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Goodbye Safe Haven?

Risk avoidance drives utility stock performance.

Fortnightly Magazine - March 2009

with strong regulatory relationships: Any discussion of future winners and losers must include a regulatory review, as regulatory relationships drive the performance for companies that generate the majority of their income from regulated operations. In 2008, some of the strongest performers included several gas distribution and energy delivery utilities that were able to recover their infrastructure investments. Winning utilities will continue demonstrating an ability to recover their infrastructure investments associated with clean energy ( e.g., renewable generation and transmission to support it, energy efficiency, smart grid and AMI), as well as traditional infrastructure investments in reliability. A constant in this industry is that utilities must maintain a focus on satisfying their customers and regulators, particularly given the tightening of credit and the potential for companies to increase capital investments in infrastructure.

While 2008 was a year when TSRs strongly were tied to the strength of utility balance sheets, a variety of issues will impact future utility TSRs. The question now is how utility management teams respond to the challenges set before them, particularly regarding the business opportunities, risks, and cost recovery associated with clean energy in this capital-constrained environment. The winners and losers in 2009 likely will be determined by their ability to leverage their balance sheets and regulatory relationships, as well as to capitalize on continued growth in clean energy, spurred by both the government and end-use customers.



1. To be included in this analysis, a company had to be publicly traded during the period 1/1/2008 to 12/31/2008 and be in one of the five industry sub-segments listed. The analysis excluded companies with less than $700 million in market capitalization.

2. Market-to-book ratios were computed based on end of 2007 year values for debt and equity. Analysis was performed on the integrated gas and electric segment.

3. Estimated, based on the market value of equity at the end of 2008, the market value of debt as of 3Q 2008, and the book values of debt and equity as of 3Q 2008.