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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Earnings sharing mechanism limits ratepayer impact

Weekly Update courtesy of Utility Regulatory News #3981: Discovering that an electric utility’s rate of return on equity (ROE) had slid to below 6% in 2009, the New Hampshire Public Utilities Commission has granted the utility a distribution rate increase of $45.5 million and has authorized it a ROE of 9.67%.

The utility, Public Service Co. of New Hampshire (PSNH), had shown that it had realized a ROE of only 5.54% as of March 31, 2009, a level that the commission said was dispositive of the utility’s financial distress. In an attempt to help PSNH avoid any further erosion of revenues, the commission instituted an earnings sharing mechanism for the utility, which sets the benchmark ROE at 10%, slightly above the authorized ROE. Under the sharing formula, to the extent the utility earns a ROE above 10%, 75% of the excess is to be allocated to customers and 25% will be retained by shareholders. The sharing mechanism is noteworthy in that the ratepayer portion is more generous than the allocation protocols of most sharing formulas, which often require only a 50/50 sharing.

The mechanism put in place for PSNH also has another feature that sets it apart, in that it provides that should PSNH experience a ROE of 7% or less for two consecutive quarters, it may petition for additional rate relief from the commission, regardless of how much time remains in its then-current rate agreement.  The commission averred that such a provision should prevent the utility’s financial condition from slipping to the point it had in 2009. Subscribe to URN for the full story.

Posted: August 13th, 2010 under recession, regulation.
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NY PSC Phases-In Hike to Soften Blow in Weak Economy

July 22, 2010 - Weekly Update From Utility Regulatory News #3977: In recognition that the local economy remains in an underperforming mode, the New York Public Service Commission, in authorizing new rate schedules for an electric and natural gas utility, has postponed as long as possible certain of the rate increases approved therein. The commission said the new three-year plan for Central Hudson Gas & Electric Corp. (CHG&E) takes into account the torpid economy and seeks to mitigate the impact on ratepayers by delaying a substantial portion of the increase to the plan’s second and third years, in the hopes that the economy will have improved by then.

For electric distribution service, CHG&E is allowed to raise rates by $11.8 million in the first year, $9.3 million in the second year, and $9.1 million in the final year. Of the initial increase, the commission estimated that approximately 80 percent of the higher charges were necessary to cover additional local property taxes, the capital costs of infrastructure projects, and uncollectibles expenses, which have grown as the economy has soured. For natural gas delivery service, CHG&E is permitted to raise rates by $5.7 million in the first year, $2.3 million in the second year, and $1.6 million in the third year. According to the commission, about 50% of the first year increase is attributable to the same three items cited for the electric increase.

The rate plan includes an earnings sharing mechanism that is weighted toward customers, with ratepayers entitled to 50 percent of any earnings exceeding a 10.5 percent return on equity (ROE) in any one year. Should CHG&E’s earnings exceed an 11 percent ROE, the customer share would rise to 80 percent, and that share would go as high as 90 percent if the utility’s ROE reaches 11.5 percent or higher.

The commission expressed optimism that the earnings sharing mechanism will be of significant value to ratepayers should the economy finally begin to recover. Subscribe to URN for the full story.

Posted: July 22nd, 2010 under recession, regulation.
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Tax consequences of federal health care reform cited in DPUC’s decision

July 22, 2010 - Weekly Update From Utility Regulatory News #3977: Although acknowledging that the local economy remained sluggish, and that an electric utility seeking additional revenues already had among the highest rates in the country, the Connecticut Department of Public Utility Control (DPUC) has nevertheless authorized the utility, Connecticut Light & Power Co. (CL&P), to raise its rates by more than $100 million over the next two years.

The department explained that the company had demonstrated that it actually had postponed its rate filing by a year out of sensitivity toward its ratepayers and that it also had forgone claims for certain expenses for the same reason. According to the DPUC, the poor economy has taken a toll on the utility, not just its customers, such that a rate increase was warranted. In fact, despite trimming some of CL&P’s operational expenses, it actually boosted one cost category, that of vegetation management. The DPUC said that it was important to keep power lines cleared of overgrown trees so as to reduce the number and duration of service outages caused by downed power lines.

The department also found that certain accounting changes required under the federal government’s new health care reform bill would affect the utility’s tax liabilities. Because that new law eliminates the corporate tax deduction for expenses allocable to Medicare Part D subsidies beginning in 2013, CL&P will not be able to realize tax benefits associated with certain deferred tax assets already on its books.

Even though those changes will not take effect until after the instant rate-effective period ends, the DPUC agreed that it would be appropriate to create a regulatory asset now to reflect the total projected impact of the reform legislation. Subscribe to URN for the full story.

Posted: July 22nd, 2010 under recession, regulation.
Comments: none

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Sept. 1, 2009

FOR IMMEDIATE RELEASE

Contact:
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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