Financial Modeling for Infrastructure Projects: Power, Water, Telecom & Transportation

Financial Modeling for Infrastructure Projects: Power, Water, Telecom & Transportation

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Introduction

We’ve seen the headlines before: It’s Infrastructure Week. 

Much media attention has been given to America’s crumbling infrastructure. As of 2021, the American Society of Civil Engineers gives the US a C- Infrastructure Grade—not fantastic for the wealthiest country in the world.[1]

With each passing day, the need for infrastructure upgrades across states and municipalities becomes more crucial. From rebuilding roads and bridges to improving renewable energy systems and our broadband internet, there is a lot of work to do.

In government, we’ve seen a renewed push to pass an infrastructure plan in 2021, with both Biden’s administration and the Republican Party putting together proposals.[2] Though Washington may disagree about the details of the plan, especially the cost and environmental initiatives, there’s consensus that America must upgrade its infrastructure soon to be prosperous in the 21st century. 

This means public power, water, and utility companies will have much work to do. This won’t be easy. Public power and utility firms face the challenge of ensuring new infrastructure investments not only are manageable, but also put them on a sustainable financial path. Along the way, they must balance customer needs, an ever-changing political landscape, funding sources, and regulatory restraints and hurdles. 

Public power and utility companies may have more questions than answers now, such as: 

  • How do you plan projects when borrowing rates, funding sources, energy policies, environmental laws, and more continue to change? 
  • How can you upgrade aging infrastructure while preparing the business for future success?
  • What metrics and financial models should guide your decisions?

In this whitepaper, we’ll break down these challenges and explore how the right financial modeling can help. This way, public power, water, and telecom companies can navigate uncertainty, optimize infrastructure investments, and move towards a brighter future. 

solar panels

Upgrading aging infrastructure amidst uncertainty

It’s difficult to upgrade old infrastructure when you don’t have control of significant external factors. For instance, inconsistent environmental policies over the last decade-plus make it hard for energy companies to plan big projects. Just look at what’s changed:

  • During the Obama administration, environmentalism gained momentum with the Climate Action Plan (CAP) — a comprehensive strategy to reduce carbon dioxide emissions across the United States[3]. Obama also signed the Paris Climate Agreement, a global effort to combat climate change.[4] 
  • During the Trump administration, the US pulled out of the Paris Climate Agreement and also rolled back or got rid of many of the CAP rules and initiatives[5]. Trump also pledged to bring back coal. [6]

The Biden administration has returned America to prioritizing environmentalism. The US has rejoined the Paris accord and Biden has called for net-zero carbon emissions across the nation’s electricity sector by 2035. By 2050, the USA aims to achieve net-zero emissions across the whole economy.[7]

It seems like the energy sector is destined to go fully renewable, and utility companies should plan accordingly. However, when there are dramatic shifts in policies, regulations, and funding based on who’s in office, long-term planning becomes challenging. 

infrastructure planning

Futures thinking: Understanding larger trends and all the scenarios

For power, water, and telecom companies, success with infrastructure investments hinges on understanding the sector’s long-term trends and direction. This means asking the hard questions, such as:

  • What might the future look like?
  • What drivers could impact future scenarios?
  • What are all the future scenarios you could encounter?
  • What’s the best path to capitalize on future opportunities while mitigating risk?

By answering such questions, you empower your strategic decision-making and can take a proactive approach. You stay in control. 

For instance, if you rely on fossil fuels, such as coal, it makes sense to retire the coal plant at some point. If current initiatives continue, you’d have to do so before 2035. Many coal factories have even expedited their operational shifts. Some who planned to shut down in 2035 have now accelerated their timeline to 2028. 

But what if another pro-coal president is elected? It would be wise to invest in coal again, right?

Maybe. But maybe not.

It may still make sense to wind down operations. Even though Trump promised to “bring back coal,” the number of US coal jobs declined 24%, and production fell 31.5% during his presidency[8]. Overall, the Trump administration delayed the coal industry’s decline, but they couldn’t stop it[9]. 

Even still, the decision to retire the coal plant isn’t an easy one. There are questions of how and when to wind down operations. You also must pay attention to shifts in policies and regulations. 

However, with a better understanding of what the future could hold, you can put together the proper framework. You can understand all your options and risks, map out all the possibilities, and carve the best path forward. 

bridge traffic

Case in point: Brent Spence Bridge

If you can believe it, $1 billion of freight moves over the Brent Spence Bridge daily. The bridge is currently the second most congested commuter route in the US[10]. And, as a New York Times article points out, federal money is desperately needed to fix the problem. Current daily traffic is double what the bridge was originally designed to handle. With the bridge considered functionally obsolete, it’s not a matter of if but rather when disaster will happen[11]. 

Since the Brent Spence Bridge connects Cincinnati, Ohio with Covington, Kentucky, the two states must agree on funding (something lawmakers from Ohio and Kentucky have long been unable to do). Fortunately, the Biden administration’s $2 trillion infrastructure proposal has brought renewed hope the region will have the roughly $2.6 billion needed to repair the bridge. 

However, given the economic importance of the Brent Spence Bridge, any upgrade or construction of a new bridge must be well-planned. The Cincinnati metro area and the Ohio and Kentucky Department of Transportation have to address questions such as: 

  • How much ongoing bridge repairs disrupt and hurt the local economy? Where will the flow of traffic go when construction traffic prevents or slows movement?
  • How much money will the federal government actually provide? As a local article notes, officials don’t know if it will be 100%, 80% or 50%. [12]
  • What’s the best way to fill in funding gaps: tolls, municipal bonds, increased local taxes, gas tax bill, etc.? 
  • If another bridge has to be built to support the Brent Spence Bridge, as experts have suggested to spread out traffic load, what’s the best work timeline? 

To answer these questions, local and state governments in Ohio and Kentucky need to think about what makes the most fiscal sense. This is where financial modeling comes into play. 

As you can imagine, financial modeling for the complex range of scenarios is no simple task. The financial viability of such a mammoth project depends on so many factors. The results of such a project change when you start, where funding comes from, and how the project is implemented. 

Ultimately, city governments don’t know how their current decisions will impact the long-term financial health of their city and the greater region. To truly understand, we need to evaluate all the potential scenarios.

This is where intelligent financial modeling comes into play. With Synario, for instance, you can model the long-term impacts of different decisions on funding sources and rates. 

institution

Considering the transformation of the energy industry

Brent Spence Bridge is just one example of how agile financial modeling is crucial to infrastructure development. It’s not just a matter of “what” will be developed, but “when” to move forward, “who” should the deal go to, and “if” it’s financially feasible to move forward. Thankfully for the infrastructure industry, a bridge is, ultimately, a bridge. Some industries are significantly more complicated. 

We touched on the political and social ambiguity for the future of the coal industry, but coal plants can’t live in uncertainty forever. Ultimately, they need to make hard decisions for their business and their employees. Most US coal plants are seeing the writing on the wall: politics aside, coal will likely be phased out in the next few decades. 

On the one hand, if you’re a coal plant owner, you can decide to phase out the operation entirely. If you do decide to shut down the plant, that will not happen overnight. Specific changes will need to be prioritized to preserve your plant’s financial health in the short term, while nonessential moves may be postponed until a more opportune time.  

But for many coal plant owners, this is a chance to transition—often to solar, water, and wind power. While coal plants can still function for the time being, they can also adapt themselves to handle larger shifts in output by implementing peaking units to capture wind and solar energy[13]. Power purchase agreements (PPAs) can help facilitate this transition process. Coal plants can source electricity from renewable energy sources to cover the peaking units, thus offering a hybrid energy solution.[14] This can even provide substantial renewable energy tax breaks for the coal plants. 

However, PPAs are expensive endeavors, often which need to be financed using debt. While sourcing capital for PPAs is generally easy, what’s more important is choosing the amount of debt to take on and how to manage it. Cash reserves are critical for a healthy financial future, but too much or too little could backfire. It’s important to realize the potential obstacles that can arise with PPA debt. 

  • Consider the option of pre-purchasing PPA energy via debt. How will that impact your income statement? What happens if the revenue doesn't materialize? With too much debt or pre-purchased power, expenses could exceed revenue. It’s imperative to understand market exposure, especially with locational marginal prices (LMPs). You have to plan far into the future, as this type of exposure usually has a long lead time, somewhere between 150 to 180 days.
  • There is also the impending threat of stress on revenues, where you have to decide whether to defer capital or increase rates. Rate stabilization is critical—with the impetus to move money into an operating fund. However, adjusting rates can be a very sensitive procedure, as even minor changes can dramatically impact your internal revenue generation and your client base.
     
  • There is no one “right” rating methodology for pricing and managing public power. If income statements or balance sheets become stressed, what’s the best way to move forward? If you apply a five to six percent revenue reduction and hold all other things constant, what's the impact on cash and coverage? 

It’s important to anticipate all scenarios on your income or balance sheets, especially the worst case or “stress scenarios.” This is an opportunity to look at all possibilities to establish the most risk-mitigated framework to move forward and the best conditions for success.

Using agile financial modeling to plan for a coal plant transition

Financial modeling for a coal plant transition is a complicated endeavor. The sheer number of permutations that can arise can be intimidating, even for a veteran CFO.

Even if the transition is imminent, many questions remain. What would happen if you switched to renewable energy in 2022 versus 2025? Which kind of renewable energy makes the most sense? What is your risk with different providers of renewable energy? Do you have downside protection in case of an expedited coal production deadline? 

The number of variables is staggering. It’s essential to create a framework for understanding everything that could happen in the transition. Here are some of the most impactful variables to consider:  

  • Renewable type: Solar, wind, water, or hybrid? Which makes the most sense?
  • Providers: Who do you go with for your PPA energy? What risks are associated with each party?
  • Debt: How much debt provides the greatest amount of opportunity with the least amount of risk?
  • Start date: When makes the most sense to transition? What potential variables could arise in the interim? 
  • Pricing: How do you pivot your pricing to accommodate for the PPA contribution? 
  • Infrastructure: What new infrastructure do you need to accommodate the PPA?
  • Human capital: What new employees will need to be brought on to make this successful? Who will be made redundant? 
  • Tax implications: What tax incentives do you accrue by bringing on renewable energy sources? 
  • Long-term plan: How long will the operation continue to run? As coal fades out, is there a way to transition entirely to renewable energy, or will the plant ultimately need to be shut down? What is your wind-down period, and what are the benefits and risks to ending at time X, Y, or Z?

The complexity of these variables is too much to model in a simple Excel spreadsheet (or even a collection of spreadsheets). 

This is precisely why intelligent financial modeling software like Synario is so important. You need to model the long-term impacts of different decisions on rates and funding sources (e.g., the cost to replace pipes with 50 years of useful life should be spread out [amortized] over 50 years).

Account for every iteration of who, what, where, when, and how—that way, you can mitigate risk and put yourself in the best possible situation for a prosperous financial future. 

How Synario helps you create long-term agile financial planning 

Synario’s inherent advantage over spreadsheets is its ability to instantly and effortlessly run multiple models and scenarios.

Spreadsheets are fundamentally limiting because they are overly reliant on human capital and manual inputs. For models that are as complicated as water, telecom, and (especially) power, spreadsheets will often lead to two major challenges:

  • Limited scenario output: Because of the manual, human effort required to create multiple permutations of your scenario analysis, there is a ceiling to how many variations you can make. Even the most robust spreadsheets will require substantial time and effort to create new iterations.
  • Potential for human error: With so many moving parts, navigating endless spreadsheets and equations can become tedious. Human error becomes the natural byproduct. This can have far-reaching implications, as a minor error may make one permutation seem preferable to another when in reality, the inverse is true. 

Synario solves these problems by creating a smarter methodology for scenario planning. Our proprietary software allows for seamless modeling of multiple permutations, all at the same time. Variables can be adjusted on their own or in conjunction with others. There is no need for countless spreadsheets, as everything is self-contained and adjustable from a high level. 

This means that you can analyze the multi-year impacts of different scenarios across the power, water, and telecom spaces. Gain keen insight into the risk profile of every financial decision, exploring contingencies and developmental options that would have never crossed your mind due to your limited ability to manipulate variables. 

Your financial decisions have far-reaching implications—which is why it’s crucial to have a scenario planning tool that is capable of producing the multidimensional financial models nuanced enough to cover the sum of your potential opportunity. Furthermore, our tools allow you to automatically present your findings with the click of a button while even making real-time changes reflected mid-presentation.

If you’re interested in learning more about how Synario can be transformational for your financial modeling, let’s have a conversation.