The Fortnightly 40

Fortnightly Magazine - September 2008
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The annual Fortnightly 40 always tells many interesting stories about the industry, as well as the individual companies in the rankings. This year the numbers show a multi-part drama that’s playing out in the U.S. power and gas industry.

First, exposure to unregulated markets began to help rather than hurt a company’s success in delivering shareholder value in 2007 (see Figure 5). As prices increased for all types of energy commodities, companies with major assets in merchant-power generation, coal mining and gas exploration and production tended to perform better than they have in the past.

Second, the industry’s T&D and generation construction spending strongly affected companies’ financial performance—most obviously their cash flow. “Free cash flow has plummeted,” says Jack Azagury, a partner with Accenture and leader of the firm’s utility strategy and business transformation practice. “I attribute that to the massive investment our sector is undertaking. We’ll be seeing a period of negative free cash flow.”

Third, while stock values have appreciated nicely in the past three years for the F40 companies as a group, their equity returns have grown at a sluggish pace—rising by 8.5 percent on average in 2007, compared to a 14.3 percent increase in stock values (see Figure 6). A trend toward weaker ROEs seems to show the effects of increasing economic pressure in utility rate cases.

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