Asset financing could unlock value in electricity transmission assets

NEW YORK, July 30, 2002 — As the energy market continues to deregulate, some utilities are finding new opportunities in the way that they finance their transmission assets.

Gone are the days when such assets were a necessary burden that just drained cash flows for maintenance and expansion. Now, many unbundled electric utilities have sold off their generating assets and are focusing on the new core asset base: transmission and distribution wires.

“If you don’t think about unbundling the liabilities as you are unbundling the assets, you are missing a glorious opportunity to maximize corporate returns and shareholder value,” according to John C. Salomone, author of the R.J. Rudden Financial, LLC article. This opportunity can be realized by using an asset finance model in place of the currently ubiquitous standard model.

Salomone states contrary to what most investors might think — debt normally associated with electric transmission assets over their 50-year life span is not fixed-rate, amortizing debt. Instead, the 50-year assets are financed with what is essentially a non-amortizing, variable rate payment.

Under current market conditions, once generating assets are off the books, from a financial perspective, transmission assets must start meeting the organization’s new investment criteria. Like any other potential new investment under consideration, these assets now become a project with a “threshold” and get analyzed according to the targeted “go, no-go” equity rate of return, not the historic rate of return that was used to finance such assets in the past.

The payoff? “Once one focuses on the ability to use directed cash flows to support transmission asset financing, a range of structural options is available. The cash flow to support asset financing can be completely separate from the Regional Transmission Organization control and the maintenance control in direct contrast to the standard model.” Salomone elaborates on the variety of other options (tax breaks, etc.) available to all parties (asset owners, ITCs, etc.) by utilizing an asset finance model versus a standard model in the article. The companies’ decisions to retain or transfer ownership of such assets and the results of these hold or sell positions when the asset finance model is utilized are also addressed in the article.

The complete article can be accessed from our web site at www.rjrudden.com. From this home page click on “Profiles” then click on “Papers,” after filling out a brief registration.

R.J. Rudden Financial, LLC provides independent financial research and advisory services to the energy and utilities practices of the investment and commercial banking communities.
The services offered by R.J. Rudden Financial complement the services R.J. Rudden Associates, Inc. presently offers in the areas of strategic planning, project and M&A due diligence, industry economic and financial research and analysis, project and enterprise valuation, financial and technical support of merchant generation and transmission ventures, regulatory research, and risk assessment.

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