Financial rankings 2001: Inventory of black eyes & bruises

Pam Boschee, Managing Editor

Not many investors will wax nostalgic about the overall financial state of energy companies in 2001. Utilities, in general, probably won’t be including the year in any retrospective looks at historical high points.

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For many people (including utility execs), the year shaped up as one to forget. (And for some dismissed execs, it was the year that kicked off the “forgive and forget” periods of their careers, referred to in politically correct parlance as “pursuing other business and personal interests.”)

Dark cloud of debt

The struggle of many utilities to stay afloat was emphasized again at press time by Standard & Poor’s (S&P) Rating Services. They reported that U.S. utilities and energy merchants that piled on debt to finance the acquisition and construction of power plants in recent years are now faced with refinancing about $30 billion of shorter-term debt over the next 18 to 24 months in the bank and capital markets.

A number of companies improved their positions in late August by taking advantage of a reopening of the corporate bond market.

Tampa Electric, a regulated utility of TECO Energy, raised about $550 million. Constellation Energy Group Inc., which has both regulated and unregulated operations, raised $500 million, and Northern States Power, a regulated utility of Xcel Energy Inc., raised $450 million. ONCOR Electric, the regulated utility of TXU Corp, sold $1 billion in debt. National Rural Utilities Cooperative Finance raised $1.25 billion. National Rural plans to raise close to $6 billion in total during 2002,which it will then lend to small, rural utilities.

Lower funds from operations, greater reliance upon asset sales to maintain liquidity and a more difficult environment for raising capital were noted as contributing to an unprecedented confluence of operational and financial challenges. Consequently, S&P said liquidity would become a much more important component of credit analyses.

S&P also reported that the ratings trend for the U.S. power industry remains negative, with the average rating at BBB+ after a continuing series of downgrades. Of the 21 rating actions summarized in an early August report, all but one were downgrades.

There doesn’t seem to be much promise of a turnaround any time soon. S&P predicted that downward pressure on ratings is likely to continue. Counting each company and subsidiary separately, the number of issuers with negative ratings outlooks or CreditWatch listings stands at 108-more than six times the number of issuers (17) with positive outlooks or CreditWatch listings.

Cheryl Richer, a director in S&P’s U.S. Utilities, Energy and Project Finance group said, “The deteriorating credit picture of many U.S. investor-owned power companies can be traced to the large amounts of debt raised to fund unregulated business ventures or acquisitions. Further hampering their credit outlook is the constrained access to capital markets as a result of investor skepticism over accounting practices and disclosure.”

Going by the numbers

Data was provided by PennWell’s MAPSearch, an information provider to the oil, gas, electric and related industries. Its electric database includes transmission lines, power plants, municipalities, rural electric areas, investor-owned utilities, substations, NERC regions and non-utilities.

Additional data and analyses were provided by The C Three Group, Atlanta, which provides corporate advisory and consulting services, merger and acquisition support, venture capital support, custom market research and benchmarking, in-depth research reports, and hands-on workshops on topical issues.

Data was derived from annual reports/10K, income statements, statement of operations, statements of cash flow, company FERC Form 1, electric operation and maintenance expenses, electric/utilities operating data or statistics. MAPSearch included calculated data for electric operating revenues, electric operating expenses and net electric operating income.

Table 1 provides a general overview of electric holding companies. The top six total revenue generators in 2001 were: Public Service Enterprise Group Inc. ($98B), American Electric Power Co. ($61B), Duke Energy Corp. ($59B), Dynegy Inc. ($42B), and Reliant Energy Inc. ($41B). While earnings per share (EPS) generally increased in 2001 compared to 2000 (43 of the listed 76 companies), dividends per common stock remained unchanged overall.

David Nastro, executive director at Morgan Stanley’s power group, stated, “EPS growth is no longer the driver for many companies. It’s all about balance sheet strength, liquidity, and business model clarity.”

Table 2 shows that 2001 was a very good year for trading and marketing-at least prior to the ricochet of Enron’s shrapnel. Trading and marketing revenues and income, in most cases, were robust and significantly greater than in 2000. The top three companies for which data was available in trading and marketing revenue in 2001 were American Electric Power ($56B), El Paso Energy Corp. ($53B), and Duke Energy ($43B).

The bottom dropped out for many energy traders and marketers post-Enron. Scrutiny of accounting practices left many of the big dogs whimpering.

Dynegy, CMS Energy Corp., Williams Cos., Aquila, and El Paso Corp. were hawking their prized assets. The sellers offered bargain basement prices, hoping to bolster crumbling bottom lines. But, for many of them, the red ink continues to flow.

Entering the trading arena now are Wall Street firms. For example, Deutsche Bank’s U.S. securities unit and Bank of America Corp. hope to capitalize on their topnotch credit ratings, experience in commodities trading, and risk management skills. UBS Warburg bought the trading business of Enron Corp. Investment bank Morgan Stanley is actively involved in physical trading through its Morgan Stanley Capital Group, and Goldman Sachs Group Inc. is also involved in trading.

Eyeing equity

Table 2 also includes equity indicators. EL&P included return on equity (ROE) for use as an indicator of management’s ability to get the job done.

ROE may be viewed as a composite of profitability, asset management, and leverage. Investors can use ROE to gauge whether a company is an asset creator or a cash consumer. If the ROE is 20 percent, for example, then 20 cents of assets are created for each dollar that was originally invested.

Comparisons between 2000 and 2001 ROE show that only 29 of the 75 companies (for which data was available for both years) had an increased ROE. However, one company certainly deserves special mention.

RGS Energy, headquartered in Rochester, NY, showed an ROE increase of more than 200 percent between 2000 and 2001. Its chief subsidiary, Rochester Gas & Electric Corp., supplies regulated electric and gas service within a 2,700 square-mile service territory with a population of one million people.

In March 2002, the Edison Electric Institute presented the EEI Index Award to RGS Energy for having the highest total return for the five-year period ending Dec. 31, 2001. RGS Energy’s rewarded its investors with a 171.9 percent total return during that time span.

Looking at long-term debt to equity, Table 2 shows an increase from 2000 to 2001 for 38 of the 78 companies listed. The top three heavyweights are UGI (533 percent), Westar (527 percent), and MidAmerican Energy (416 percent).

Looking ahead

Forecasts for investor-owned utility recovery are generally linked to the overall recovery in the U.S. economy. Infrastructure and capital constraints add to the weak forecast. The commodity trading markets and the energy traders/marketers clearly have tenuous courses ahead of them.

EL&P’s report for year 2002 is quite likely to show a continued departure of the weakest links in the industry.

For additional information about PennWell MAPSearch, visit, or call 800-823-6277. The C Three Group recently released its Financial Performance Measures of U.S. Investor-Owned Utilities copyright2002. For more information, visit http://www.cthree. net/reports/performance/index.html, or call 404-233-8555.

Click here to view Table 1 Electric holding companies overview
Click here to view Table 2 Trading & marketing & equity indicators

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The Clarion Energy Content Team is made up of editors from various publications, including POWERGRID International, Power Engineering, Renewable Energy World, Hydro Review, Smart Energy International, and Power Engineering International. Contact the content lead for this publication at

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