge Funds.”¹

Utility executives face volatile energy markets, skyrocketing fuel prices, and changing federal energy policies. How are utilities benefiting from the turnaround in energy trading?

The news is full of stories about Calpine and the difficulty merchant generation players face from the uncertainty and volatility of power markets. Now is a good time to review key measures of performance and profitability under uncertain conditions.

The utility sector still has excellent access to the capital and credit markets. Yet, it is never safe to assume utilities will continue to enjoy the same low costs of capital. This is particularly true for companies facing compressed margins, regulatory deferrals or disallowances, and rising debt leverage.

TSR is a paradox among financial metrics—dominant in assessments of past performance yet peripheral in plans for future performance. This paradox can be resolved.

Capacity and energy, although related, are not identical products. If we are to continue to rely on competitive market forces to provide new generation supplies, we need separate, long-term, installed capacity markets.

Trading is dead. At least that’s what some analysts are saying about the electricity markets. “Trading died with Enron on Dec. 2, 2001,” says Mark Williams, an energy risk management expert at Boston University. Whether trading is really dead or not, some signs of a rebirth are beginning to emerge.