The industry’s transformation has begun. Should the F40 transform too?
Michael T. Burr is a Fortnightly contributing editor and was editor-in-chief from September 2007 through April 2014. In 2013 he founded the Microgrid Institute (www.microgridinstitute.org) and serves as its director.
As compared to other financial benchmarks - such as total shareholder return (TSR) and credit ratings - the Fortnightly 40 presents a unique and multi-faceted picture of utilities' four-year investment performance and prospects.
DuPont ROE and ROA calculations provide the foundation for the F40 model, because the strongest returns on equity and assets exemplify the most successful investment strategies and the most efficient operations. (See sidebar "Behind the Fortnightly 40.")
The DuPont model was purpose-designed for valuing businesses like utilities. Namely, the DuPont formula1 measures operating efficiency, asset utilization, and financial leverage - the keys to success as a regulated utility. Also, the DuPont analysis measures assets at gross book value rather than net book value, which removes a technical penalty for capital investments. (For many utilities, depreciation accounting back-loads returns from new assets.)