(September 2007) The impact of dividend policies, capital expenditures, and publicly traded equities highlights an in-depth look at what goes into the modified Dupont Model behind the ...
Fortnightly 40 Best Energy Companies
Superior asset management, exceptional cost discipline, and magnificent growth opportunities define the winners of our second annual financial ranking.
Utilities Strategy practice at Accenture, says that placement in the F40 indicates a well-run, solid, asset-intensive business. “If you have year-over-year good predictable operating earnings, you will show up on the F40,” he says.
Of course, consistent performance over time is the Holy Grail of corporate management, and a focus of many of the executives that made the list. Hendrickson notes that his research and considerable business literature on the subject shows that very few companies achieve sustainable performance over a 10-year period. For utilities, in particular, earnings volatility earns a market discount.
But clearly, being on the F40 means a company has been consistent on many different measures over a three-year period, says Jean Reaves Rollins, managing partner at the C Three Group LLC.
The F40 is not forgiving if you fail to maintain sustainable performance.
“If you have one bad year, it’s going to take you down in any measure of the key measures that the DuPont Hybrid looks at,” Rollins says. (Rollins analyzes the F40 model [the Dupont Hybrid] and its predictability of shareholder value.)
For example, she explains, Duquesne earns high honors this year because in the previous years management sold off many of the disparate businesses. “What the current management did wasn’t sexy. They got in there and cleaned the balance sheet up and got it down to a basic business that could be evaluated pretty easily,” she says.
Hendrickson and Rollins found mixed results when trying to correlate total return to shareholders (TRS) (a popular performance method) with the F40 (DuPont Hybrid), but they agree that using the F40 and TRS models is an effective way to identify corporate performance.
Meanwhile, WGL Holdings Chairman and CEO James H. DeGraffenreidt Jr. found this year’s F40 results were consistent with some of the long-term internal benchmarks that his company has used to chart its performance.
“We also put out five years of financial objectives three years ago, where we said we were going to generate free cash flows. … We said we were going to grow earnings on average 5 percent per year over that five-year period. We said we were going to maintain a strong credit rating, and we are one of the strongest credits in our sector. … And [we will] maintain our ability to maintain the dividend.
“So, you are seeing the culmination of all of that in the 2003 through 2005 three-year increment that the F40 measures,” DeGraffenreidt Jr., says.
John E. Bryson, chairman, president, and CEO of Edison International, also shows exceptional consistency in the management of his company. He says all the F40 measures became negative during the California crises, which began in the 2000-2001 timeframe. Bryson, in less than five years, not only was able to save his company from the brink of bankruptcy, but exceed the company’s performance measures that existed before the crisis. It also didn’t hurt that Edison International, which has a large, low-cost coal fleet, is in one of the country’s highest-growing service territories: Southern California.
“I think looking at a three-year time horizon is a