GLG News by Utilities and Power Generation Industry: Financial Statement Analysts

George PughPresidentGeorge Pugh & Co

Red-Hot Smoking Beta

November 27, 2006

Analysis of:Lowering the Bar (on cost of capital) | www.cfo.com

The author writes on declining Betas and the impact on share pricing and hurdle-rate selection.  The author properly points out that falling Betas can be used to create hurdle-rates were just too low. The author further notes that Beta came back to historical levels for non-tech stocks.

The author claims that these changes could be the result of either greater fluctuation in stock price or in broader market. The author further calls for caution in situations where the Beta declines to extremely low levels.

The following analysis will discuss what Beta actually represents, and how to use them more effectively.

George PughPresidentGeorge Pugh & Co

Don't Mess with TXU

November 8, 2006

Analysis of:In Texas Energy Deregulation, Top Company Is a Big Winner | online.wsj.com

The author claims that Texas’s four–year-old deregulation has failed to bring expected benefits to the consumer and that TXU has manipulated the market. The article seeks to explain why the partial deregulation in question has not brought better and quicker results.

The analysis is better than the New York Times, on which I have written, but still, does not completely answer the question. Some of the author’s comments are relevant; others show some misunderstanding of Texas or the regulatory issues involved. A review of TXU’s SEC filings could have prevented some of the errors in the article.

George PughPresidentGeorge Pugh & Co

Electric Utilities: Reg? Dereg? or Rereg?

October 27, 2006

Analysis of:Competitive Era Fails to Shrink Electric Bills | www.nytimes.com

This article is the first of a series discussing the decade long rearrangement of the electric utility industry. The underlying premise is that unlike other deregulated industries, such as trucking, airlines and telecommunications, time has not brought the decline in rates expected.

The problem with the premise and comparison is that the industry has not been deregulated, being under transitional rate protections which will not expire until next year.

Second article in series

"In Deregulation, Power Plants Turn Into Blue Chips", David Cay Johnston. New York Times October 23, 2006

http://www.nytimes.com/2006/10/23/business/23utility.html?pagewanted=1&ei=5094&en=fe3406946e289d6a&hp&ex=1161662400&partner=homepage

George PughPresidentGeorge Pugh & Co

Capitalizing Operating Leases is not GAAP

October 17, 2006

Analysis of:New Leasing Rules Could Add Assets | www.cfo.com

There has been a lively debate over the last fifty years or more on whether a long-term lease obligations should be capitalized. Dr. Miller is certainly adamant in his belief that all long-term lease obligations should be..

The FASB and its predecessors have disagreed with Dr. Miller, giving very short shift to his views in SFAS No. 13. I will go to the APB and ARB pronouncements and see if I can’t whistle up a proper answer.

George PughPresidentGeorge Pugh & Co

Morgan Stanley Strikes Back! Firm returns to the private equity market

October 11, 2006

Analysis of:Morgan Rejoins Private Equity | www.thestreet.com

Wall Street loves symmetry, especially when it involves a lot of trees growing right up to the sky: as a group they are optimistic and like penguins, if the first penguin off the ice is not eaten, the rest follow right along for a swim.

The question for Morgan Stanley is why return now after such a short time out of the water?

George PughPresidentGeorge Pugh & Co

One Public Utility IPALCO, made it work

October 11, 2006

Analysis of:Stock Buybacks at 'Unprecedented Level' | www.cfo.com

Many commentators have discussed buybacks based on recent activity. To help the quality of debate, I will show the results of a well-planned buyback program, how it increased shareholder value, and finally how this program shows the weakness of some buyback efforts.

George PughPresidentGeorge Pugh & Co

Rational is as Rational Does

September 29, 2006

Analysis of:What Lies Behind Those "Rational" Decisions? | www.cfo.com

This book, Behavioral Corporate Finance: Decisions That Create Value, presents three decision-related sources of error.

• The first are just raw biases: excess optimism, overconfidence and confirmation bias, that is, ignoring data that doesn’t support the desire outcome.

• The next is heuristics rules of thumb or shortcuts that feed bias. This is a very important point and bears repeating. The tools we use reflect our biases and reinforce them. Frequently these foibles are used in place of proper analysis.

• The way an issue is framed and even the venue can influence how decisions are made and can be influenced by non-rational factors.

The author offers descriptions of how to remove personal and institutional bias from the process. The one process the review mentions asked the critical questions needed to see if a project is failing and should be terminated, frequently a difficult decision to make.

"In any given case," he concedes, "it's always possible that the person was acting in a way consistent with rational decision making." But the probability that biases drove the person's behavior is "high," he adds.

It appears that the book offers an ex-post study of bad decision making that though useful, may raise more questions than it answers.

George PughPresidentGeorge Pugh & Co

A Wal-Mart Industrial Bank: Threat or Menace?

September 18, 2006

Analysis of:FDIC delays Wal-Mart bank decision. Mratorium for at least six months on industrial loan company ownership rules | www.marketwatch.com

Wal-Mart has applied to the FDIC for deposit insurance on its bank in Salt Lake City, Utah. Wal-Mart said it only wants to process its own credit and debit applications by opening an industrial bank. But the banking industry fears that Wal-Mart will take the next step and compete for customers through a retail operation. The FDIC announced on July 28, a six month moratorium on any decision "…to provide time to assess developments in the ILC industry, to determine if any emerging safety and soundness or policy issues exist involving ILCs, and to evaluate whether statutory, regulatory or policy changes need to be made in the oversight of these charters."

The clearest objections came from Rep. Barney Frank (D-MA). "Chairman Bair has taken the right step in giving Congress the ability to consider the implications of the increasing efforts to use ILC charters to avoid the long-standing separation of banking and commerce." Rep. Frank had introduced legislation that would only give FDIC insurance to companies that earn 85% of its revenues in financial services, also praised the FDIC's decision to delay.

This moratorium will give the time for a proper consideration of what the ultimate direction of the banking industry will take. Will the separation between banking and commerce hold, or will Depression era practices fall by the way side?

George PughPresidentGeorge Pugh & Co

SFAS 13 Lessees Capitalization and Retail

September 18, 2006

Analysis of:FASB Formally Adds Project to Reconsider Lease Accounting | www.fasb.org

There has been a great deal of comment on the need to change the rules, capitalizing, most, if not all, operating leases. Research into the SEC report, SFAS No. 13, IAS 17 from the IASB suggest that no change in lease capitalization may be foreseen and further, there may be changes in the rules that might actually make it easier to treat an arrangement as a operating leases.

As will be seen in the following, expanding lease capitalization has been repeatedly rejected, FASB and by extension the IASB, for good and excellent reasons relating to passage of ownership, and ownership attributes, including tax benefits.

George PughPresidentGeorge Pugh & Co

Which Witch for High Tech Options

September 18, 2006

Analysis of:Upside Down View | www.auditintegrity.com

There are two views on option back-dating: one from Daniel Warmenhoven, CEO of Network Appliance, and the other from James A. Kaplan Chairman, Audit Integrity, Inc. The first claims that back-dating options is a non-issue, and the second, that the arguments presented by the CEO are nothing but a rationalization of wrongdoing.

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