When we first saw the numbers for this year’s Fortnightly 40 report, two rankings immediately stood out from the rest.
First, a wholesale energy company that emerged from bankruptcy less than five years ago—Mirant—rocketed into a coveted top five position in the F40. At the same time, Mirant’s former parent, Southern Company, sank into the bottom half of the rankings (#28) after being a perennial leader since the F40’s inception in 2005 (see Figures 2 and 3) .
Not coincidentally, Moody’s downgraded Southern Company’s credit rating just as this issue was going to press. The rating agency pointed to some of the same factors that dragged Southern downward in our analysis—including a balance sheet burdened by negative cash flow and ballooning capital expenses (see Figure 5) . Moody’s also identified ratemaking challenges in two of Southern’s regulated markets—Florida and Georgia.
With regard to Mirant, its position in the rankings will be short-lived, because earlier this summer the company agreed to be acquired by RRI Energy (formerly Reliant). Nevertheless, the diverging fortunes of Southern and Mirant combine to suggest an obvious trend, namely: From the shareholder’s point of view, the industry’s financial momentum seems to be shifting away from the traditional rate-regulated, cash-flow oriented utility business and toward unregulated, growth-oriented business opportunities.
Indeed, analysis of revenue sources for the top 10 and bottom 10 companies in the 2010 F40 reveal that such a trend has been building for at least four years (see Figure 7) . The same phenomenon also is evidenced in dividend payouts for the top 10 versus the bottom 10 ranks in the F40(see Figure 8) ; namely, as a group, the top 10 companies—even excluding those like Mirant that don’t issue dividends—consistently pay out much more of their revenues in dividends than do their peers at the bottom of the F40. The conclusion: Growth-oriented companies apparently are delivering stronger overall shareholder performance than their peers, as measured by Fortnightly’s comprehensive benchmark (see “Behind the Fortnightly 40 Rankings”) .
However, changes in corporate business strategies aren’t the only possible explanations for this statistical trend. For example, as GDP-linked retail energy sales have stagnated along with the economy, companies with unregulated investments have been in a better position to deliver returns—a situation that might reverse itself in a different economic situation. Additionally, regulated utility companies experienced a substantial degree of regulatory lag in 2009, following 2008’s record capital spending.
Such factors likely will continue playing an important role for shareholder performance for the foreseeable future. Although the economy might be slow in its recovery, electricity sales seem to be rebounding across the country, and not just because we’ve had a hot summer in 2010. “We see demand coming back, albeit slowly,” says Chaka Patterson, vice president and treasurer of Exelon (ranked #2). “In PECO’s service territory, demand growth is driven principally by commercial and industrial customers. Those are bellwethers of the economy when you think about demand, so we see that growth as a good sign.”
At the same time, utilities are bringing a slew