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How to Be CFO of a Public Utility

It may not set its pricing or have much control over revenue, but its CFO has plenty to do: wrangle with regulators, oversee huge capital expenditures, keep shareholders happy, issue debt and lobby in D.C.

On Monday we published an article about human-capital concerns in the energy industry, focusing on PPL Corp., a $12 billion, publicly held electric-power company. Here we offer a detailed look at other demands on CFOs in that industry, from the viewpoint of PPL finance chief Paul Farr.

Is anything newsy happening for PPL’s finance group these days?
We have big capital-expenditure programs going on. We have a lot of old infrastructure, and [Environmental Protection Agency] regulations have caused old coal-fired power plants to either spend a lot of capital or shut down.

Not just PPL but the entire utilities industry is in the minority group of companies that have a lot of capex at the moment, right?
The sector has been at record capex levels the last few years. Historically in this space, if we go back more than three years ago the sector was spending $40 billion to $50 billion per year, and we’re now between $75 billion and $95 billion, depending on the year. Everything ­– our plants, our equipment – was old.

The capex falls into multiple buckets. There is the normal maintenance-capital bucket to keep plants operating at acceptable levels and replace old equipment. Then there’s a bucket of discretionary growth capital. Most of it is for big transmission-line projects that we work on with regional operator PJM, which are critical for grid reliability in Northern New Jersey. Right now we’re building a big line from our power plant in Berwick, Pa., to a substation just outside Newark. For PPL it’s about a $550 million project. A third bucket is obligated environmental spending.

In the United Kingdom, which is our largest business segment, it’s almost all maintenance capex. It’s similar to the United States in that a lot of the infrastructure was built from the 1930s to the 1960s.

Overall, our infrastructure needs to be storm-hardened in order to respond to situations like Superstorm Sandy.

What kind of a financial loss did you suffer from Sandy?
Net of money that the Pennsylvania Public Utility Commission provided us for [abnormal storm] experience and a small insurance policy that we no longer have, it was in the $25 million to $35 million range. It was actually pretty much identical to the prior year when we had a freakish October snowstorm in the Lehigh Valley and surrounding areas. That affected fewer customers, but because the leaves were still on the trees it had almost the same financial impact.

The state jurisdictional regulator – in Pennsylvania over the wires business and in Kentucky over the combined wires and power-generation businesses – allows us to use a certain amount of base revenue to cover a trailing level of storm experience. Over the past couple of years what we’ve experienced is exceptional by any metric – the number of customers affected, the amount of infrastructure damaged, the duration of the outages.

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