(July 2012) Thanks for your enlightening editorial about the problems of feed-in tariffs for photovoltaic installations and the distortions they are causing in cost responsibilities among...
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The Fortnightly 40 Best Energy Companies
A challenging year brings a change in the rankings.
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If the Fortnightly 40 report tells us nothing else about the U.S. utility industry, it reminds us about two immutable facts.
First, after all is said and done—after all the strategic positioning and planning, after all the talk of transformation and customer engagement—utility financial performance comes down to customer demand for energy. If demand is flat, then utility performance will be flat.
Second, it reminds us that utilities are the quintessential asset business. Power and gas companies really have only one way to deliver greater value for shareholders, and that’s by growing the asset base—either through expansions or acquisitions.
If these facts sometimes get lost in the haze, this year’s Fortnightly 40 brings them into stark relief. In 2011, meager economic growth combined with a warm winter to yield flat demand in most parts of the country. Accordingly, the industry’s production levels sank, and returns suffered. Specifically, U.S. electric output fell by 0.6 percent overall, compared to 2010 production. And the industry’s average return on assets (ROA) dipped to its lowest level—2.4 percent—since Fortnightly began keeping track in 2006 (see Figure 6). Trends in return on equity (ROE) (see Figure 7) and free cash flow tell similar stories.
At the same time, however, companies have pumped up their capital spending programs—perhaps in a bid to invest their way out of the doldrums. The industry spent $89 billion in 2011—9.4 percent more than it did in 2010, matching the previous record high mark in 2008. The F40 companies invested $49 billion—a 16.3-percent increase, and $2 billion more than they ever have before. Some of these assets are needed to serve new load, but the lion’s share involves either plant replacements or reliability upgrades, most notably with new transmission lines.
“How do you make money as an investor-owned utility? You put more assets into the ground,” says Jean Reaves Rollins, managing partner of the C Three Group in Atlanta, which developed the Fortnightly 40 model and provides financial analysis for each year’s report. “There’s a huge rush to build electric transmission projects, and utilities are busy working on gas pipeline replacement programs, especially in older service areas. In the near term these investments hurt cash flow, but in the long term they increase the rate base.”
Amid these facts, however, the industry’s financial leaders also demonstrate the importance of effective operational execution. “A lot of it is nuts and bolts,” says Caroline Dorsa, CFO and executive vice president at Public Service Enterprise Group—this year’s #2, and among the top 10 for three years running. “When you’re an operationally excellent company, focusing on delivering for your customers, you’ll get new opportunities. But the best planning in the world doesn’t do anything if you don’t deliver operational performance.”
The need for solid blocking and tackling becomes even more important when times are challenging, like they’ve been lately. And those challenges seem unlikely to abate any
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