Electric Utility Industry Financial Analysis

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Electric Utility
Financial Analysis

Electricity has become a basic necessity in our lives. Without it, businesses would stop production losing millions of dollar by the hour, and people would dramatically change their comfortable lifestyle. For most people, electricity is a “given” in their lives because everything we do is in function of electricity, and at the same time, we do not understand or are aware of the importance of electric power production and the commitment that electric utilities have to their customers. Electric utilities refer to a government or investor owned industry primarily involved in the generation, transmission and distribution of electricity to the end user customer. An industry with the reach and staying power that public utilities possess appears to be a worthy long term investment to a prospective investor because of its attractive stability. THE PUBLIC UTILITIES INDUSTRY

Electric utility companies provide electricity services for citizens/industrial groups throughout the United States, though some of these companies are owned by foreign corporations and are listed on foreign exchanges. With few exceptions, these utility companies are regulated by special commissions set up by the states in which they operate and ultimately by the Federal Energy Regulatory Commission on a national level. This is because these companies, known as natural monopolies, require so much capital to operate that it is more efficient for there to be only one company serving a given area. One of the major responsibilities of the state utility commissions are to set what they believe to be fair and reasonable rates of returns for the utility companies. These rates of return do not necessarily mean that the company will achieve said rates, but rather that they are authorized to design the base rates of its operations to achieve this return. Ultimately investors must still monitor the performance of utilities, as they can still, and often do, underperform. Competitors and marketability are not deciding factors for customers when deciding on a particular utility company due to the monopolization of the utility industry. Despite the ceiling on potential returns, investors are still drawn to these stocks for their very consistent dividend returns. Still, these investments remain influenced, mainly by macroeconomic factors that affect customer demand. In times of economic crisis utilities face a reduction in demand with the closing of businesses and industrial plants, the penny pinching of the residential class customers, and the foreclosure of homes in the service territory of the utility. This reduction in demand, coupled with the fixed status of the company’s physical assets to accommodate the maximum possible demand to the system, means the company’s returns will suffer vastly. In fact, according to Value Line Investment Analyzer “Poor economic conditions weighed considerably on the demand for power, most notably among industrial consumers, which led to depressed top-line figures for several in the [electric east industry].” In the following pages, we will analyze the historical performance of some of the largest electric utilities in the United States (Consolidated Edison, Dominion, Duke Energy, Exelon Corporation and Florida Power and Light). We will also analyze the future expected performance of Dominion Inc. and the performance of Consolidated Edison relative to industry peers. UTILITY OVERVIEW AND PAST PERFORMANCE

For over 180 years, Consolidated Edison has served metropolitan New York.  Consolidated Edison, Inc (ED) is a holding company of Consolidated Edison Company of NY and Orange and Rockland Utilities, Inc (O&R). It is one of the largest publicly owned holding companies in the US.  The main subsidiary is Con Ed of NY who distributes electricity to over 3.2 million residents and businesses in New York...
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