One way that some utilities have been getting ahead of market changes is by issuing equity to pre-fund costs they expect to incur later. This generally takes two forms: equity forward contracts, and mandatory convertible offerings. Examples include Pepco Holdings, which sold about $350 million in shares on a forward basis in March, and PPL, which sold about $270 million in April. Also, NextEra Energy issued $600 million in three-year, mandatory convertible bonds on May 1, and another $650 million in September.

Both approaches carry a premium, but they allow utilities to capture today’s high stock prices in a forward sale. And some issuers have found banks hungry enough to participate in equity deals that they’ll take a substantial haircut for the opportunity. (See “BofA loses $12m on bought convert,” IFR 1932, May 2012.)

However, terms likely will normalize as soon as the current confluence of forces drives utilities back into the equity markets in earnest.–MTB

Our annual survey of power and gas company performance relies on a modified DuPont model, based on its 89 year-old namesake approach for calculating shareholder value in asset-intensive industries. In 2008 we tweaked the model—which originally was developed in 1919 by a finance executive at E.I. du Pont de Nemours & Co.—to measure growth on a long-term, sustainable basis (See sidebar “F40 Model Characteristics”).

The Fortnightly 40 model combines several common measures of financial performance—profitability, dividend yield, cash flow, return on equity (ROE) and return on assets (ROA)—together with a sustainable growth-rate calculation, to produce an overall picture of a company’s value and long-term prospects. To avoid the pitfalls of short-term fluctuations, the model evaluates four years of results for each company. (This represents a change from 2008 and previous F40 rankings, which considered three years of financial results.)

The universe for the ranking—which this year numbers 82 companies—includes publicly traded, U.S.-based companies with major assets in energy production, transportation and retail delivery, and positive shareholder equity value for the past four years. Pure-play mining and exploration & production companies are excluded, but a few pure-play merchant power generation companies are included in the sample.–MTB

Credits: The Fortnightly 40 model was developed in 2006 by former Fortnightly Executive Editor Richard Stavros and Jean Reaves Rollins, managing partner of the C Three Group in Atlanta.

F40 Model Characteristics

Time Frame: 4-year average

Sample: 80 largest U.S.-based investor-owned power and gas companies, with assets in power generation or electricity and gas transmission and distribution.

Components:

1. Profitability= Margin = Income from Continuing Operations/Total Revenues.

2. Dividend Yield= Annual Declared Dividends/Year-End Stock Price.

3. Free Cash Flow= Operating Cash Flow from Continuing Operations – Capital Expenditures.

4. DuPont ROE Five-Ratio Model:

a. Earnings after taxes (EAT) = Income from Continuing Operations after Taxes;

b. Earnings before taxes (EBT) = Income from Continuing Operations + Income Taxes;

c. Earnings before interest and taxes = Income from Continuing Operations before Income Taxes and Interest;

d. Revenues = Total Revenues;

e. Assets = Total Assets; and

f. Equity = Total Common Shareholders Equity.

5. DuPont ROE= (EAT/EBT)×(EBT/EBIT)×(EBIT/Revenues)×(Revenues/Assets)×(Assets/Equity).

6. DuPont ROA= (EAT/Revenue)×(Revenue/Assets)

7. Sustainable Growth= DuPont ROE×(1–Dividend Payout Ratio).

8. Fortnightly Index9. Companies excluded from the FY2011 survey due to M&A activity: Allegheny Energy, DPL, and Nicor.