Leadership Lyceum

Leadership Lyceum: A CEO’s Virtual Mentor

This podcast series focuses on corporate and industry strategy and trends from the direct vantage point of key industry leaders. Subscribe to the podcast at Apple iTunes. Interviews with Tom Fanning and Bob Flexon are available, as well as one with Joe Rigby, Bob Skaggs and Les Silverman.

See Podcasts

Public Utilities Reports

PUR Guide Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

Greening IOU Equities

Low-carbon strategies are yielding rewards for shareholders.

Fortnightly Magazine - March 2008

2007 proved to be a strong year for utility stocks, with the Dow Jones Utility Index outpacing the Dow Jones Industrial Average by 10 percent (16 percent vs. 6 percent). This is a reversal from 2006—the first year the Industrials beat the Utility Index since 2003.

There is a story behind every company’s individual performance; however, compared to previous years, which were characterized by such broad industry strategies as back-to-basics and attempted mega-mergers, 2007 cannot be characterized by any one dominant strategy or direction by investor-owned utilities. In 2007, two IOU acquisitions by private equity groups were announced: TXU by KKR, TPG and others (closed in October), and PSE by a Macquarie-led investor consortium (still pending). The year also saw the acquisition of Energy East by a major foreign player, the Spanish utility giant Iberdrola, S.A. (still pending). However, only one traditional M&A transaction went forward, and a relatively small one at that: Aquila by Great Plains Energy (still pending).

But 2007 might be remembered as the year we started to see shades of green impacting total shareholder return (TSR). This phenomenon is demonstrated in the one- and three-year TSR—dividends plus change in stock price—of 77 utility companies. 1 An analysis of the TSR of these companies by their traditional industry sub-segments (energy delivery, gas distribution, integrated gas, power generation, integrated electric and gas) showed a correlation between high TSR and apparent “green” business strategies. In particular, for generation-owning companies, those with the highest relative percentage of non-carbon and nuclear generation capacity have achieved higher TSRs.

TSR Performance

A sector review reveals continued leadership from the power generation and integrated gas segments, with three-year TSRs of 86 percent and 98 percent and one-year TSRs of 34 percent and 25 percent, respectively (see Figure 1) . Generally, these companies have been able to take advantage of continued high energy prices, selling power or gas into the market. For the broad group of 77 investor-owned utilities, the total one-year TSR was 23 percent, with the average one-year TSR for all companies in the analysis at 13 percent.

While 2007 was a strong year for utilities compared to broader market indices, the group of companies analyzed did not fare as well as they did in 2006. In 2007, to be in the top quartile of companies in the group, a utility needed a one-year TSR of 21 percent or better, versus almost a 30 percent one-year TSR in 2006. Even more compelling was the increase in poor-performing utilities, as 18 of 77 companies had negative one-year TSRs in 2007, compared to only three utilities in 2006.

As expected, in the list of top ten utilities in 2007, the power generation and integrated gas segments were strongly represented (see Figure 2) . Additionally,