FUNDING THE ENTERPRISE
What's Top of Mind for CFOs?
Published In: EnergyBiz Magazine January/February 2012
UTILITIES ARE PREPARING to make an unprecedented mountain of capital expenditures, yet sales have been flat in recent recessionary years. Regulators are increasingly concerned about rising rates. And several huge utility merger deals are nearing completion, changing the industry landscape.
Challenges continue to mount for utilities and energy companies as they execute their mission to provide power to their customers.
EnergyBiz magazine recently sat down with chief financial officers to discuss the pressures they and their organizations face in 2012 and beyond. The conversation, edited for length and style, follows.
ENERGYBIZ Where do you see the economy headed and what kind of potential disturbances do you foresee?
ELDRED We're located in New Mexico and also Texas where there has been steady load growth and customer growth. Our issue is on the regulatory front and how we're challenged with a poor regulatory environment in New Mexico.
SAMIL We're in Nevada, a state that was growing by leaps and bounds, 5 percent or 6 percent per year in customer additions. That was nice for revenue growth. But keeping up with that from a capital perspective was challenging. We're having a chance to catch our breath and look at the business and evaluate how we're doing business.
BREADY We're principally in Michigan and parts of Iowa and Minnesota, Kansas and Oklahoma. In Michigan, the auto sector rebound is helping, but it's going to be a long, slow recovery. Iowa and southern Minnesota have agricultural economies that tend to lag going into recession, and they tend to lag a bit coming out, but they have generally persevered better.
McGETTRICK Dominion operates in 13 states but our principal customer operations are in Virginia and North Carolina. I'm glad I'm in Virginia. We never had negative growth in this recessionary period. We will grow 1.5 percent to 2 percent this year in energy demand, driven mainly by small commercial growth. It's not a thriving economy, but it's a growing economy.
SHAY Great Plains Energy is headquartered in Kansas City with service territories in western Missouri and eastern Kansas. We have seen a decline in weather-normalized demand this year. However, in our most recent quarter, we actually did see some growth led by the commercial sector, but it is too early to call that a trend. We're being conservative as we plan the business for 2012, expecting modest load growth. The big wild card I think for everyone is whether we get a surprise coming out of Europe with the banking system that could derail things.
POPE Portland General Electric serves an economy going through a transition. We're probably about 5 percent to 6 percent off of our peak loads of a few years ago. Certain sectors, particularly high technology, are doing very well and others continue to struggle.
BIRD Northwestern Energy is located in Montana, South Dakota and Nebraska. We see a 1 percent to 2 percent growth rate typically.
ENERGYBIZ Your best economic predictions for 2012?
ELDRED It will be an improved economy.
SAMIL If you are asking if a recession is likely, I would say no.
McGETTRICK I think it's going to be flat.
ENERGYBIZ How much of a strain has flattened load growth put on your financial health?
BIRD It hasn't really impacted our business much. We have quite a bit of investment we need to do to maintain reliability and that investment continues.
POPE We have been extra conscious of how our prices affect our customers' businesses and have done everything we can to keep prices as low as possible. We've made investments to lower our production as well as operations and maintenance costs, and that's having a positive effect.
ENERGYBIZ Some estimate that as much as $1.5 trillion of investment will be made by this industry by 2030. How are your companies preparing for outlays ahead?
McGETTRICK We will spend $13.5 billion over the next six years just on growth capital. We also spend about $2 billion a year on maintenance capital expenditures, or a total of $20 billion to $25 billion in a five- or six-year period. We have a significant generation deficit in Virginia and will need to add significant generating capacity over the next decade. We're in the gas business in the Marcellus and Utica shale region, which is giving us significant growth opportunities in Ohio, West Virginia and Pennsylvania. We've also been a very large beneficiary of bonus depreciation that has allowed us to stay out of the equity markets. The very large generation and construction projects we have over the next two years qualify for this benefit, which limits our tax to the federal government. That allows us to defray financing costs. We are often in the debt markets, but they've been very favorable to us. We have no trouble financing our capital needs over the next decade or so.
BREADY We are about a $2.8 billion rate-based transmission- only utility. Over the next five years we're investing about $3.9 billion of new capital into our business. So by 2015 we'll essentially double our size as a transmission only utility.
ENERGYBIZ The slow economy has given NV Energy a breather.
SAMIL We started the decade short of capacity. We embarked on a strategy of becoming more self-sufficient, and that meant building and buying generation. We easily doubled the rate base of the company starting in 2005. After 2012, we are thankfully looking at a much more manageable, modest capital expansion program. Our challenge now is to harvest what we've sown.
ENERGYBIZ Great Plains Energy just finished a major coal generation unit.
SHAY Yes, and we have a $1 billion environmental capital investment plan and that compares to our $5.6 billion rate base. We have a great deal of sensitivity toward managing the customer bill and being efficient in our organization, which is critical as these investments are not really tied to growth. Our capital expenditures in the next few years will be significant, but manageable.
POPE We have seen quite a bit of investment growth over the last few years. A lot of it has been driven by renewable energy standards. We will need to add renewables and transmission. We'll continue spending on environmental retrofits, particularly around mercury, particulates and other issues.
BIRD On the distribution front, we're trying to address aging infrastructure. On the generation front, we are focused on what we need to do to deal with the U.S. Environmental Protection Agency regulations. We are looking at opportunities to grow from a transmission perspective.
ELDRED We have a core investment in infrastructure of more than $1 billion over the next five years. The EPA is attacking one of our coal plants, which may require an additional $400 million of investment. We also have mandated renewable portfolio standards in New Mexico. Ensuring certainty of regulatory recovery will be crucial, but we also need to work hard at reducing costs to lessen the rate impact to customers.
ENERGYBIZ Proposed emissions rules are changing. What kinds of problems does that create on the financial side?
McGETTRICK It's a challenging environment. The good news is that we finally are getting some clarity from the EPA. Dominion is well positioned. We started well over a decade ago to install emissions controls on our units. We're shutting down a number of facilities because we're not going to invest the capital. We're going to replace them with gas facilities. I'll be happy when the final EPA rules are out on mercury and other emissions in the next few months so we can get some policy stability.
ENERGYBIZ State regulators are particularly concerned about energy costs in a poor economy.
ELDRED You have regulators who regulate on ideology. They don't regulate on being accountable for what it takes to finance the business and what it takes for shareholders to get a fair return. There are huge gaps between federal policy and state regulators who don't show utilities how we recover our investments. According to Standard and Poor's, New Mexico regulation is the lowest rated of anywhere in the country.
SHAY Consistency is important. Regarding the need for rate cases in the future, our role is to strike a balance. We want to maintain a high level of system reliability but also manage the impact on customers' rates. As a whole, we expect utilities in general to increase the frequency of rate case filings.
ENERGYBIZ What will be the impact of smart grid and smart meters on your operations and rates?
McGETTRICK Our regulators have been extraordinarily cautious on smart meters, and they want to be absolutely sure that the benefits will be realized before you invest - in our case, $600 million to replace meters. Regulators are not against it, but until they really see concrete results, they're not going to allow us to move ahead. In Virginia, it's going to be a slow march.
SHAY I agree. We'll probably be taking a slower, more cautious approach.
POPE We've completed our investment in smart meters. We've invested over $145 million actually in the same meter technology that NV Energy and others are using. We have achieved about $20 million annually in savings. It's really improved our entire operation.
BREADY There's a fundamental lack of appreciation for how "smart" the transmission grid is today. We haven't done the best job communicating that.
ELDRED With the smart meters, there's a big difference between New Mexico and Texas. Texas has incentives and encourages utilities to install smart meters. They want to go to smart meters. New Mexico has no policy.
ENERGYBIZ What will be the impact of the Dodd- Frank Act on your operations and risk management?
POPE As for Dodd-Frank, it's just one more set of regulations that we're dealing with. We are very concerned about what it will mean for the liquidity of the market. In terms of overall risk management, we are looking at how we manage the entire power supply operations area and doing extensive benchmarking with other utilities. We also have a fairly robust enterprise risk management program. Through enterprise risk management, we're looking at risk in an entirely new integrated way.
BIRD We also have a very active risk management program. We use an automated system. Every manager within the company rates and ranks the risks of their business. Those risks go up ultimately to their vice president and their VP looks at and ranks them. We have action plans for how we address or try to mitigate those risks as best we can.
ENERGYBIZ What tops the list?
BIRD Regulation. We spend a lot of time educating commissioners about our plans and they appreciate that.
ENERGYBIZ How important have the low interest rates of recent years been to your company?
BREADY We are investing significant amounts of capital in our operating companies to improve reliability, so it's been tremendously helpful.
SAMIL Certainly the low-interest environment has been very helpful in refinancing our existing debt. But the flip side of that is return on equity. We are in the middle of a rate case right now. The challenge has been to convince folks that equity risk premiums have gone up.
BIRD Lower interest rates have certainly hurt pensions. We're all looking at that issue.
ENERGYBIZ ROUNDTABLE 2011
Great Plains Energy