decision-making in a time of uncertainty: is there ever a

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Decision-Making In A Time Of Uncertainty:

Is There Ever A „Right‟ Answer?

Richard W. Cortright, Jr.

Managing Director

Utilities & Infrastructure Group

August 6, 2012

National Conference of State Legislatures

Energy Summit

Chicago, IL

2.


Basic Truths About Electricity

“You Know What I Want More Than Cheap Electricity? I

Want Electricity.” – Paul Patton, Former Governor Of

Kentucky

“Juice From The Grid Now Penetrates Every Corner Of Our

Lives, And We Pay No More Attention To It Than We Do To

The Oxygen In The Air.” – National Geographic

“In Our Business We Build Plants For 40 To 60 Years, So

We Have To See (Deep) Into The Future.”

-- Jim Rogers, CEO Of Duke Energy

3.


How Go The Prognostications?

Source: U.S. Energy

Information Administration

4.


How Go The Prognostications?

Source: U.S. Energy

Information Administration

5.


-

2

4

6

8

10

12

14

Jan

-08

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eb-0

8

Mar

-08

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Jun

-08

Ju

l-0

8

Au

g-0

8

Sep

-08

O

ct-0

8

No

v-0

8

Dec

-08

Ja

n-0

9

Feb

-09

M

ar-0

9

Ap

r-0

9

May

-09

Ju

n-0

9

Jul-

09

A

ug

-09

S

ep-0

9

Oct

-09

N

ov-

09

D

ec-0

9

Jan

-10

F

eb-1

0

Mar

-10

A

pr-

10

May

-10

Ju

n-1

0

Jul-

10

Au

g-1

0

Sep

-10

O

ct-1

0

No

v-10

D

ec-1

0

Jan

-11

Feb

-11

Mar

-11

Ap

r-11

M

ay-1

1 Ju

n-1

1 Ju

l-11

A

ug

-11

Sep

-11

Oct

-11

No

v-11

D

ec-1

1

$/m

illio

n B

TU

Henry Hub Spot Price

2

3

4

5

6

7

8

9

$/m

illio

n B

TU

Dec-08 Dec-09 Dec-10 Dec-11

Henry Hub Futures Price

Source: EEI

The Fly In The Ointment

6.


Snapshot Of Today‟s Significant Utility Challenges

• Aging utility infrastructure

• Federal/state environmental/renewable requirements

• New technology deployment

– Smart grid, alternative generation

• Flat to marginal growth in power sales

7.


Aging Infrastructure

• Substantial Infrastructure Spending Requirements…

– $1.8 trillion over 20 years for electric* --- 2.4 times net book value of

current asset base

– $335 billion over 20 years for water; $1 trillion, including waste water**

… As Utility Physical Plant Ages:

– About 45% of total electricity generating capacity is greater than

30 years old; about 20% is greater than 40 years old

– About two-thirds of coal capacity is at least 30 years old; about

one-third is greater than 40 years old

– About 70% of transmission lines are at least 25 years old

*Brattle Group estimates

**EPA estimates

8.


EEI‟s Capital Expenditure Forecast

43.0 41.1

48.4

59.9

74.1

83.0 77.8

74.2 79.3

94.7

83.6 80.0

30

40

50

60

70

80

90

100

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012p 2013p 2014p

($ Billions) U.S. Shareholder-Owned Electric Utilities

Source: Edison Electric Institute Finance Department, company reports, SNL Financial (June 2012)

9.


An Environmental Compliance Juggernaut

• Environmental Mandates

– EPA Regulations

Cross-State Air Pollution Rule (currently under legal challenge)

MACT

Cooling Water Intake (316(b))

Ash Disposal

Greenhouse Gas Restrictions

• Industry Response

– Retrofit, repower, or retire virtually entire coal fleet (~53GW announced

through 2022, ~34MW of which will be retired)

10.


The Bull In The China Shop

0.0

5.0

10.0

15.0

20.0

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Barnett Deep Bossier

Fayetteville Haynesville

Woodford Antrim

Marcellus

Source: Tristone Capital, Devon Energy

Shale Gas Production

11.


Monthly Gas- And Coal-Fired Generation

Equal For The First Time (April 2012; 32%)*

*Preliminary; Source: U.S. Energy Information Administration

12.


EIA‟s Coal Plant Retirement Scenarios

Energy Information Agency,

July 31, 2012

13.


The „Shale Gale‟

• 93 gigawatts of gas-fired capacity additions over next ten years*

– YTD 2012 electric sector consumption of gas increased 21% over 2011

– 24,000 miles of pipeline will be necessary to transport the fuel to new

gas plants

– Adjustments may be necessary to traditional scheduling protocol: firm

versus interruptible transportation contracts

• Incremental coal capacity is in doubt

• Renewable alternatives are substantially disadvantaged

*North American Electric Reliability Corp. estimate

14.


Smart Grid

• Enables two-way flow of electricity and information, automates

controls for a widely distributed energy delivery network

– Implications

An industry that is no longer primarily dependent on central station power and

one-way power flow

An industry that is increasingly dependent on distributed and central station

renewables/storage

Increased usage of demand response

15.


Electric Utilities Ratings --- Emphatically High Grade, But…

0

5

10

15

20

25

30

35

40

45

50

AA- A+ A A- BBB+ BBB BBB- BB+

16.


Credit Quality Has Eroded Considerably In 40 Years

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1970 1980 1990 2000 2010

% O

wn

ers

hip

AAA AA+, AA, AA- A+, A, A- BBB+, BBB BBB- BB+, BB, BB-, B+, B, B-, CCC+

17.


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