June 1 , 2002
Business & Money
were not unduly leve- raged (, Exelon, Edison International); and The impact of new management in restoring investor expectations (, TXU, Duke Energy).
Perhaps the most significant difference in the performance in this group is the role played by strong regulated electric utilities at the core of the overall revenue engine. Enough bad investments can sink a company (as in the case of TECO Energy), while strong utilities saved companies like Xcel, AEP, Edison International, and Exelon.
Regardless of the impact of these factors, it is unlikely that some of these Convert companies will ever gain back the valuations enjoyed before the back-to-basics era.
Traditionalists: Safe and Not Sorry?
During the late 1990s, investor and media attention focused on aggressive earnings growth strategies tied to merchant power plant development, wholesale power marketing, and international expansion. However, most electric utilities continued to emphasize a traditional regulated business despite (or because of) its low-growth, low-risk business model. For these companies, there was no "back" in back-to-basics because they had never abandoned a "basics" strategy.
Traditionalists did create a fair amount of total shareholder value for the 2001-2004 period-with the average company registering a 22 percent return. A few companies stand out among Traditionalists, but most performed within the range of 20-40 percent.
Most of the best performers enjoy favorable regulatory conditions and protected markets, and primarily low-cost coal or nuclear generation portfolios. Transmission and distribution-focused companies, such as Energy East, also have performed well, helped by high allowed rates of return and new customer growth.
One of the best performers was Southern Co., which created almost $10 billion in value during this period and has emerged as one of the top U.S. utilities in terms of market capitalization. Southern has benefited from its good relations with state regulators and a large low-cost baseload portfolio. More important, having previously spun off its unregulated wholesale generation and trading business (Mirant), Southern avoided merchant business exposure.
Skeptics: Often Wrong, Never in Doubt
Companies in the Skeptics group have continued to execute growth strategies based on expansion of non-regulated businesses. Although these companies have strong utility operations, the overall message made by management to investors has not focused on the utility business. The Skeptics' message centers on a soup-to-nuts natural positioning throughout the entire natural gas value chain that emphasizes oil and gas exploration and production (in the case of Dominion Resources), or the creation of a critical mass of retail energy customers in competitive markets throughout the United States (in the case of Constellation Energy), or the continuation of a broad base of energy and non-energy commodity marketing and trading activities (in the case of Sempra). Skeptic companies generally have adopted the message contained in remarks by Mayo Shattuck, the chairman, president and CEO of Constellation Energy, who said, "In order to realize our growth objectives, Constellation departed from the conventional strategies prevalent in our sector … while some of our peers are restructuring their operations to recreate the old utility model. While 'back-to-basics' is viewed as a strategy of safety, earnings certainty is achieved at the