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Turning Capital to Wealth: A Ranking of U. S. Utilities

Fortnightly Magazine - December 1999

MVA to capital, 1.1, as of the end of 1998. Through efficient capital use, IPALCO turns an MV rank of 53 into a relatively impressive MVA rank of 29. In wealth-creating efficiency, IPALCO is followed by Black Hills, Montana Power, Duke and LG&E Corp. Southern, which ranks highly on MV size and MVA, drops to the 38th place in standardized MVA. But the biggest shift among the top 10 is Edison International, which drops from fifth in MVA to 49th in standardized MVA.

Duke is the only clear winner on both measures. Not only has the company invested a lot of capital, but it has done so efficiently for the most part. Of the top 10 companies ranked by wealth-creating efficiency (i.e., standardized MVA), only Duke, Carolina Power & Light and FP&L also loom large in MV size. The other seven most efficient companies have MV ranks of 39 or lower. Thus it appears that as utilities grow larger, they create less MVA per dollar of capital invested. There are two possible reasons:

It could be a sign of governance failure, i.e., the tendency for larger companies to insulate managers from the pressures of accountability and incentives of ownership.

Large utilities tend to have more regulatory visibility. They may be "too big to succeed," and may be denied the opportunity to earn a high return on large capital bases.

Firms that do well both in the dollar and standardized MVA rankings are creating lots of shareholder wealth, and doing so efficiently. Duke, Con Edison, FP&L, Carolina P&L, New Century Energies, LG&E, Florida Progress and NiSource are in the top quartile of both the MVA and standardized MVA rankings.

The utilities at the bottom of the dollar MVA ranking also tend to be at the bottom of the standardized MVA ranking. Illinova, El Paso Electric, Niagara Mohawk, Public Service of New Mexico, Unisource Energy, Northeast Utilities and Central Vermont Public Service are some examples. Some of these firms have resolved previous problems, but still must recover from the discounting of their stocks.

Illinova, for example, decided to exit Clinton operations, resulting in a $1.8 billion after-tax charge against 1998 earnings. El Paso Electric emerged from bankruptcy in 1996. Niagara Mohawk successfully restructured expensive purchased power contracts it was forced to sign under PURPA regulations, but continues to suffer from the after-effects. Northeast Utilities recently recovered from troubled nuclear operations, and is now merging with Con Edison. Since the MVA methodology carries a memory of capital invested, the rankings accurately reflect past inefficiencies in operations and capital use. This is another example of how the EVA approach increases accountability for capital invested in a business.

Investment in Generation:

A Relevant Factor?

No single strategy appears to be winning the MVA sweepstakes. The approaches of leaders in both the MVA and standardized MVA rankings represent a cross-section of industry strategies. Duke and Southern are large, internationally diversified utilities with regulated and unregulated businesses, and participate in all portions of the value chain - generation, transmission, distribution and services. Others such as Con Edison, FP&L, Black