by Teresa Hansen, editor in chief
The utility financial rankings were described as “quiet” in 2005, “very good” in 2006 and “remarkable” in 2007. From these descriptions, it’s clear that utilities’ financial performance trended upward for several years in a row. The 2008 financial rankings, however, show a different trend. Jean Reaves Rollins, who has provided the financial data for this report for the past few years, said the 2008 rankings indicate the industry is “showing signs of weakness.”
When interviewed for this report last year, the country was already experiencing the recession’s impact, and Rollins predicted that 2008 would see a turn down. She did not think a year ago, however, that it would hit utilities as hard as it did.
“The financial services meltdown was just becoming apparent (last September), and its impact on the general economy took most by surprise,” Rollins said.
As in years past, Rollins, head of The C Three Group–a senior management and research advisory firm to the energy industry–provided data and commentary for this report, which provides Electric Light & Power readers with a glimpse at utilities’ financial performance and health. For readers who wish to compare the market results year-after-year, previous reports are available in archived September-October issues at http://elp.com.
Overall Revenue Up, But Not for Everyone
“While overall revenue was up almost 9 percent, income from continuing operations dropped year-over-year by 4 percent, the first time in four years,” Rollins said. “A number of utilities saw their actual revenues drop, in many cases, reflecting rapidly decreasing unit sales, especially in the last half of 2008.”
Rollins predicts that in 2009 utilities will experience significantly decreased unit sales, which will be reflected in reported revenues.
As Table 1 on page 21 illustrates, the utilities holding the top 10 slots in the total revenue rankings changed little from the previous couple of years. While there was a little movement in the order of the top 10 companies, only one newcomer, Integrys Energy, managed to break into the top 10 list, while Consolidated Edison slipped out of the top 10.
Integrys Energy’s revenue growth was driven in part by its acquisition of Peoples Gas in 2007 and significant revenue growth in its nonregulated businesses, Rollins said. Integrys is in the process of divesting most of its nonregulated businesses.
Capital Expenditures and Free Cash Flow
Not surprisingly, 2008 saw a decrease in capital expenditure growth, but not an actual decrease in capital spending from 2007 to 2008, Rollins said. She expects this trend to continue into 2009.
“Generally, the industry has made minimum capital investments in the past 30 years,” Rollins said.
A period came after the build out of the U.S. nuclear power plant fleet where focus was on getting balance sheets more balanced. Then came the deregulation trend where for years utility executives faced tremendous ambiguity about what would be regulated and what would move to unregulated status, she said.
“Now we are in a period of catch up,” Rollins said. “Environmental compliance, new technologies such as smart meters and smart grid, renewable energy, demand growth and aging existing infrastructure are all driving the need for new infrastructure and thus increasing capital expenditures.”
Based on anecdotal information, however, Rollins expects an upturn in capital expenditure growth in 2010 as the recession winds down and general economic indicators improve.
“Capital expenditures are increasing and so are asset bases,” she said. “There was more than 9 percent growth in the asset base of the industry from 2007 to 2008, and we expect to see further growth in 2009.”
Rollins said all of these capital expenditures are taking a toll on free cash flow. An almost 90 percent growth in negative free cash flow year over year was seen from 2007 to 2008. Although many companies slashed budgets in 2009, capital and noncapital free cash flow are still expected to take utilities further into negative territory. This trend is being driven by the significant downturn in unit sales.
Dividends Up, But Growing Slower
In last year’s report, Rollins said that shareholders were the big winners due to dividends and share prices. While most utilities are still paying dividends to their shareholders, the dividends are declining along with share prices.
“Dividend policies are still fairly sacred in this industry,” Rollins said. “Integrys and Great Plains both cut their dividends in 2009 and saw an immediate hammering of their stocks. While divided payout was up more than 6 percent from 2007 to 2008, we do not expect to see that kind of growth from 2008 to 2009.”
Generally, utility stocks are still trading at 15 to 20 percent below their highs back in June 2008.
In addition, Rollins said another trend has emerged: For the first time since 2002, utility stocks on average are not outpacing indices such as the Dow Industrials and the S&P 500.
Climate Bill Adds Uncertainty
While utilities have been focused on adjusting to and operating in the economic recession, many have an even bigger issue to address–pending environmental legislation. In late June, H.R. 2454: American Clean Energy and Security Act 2009, also known as the Waxman-Markey bill, was approved by the House and sent to the Senate. This bill includes a cap-and-trade provision for dealing with greenhouse gas emissions.
Just how much such a bill will cost the industry and its customers is the subject of much debate. Some estimates show the cost to be as low as $175 per household, while others come in above $1,000 a year per household.
At this point, the true cost is still unknown, but utilities will feel an impact.
“Separating the spin from reality on both sides of this issue is difficult,” Rollins said, “but if passed with its intended purpose, those companies with less reliance on coal should be the winners.”
In addition, no one knows whether the Senate will approve a version of the bill this year. Most people in the industry agree that if a bill is not sent to the president’s desk in 2009, some version of a clean energy bill will be signed into law in 2010.
“It is not clear that a cap-and-trade bill will pass this session, and if it does, it isn’t clear what it will actually contain,” Rollins said. “There are very powerful interests on both sides of this issue. It is likely that if a bill does pass, it will be a muted version.”
A pending clean energy bill and a weak economy have affected and will continue to affect utilities in 2009 and beyond. Next year’s numbers will tell us how much.