EnergyBiz - January/February 2008 - (Page 36) EnErgyBiz What will be the impact of a cap-and-trade system, or a tax on greenhouse gas emissions? rOgErs We’re planning to invest in 1,500 megawatts of coal in Nevada. Potential legislation with respect to greenhouse gases could impact the economics of that. But coal may still be economic if gas prices are going to go even higher and be more volatile. pirO About 25 percent of our portfolio is coal so we are concerned about where this goes and how the allowances get allocated. prOTsch Cap and trade is probably the way it will go and that’s what we’re planning for. The challenge is going to be engaging our customers in the debate and the political process. At the end of the day it’s all about our international competitiveness balanced against the environmental implications of having a cap-and-trade program. Joseph Rigby Financial strains ahead CFos Get Ready By Mary ann stewart Given the unprecedented challenges facing utilities in massive building of new generation, new transmission and preparing to deal with new regulatory programs for global warming, utility chief financial officers must prepare their organizations for the inevitable financial strains ahead. Do they intend to issue more stock, add to debt, or alter the debt-equity ratios at their companies? Recent EnergyBiz conversations with CFOs reveal a diverse array of approaches to meeting the financial challenges of the upcoming growth cycle. “It feels like the late 1970s to early 1980s all over again.” These reflective words come from Alliant CFO Eliot Protsch. He believes Alliant is in much better shape going into buildout than it was in the previous generation build cycle. “We have a strong balance sheet. We recently spun off American Transmission Company and now own 18 percent of this company, which is solely focused on transmission. Our activity was motivated by a desire to free up capital, which will be needed as we spend several billion dollars in the next few years on power plants, wind farms and regulatory compliance.” Alliant’s build cycle will benefit from legislation passed in Iowa and Wisconsin regarding return on capital with the depreciation schedule determined up-front during the licensing of a plant. Protsch notes Alliant will be tripling its capitalization with the upcoming spending. A sense of generation deja vu is echoed by Great Plains Energy CFO Terry Bassham. “From an industry perspective, it is looking like times in the 1980s,” he said. “The country is growing in electric usage – just look at all the consumers with plasma screens. The focus on utility expenses will pick up with requests for rate increases. Meanwhile, accessing the debt and equity markets and getting the public to understand how it works is a major effort.” Fortunately, Great Plains has been recognized for its success in communication with the public. Its activities included discussion with the community, legislators, regulators and shareholders on the topics of baseload generation plants, emission controls and renewables. One product of the discussion was an agreement to add emission controls before they were required, which contributed a large piece to Kansas City’s attainment plan. Another result was approval for building a new coal plant as well as several new wind plants. Thomas Webb, CFO of Consumers Energy, has been focusing on sustaining his company’s credit rating. He notes, “We had to rebuild our balance sheets over the past five years and now have our credit ratings where they should be. This was done by redeploying assets and moving to our core assets. Our strategies include reducing O&M and taking out pass-through costs.” Building new generation will be challenging for Consumers, as demand for power is growing even though the economy in its area is soft. A further stress comes from having small plants that are too expensive to update for new regulations. Duke Energy CFO David Hauser believes most utilities will experience big increases in generation spending, regardless of whether they build their own new plants, and thus all will have the same concerns regarding price increases. Hauser welcomes this growth with confidence. “Duke has one of the strongest balance sheets in the industry. This is no accident and we are committed to maintaining this status. We have no plans to issue new equity for 2008 or 2009. Nor do we have plans to buy back equity. We will need to issue debt and will be able to maintain our credit rating when we do this. We expect a 4 to 6 percent growth rate with an earnings rate expected to increase comparably.” It’s fun to work in the capital markets. Budgets are always not fun. Fanning Cap and trade appears to be the predominant choice. We need safety valves in place in order to moderate the negative consequence to the economy. We’ve got to make sure that countries like China, India and others come along with us. What is the most challenging part of a CFO’s job? The challenges and the excitement of the job are one and the same. That is to be able to forecast the uncertainties around the future and the needs of the company and to find ways to manage so you can get to the end objective over the next five to ten years. pirO The hardest thing is dealing with all the new issues, new compliance requirements, all the regulations. It’s fun to work in the capital markets. Budgets are always not fun. But it’s part of the job. prOTsch The greatest challenge is building in as many options as William Rogers is possible into our business as we execute our strategic plan over the next seven years. What I personally enjoy the most is the development of our younger people. rigBy While I was a CFO, the greatest challenge was being involved in everything. Fanning My highest job responsibility is maximizing stock value by creating the optimal balance between risk and return in the company. EnErgyBiz rOgErs 36 E n E rgyB i z January/February 2008
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