Karbenn: “Municipal utilities face persistently high capital needs”

In a volatile market environment, energy utilities are facing growing challenges in securing corporate financing. energate spoke with Frank Karbenn, Managing Partner at HKCF Corporate Finance, about rising financial risks and possible solutions.

energate: Mr. Karbenn, a recent study warned of increasing financial risks for utilities. How do you assess the financial outlook for municipal utilities?
Karbenn: Where we’re talking about the core energy business and no ongoing burdens from problematic asset investments exist, we’ve seen encouraging financial results from utilities in recent years. Key drivers include strong customer loyalty and stable revenues from regulated grid operations. Based on our rating analyses — drawn from published annual financial statements of approximately 100 municipal utilities — most companies still qualify for a robust “investment grade.” However, the medium-term outlook deserves scrutiny. Pressure on regulated network revenues is becoming more tangible, expectations for the retail segment are increasingly cautious, and loss-making business areas continue to present challenges. Added to this is the fact that persistently high capital expenditures — often funded through increased borrowing — are leading to rising levels of debt across the sector.

energate: What specific financing challenges are utilities currently facing?
Karbenn: Capital requirements remain high, as do distribution expectations from municipal shareholders. In the current capital market environment, municipal utilities can generally still access debt capital for core operations on favorable terms. The challenge lies in optimizing those terms. In contrast, the banking market is showing increased caution when it comes to financing municipal holding companies. Another key issue is broadening access to capital markets. Utilities are increasingly finding that previously well-trodden financing paths can no longer be taken for granted. This is due to accumulated debt volumes with existing banking partners, coupled with a reassessment of the sector’s risk profile. The municipal ownership structure is now evaluated much more critically than in the past.

energate: What strategies can companies use to address these challenges?
Karbenn: Cost and process optimization remain recurring themes across many business areas. But when it comes to raising debt capital, many utilities are not yet leveraging their full optimization potential. Structured, competitive financing processes can help identify the right financial instruments and align loan maturities with long depreciation cycles in an efficient and sustainable way. In addition, regular analysis of key financial indicators relevant to debt financing provides greater transparency on the financial viability of planned projects. It also yields valuable insight into shareholder distribution expectations. Even today — and increasingly in the future — dividend policy will become a critical factor in assessing the creditworthiness and financing capacity of municipal enterprises.

Rouben Bathke

Source: energate messenger+