Business & Money

Deck: 
Lehman Brothers and others say upcoming rate cases and falling unregulated earnings mean some IOUs will have less to show for their effort.
Fortnightly Magazine - July 1 2003
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Lehman Brothers and others say upcoming rate cases and falling unregulated earnings mean some IOUs will have less to show for their effort.

Even as utilities enjoy the spoils of higher valuations as a result of the dividend tax repeal, institutional investors and Wall Street experts predict a continued threat to earnings from upcoming rate cases and underperformance in unregulated activities. Daniel Ford, equities analyst at Lehman Brothers, in a report titled A Blast From the Past, says, "The enacted dividend tax reduction is now fully incorporated into utility valuations. Dividend safety and growth will become important for individual electrics to maintain their new higher valuations."

Ford's concern is that rate cases are likely the greatest threat to utilities' dividend growth and safety. "[Lehman Brothers] expects a surge in regulatory activity in the coming years arising from 1) low interest rates; 2) the end of deregulation transition periods; and 3) new capital investments and costs not reflected in rates.

Historically, Ford notes, allowed returns or return on equity (ROE) have been 393 basis points above the 10-year Treasury yield (+/-153 basis points), which implies decisions in the 9 percent plus range could be ahead. In addition, experts say this may mean quite a clip in ROE for some utilities, as Lehman Brothers own research shows many utility companies are enjoying several hundred basis points above that level.

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