Investors historically have been skeptical about merger synergies in utility mergers, assuming that regulators will insist that most or all economic benefits flow to customers. However, recent...
Winners and Losers: Utility Strategy and Shareholder Return
Diversified companies lead (and the globals lag) over the past five years.
The unbundling of services and companies in the electricity and natural gas industries have created unprecedented opportunities to reinvent the traditional integrated utility model, with a broader array of attendant risks and rewards. But this past year was clearly one of retrenchment and strategic soul searching, allowing an opportunity to re-examine the sector for winning business formulas.
Our prior research over the restructuring period of 1998-2002 showed that the modest yet steady profits of companies with a high degree of rate regulation easily won out over flash-in-the-pan step-out strategies. Companies like Exelon and Southern Co. reigned, while companies like Aquila and Dynegy faltered. A return to regulated roots ensued.
This year, relying upon the same financial metrics we used in this earlier investigation, the current study focuses on the shareholder returns for 66 companies in the energy value chain that are listed in the Fortune 1000.
Shareholder Returns: Outperforming Other Industries
Figure 1 illustrates annual shareholder returns from 1999-2003. This time frame is long enough to capture the impacts of strategic decisions and investment cycles that take years to unfold. The companies are arrayed according to five-year performance, grouped by quartiles. Based on shareholder return and an examination of the basic differences in the business models of these companies, several observations emerge.
During the five-year period, the median annualized shareholder return for the entire group of companies was 4.7 percent, a notable increase over last year's 2.6 percent five-year return, reflecting both improvements in the stock market in general and fewer significant losses announced in the 2003 fiscal year compared to 2002. As much as energy and utility companies have been maligned in the industry and financial press, the group of 66 companies has actually outperformed the broader market. Over the five-year period, the mean group return of 1.8 percent has outpaced the Standard and Poor's average annual return of (0.6) percent. The reality is that many of these companies have provided favorable returns during a period of turmoil in the broader market, particularly over the negative market years of 2000-2002. The surprise has been the business failures from this previously trustworthy sector.
Return of the Merchants
There were six companies that scored in the top quartile for each of the five-year, three-year, and one-year periods ending Dec. 31, 2002, but none achieved that triple-play in 2003. Indeed, the vast majority of this year's top-quartile one-year performers are last year's laggards, a group composed primarily of energy merchants. Three of the top five in annual returns included The Williams Companies, Dynegy, and AES. This shift in performance is evident in the ranking of top-quartile returns, shown below in Table 1.
Best Sustained Performance
Last year's results listed Exelon Corp., Western Gas Resources, and UGI Corp. as the leaders of the five-year, three-year and one-year shareholder return categories, respectively. This