Modeling And Valuation Of Energy Structures PDF Download

The goal of valuation models that value publicly traded companies would appear simple enough: to provide a single number that represents a company's value. For the mature, stable energy utility industry, an industry traditionally shielded from competitive market forces, it would appear to be particularly straightforward. Yet, even in this industry, the application of valuation models is not straightforward. There are multiple reasons for this: valuation models use historical data to make predictions on the future, and the past is not always a reliable guide to the future; valuations can be highly sensitive to the choice of inputs and for certain inputs there are not widely held agreements in the field on which ones to use; companies can face unique economic circumstances, requiring the selection of a model that best fits these circumstances; and finally, industries change, and valuation models need to reflect these changes to ensure that they are properly predicting the future risks and growth potentials of the companies that they are attempting to value. By applying income valuation techniques to the energy utility Pacific Gas and Electric Co. (PG&E), several conclusions can be reached. First, a valuation model must match the company it is attempting to value: there is no such thing as a universal valuation model that can be applied to all companies. Second, since companies compete for capital in competitive markets, company valuations should be viewed against their industry peers and industry averages. In the case of PG&E, a model needs to take into account its distressed growth in the immediate term caused by the effects and consequences of the San Bruno gas explosion of September 9, 2010. By comparing PG&E's valuation to two of its industry peers, Xcel Energy and NextEra Energy, one can better understand why the market values these companies differently and why different valuation models need to be applied to all three to capture their unique economic realities: PG&E with distressed short-term growth, Xcel Energy with stable growth, and NextEra Energy with a higher growth potential from a higher reinvestment of capital into generating assets. Finally, since valuation models are forward-looking, these models need to take into account changing industry structures. In the case of energy utilities, deregulation in electrical generation has created both higher growth prospects, but also greater market risks, and valuation models will need to capture these.