Frugal utilities rise to the top, but anticipate cap-ex turnaround.

America’s power and gas companies cut capital spending in 2009 by more than 10 percent compared to 2008, according a report published in the September issue of Public Utilities Fortnightly magazine (www.fortnightly.com). However, as regulatory and economic uncertainties diminish during 2010 and 2011, many companies are resuming major construction programs that were delayed during the recession.

The sixth-annual Fortnightly 40 study, sponsored by Accenture, ranked the four-year shareholder value performance of U.S. investor-owned utilities (IOUs) and merchant power companies. The C Three Group of Atlanta, which along with Public Utilities Fortnightly developed the F40 financial model, analyzed the annual reports of 84 power and gas 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.

Among the F40 study’s results, the report showed that cumulative capital expenditures among all 84 companies in the survey declined by nearly $10 billion from 2008 to 2009, with a corresponding improvement in free cash flow. As a whole the industry’s cap-ex totaled $83.9 billion in 2009, versus the previous year’s expenditure of $93.8 billion. Accordingly, the average F40-ranked company in 2009 generated $300 million in free cash, compared to negative-$100 million in 2008.

Despite the industry’s cap-ex retrenchment through 2009, rebounding electricity sales and a stabilizing economic outlook subsequently have allowed some companies to expedite projects that previously were deferred, according to Jean Reaves Rollins, managing partner with the C Three Group. “Well over 10,000 MW of new generating capacity has been announced or placed in the licensing process in the past 12 months,” she said. “We expect to see more announcements as the implications of clean air standards become clearer.”

Moody’s senior vice president James Hempstead echoed the observation. “Many big companies are actively revising their views and strategic assessments as to how much capacity will be refurbished, repowered or mothballed,” he said. “There could be a significant amount of capital expense on the sidelines that hasn’t been incorporated into plans yet.”

F40-ranked Dominion Resources (#9) provides a clear example; CFO Mark McGettrick told Fortnightly the company purchases more wholesale electricity than almost every other utility in America, but nonetheless the company is proceeding cautiously with construction plans. “We have a lot of catching up to do on the generation side,” McGettrick said. “We have a construction plan through 2012 … but environmental regulations are a moving target, particularly regarding CO2 emissions.” He said Dominion is “taking a wait-and-see approach” toward investments affected by potential changes in federal environmental and energy policies.

“The industry is in a holding pattern, but the end is in sight,” said Michael T. Burr, Public Utilities Fortnightly’s editor-in-chief and author of the F40 report. “Companies are waiting to see what happens with the economy and with shale-gas developments. They’re waiting on the outcome of elections in November, and they’re waiting for energy policy leadership from Washington. Once we get clarity on those issues, we’ll know whether the Big Build is returning.”

The 2010 Fortnightly 40 Ranking

Companies leading the F40 ranking in 2010 included DPL, Exelon and Energen. Ranked among the top 10 companies for the first time was Mirant (#4) — which recently agreed to be acquired by RRI Energy. And NRG Energy jumped into the 11^th position after appearing in the top 40 rankings (#32) for the first time last year. Such shifts exemplify an ongoing trend among the F40 ranks, with growth-oriented unregulated businesses driving stronger long-term shareholder performance. For the past four years, the top 10 companies in the F40 have earned an increasing share of their revenues from unregulated resources, compared with a decreasing share among the bottom 10 ranked companies.

In other trends, Southern Company and Edison International — both of which increased their cap-ex budgets substantially in 2009 and produced negative cash flow at least two years in a row — dropped to the bottom half of the F40, after previously holding strong positions in the top 15. And volatility in natural gas prices sent rankings downward for some gas utilities, including Delta Natural Gas, Equitable Resources and New Jersey Resources.

In general, however, the F40 metrics — combined with supplementary 2009 and 2010 data from the C Three Group, Accenture, Moody’s and the Edison Electric Institute — showed that F40 ranked companies remain financially robust despite some adverse results in 2009. For example:

• Slumping electricity sales drove ROA figures for the F40 companies downward by about one-fifth last year, from an average of about 6 percent in 2008 to 4.75 percent in 2009;
• Stock prices for the F40 companies have underperformed the broader market since January 2009 — although they outperformed the Dow Jones Utilities Index by nearly 10 percent;
• F40 companies outperformed all other categories of power and gas companies in most measures of credit quality, including debt-coverage ratios; and
• Except for a few companies that face substantial regulatory risk, credit ratings have held steady for most companies in the F40 rankings.

“There’s no homogeneous answer to what drives long-term performance,” said Robert Laurens, senior executive in Accenture’s strategy practice. “The most successful companies are those that execute a strategy that’s consistent with the company’s core competencies and its market context — whether it’s a regulated or non-regulated business.”

Fortnightly 40 RankingsFull Financial Data, Historic Trends and Supplemental Analysis from the C-Three Group LLC, Accenture and Moody’s available in the FULL REPORT. Not a subscriber? Click FREE TRIAL to gain immediate access.

* Indicates statistical tie among category ranks. Because the 40th position was a tie, the 2010 Fortnightly 40 includes 41 companies.

Copyright 2010, 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 2010 (www.fortnightly.com). Sponsored by Accenture, with methodology and analysis provided by the C Three Group.

Posted: September 2nd, 2010 under Current News, Uncategorized, credit crunch, credit ratings, energy policy, finance, recession, regulation, utility stocks.
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