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Athena Jiang

EAS AT A GLANCE

P/E ► 18.4 AVG EV/EBITDA ► 8.71 AVG ROA ► 4.4% AVG ROE ► 7.5% AVG Debt to Equity ► 2.64 AVG Current Ratio ► 1.67 AVG Interest Coverage Ratio ► 2.24 AVG

 

 

 

 

 

 

Energy East Corporation (EAS), a public utility holding company incorporated in New York, delivers electricity and natural gas to 3 million customers in the states of New York, Connecticut, Massachusetts, Maine, and New Hampshire ^[1]. It has a regional and therefore highly stable customer base, and its principal businesses are regulated by state governments. This price regulation also contributes to the stability of its income and financial state.

During the past few years, Energy East has focused on acquiring smaller utilities companies in the Northeast. Its main subsidiaries now include New York State Electric & Gas (NYSEG), Rochester Gas & Electric (RG&E), Central Maine Power Company (CMP), and Berkshire Gas; other subsidiaries include smaller electricity generating companies and telecommunications assets. Customers of these subsidiaries range from high-technology firms, consumer goods manufacturing, colleges and universities, and recreational facilities. The percentages of revenue generated from electricity and natural gas sales has remained relatively constant over the past three years, averaging 57% and 33% respectively ^[2].

Since Energy East’s customer population is growing much more slowly than the populations of other parts of the country, it has experienced correspondingly low growth rates. Its main growth strategy is to continue its policy of acquisitions. In 2007, Energy East agreed to be bought out by Spanish utility company Iberdrola for $4.5 billion. The merger is expected to be completed in 2008 and has already been approved by shareholders and the Federal Energy Regulatory Commission (FERC) ^[3].

Business Financials

As a holding company, Energy East owns subsidiaries that transport and distribute energy to various customers. Operating revenue has remained almost constant, falling $5.2 billion in 2006 from a high of $5.3 billion in 2005 ^[4]. The decrease in revenue was caused by an $84 million fall in sales volume due to a warm winter and cool summer, as well as a $52 million loss due to lower electricity prices ^[5]. The last major increase in operating revenue occurred after the July 2002 acquisition of RGS Energy, which included RG&E.

Long-term contracts with state public utility commissions ensure the stability and predictability of revenues. NYSEG is in the first year of a five-year electric plan that charges approximately 6% lower rates than its previous contract ^[6]. RG&E’s electricity delivery rates will be frozen until December 2008, at which time a new contract will be negotiated with state and local governments. Both NYSEG and RG&E offer their customers fixed and variable rate plans which are purchased annually. Although the 2007 projected revenue breakdown by plan indicates that nearly half of the electricity load is charged by a variable rate plan, the majority of residential and small commercial customers prefer the fixed rate option ^[7].

Energy East obtains natural gas from BP (BP) and renewed a long-term contract in 2007. Natural gas delivery rates are also regulated by state and local governments. NYSEG and RG&E both have contracts stipulating that natural gas rates are to be frozen through December 2008. However, both of these agreements contain clauses that allow for the adjustment of rates to account for weather conditions.

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Energy East is set to be acquired by Iberdrola, a Spanish utility holding company based in Bilbao that owns gas and electricity businesses in over 25 countries. It is the biggest owner of wind energy power plants in the world, including the assets of Scottish Power Plc., acquired in April 2007 ^[10]. Iberdrola has proposed a $28.50 per-share buyout in cash, which has already been approved by Energy East’s shareholders and by the FERC ^[11]. The transfer of ownership is expected to be completed in 2008.

Trends and Forces

• Government regulation: federal, state, and local laws determine many aspects of Energy East’s business, including the rates it charges, the facilities it builds, and the amount of damages caused by natural disasters it can recover. A significant amount of time may pass before a new project is approved by the government, and regulatory approval is to a certain degree beyond the control of the company.

• Environmental policies: recent years have seen legislation imposing higher environmental protection standards, which can be expensive to implement. However, Energy East has invested in new transmissions systems to take advantage of a revitalized interest in clean energy and expects to spend over $3 billion on capital investments through 2011 ^[12]. These investments include hydroelectric generation facilities and wind farm programs, the latter of which experienced a 150% increase in customer participation ^[13]

• Supply of natural gas and electricity: Energy East obtains its natural gas from BP (BP) and is dependent on other companies to generate the electricity that it distributes to its customers. However, the supply of natural gas can be affected by adverse weather conditions, pipeline breakdowns, war, or other such situations. Energy East is insured against these losses, but abrupt changes in the price of natural gas and electricity will squeeze revenues.

• Demand based on weather conditions: the demand for energy is directly related to weather conditions. Cold winters cause an increase in the use of natural gas for heating, and hot summers cause an increase in the use of electricity for cooling. Energy East hedges risk by trading futures and other financial instruments, but since the demand for its services is affected by the weather, dramatic and unpredicted changes in climate can either increase or decrease its revenue. Energy East must be able to accurately predict the weather in order to maximize its profits.

Competition

Because Energy East is a regulated public utilities company, it is a monopoly and faces no competition within its operating regions. Other energy companies operating in the Northeast include Consolidated Edison, serving southeastern New York and New Jersey; Northeast Utilities, serving Connecticut, western Massachusetts, and New Hampshire; and FirstEnergy, serving Pennsylvania and New Jersey.

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Notes

1. ↑ 2006 EAS 10-k, Item 1, pg. 10
2. ↑ 2006 EAS 10-k, Item 1, pg. 11
3. ↑ "Spanish Utility Plans to Acquire Energy East," The New York Times
4. ↑ 2006 EAS 10-k, Item 8, pg. 25
5. ↑ 2006 EAS 10-k, Item 8, pg. 48
6. ↑ 2006 EAS 10-k, Item 7, pg. 26
7. ↑ 2006 EAS 10-k, Item 7, pg. 27
8. ↑ 2006 EAS 10-k, Item 7, pg. 25
9. ↑ 2006 EAS 10-k, Item 2, pg. 19
10. ↑ "Iberdrola Unit Drops in Debut After $6 Billion IPO," Bloomberg
11. ↑ "Spanish Utility Plans to Acquire Energy East," The New York Times
12. ↑ 2006 EAS 10-k, Item 7, pg. 26
13. ↑ Energy East | Renewable Energy
14. ↑ CNNMoney