Analysis of the Financial Health of the Electric Utility Industry

Pursuant to a congressional request, GAO: (1) identified key financial indicators for the electric utility industry; (2) analyzed the industry's financial state; (3) determined factors affecting the health of the industry; and (4) assessed the industry's future financial prospects.

GAO determined that, taken together, the best three indicators to use in assessing the financial health of the industry are: (1) the ratio of return on common equity; (2) the ratio of market price to book value of common stock; and (3) the corporate bond rating. Using these indicators, GAO found that: (1) the financial health of the industry has been improving since 1981; (2) fluctuations in the industry's performance have been moderate; (3) some individual utilities have fared worse than average because of financial commitments to nuclear powerplants facing construction or licensing difficulties; and (4) measured against a selection of other industries, the financial health of the electric utility industry has been stable. GAO also found that the entire industry has been affected by inflation and rising interest rates and that: (1) when the industry's debt and new construction levels declined, its financial indicators improved; (2) companies which relied heavily on coal for fuel fared better than companies which relied on petroleum; and (3) companies which increased their earnings relative to interest expense were better able to attract new capital at a lower cost. GAO found no evidence that individual regulatory factors significantly affected industry-wide financial indicators. In addition, GAO noted that the financial outlook for the industry appears more favorable than in the past.