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Sept. 1, 2009

FOR IMMEDIATE RELEASE

Contact:
Michael Burr
burr@pur.com
320-632-5342
Public Utilities Reports Inc.

Fortnightly 40 Survey: Utility Balance Sheets Strained by Growing Expenses, Declining Sales

 Cost pressures portend contentious rate cases.

Vienna, Va.: Share values among America’s utility, gas and power companies have outperformed the broader market since the financial crisis began one year ago. Maintaining this performance, however, might become more difficult in the months ahead, according to a report published in the September issue of Public Utilities Fortnightly magazine (www.fortnightly.com).

The fifth-annual Fortnightly 40 study, sponsored by Accenture, ranked the four-year shareholder value performance of U.S. investor-owned utilities (IOUs) and other companies active in electric power and gas industries. The C Three Group of Atlanta, which along with Public Utilities Fortnightly developed the F40 financial model, analyzed the annual reports of 85 companies to compare a series of shareholder-value metrics — such as profit margin, dividend yield, return on equity (ROE), return on assets (ROA) and sustainable growth.

Companies leading the F40 ranking this year included DPL, Energen and PPL. Ranked among the top 40 for the first time was NRG (32), and returning to the ranking after a year’s absence were Mirant (21) and AES (37) — three companies with heavy exposure in wholesale power markets. Conversely, Alliant and Northwest Natural Gas slipped to the bottom of the F40 after ranking in the high 20s last year.

The F40 metrics — combined with supplementary 2009 data — showed the industry remains financially robust despite a substantial decline in stock prices. Cap-ex spending among the Fortnightly 40 companies grew by nearly 30 percent in 2008, topping $49 billion, and the entire industry’s cap-ex increased 17 percent to nearly $94 billion. At the same time, equity returns among the top 40 companies declined only slightly, from 15.4 percent in FY2007 to 14.6 percent in 2008.

Notwithstanding these strong figures, economic forces are putting pressure on balance sheets. Kilowatt-hour deliveries have declined rapidly in many parts of the country — with residential consumption falling by as much as 8 percent in the second quarter of 2009, and industrial sales dropping at double-digit rates. These trends, combined with the costs of ongoing cap-ex programs, pushed the industry’s total net cash flow deeper into negative territory, from -$10.2 billion in FY2007 to -$19 billion in FY2008. Yet, despite this decline in free cash, utilities have continued growing their dividend payouts — albeit at a slower pace in the first half of 2009.

To protect dividends, companies are delaying spending projects and tightening operating budgets. “We’ve consolidated spending decisions among our plants,” said Paul Barbas, CEO of number-one ranked DPL Inc., parent of Dayton Power & Light in Ohio. “We have an engineering team for our entire business that stacks up investments on a fleet-wide basis.”

Additionally, some utilities have cut their payroll, and a few have been forced to slash dividends — a move applauded by rating agencies but abhorred by shareholders. The Fortnightly 40 study concludes that future financial performance — including the sector’s generous dividends — will depend as much on regulatory relationships as it does financial management.

“Utilities need regulators to make them whole for lost revenues, and also to finance the industry’s transition to a greener operating model,” said Michael T. Burr, Fortnightly’s editor-in-chief and the F40 study’s author. “The result will be rising rates — an unpopular move in any economy, and a political nightmare during a recession. Continued strong performance will depend on balancing customers’ need for clean and affordable energy supplies against utilities’ need for low-cost capital.”

The 2009 Fortnightly 40 Ranking
Copyright 2009, PUR Inc., Vienna, VA, All Rights Reserved. Permission to cite the F40 table in whole or in part is granted to publications that acknowledge the source as follows:

Public Utilities Fortnightly magazine, September 2009 (www.fortnightly.com). Sponsored by Accenture, with methodology and analysis provided by the C Three Group.

1  DPL
2  Energen
3  PPL
4  National Fuel Gas
5  Exelon
6  FirstEnergy
7  Entergy
8  New Jersey Resources
9  Southern Company
10  Questar
11* CLECO
11* Equitable Resources
13  Edison International
14* MDU Resources
14* TECO Energy
16  Dominion Resources
17  Public Service Enterprise Group
18* Allegheny Energy
18* Sempra Energy
20  AGL Resources
21  Mirant
22  Nicor
23  OGE Energy
24  UGI
25  NStar
26  South Jersey Industries
27  Delta Natural Gas
28  Centerpoint Energy
29* DTE Energy
29* PG&E
31  El Paso Electric
32* NRG
32* SCANA
34  WGL Holdings
35  MGE Energy
36  Vectren
37  AES
38  Northwest Natural Gas
39* Alliant
39* Ameren

* Indicates statistical tie among category ranks. Because the 39th position was a tie, the 2009 Fortnightly 40 contains no 40th rank.

PUBLIC UTILITIES FORTNIGHTLY (www.fortnightly.com), published by Public Utilities Reports Inc., in Vienna, Va., is the journal of record for the U.S. utility industry, providing authoritative, in-depth analysis of trends in generation, transmission and distribution of electricity and natural gas. For more than 70 years, Public Utilities Fortnightly has delivered exclusive interviews and expert analysis to help utility-industry executives and regulators decide where to invest, how the industry will be regulated and what the future holds. Subscription Rate: $169/year.

Posted: September 2nd, 2009 under Current News, Uncategorized, credit crunch, investment banks, recession, utility stocks.
Comments: 1

By Michael T. Burr

The London-based Institute of Mechanical Engineers (IME) published a thought-provoking report in August examining the role of geoengineering strategies for dealing with climate change. The report is interesting partly because of the technologies it examines, but mostly because of the policy argument it raises.

The report focuses primarily on three approaches, namely:

- CO2 scrubbing artificial “trees,” containing sorbents that would require subsequent burial;

- Algae-growth strips, attached to buildings and later harvested for biofuel production; and

- Reflective roofing, intended to direct solar radiation back into space and reduce AC demand.

Although these approaches seem novel and interesting, I’m not sure they really comprise geoengineering. The National Academy of Sciences defines geo-engineering as “large-scale engineering of our environment in order to combat or counteract the effects of changes in atmospheric chemistry.” Examples include seeding the stratosphere with reflective sulfur aerosols, or stimulating phytoplankton blooms by fertilizing ocean shallows with iron. By contrast, the hands-on, site-specific technologies discussed in the IME report would face a very steep growth curve before they could resemble “large-scale engineering.”

Quibbling aside, however, the IME report merits attention, if only because it makes an important point that’s been mostly ignored in the climate policy debate. In short, most discussions seem to position geoengineering as a “Plan B” approach to addressing climate change. In other words, if Plan A fails, and greenhouse gas (GHG) reduction and mitigation fall short of what’s necessary to avoid a climate catastrophe, then we’ll default to Plan B — direct intervention in the global climate, vis-à-vis geoengineering.

The IME report suggests that if we wait for GHG policies to fail before putting R&D resources into geoengineering, then it might be too late for geoengineering to work — or to be more precise, reining-in a runaway climate might require desperate geoengineering measures, incurring higher costs and yielding more damaging side-effects for the environment than we’d get with more moderate approaches. Instead, the report argues, policy makers should treat Plans A and B as complementary rather than exclusive approaches, and should consider geoengineering as part of an integrated strategy — a strategy that notably includes adapting to the inevitable climate change that already is happening and almost certainly will continue, to some degree, no matter what we do.

“Two decades of failed global mitigation efforts should be a wake-up call,” the report states. “It could be geo-engineering that provides the global community with those extra years to introduce effective mitigation and adaptation strategies, and, in the long term, remove some of the existing CO2 from the atmosphere. As such, Plan B needs to be upgraded to become a fully integrated part of a comprehensive three-point approach embracing mitigation, adaptation and geo-engineering.”

In other words, if we’re re-tooling for a more sustainable future, then we should make sure we’re using all the tools at our disposal — not just the ones that adapt our economy, but also the ones that adapt the climate itself. In the long term this might turn out to be the inevitable strategy, given the century we’ve spent gasifying the planet’s fossilized carbon. But that strategy will be cheaper and less damaging if we accept and pursue geoengineering earlier, rather than later in the process. -MTB

Posted: September 1st, 2009 under Uncategorized, carbon regulation, climate change, energy policy, geoengineering.
Comments: none