The Next Stranded Asset Crisis Could Hit Utilities
Turkey Looks to Create Azerbaijan-Europe Electricity Corridor Leonard S.
Hyman is an economist and financial analyst specializing in the energy sector.
He headed utility equity research at a major brokerage house and… Can it be real? Utility stocks offer a super combination of high dividends, steady growth, and potential total returns that exceed the cost of capital? All that with captive customers and the government standing by to make sure it all works out that way.
Too good to be true? What about risks? Risk in business has two meanings: the possibility of loss (or what might cause that loss) or the possibility that investments do not earn expected returns (or the cause of that underperformance). Utility planning tends to assume continuance of prevailing trends, a projection by ruler, more or less.
That procedure will not call the inflection point, where risk lies, because utilities move with the agility of supertankers.
They have too much invested in what they are already doing.
We need to ignore the projections and examine specific risks.
The electric, natural gas and water utilities, aside from being regulated, have these common financial characteristics: Assets retain value because regulators protect their earning power.
Without that assurance, the utility financing model is akin to a Ponzi scheme, with funds from new investors used to pay old investors, a process that continues until no more new investors show up.
This model will fail if customers can find cost- competitive alternatives to utility service, or if utility assets become technologically obsolete before being fully depreciated, or if the cost -of -rescue becomes so great that regulators cannot take the political heat generated if they were to keep their implicit promises to utility investors.
The electricity industry could turn into a case study in what happens when new ideas clash with the old order.
Capital spending is in a vertiginous rise thanks to a combination of robust demand for electricity and catch-up spending to correct for years of under-investment.
| Product | Price | Change |
|---|---|---|
| Brent Crude | $102.14/bbl | +0.34% |
| WTI Crude | $96.90/bbl | +0.21% |
| EN590 Diesel | $846/MT | +0.18% |
| Jet Fuel A-1 | $1090/MT | +0.55% |
| Mazut M100 | $450/MT | -0.15% |
| Bitumen 60/70 | $470/MT | +0.08% |
| Sulphur Gran 99.5% | $470/MT | -0.44% |
| Urea 46% Gran | $650/MT | +1.12% |
| NPK 16-16-16 | $460/MT | -0.28% |
| Nat Gas TTF | $15.42/MMBtu | +0.92% |
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