Utility CFOs make case for capex plans as cost pressures continue

US investor-owned utilities are laying out plans to invest hundreds of billions of dollars in cleaner energy resources and reliability that they say remain critical even in the face of higher interest rates, rising project costs and supply chain constraints.

"There are just new opportunities and it's incumbent on us to try and do it as efficiently as possible despite those rising costs," Exelon Corp. Executive Vice President and CFO Jeanne Jones said in an interview Nov. 12 at the Edison Electric Institute Financial Conference in Phoenix.

Exelon has a $31.3 billion capital investment plan for 2023-2026 geared primarily toward electric transmission and distribution projects, with about $3.9 billion earmarked for gas delivery.

"The challenge for us is there is no shortage of work to do; it is just how do you make sure ... that these are the right investments so that everyone understands sort of the journey here, because this [energy transition] will be multi-decades," Jones added.

New opportunities

Exelon, which no longer owns generation since the February 2022 separation of its unregulated power generation business into Constellation Energy Corp., sees investment opportunities in new transmission projects as the industry reaches a "pivotal point in the energy cycle."

"Transmission is critical as we are replacing [fossil] generation," Jones said. "Secondly, we're seeing a lot of need in [PJM Interconnection LLC] as well, not only due to changing the generation stack, but also more demand on the grid."

Exelon operates six transmission and distribution utilities serving about 10 million customers, all in the PJM region.

NiSource Inc. Executive Vice President and CFO Shawn Anderson said the management team still sees "tremendous amounts" of opportunities to invest.

"For us, it really comes down to how can we choose the right sets of projects to both grow, but also ensure reliability, stay in compliance with everything that we do and then, of course, minimize the overall impact to customers," Anderson said in a Nov. 12 interview on the sidelines of the industry's major annual conference gathering utilities and investors.

NiSource on Nov. 1 rolled out a $16 billion base capital expenditures plan through 2028, up from its $15 billion capex plan from 2023 to 2027.

"From an environmental standpoint, the decarbonization movement has helped illuminate new types of investments," Anderson said. "It has also helped shine a light on the same work that we're doing and how it drives even greater value through both enhancing safety and decarbonizing. When you think about gas pipeline modernization, it's the poster child for that."

Duke Energy Corp. has a $65 billion capex plan for 2023-2027 and a $145 billion capital spending plan over the next 10 years. The company plans to update its five-year capex plan in February 2024, with spending for 2024-2028 expected to increase above $65 billion.

"We have inflation in our models, but that's not what's driving the capex plan in large measure," Duke Executive Vice President and CFO Brian Savoy said. "It's the grid investments that we're executing to improve reliability and resiliency of the grid, dealing with changing climate patterns and increased threat of weather impacting grid and reliability, as well as generation investments to decarbonize the system."

Duke is also investing heavily in regulated zero-carbon generation and hydrogen-capable natural gas generation.

"Our clean energy transition is an all-of-the-above strategy," Savoy said. "We have a very large system, over 50 GW of generation, and we are going to be retiring some of our older fossil generation over the next 10 years. We need every source of clean energy generation to make that happen."

Duke serves about 9.8 million electric and natural gas customers in six states.

Regulatory Research Associates, a group within S&P Global Commodity Insights, predicts US utility capex will continue to climb, to about $171 billion in 2023 and reaching spending levels of about $173.5 billion in 2024 and $179.4 billion in 2025.

Cautious approach

Meanwhile, developers are canceling offshore wind and small modular nuclear reactor (SMR) projects seen as important resources to advance the energy transition.

Duke Energy Renewables Wind LLC in May 2022 won a 55,154-acre lease in the Carolina Long Bay federal auction for $155 million. Duke management, however, has said the company will not move ahead with development of offshore wind resources unless North Carolina regulators determine it is a viable path forward to meet the state's decarbonization and resource goals.

Duke is "not going to get ahead of our regulators or our customers" when it comes to investing in nascent technologies, Savoy said.

Anderson, NiSource's CFO, said SMRs are an "interesting technology" that "isn't commercially viable in the marketplaces that we've been able to see yet."

"But we don't think that's that far off," he added. NiSource believes utility-scale battery storage seems to "make more sense on a commercial basis."

"We don't see that really coming into our plan until the back half of this decade," Anderson said. "But we do think it becomes a viable solution for smaller amounts of capacity as needed that will be available on demand around the clock."

NiSource also is exploring opportunities to add hydrogen to its energy mix, including through a demonstration project in Pennsylvania.

Managing costs

When it comes to managing costs and maintaining a strong balance sheet in this inflationary environment, Exelon's Jones emphasized that "not one silver bullet is going to solve it."

"So, we attack it on many fronts," Jones said. "Some of the things that are helpful or that we look [at] to sort of help mitigate those headwinds are our size and scale."

"Also, we are constantly looking at technology that can create efficiencies," Jones added. "Exelon very much leans into innovative ways to find sources of funding."

In addition, energy efficiency programs and operations and maintenance cost management help mitigate costs.

Savoy, Duke's CFO, also noted that "cost management is super important to customer affordability," and the company has been able to realize significant costs savings through operations and maintenance efficiency.

"But what we're learning ... is that the journey is never over, right? We must continue to find the next area of opportunity," Savoy said.

NiSource also constantly looks at ways to mitigate cost impacts, according to the company's CFO.

"Where you can control those costs and how you can work with regulators and other stakeholders within the community to drive greater value, and be the integrator that a utility is really the best position to be, is how you get through this with as minimal cost impact as possible," Anderson said.

Equity alternatives

Funding spending plans in a high-cost environment represents another challenge.

Exelon is "taking a very balanced approach" to its $31 billion capex plan, according to Jones.

"We'll fund about $17 billion of that with internal cash flow, so equity is reinvested back in the business," Jones said. "There will be about $13 billion of debt across the operating companies and the holding company and then a modest amount of equity, about $425 million that remains from our $1 billion that we announced at the time of separation."

"There are a lot of additional growth opportunities," Jones added. "To the extent as we layer those in, we would look to do it in a similar way, reinvest our cash flows back in the business [and] access the capital markets."

"Importantly, when we do access the capital markets, it's about making sure that we have a strong credit profile that allows us to get efficient costs on our debt," she said. "And so, our credit spreads on top of the rising interest rates have always been as tight, if not tighter, than companies rated a notch above us. I think that's a reflection of the market understanding sort of Exelon's unique low-risk business profile."

Exelon, however, is "not looking at selling any assets," Jones said. "We've gone through sort of that big separation and everything that we have now is very core to the business, performing well and part of our strategic vision."

NiSource's Anderson said it is important to be "open-minded to how you source the capital that you'll need to execute a utility plan such as NiSource's [capex plan]."

"We'll be part of the capital markets, in any case, every single year of our plan," Anderson said. "The debt markets are still there. We think the equity markets will still be there and accessible, but alternative forms of both and being open-minded that where we are able to source that, we think, will be a critical element for us to keep our plans actionable."

NiSource in late June agreed to divest a 19.9% equity interest in subsidiary Northern Indiana Public Service Co. LLC to an affiliate of Blackstone Infrastructure Partners LP for $2.15 billion. The deal includes an additional $250 million equity commitment by Blackstone Inc.'s dedicated infrastructure group to fund ongoing capital requirements.

NiSource utilities serve about 4 million electricity and natural gas customers in six states.

Duke expects to issue some form of equity to support its updated capital plan, Savoy said.

"Investors want to invest in this infrastructure," Savoy said. "We are seeing huge demand."

When it comes to alternative ways of raising capital, Savoy pointed to Duke's sale of its commercial renewables business to Brookfield Renewable Partners LP in a $2.8 billion deal.

"That was a source of equity funding that we can unlock from our assets, and it was the right decision for us to become a fully regulated enterprise," he said.

The company does not have any "imminent plans" to do a deal similar to its sale of a 19.9% equity stake in Duke Energy Indiana LLC, Savoy said, which helped to fund growth plans and avoid issuing about $1 billion in equity.

"But that doesn't mean we don't look at our assets over time and determine what's the optimal portfolio for Duke and for our shareholders," Savoy said.

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