(September 2007) The impact of dividend policies, capital expenditures, and publicly traded equities highlights an in-depth look at what goes into the modified Dupont Model behind the ...
The Fortnightly 40
market, the F40 rankings reinforce the value of solid regulated utility operations—especially those in favorable rate-making environments. Of the companies that moved the most in the F40 rankings (see Figure 2) , many went through significant rate cases in 2007.
For example, Virginia lawmakers rolled back retail competition in the state and enacted new policies considered favorable to integrated utility companies. Consequently, Dominion Resources ascended from deep below the rankings last year to 17th place this year. And Alliant Energy, which jumped into the 26th position this year, prevailed in its petition before the Wisconsin Public Service Commission in 2007, securing a $26 million rate increase and favorable clarification of its allowance for funds used during construction (AFUDC).
On the other hand, Ameren Corp.—which slid to 34th place this year, from its number-18 position two years ago—has faced contentious battles with lawmakers in Illinois and Missouri. Last year, the Missouri Public Service Commission approved only $43 million of Ameren’s $361 million requested increase, and in late 2006, the Illinois Corporation Commission (ICC) approved less than half of the company’s $202 million filing. In 2007 Ameren’s Illinois utilities gave up $150 million in rate relief in a negotiated settlement, and the company now is asking Illinois regulators for a $247 million rate increase. Although the Illinois Commerce Commission hadn’t ruled on the case at press time, ICC staff reportedly recommended granting only $47 million of Ameren’s request. Such an outcome could bode ill for the company’s ability to recover $900 million in planned cap-ex in Illinois, and would put further pressure on Ameren’s credit ratings—which have fallen to just above junk status in recent years.
Similarly, citing a combination of poor performance in unregulated markets and regulatory risks, rating agencies have downgraded the credit ratings of PNM Resources multiple times since early 2007. The most recent action, in May 2008, followed an unfavorable ruling by the New Mexico Public Regulation Commission, which among other things denied two-thirds of the company’s requested $33 million construction-work-in-progress allowance, and trimmed the authorized ROE in PNM’s most recent rate case to 10.1 percent, from the requested 10.75 percent. The commission had contemplated an even skinnier 9.71 percent ROE, which would’ve weakened the company’s already shaky financial position. “PNM’s large capital expenditure program over the next several years increases its dependence on capital markets, which have become volatile and more unpredictable,” Morin said in his testimony before the commission. “This is certainly no time to recommend what would be the lowest ROE award in the country for a major integrated electric utility.” (See “ Diminishing Returns ”.)
PNM has never made it to the ranks of the F40—and won’t any time soon, unless its fortunes change dramatically. In August 2008, the company reported a $143.5 million second-quarter loss, after writing off $140.7 million in impaired assets and abandoning plans to expand the Twin Oaks power station.
“Two fundamental elements drive performance,” Azagury says. “They are regulatory relationships and commodity linked returns.”
Both might become more complicated in the future, as commodity prices and capital spending put increasing