The utilities industry is in need of more equity.
Robert G. Rosenberg is a principal of Edgewood Consulting Inc., specializing in regulated industry economics and financial analysis.
Regulated utilities, in response to increased risks and bond downratings, have de-leveraged their capital structures. According to preliminary figures from the Edison Electric Institute (EEI), in 2003 utilities cut their short-term debt by more than half compared with 2002. The EEI data also reveal that for 2003, electric utilities issued more than $10 billion of new common equity and repurchased just slightly more than $100 million of common stock. Value Line projects that total capital for electric utilities will increase about 12 percent during the next several years, while common equity will increase nearly 28 percent. Similarly, natural gas distribution company total capital is projected by Value Line to increase about 10 percent, while common equity is projected to increase close to 15 percent. For both industries, the median common equity ratio in the near-term future for companies with investment-grade rated subsidiaries is in the range of 51 to 52 percent.1
Common Equity
For utilities, higher equity ratios are desirable for several reasons.