THE CEO POWER FORUM
TXU's Wilder nets $55 million package.
Power and utility companies had a good year in 2004, as did their investors. Energy stocks broke away from the pack during the second half of the year and ended up doubling the performance of the overall market (). This marks the second consecutive year of positive returns for the SNL Energy Index; however, in 2003 the index underperformed the broader market. Although industry operating revenues were up just 2 percent (from $22.1 billion to $22.5 billion), operating income rose 7 percent to $3.4 billion. Companies continue to embrace the back-to-basics strategy, and investors seem to think that it is paying off ().
The strong stock returns and improving profitability led to large compensation packages. TXU was at the top of the pack with a 177.7 percent increase, far ahead of all other power and utility stocks. As a result, CEO John Wilder also became the top paid executive in the industry, garnering a heady $54.7 million in total compensation for the year.
Back in the go-go trading days of 2000, former Enron CEO Jeffery Skilling's compensation package was $72.5 million. No one has seen such a hefty pay day since, but Wilder's compensation package is one of the highest ever in the industry. The number two and three power and utility executive compensation combined don't equal Wilder's pay package.
Allegheny Energy's Paul Evanson, the number two chief executive on the top pay list, netted $29.9 million. Like TXU, Allegheny is still undergoing its own turnaround effort. For 2004 the stock was up 54.5 percent.
Coming in at number three on the list is Dominion CEO Thomas Capps. In April, Capps announced he would step down from his CEO post, and, perhaps in anticipation of that event, he exercised more than $16 million in stock options as part of his $23 million compensation.
The name that stands out among the top 10 CEOs in terms of compensation is Equitable Resource's Murry Gerber. The integrated gas company added more than $1 billion in market capitalization with Gerber at the helm, after starting the year with only $2.6 billion.
Measuring Up
How do the industry's top paid executives compare with the rest of corporate America? The answer is, very well. Wilder's compensation package made him the 11th highest paid chief executive out of America's 500 largest companies, putting him alongside corporate chiefs from high-growth companies like a Yahoo, InterActive Corp, and UnitedHealth. According to a feature on executive pay in the May 9, 2005, edition of magazine, each of the 10 highest paid power and utility industry executives (see Table 1) are among the top 150 executives in pay listed in the article, even though not all the energy companies are among the 500 largest.
There has been quite a lot of turnover post-Enron at the top level of several energy companies. Roughly 30 percent of power and gas companies have new CEOs since the beginning of 2002. Some like TXU, Allegheny, Duke, and NRG, were among the top performers in 2004. All four of those recovery projects outperformed the SNL Energy Index for the year. Other companies with new CEOs, such as Great Plains Energy, ALLETE, and Northeast Utilities have not fared so well. Their CEOs might well have to consider drastic changes in their current business plans. Aquila, whose new CEO is really its old CEO, already has announced it will try to sell off large parts of the company.
Current conventional wisdom holds that too much emphasis was placed on stock grants and options as part of management compensation throughout the late '90s into the early part of this decade. Though essentially unprovable, business gadflies felt that this trend contributed to the stock-market bubble and succeeding corporate scandals. Despite discussions in the post dot-com-bubble era of moving away from overreliance on stock options, compensation packages of energy CEOs rely on hefty doses of stock grants and options, performance units that track stock, rabbi trusts, and other perquisites. At TXU, the actual cash part of John Wilder's compensation was only $2.1 million, and a cool million of that was a signing bonus to woo him away from Entergy Corp. Cleary, the compensation package set up by TXU's board just last year is prima facie evidence that the primary job of the CEO is still to move the stock price.
To the Rescue
In February 2004, Wilder rode into Texas to save once mighty TXU Corp. The company had foundered amid a see of financial turmoil in 2002, and the reputation of its management team suffered in the eyes of the financial community. Facing stiff competition, and saddled with a lot of unprofitable megawatts in what was in effect the only fully deregulated market in the country, the company needed bold action and decisive leadership. Gone were the days of trading your way to more and more revenue. Back-to-basics was the mantra, and therefore the prospects were for low single-digit growth for most companies.
Wilder quickly showed Texas and the rest of the industry that he was not all hat and no cattle. In a dramatic cost-saving move, TXU essentially outsourced most of its back-office functions through a joint-venture with Cap Gemini. Wilder sold off the gas distribution business, sold or mothballed marginal plants, realigned management, and convinced investors it would pay off. TXU's proxy filing indicates that $560,982 of Wilder's compensation was for use of TXU corporate aircraft.
Investors would argue that Wilder was worth every penny he was paid. Texas regulators may not agree, but the company is still headquartered in Dallas and is certainly much stronger financially than at any point in the last few years. Other CEOs also provided a lot of value to shareholders, though at not so great a cost (). Southwestern Energy's stock was the second highest performer in the SNL Energy universe last year, but CEO Harold Korell netted "only"a package of $2.5 million.
Despite the largesse to the top-paid executives, investors typically do not pay much attention to pay packages as long as the stock is performing. However, when performance lags for too long, the natives get restless. Perhaps at the top of a possible worst-bang-for-your-buck () list is Calpine's Peter Cartright. Calpine's stock languished in 2004, down 18.1 percent for the year and down another 44.1 percent though May of 2005. Lately, the company has had to fight off rumors of impending bankruptcy. That is not the type of distraction a struggling merchant generator needs. Yet despite all of this, Mr. Cartwright pulled in $10.8 million in 2004. To be fair, most of that compensation came through previously announced exercise of stock options that were set to expire at the end of the year. However, Cartwright's large payday in '04, coupled with financial struggles and terrible stock performance, is certainly ironic.
Recent word from TXU is that they have reached the cost-savings targets set out in the outsourcing ventures, with many back-office jobs moved overseas to India and Poland. Look for more executives to take a page from Wilder's textbook and possibly try dramatic outsourcing to match his company's performance and maybe his pay. It certainly will be interesting to see if operators in more regulated states can turn away from building up the rate base or if regulators can stomach the jobs possibly sent overseas.
It is unlikely that any CEO will pull Wilder-like pay for 2005. In fact, Wilder already has lost some of his newly acquired fortune as the credit-rating agencies start to push back. Both Fitch and Standard & Poor's put TXU on a negative outlook, citing concern over management initiatives aimed at improving shareholder returns. The credit rating agencies had hoped for continued balance-sheet improvement, and as a result TXU's ratings have tumbled. The sector continues to outperform the broader market; through May, 2005, the SNL Energy Index is up almost 6 percent, while the S&P 500 actually has declined more than 4 percent.
Each member of the top 10 will measure his income in eight figures, but the only likely change in the list will be the appearance of Duke's name, rather than Cinergy's, next to Jim Rogers.
Endnotes
- Total Annual Compensation: Cash-equivalent compensation paid to the executive, comprising base salary, buns, and other annual compensation. The base salary is annualized if the data is provided for less than one year's work.
- Long-Term Compensation: Annual cash, stock, or performance-unit awards paid or credited during the fiscal year in accordance with multi-year performance goals. Includes restricted stock awards, long-term incentive plan awards (whether paid in cash or stock, but not stock options), and other long-term compensation.
- Value of Options Exercised: Aggregate dollar value realized of options, warrants, or SARs during the period. As required by SEC regulations and as reported in the company's filings, the value realized is the difference between the market value of the securities underlying the options and the exercise price of those options, as of the exercise data. Tax reimbursements are not included: These are included in Total Annual Compensation.
Industry Metrics
Energy industry's financial health continues to improve.
All parts of the power and gas industry provided positive returns to shareholders in 2004. Figure 2 shows the total returns (price gains plus dividends) of several sub-sectors. Even merchant generators were up 24 percent, with NRG's emergence from bankruptcy offsetting Calpine's possible slide toward the same.
Table 1 shows four key metrics measuring the relative financial health of the industry from the years 2000 through 2004. In 2004, the industry had lowered its overall debt level for the second consecutive year and was generating more cash flow to meet interest payments on that debt. Additionally, for the second year in a row, cash flow was high enough to meet capital expenditure needs without external financing. Most important for investors, profitability as measured by returns on common equity were back to double-digit levels for the first time since 2001.-E.M.
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