A wave of mergers and acquisitions is moving through the industry, as utilities and financial players position for growth and strategic advantage. Will economic and regulatory forces continue...
High Performance? Your Strategy Matters
Leadership requires alignment between performance measurement and strategic priorities.
Incremental operating improvement will contribute to achieving this growth, but it is not enough. The DuPont rankings, which are strongly correlated with historical operating performance, do not provide strong guidance on which companies will sustain performance, grow, and translate execution into bottom-line results over the long term (see Figure 3) .
Growth or Value: Is One Strategy Superior?
High growth expectations, coupled with the seeming disconnect between operating performance and TRS, reflect the continued separation of the utility market into growth and value stocks.
Dividend yield, price-to-earnings ratios, and implied growth in the share price vary between the two groups, as do the key underlying drivers of performance.
The growth group has an average TRS about six times higher than the value leaders, at similar DuPont indexes. The strongest differentiator is ROIC spread. The growth group is being discounted slightly in terms of price-to-earnings ratios because of perceived risk, and, we believe, a general difficulty articulating value propositions. Table 1 compares the two groups.
Value utilities are typically more highly regulated, core-focused companies. They include traditional vertically integrated utilities and delivery (T&D)-focused companies. They emphasize maximizing cash-flow growth through operational excellence and regulatory strategy/execution, aligning operational performance to stakeholder expectations. They are not necessarily cost leaders. Value leaders typically are in advantaged regulatory environments and create shareholder value through increased dividends.
Growth-oriented companies typically are hybrid regulated/unregulated models with more than 40 to 50 percent of their revenues unregulated. They are value-chain portfolio managers who are “commercially reintegrating” the business.
Growth utilities typically have significant operations in de-regulated states, are multi-commodity, and have comprehensive value-chain positions. They are likely to have made asset or value chain extension acquisitions as opposed to core business consolidation. They also are likely to maintain some portion of the core business to provide predictable cash flow and access to cheaper capital. For most, not over-weighting the unregulated portfolio, relative to the regulated, is an important consideration. Growth utilities are active portfolio managers and not hesitant to divest of assets.
In summary, independent of the chosen strategy—value or growth—utilities should focus on the fundamental creation of value through their deployment of capital. Having a positive spread between ROIC and WACC is the key to shareholder value creation.
The Essentials of High Performance
Accenture systematically has researched high-performance drivers in the utilities industry. We have isolated five key explanatory factors that predict utility TRS performance (see Table 2) . Growth and value companies are driven by different core financial drivers, as implied by their strategies. Only capital efficiency, as reflected in ROIC spread, is a consistent performance factor across all companies and company strategic groupings.
Capabilities and execution ultimately define performance and the ability to navigate through market cycles. Four capabilities are characteristic of sustained leaders. These factors are consistent in principle across all industry groups:
• Strategic Discipline
Performance leaders possess strategic focus and clarity. They have a clear, explicit value proposition that drives execution. They seek to create and maximize structural, economic, and regulatory advantages by anticipating the market. They typically have a balanced, integrated portfolio encompassing