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IOU dividends fall as free cash flow sinks
But merchant margins to rise, says study sponsor Accenture
VIENNA, Va., Sept. 4 /PRNewswire/ -- Investor-owned power and gas companies spent more than $80 billion on capital investments in 2007, and at least $200 billion from 2005 through 2007, according to a report in the September issue of Public Utilities Fortnightly magazine (http://www.fortnightly.com).
The fourth annual Fortnightly 40 report -- published by Public Utilities Fortnightly and sponsored by Accenture -- ranks the three-year shareholder value performance of U.S. investor-owned utilities (IOUs) and other companies active in electric power and gas industries. The F40 methodology, developed by Public Utilities Fortnightly and the C Three Group of Atlanta, uses a modified Du Pont model to rank companies' shareholder value by comparing publicly reported financial data -- such as profit margin, return on equity (ROE), return on assets (ROA) and sustainable growth.
Companies topping the F40 ranking this year are Energen, PPL and National Fuel Gas. Achieving the 40-company ranking for the first time are Dominion Resources (17), Alliant (26), El Paso Electric (31), Delta Natural Gas (35) and CenterPoint Energy (38). One of the biggest movers in the F40 is New Jersey Natural Gas, which ranks 10th this year after falling off the list last year, and ranking 38th in the 2006 F40. Several major utility holding companies failed to make the cut this year. Examples include Constellation Energy, FPL Group, Duke Energy and Progress Energy.
Data in the report show that average stock prices for the 2008 F40 companies grew by about one-third during the period from 2005 through 2007, while average dividend yield fell by 50 basis points during the same period -- from 3.7 percent to 3.2 percent. These trends tracked a major surge in capital spending; the F40's cap-ex grew by 47 percent from 2005 to 2007, with the F40 companies dedicating $96.2 billion to capital expenditures over the three-year period. The entire 87-company sample spent nearly $200 billion.
"The utility industry's Big Build officially has begun," said Michael Burr, editor-in-chief of Public Utilities Fortnightly and author of the report. "The F40 companies spent more on cap-ex in 2007 than they earned from continuing operations, signaling the beginning of a long period of negative free cash flow. We'll be running in the red for several years as the build-out proceeds."
Utility executives interviewed for the report confirmed aggressive plans for new construction. "Over the next four years, projects we have planned and underway will more than double our domestic transmission rate base," said Paul Farr, CFO of PPL Corp.
At the same time, however, the F40 companies' returns are rising -- largely in proportion to their participation in deregulated markets. "For the first time since the Enron collapse and the industry's refocus on core business, the pendulum has shifted toward commodity exposure driving returns," said Jack Azagury, a partner with Accenture. "If you have E&P exposure, or a big merchant-power portfolio, margins will be very strong for the next few years."
Allowed returns among rate-regulated utilities face pressure, however, as rising costs for commodities, labor and cap-ex make their way into rate cases, and state utility commissions try to prevent rate shock among retail customers. "Managing regulatory relationships is perhaps the biggest challenge utilities will face," said Jean Reaves Rollins, managing partner with the C Three Group. "Getting those relationships right will determine utilities' financial health in the future."
In the same issue as the F40 report, Public Utilities Fortnightly published data showing that over the past dozen years, the average authorized ROE for U.S. electric and gas utilities has declined by about 180 basis points -- from just over 12 percent in 1996 to less than 10.5 percent today. "To the degree the utility industry is becoming more uncertain and complex, regulated ROE is going in the wrong direction," Burr said.
The 2008 Fortnightly 40 Ranking
Copyright 2008, 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 2008 (http://www.fortnightly.com). Sponsored by Accenture, with methodology and analysis provided by the C Three Group.
1 Energen
2 PPL
3 National Fuel Gas
4 DPL
5 Exelon
6 TECO Energy
7 CLECO
8 Questar
9 EnergySouth
10 New Jersey Resources
11 Southern Company
12 Entergy
13 Edison International
14 FirstEnergy
15 Equitable Resources
16 MDU Resources
17 Dominion Resources
18 Nicor
19 AGL Resources
20 OGE Energy
21 Sempra Energy
22 Public Service Enterprise Group
23 Allegheny
24 Nstar
25 South Jersey Industries
26 Alliant
27 SCANA
28 PG&E
29 Northwest Natural Gas
30 DTE Energy
31 El Paso Electric
32 WGL Holdings
33 UGI
34 Ameren
35 Delta Natural Gas
36 Vectren
37 Piedmont Natural Gas
38 CenterPoint Energy
39 MGE Energy
40 Otter Tail
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 production, transmission and distribution of electricity and natural gas. For nearly 80 years, Public Utilities Fortnightly has delivered expert analysis and exclusive interviews 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 (http://www.fortnightly.com/puf_order.cfm).
Contact: Michael T. Burr
320-632-5342
Burr@pur.com
SOURCE Public Utilities Reports, Inc.
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