Wall Street analysts favor the utilities whose leaders think like they do.
Electric utilities have enjoyed a love/hate relationship with Wall Street in recent years. While market valuations have risen steadily in many industrial sectors, utilities have been riding a roller coaster. 1998 was essentially flat for electric utilities. Then the S&P electric index slumped by more than 22 percent in 1999. It rebounded in 2000, thanks in part to investor flight from Internet stocks, but not without a fair bit of carnage in California.
On one hand, it's natural to see changes in price performance for electric utility equities. (Witness the California crisis.) Yet certain utilities—and certain utility CEOs—have seen their efforts consistently recognized by Wall Street and rewarded by investors over the long term. With the many challenges facing today's utilities—such as consolidation, capital costs, debt burden, globalization, and deregulation—the CEO's role has become more important than ever.
Consider the following:
Case Study # 1. With 1999 revenues exceeding $22 billion under CEO Richard Priory, Duke Energy has "stuck to the knitting" even while widening its geography. Recently, Duke completed a $297 million pipeline to help bring natural gas competition to Australia. Anticipating deregulation in Canada, Duke expanded its commitments to nuclear power projects in that country. Domestically, Duke will furnish an additional 3,000 MW of power in California, whose peak demand has risen to more than 10,000 MW without the addition of a single generation facility in the past decade.
Case Study # 2. While a modest increase of 2 to 4 percent in annual earnings has been typical for electric utilities, UtiliCorp United CEO Richard Green has targeted and exceeded an 8 percent growth rate. To achieve this goal, he has led UtiliCorp in developing new operating units both inside and outside the utilities business. Aquila, for example, trades and sells energy-related products, while Quanta provides construction and infrastructure support for telecommunications. UtiliCorp now has 4.5 million customers worldwide, including Europe and the Pacific Rim. More than one-third of its $414 million in last year's earnings was generated through its international operations.
Case Study # 3. Based in the Appalachian foothills of Maryland, Allegheny Energy is an example of a utility whose strategic goals extend well beyond the geographic limitations implied by its corporate name. CEO Alan Noia has led the company-formerly a little-known rural supplier of coal-generated power-into markets as far west as Arizona, while simultaneously expanding into gas-fired plants. Allegheny's acquisition of Merrill Lynch's energy trading unit in early 2001 provided the company with another avenue for becoming a nationwide wholesaler of electricity. While its current policy of increasing capacity annually by 1,000 to 2,000 MW of power still leaves Allegheny smaller than many of its competitors, the company aims to deliver earnings increases of 10 percent a year, a rate unmatched by most utilities.
Case Study # 4. Exelon, forged through the merger of PECO Energy and Unicom, has established the goal of becoming the world's most admired utility service company. With diverse businesses in power marketing, deregulated energy, telecommunications and infrastructure services, Exelon provides both electric and natural gas distribution to its consumer base of 5 million. At 16,500 MW of capacity, it ranks as the nation's largest nuclear power operator. Contributing to the company's investor appeal are the cost benefits realized by the merger, with $100 million saved in the first year of operations alone. Co-chaired by Corbin McNeill and John Rowe, Exelon also stands as testimony to foresight in leadership planning, with the former PECO and Unicom CEOs alternating functional responsibilities during a five-year post-merger transition period.
Despite their diverse business enterprises and wide-ranging market strategies, Duke Energy, UtiliCorp, Allegheny Energy, and Exelon share a common attribute: strong Wall Street performance in 2000. Duke Energy's traditional approach propelled the company to an impressive 70.1 percent valuation gain, while UtiliCorp's broader-based tactics resulted in a 59.5 percent increase in share price. Allegheny Energy, which entered several new markets but remained a small company, gained 78.9 percent for the year, while the significantly larger Exelon saw its stock increase by 102.0 percent.
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The accomplishments of these CEOs typify the evolving mandate for electric utilities: Convert new challenges into a opportunities, while deploying resources strategically. The result—for these and other forward-looking electric utility company CEOs—has been enhanced profitability and shareholder value. And while the past is not a yardstick for future performance, the risks and rewards associated with an electric utility company's business pursuits—and its reception on Wall Street—largely will be vested in the quality of its leadership.
Yet, as deregulation takes further hold, capital costs continue to climb and global competition increases, the threats facing the industry likely will intensify and broaden in scope. What leadership characteristics will Wall Street recognize and reward in the future?
Looking specifically at utility company CEOs, Wall Street likely will favor those who are more like their competitive market counterparts, with strong capabilities in finance, marketing, globalization and technology.
For example, familiarity with financing will be increasingly essential. Though the majority of CEOs traced their roots to engineering during the industry's long regulated era, the ongoing M&A activity that now characterizes the field necessitates that CEOs quantitatively assess new business opportunities and initiatives.
Electric utility company CEOs also will need to call upon experience in competitive environments, embodying responsiveness to consumers that is still new to the sector. As electric utilities engage in an ever-widening variety of businesses, the ability to synthesize strong marketing and branding will be essential to develop a loyal customer base that feeds the bottom line and Wall Street's appetite for results.
Similarly, effective interpersonal and communication skills will be key. One of the CEO's most important roles is that of corporate missionary, building and nurturing productive relationships with Wall Street analysts, while motivating employees to exceed targets.
Wall Street, home to a body of investors that has dramatically expanded in both size and sophistication, has recognized that electric utilities stocks are no longer the equity equivalent of a staid fixed income investment. In effect, the lens through which Wall Street and electric utility companies view one another has both widened and magnified. The likely result is that the strongest companies—and those most likely to attain recognition and reward on Wall Street—will be those whose CEOs have the vision and skills to address Wall Street's interests and steer their organizations through a shifting landscape of challenge.
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