State commissions are having a real impact on the value of the stocks we follow. The top three and seven of the bottom 10 of the “April 2008 Winners and Losers” were propelled upward or downward by state regulatory issues. (See chart.) The good news? Only eight companies were in negative territory for the month.
Rapidly increasing capital expenditures coupled with increasing fuel, purchased power and natural gas costs will continue to challenge utility management for the foreseeable future. How state regulators deal with these issues will determine the fate of the equities of the more regulated components of our indices. Those companies with pre-approved allowed returns on construction expenditures (or similar mechanisms) and those companies with adequate fuel and purchased power recovery clauses are likely to perform better than those without.
Case in point: PNM Resources has seen more than half of its market value wiped away by the initial recommendations of a $60 million-plus decrease in rates by the commission staff in New Mexico. This at a time when virtually all costs that PNM is facing are increasing. After much angst and maneuvering, including having the governor intervene, a final order was approved for a $33 million increase, but still without approving a rational fuel cost adjustment mechanism. Further hearings are scheduled. Since this order, PNM has recovered some, up about 16 percent from a March 2008 low of less than $10 per share.
As one utility CEO once told me, “I have one customer where we have everything right—the state commission. If we don’t get that right, nothing else works.”
The less regulated natural gas companies continue to beat all of our other indices year-to-date, for 12 months and for five years. During the past 12 months, the Less Regulated Gas Focus Index is the only one back on positive ground. During mid to late 2007, the Dow Jones Industrial index had for the first time in the past six years outperformed any of our indices. However, during the past few months, it has given up its lead over our less regulated electric and less regulated gas indices.
For more, visit www.cthree.net.