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STATISTICS
Joan Esquivar is manager of taxation and finance at Edison Electric Institute (EEI). This article is part of EEI's "2000 Financial Review."
It's a Diversified World
In 2000, the shareholder-owned electric utility industry's nonelectric business segments provided 53.8 percent of the industry's total revenues. (See Figure 1.) That was up from 41.2 percent in 1999. Moreover, 2000 was the first year in which nonelectric sources dominated the revenue totals.
Out of 66 companies in the industry, 18—28.1 percent—reported that they derived the majority of revenues from nonelectric sources. Just over half the industry—33 companies—had nonelectric revenues of 25 percent or greater. Seven diverse utilities, represented by companies of all market capitalization sizes, had nonelectric revenues in excess of 80 percent of total revenues.
Also, there was an overall correlation between large revenues and a high percentage of nonregulated activities. The three largest companies, based on total revenues, had an average of 94.1 percent of revenues from nonregulated sources.
The reliance on regulated electric revenues continues to decrease. The segment's percentage of total revenues fell from 62.8 percent in 1998 to 58.8 percent in 1999 and continued to decline to 46.2 percent in 2000. Although the overall percentage share of electric revenues dropped, this segment realized an impressive 16.2-percent (or $24.2 billion) increase during 2000. This is primarily attributable to higher power prices resulting from the effects of an inadequate power supply coupled with sharply increasing demand.
Increasing Importance of IPPs
In terms of individual business segments, the largest sources of revenue in 2000 were regulated electricity, independent power production (IPP), and trading and marketing. (See Table 1.) Although the top three segments in 2000 are identical to the top 1999 sources, the most significant improvement was realized by the IPP segment, with a 117.7 percent ($49.7 billion) increase. It showed the greatest growth, followed by regulated electricity and trading and marketing. This growth is in stark contrast to the 1999 results in which the trading and marketing, energy services, and "other" revenue segments realized the largest nominal gains.
This rise in IPP operations was driven by escalating power prices, consequences of divesting regulated generation assets, transfers of regulated generation to unregulated subsidiaries, and the supply/demand imbalance in the power markets.
The growth in the IPP sector was significant over the last three years. Some companies recently reported expansion into the IPP area while others have been aggressively building substantial portfolios of generation assets. New plants are being added through acquisitions and building, with an increasing portion of the generation being sold to large wholesale customers. Some companies have maintained a regional focus while others have significant generation assets in several regions, often targeting areas with supply shortages. In addition to new construction, the divestiture and transfer of generation facilities have augmented the IPP sector.
Other Sources
Trading and marketing provided a $12.4 billion rise in revenues. Expanding trading operations and price spikes in the wholesale markets were the main causes of the upsurge. Indeed, several companies derived a greater share of earnings from wholesale marketing in 2000. Across much of the industry, the wholesale sector includes fuel procurement and electric plant generation. The segment's portion of revenues is expected to grow due to enhanced commodity trading, geographic expansion, and wholesale market opportunities. Telecommunications was the fastest growing segment with a 207.5 percent growth rate, despite the fact that some companies have divested holdings due to dwindling returns on investment.
Telecommunications was up by a modest $1.2 billion—this number is understated due to the fact that only eight companies disclosed detail from this segment. It continues to be difficult to measure actual telecommunications financial activity—much of it is reported in the "other" segment.
Other rapidly growing segments include natural gas pipeline and oil and gas exploration/processing, with increases of 164.5 percent and 133.1 percent, respectively. Natural gas pipeline and oil and gas exploration/processing increased by a combined $8.3 billion with the benefit of a surge in gas prices during 2000. Although there is no current shortage in natural gas resources, the price hikes were primarily due to the inadequate channels of transporting gas to the customer.
For the electric utility industry, the trend will continue: Earnings through nonregulated businesses will grow. Nonregulated entities can earn more than was established under regulated operations. A declining percentage of consolidated earnings will come from regulated utility activities as the result of generation transfer and divestiture activity. New construction of unregulated generation plants, largely in the IPP sector, will support this evolution. In this era of volatile energy markets, wholesale trading operations also will strengthen unregulated earnings.
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