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Greening IOU Equities

Low-carbon strategies are yielding rewards for shareholders.

Fortnightly Magazine - March 2008

six integrated electric and gas companies have top-ten 2007 TSRs; interestingly, five of these companies have strong nuclear generating capabilities (PSE&G, Constellation, PPL, Exelon, and Entergy), indicative of how the market rewards companies with these power-plant assets. The other integrated electric and gas company in the top ten—Allegheny—represents a continuation of a recovery story.

Among the bottom ten utilities in 2007 (see Figure 3) were seven of the 47 integrated electric and gas companies, with PNM at the bottom of the list, having missed earnings expectations in the first three quarters of 2007. Interestingly, three of the utilities on this list—Pinnacle West, Unisource, and Southwest Gas—have significant operations in Arizona, a state with both an unfavorable regulatory environment and slowing customer growth.

Eight companies—PSE&G, NRG, Constellation, PPL, Williams, Energen, Exelon, and Allegheny—have achieved top-ten TSRs both in 2007 and from 2005-2007. Further, the two “new” companies in the top-ten utility list in 2007—Reliant and Entergy—both were ranked as top-quartile performers over the three-year period.

On a three-year TSR basis, strong similarities are evident among the losers in the IOU portfolio. The four companies with the lowest three-year TSRs—Aquila, PNM, Hawaiian Electric, and NiSource—appear on both lists. These companies have underperformed for a variety of reasons, from continued missed earnings estimates (PNM) to general financial concerns (NiSource). Additionally, two of the seven energy delivery companies (Energy East and Central Hudson) are on the list of bottom-ten utilities based on three-year TSRs, while a third (United Illuminating) is just outside the bottom ten for one-year TSR, potentially indicating the market’s perception that growth prospects are limited by these utilities’ lack of generating assets.

Carbon & Shareholder Return

Given 2007’s heightened attention to carbon emissions and the overall green position of utilities, the one-year and three-year TSRs merit an analysis from a green perspective. Specifically, companies’ generation portfolios are compared in terms of carbon exposure (annual tons of CO 2 emitted/total installed MW) and their relative non-carbon position (nuclear and renewable capacity) to answer the following questions:

• Does a company’s non-carbon generation position ( i.e., nuclear, renewables) have an impact on TSR?

• How does the carbon exposure of a company’s generation portfolio impact TSR?

These findings proved very interesting. 2, 3 Generally, 2007 TSR correlates to overall green position (see Figure 4) , although there is some significant variation in performance.

In short, companies with the highest relative amount (in percentage terms) of non-carbon generation capacity have higher TSRs.

Five of the top seven companies with the highest amount of non-carbon generating capacity, had returns of over 20 percent in 2007. Additionally, the top quartile of companies based on this metric averaged returns of 26 percent, compared to an average of 10 percent for the remaining companies in the portfolio. These percentages are even more compelling when taking into consideration that companies with significant hydropower assets are weighing down returns— i.e., the five companies whose assets are over 15 percent hydro (Avista, Idacorp, PG&E, Portland General, and CMS) had an average return of -0.4 percent. Generally, these companies all had to