Finds stagnant economy necessitates more austerity moves

Update courtesy of Utility Regulatory News #4027: Although agreeing that the economy, both nationally and locally, seems to be showing signs of recovery, the New York Public Service Commission has declared the pace of improvement to be slow enough to make it imprudent to rely on a utility’s credit rating alone as a primary indicator of an appropriate rate of return on equity (ROE) for the utility. Commission staff had advocated reliance on a theory of negative correlation between an entity’s credit rating and its required ROE.

In the instant case, involving Orange & Rockland Utilities (O&R), commission staff had argued that because the company has maintained a higher credit rating compared to similar utilities, it needed a lower ROE, of no more than 9%. The commission, however, found that while it is logical to assume a direct connection between risk and return, the use of credit ratings as a measure of such risk was unwise. It noted that in today’s continually underperforming economy, bondholders and equity investors appear to view risk quite differently, making the credit rating benchmark an unreliable gauge of risk expectations. The commission found that ongoing economic struggles also impacted O&R’s operating expenses.

While not discounting the steps the utility has already taken to cut its costs wherever possible, in accord with prior austerity directives from the commission, the commission determined that further reductions must be identified. Deeming it appropriate for the utility to share in the economic straits of its customers, the commission instructed O&R to provide for close to another $500,000 in austerity savings. For the full story, subscribe to URN.

Posted: July 13th, 2011 under finance, regulation.
Comments: none

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.
Comments: none

Project removed from Appalachian Power’s rate base

Weekly Update courtesy of Utility Regulatory News #3981: While finding it reasonable for the American Electric Power (AEP) system to study various options for complying with possible future federal limitations on greenhouse gas emissions, the Virginia State Corporation Commission has deemed it unreasonable for the ratepayers of an AEP subsidiary, Appalachian Power Co. (APCo), to be responsible for the costs of any such exploratory project, at least at the present time.

In a general rate case, APCo had sought to reflect in rate base $74 million associated with AEP’s West Virginia-based Mountaineer Carbon Capture and Sequestration Demonstration Project. The utility asserted that the project is the first such endeavor to occur at an in-service coal plant and that it is likely to yield valuable information as to the commercial viability of such technology, to the benefit of not only APCo’s customers, but all electric consumers. Although the commission did not refute the possible attributes carbon sequestration might offer, the commission determined that it was inequitable to ask APCo’s customers to pay for AEP’s project.

Given that the project was still in its earliest stages, the commission held that AEP’s shareholders should be the ones shouldering the financial risks of AEP’s research and development programs. Subscribe to URN for the full story.

Posted: August 13th, 2010 under IGCC, R&D, carbon regulation, climate change, coal, energy policy, finance, green energy, regulation.
Comments: none

Vermont PSB continues alternative regulation plan

Weekly Update Courtesy of Utility Regulatory News #3969: Endorsing the price cap form of regulation for an electric utility, the Vermont Public Service Board has determined that the utility had been able to strengthen its financial position as a result of its alternative regulation plan (ARP).

The board found that the utility, Green Mountain Power Corp., had instituted an ARP that was in the best interests of its ratepayers and that the ARP, as compared to traditional cost-of-service rate making, allows the utility to respond more quickly and effectively to changes in operating costs. Nevertheless, the board agreed that some updating was needed. To that end, the board authorized both the retention of the salient features of the utility’s existing ARP and the addition of certain new provisions. One of the terms kept from the current plan is an annual adjustment to the utility’s rate of return on equity (ROE) based on yields from 10-year Treasury notes. However, the new plan offers a revised performance-based adjustment for ROE, under which Green Mountain Power’s efficiency and productivity will be measured against a benchmark group of utilities. The updated ARP also includes an inflation-adjusted capping mechanism for non-power costs, whereas the existing plan relied on a fixed dollar ceiling for such costs.

The board deemed the ARP changes appropriate given the collective experience of electric utilities operating under ARPs in the state. In the board’s view, the modified plan will facilitate more accurate capture of the impacts of inflation over time.

Observing the continued volatility in both energy and financial markets, the board ruled that such inflation adjustments marked a significant improvement in the utility’s ARP. For the full story, Subscribe to URN.

Posted: June 9th, 2010 under Uncategorized, efficiency, finance, green energy, regulation, renewables.
Comments: none

PSC says state’s consumers bear unfair burden

Weekly Update Courtesy of Utility Regulatory News #3969: Pointing to long-standing problems with cost allocations among the various operating companies of the Entergy Corp., the Arkansas Public Service Commission has again exhorted Entergy Arkansas, Inc. (EAI) to spin itself off from its parent company and become a stand-alone entity.

The commission had first raised the prospect of such a move in February 2010, when it initiated an investigation into EAI’s possible withdrawal from the Entergy operating system. The commission indicated that it would like to see EAI serve as an individual utility and join either the Midwest ISO or the Southwest Power Pool. Although EAI’s president had offered assurances at a recent PSC hearing that EAI was seriously examining the option of restructuring as a stand-alone company, the commission noted that reports in the press and public statements from EAI appeared to show otherwise.

The commission expressed concern that maintaining the status quo places Arkansas ratepayers at a disadvantage because a disproportionate amount of common costs from Entergy’s systemwide operations are assigned to EAI. Citing figures showing that Arkansas ratepayers have subsidized Entergy customers in other states by more than $4.5 billion in the last 20 years, the commission asserted that a spin-off of EAI as a stand-alone entity would be the best way to assure that such improper cost allocations do not continue. For the full story, Subscribe to URN.

Posted: June 9th, 2010 under M&A, Uncategorized, finance, regulation, transmission regulation.
Comments: 1