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Both cash-rich and cash-poor power and utility companies (P&Us) face challenges in a volatile economy. The actions of the CFO are critical to overcoming them. Louis-Mathieu Perrin reports.

After a period where banks tightened credit and reconsidered their lending policy, some utilities, particularly in Europe, remain in a cash “drought.” Others find themselves “drowning” in cash, which brings its own challenges and opportunities.

In either case, the role of the CFO is key.

Surviving drought

Managing drought has forced cash-strapped utilities to focus on some key areas:

  • Restructure the balance sheet
  • Divest non-core assets
  • Shift from mature markets

In Europe, regulatory frameworks and national energy policies are characterized by a desire to reduce subsidies to the sector, particularly renewable energy, and to curb increases in retail electricity and gas bills.

These circumstances have created drought-like circumstances for some European P&Us, which may need to adapt their business model in several ways:

  • Build trust with banks and other finance providers: P&Us must ensure they continue to communicate with their banks and strengthen these relationships.
  • Move from tactical to operational working capital improvements: Most utilities have already restructured their business – for example, by creating shared service centers, restructuring their purchasing function and developing operation expenditure reduction plans.
  • Turn to the tax department: Utilities are building stronger links between their tax function and the business to optimize their tax position and uncover inefficiencies.
  • Investigate non-bank sources of debt: Many utilities have begun to explore “hybrid financing,” a combination of equity and debt. They have also turned to different non-bank sources of finance.
  • Rethink the supply chain and business model: Utilities need to determine whether assets could be offloaded to free up cash and improve performance. Acting early is key to avoid giving the impression of “selling in distress.”

Drowning in cash

Utilities are less likely to find themselves drowning in cash, partly due to the nature of their business model. P&Us tie up a large portion of their cash by continually investing in large assets. That said, some utilities are currently in a strong financial position.

But large cash balances create their own challenges. The biggest is the risk of becoming complacent, not paying enough attention to a changing environment and subsequently making poor decisions.

Key considerations for “drowning” utilities include:

  • Invest, payout or buy back: Before the financial crisis, many utilities returned excess cash to shareholders in the form of share buybacks, and some currently maintain a high payout ratio level. These payouts send positive signals to financial investors but may create longer-term problems if they hamper growth.
  • Articulate the rationale for your cash-rich position: Utilities must continue to communicate clearly to stakeholders, including investors.
  • Lock in finance at record rates: For utilities with a relatively sound economic footing, it has never been easier or cheaper to sell bonds. Investors need a safe haven for their cash, and this has brought down borrowing costs. Many utilities are extending the average length of their debt and securing good financing terms.
  • Develop a clear treasury risk management strategy: Most P&Us are working to ensure their treasury departments sharpen their focus on identifying and mitigating risk.
  • Support your supply chain: Utilities have turned their attention to their supply chain, not only to cut costs but in response to increased attention from regulators who are prioritizing efficiency.
  • Keep your eyes open to M&A opportunities: P&Us are selectively looking at new investment opportunities, particularly in rapid-growth markets.

The role of the CFO

We have identified four key practices of successful CFOs:

  • Communicate the situation to the market: High-achieving CFOs “look beyond the numbers” to clearly communicate the situation to all stakeholders. They do not hide a difficult situation but rather ensure that all stakeholders understand the challenges and how they will be overcome.
  • Act early: The utilities that coped best with the financial crisis were those that acted early, whether their efforts were directed to selling assets, managing debt, issuing bonds, building relationships with public authorities or managing their regulatory burden.
  • Be decisive: An excellent CFO does not take a “wait and see” approach but is prepared to make difficult decisions.
  • Look beyond day-to-day operations: While CFOs of utilities in drought may be more constrained in their day-to-day management, CFOs of drowning utilities must keep an eye on the future.

The gap between the “haves” and the “have-nots” of the power and utility sector has rarely been wider.

A well-prepared CFO who acts decisively with a broad view of the business’s long-term strategy can ensure the organization survives drought or drowning and secures a more sustainable future.

How we can help

We are working with the world’s leading P&Us to manage cash-rich or cash-poor situations. Our dedicated CFO program is supporting CFOs to excel, by providing insight and guidance that helps them develop themselves, their teams and their organizations.

For more information

Drought or drowning: cash challenges for CFOs at both ends of the liquidity spectrum 2012

Read more about considerations for cash-poor and cash-rich companies here.