Michael T. Burr (email@example.com) is Fortnightly’s editor-in-chief. He gratefully acknowledges the contributions of Jean Reaves Rollins at the C Three Group in Atlanta, who provided the methodology and financial analysis for the Fortnightly 40, as well as valuable insights for this report.
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.