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The Fortnightly 40

The 40 Best Energy Companies

Fortnightly Magazine - September 2009

The industry’s best companies are weathering the financial storm reasonably well, with the F40 delivering equity returns in the 14-percent range for fiscal 2008. However, falling sales and rising costs are putting heavy pressure on balance sheets—and on regulatory relationships. Companies that balance customer value and shareholder value will be most likely to thrive in the new normal.

For the past five years, the Fortnightly 40 report has provided a snapshot of the industry’s financial status and progress—specifically focusing on long-term shareholder value. Each year we’ve plumbed a gold mine of financial data provided by the C Three Group LLC in Atlanta, to reveal interesting trends and correlations. And we’ve interviewed CEOs and CFOs at some of the exceptional companies in the ranking, and talked to analysts to gain insights into the industry’s direction.

We did the same things this year. Unfortunately, the task is vastly more challenging this year, for one obvious reason: Three-fourths of the way through 2008, Wall Street fell apart and the economy went into a tailspin unlike anything seen since the 1930s.

Many factors affect the fortunes of America’s utility companies—not the least being business strategy, operational efficiency and regulatory relationships. However, these inevitably take a back seat in a financial crisis of this magnitude. As a result, this year’s Fortnightly 40 survey raises as many questions as it answers.

For example, equity returns took a dive after September 2008, but most likely the magnitude of that descent isn’t fully reflected in annual financial data covering the whole fiscal year. Similarly, capital spending in 2008 continued the strong upward trend exhibited in the previous year (see Figures 4 and 7) , but many companies have deferred or scaled back spending—including cap-ex—since late 2008 when the F40’s data window closed.

Despite uncertainties about post-2008 data, the numbers suggest most utilities fared reasonably well last year—certainly better than many companies in other industries. Equity returns for the companies ranked among the F40 inched back to 14.6 percent from last year’s 15.4 percent—an impressive showing in a distressed economy. Dividends remained strong for the vast majority of investor-owned utilities, despite the market turmoil (see Figure 10) . While this is a reassuring sign, it isn’t too surprising considering the utility industry’s annuity-like reputation for delivering stable and consistent returns.

Behind the data, however, lurk some sobering trends. Most notably, electricity sales have fallen—precipitously in some areas—putting pressure on operating margins and financial returns (see Figures 8 and 9) . Whether the decline in returns is a short-term dip or a long-term trend remains unclear. In some cases, regulatory lag might be at least partially to blame, and returns will come back when newly-built assets fully enter the rate base. The decline in electricity sales, however, can’t easily be explained away. Anecdotal reports suggest a substantial share of recent demand destruction might prove to be permanent—partly because of the recession, and partly because of rising conservation, demand response and greenhouse-gas (GHG) reduction

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