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Financial News

Fortnightly Magazine - November 15 1996

one would expect. Increased stock prices should be associated with utilities having greater earnings and providing greater annual incomes to their stockholders. The equity-debt ratio also positively affected the M/B ratio, indicating more leveraged utilities tended to have lower M/B ratios. In turn, this showed the market penalized the use of debt financing.

Interestingly, the presence of least-cost planning requirements exerted a significant negative impact on M/B ratios. In fact, utilities with mandated least-cost planning averaged M/B ratios nearly 9 points lower than those that did not.

Model and Sample

Our model drew the hypothesis that successful and unsuccessful corporate strategies typically are rewarded or penalized by an increase or decrease in stock values, and that DSM investment should affect a utility's stock value. The simple equation used in modeling this information is quite similar to those used in earlier studies measuring the effects of such factors as rate of return on regulatory climate:

M/B Ratio = _(DSM, Financial, Managerial,

Operating, Regulatory)

Utilities pursuing a corporate strategy favored by the market can expect their M/B ratios to rise as stock prices are bid up relative to their book values.

The EIA collects a large volume of annual data on the financial and operating characteristics of private and public utilities. Fairly detailed information is available for approximately 180 of the largest investor-owned utilities. At the end of 1989, these utilities represented 99 percent of investor-owned utility sales and comprised just under 79 percent of total electricity revenues.

The Value Line Investment Survey also proved very valuable in the sample for the study. Value Line data included a various financial information, load factors, peak loads, capacities, rates of return, dividend pay-out ratios, and average ages of plants. Value Line also reported merger activities and bankruptcies. Utilities were dropped if they had merged with another utility during the four-year analysis period. (Merger year data are often inconsistent.) Other utilities were

omitted if they were not covered by Value Line or Moody's Utilities. A few utilities were removed from the sample due to significant foreign operations, or because most of their business activities were outside the electric utility industry. The final sample of holding companies, with complete data for the 4-year study period, included 81 holding companies representing 119 utility operating companies.


able 1. Samples


Sample Utilities

Operating companies reported by EIA 1990-1993 190

Operating companies dropped 71

Operating companies used in the analysis 119

Number of holding companies used in the analysis 81

Using the final sample (em electric holding companies (em provided a good indication of overall DSM impacts in the models estimated. In 1990, these electric utilities sold 60.7 percent of all electricity sold in the United States (em and 78.6 percent of the electricity sold by U.S. investor-owned utilities. In the same year, these utilities represented 83.5 percent of the total, nationally-reported DSM expenditures and 92 percent of DSM expenditures reported by all investor-owned utilities.

Available variables included detailed information on the companies' financial and operating characteristics, approximate demographic data on each utility's customer base, information on each utility's regulatory