Shareholder-Owned Electric Companies Are Self-Sustaining Business Entities That Raise Money By Issuing Stocks And Selling Debt Securities.
Since customer revenues are insufficient to finance all plants, facilities, and equipment needed to provide electric service from current cash flow, electric companies raise additional money by issuing stock and selling debt securities. This financing, called capitalization, takes three forms: long-term debt, common stock, and a very small amount of preferred stock (less than one percent). Electric companies attempt to implement an appropriate balance of debt (bonds) and equity (stock) that matches the risk profile of their investors.
Although long-term debt remains an important source of financing, companies have reduced their reliance on this type of financing in recent years. More debt can mean more risk, as companies must repay the debt obligations on a specific schedule (called debt servicing). Since 2002, most electric companies have reduced debt as part of an overall "back-to-basics" approach or a renewed focus on the core utility business.
The debt-to-capitalization (debt-to-cap) ratio is a common measure used by electric companies, credit rating agencies, and other financial entities that represents the percentage of overall capitalization being derived from longterm debt. As part of an overall effort to restore financial health and boost the confidence of investors and credit rating agencies, the shareholderowned electric utility industry gradually reduced its debt-to-cap ratio from 62.2 percent on December 31, 2002, to 55.2 percent on December 31, 2006.
Common stock represents ownership in the electric company. Each common stockholder has a right to participate in the election of the company’s board of directors and may receive part of the company’s earnings as dividends. The dividend amount can be increased or decreased depending on the company’s financial needs and the dividend return required to attract investors.
In recent years, the popularity of common dividend payments has re-emerged for the electric utility industry, which is known for its strong dividend payments. The renewed interest in dividends is due to favorable tax changes, increasing cash flows, and the overall "back-to-basics" strategy of the shareholder-owned electric utility industry. Currently, more than 90 percent of electric companies pay a common stock dividend.
Edison Electric Institute, 2005 Financial Review, June 2006.