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The Fortnightly 40 Financial Ratings

Which is the best energy company?

Fortnightly Magazine - September 2005

What might have been a seemingly simple question to answer in the energy industry of 20 years ago is today fraught with difficulty. With the divestitures, spin-offs and convergence mergers of the late 1990s and early 2000s that were spurred by deregulation, no longer do we have cookie-cutter, vertically integrated utilities in all parts of the country (if we ever did).

Rather, some of what we do have today includes E&P (exploration and production) firms that own electric or gas utilities, pipelines that own power plants, and electric utilities that have entered the E&P business.

With the August signing of the Energy Policy Act of 2005, which includes repeal of the Public Utility Holding Company Act, many industry watchers say further consolidation is all but assured.

In fact, many predict the energy industry not only will consolidate, but will converge as well with outsiders such as investment banks, insurance companies, private equity firms, oil majors, and retailers. And it is this continued consolidation trend in the industry that demands a new grounded in finance to discuss and identify industry performance and value.

One method, known as operational benchmarking analysis, while still effective at making comparisons of individual assets, has become increasingly difficult to use in comparing companies with ever-changing asset mixes. Thus, our readers have asked for a type of analysis that more truly communicates value to future investors, future owners, energy asset operators, regulators, and consumers.

With that aim, in this issue, Public Utilities Fortnightly introduces a new standard for excellence in the energy industry. Presenting the Fortnightly 40 financial energy rankings of electric and gas utilities, pipelines and distribution companies: a benchmark that highlights the industry's leading companies—its brightest stars proven in performance and exceptional corporate management.

On Top of the Energy World

 

What did it take to make it to this year’s list? We looked at hundreds of performance measures and settled on a handful of highly touted metrics. We then shared our model with some of the greatest energy finance minds, tweaked it, and this is the result.
 
Being on the 40 means the company is among the highest in profit margin, dividend yield, free-cash flows as a percentage of revenue, return on equity, and return on assets. (See Sidebar “A New Performance Standard.”) 

But Fortnightly didn’t stop there. The winners also are companies that are g-r-o-w-i-n-g.  Most utility executives told the Fortnightly that it shouldn’t be enough to pay a large dividend and then go home. There must be a viable business with evidence of future growth, they said. The story of Sempra Energy illustrates the type of company that made it to our rankings. Neal E. Schmale, executive vice president, chief financial officer and a member of the board of directors of Sempra Energy (No. 16), recalls the days before his company became a super  conglomerate.

"When Sempra was first formed back in 1998 we were paying out effectively almost 100 percent of our earnings as dividends. One of the things

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