The global economic recession may be ending, but its repercussions could last for years. The strength of the current recovery is uncertain, with the distinct possibility of a long period of stops and starts. Electric and natural gas utilities can not just count on an improving economy. To start growing earnings again, utilities need to take action on several high-potential fronts—and sooner rather than later.
Earnings growth rates have fallen over the past three years, reaching a paltry 2% in 2008. With declines likely for 2009, investors expect that earnings will rebound by 2010, as shown in Exhibit 1. Our analysis suggests that pretax results will have to improve by $4 to $5 billion industry-wide in order to meet expectations for 2010—an improvement of almost 12%. A stronger economy would certainly help in this regard, but to close at least some of the gap, we expect that utilities will have to take short-term measures to enhance revenues or cut expenses. Taking these actions now also raises the odds of returning to the long-term earnings growth trend of 5–7% per year.
Managers may be tempted to pile on further spending freezes or lay off more staff. But selective and strategic actions will yield a higher return with a lower risk of hurting customer satisfaction or hobbling operations. These actions will also pay off over the longer term. Investors expect significant, sustained earnings growth for the next four years. Should utilities’ planned investments, expected rate base growth, and rate increases be delayed or fall short of expectations, these firms will have to depend on sustained operations improvement initiatives in order to stay on course.