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by Nancy Spring, Managing Editor
Tracking the utility financial rankings from year to year gives investors an opportunity to spot long- and short-term trends and industry professionals a way to benchmark their companies' performance. Looking at the industry from 2005 through 2007 reveals an sector that has gone from "quiet" to "very good" and now "remarkable." What's in store for 2008—more of the same or a softening trend?
Jean Reaves Rollins, head of the C Three Group, a senior management and research advisory firm to the energy utility industry, provided data and analysis for this report. Rollins has been working with us for several years, making it possible for Electric Light & Power readers to compare the market results year after year. (Visit the archives at www.elp.com for previous reports.)
The big stories for 2007
The aggregate numbers were the best news, according to Rollins. "We've had significant growth," she said. "The industry's probably healthier in 2007 than it has been in a decade." Click here to view Financial Rankings Chart
If 2006 was considered a good year by any measure, 2007 is even better. "We had almost 7 percent growth in revenue from 2006 to 2007," said Rollins, "almost 20 percent growth in income from continuing operations, and 30 percent growth in capital expenditures."
Cap ex numbers were rockin', as the saying goes, plus there was almost 8 percent growth in common dividend payout, continuing an up-trend that began in the 2005/2006 timeframe.
"The only negative statistics from 2006 to 2007 are free cash flow, which reflects all the capital expenditures, and asset growth, which was actually slower—2 percent growth year-over-year," Rollins said. But she thinks that by all top-end measures, 2007 was a really healthy year. At the time of this interview she had not calculated return on equity and return on asset numbers, but suspects they will look really good.
Some results Rollins highlighted:
- Constellation Energy was No. 1 in revenue for the second year (in 2005, they were No. 2.) but the company was not the most profitable, coming in at No. 17 in income. However, Constellation's growth numbers were excellent: from 2005, Constellation has grown almost 25 percent and income was up almost 53 percent.
- A lot of the growth in revenue was being driven by acquisitions—for examples, take a look at NRG, Southern Union and Integrys, said Rollins.
Big winners, no losers
According to Rollins, the big winners in 2007 were the shareholders, in terms of dividends and, through the end of 2007, share prices. Several companies reinstated dividends, a lot of companies increased dividends, and there were a handful of companies that kept them stable. Highlights for 2007:
- Southern Company pays the most dividends (in actual payout, not in terms of per share). Following Southern, it's Exelon, Duke and Dominion. "Those companies sort of dwarf everyone else with what they pay in dividends," said Rollins.
- Biggest cap-ex spenders in 2007: FPL Group, Dominion Resources, AEP, Southern Co., Duke, Edison International, Williams and PG&E. "There was a lot of money being spent last year. Capital budgets were way up."
We wondered about losers, but Rollins explained that since the industry did so well as a whole, even the less perfect performances brought applause. To her, no company was a real disappointment. For instance:
- Alliant Resources made a remarkable turnaround. "The company lost $330 million two years ago and in 2007 they were positive $365 million."
- Northeast Utilities lost $250 million two years ago, but the company was positive $250 million in 2007.
- El Paso Corp. lost a half a billion two years ago and was positive that amount in 2007.
- Mirant is in the positive column now.
The amount of money being spent in this industry is just remarkable, Rollins said. Capital expenditures increased 25 percent year-over-year but it's even more phenomenal when you look back at 2005. In that time period "it's gone from $51 billion to $80 billion."
Regulatory risk
Not all of the industry's news and pressures can be seen in the numbers. Regulatory issues, for example, are not reflected there. "There are probably more pending general rate cases going on right now than there have been in 15 years, and the outcome of those rate cases will probably determine what will happen to most of these companies," Rollins said. "Many of them will be back again in the next two to three years. How the regulators handle all these capital expenditures will be critical for how this industry does over the next five years."
Rollins explained that a utility's relationship with its regulators can affect its valuation.
"Look at the companies that are more regulated. A lot of what you see in the share price is a reflection of how the market views the commission and how it functions rather than the numbers the companies are putting out."
Looking ahead
Rollins thinks we may begin to see things slow down. "While the numbers all look really good now, frankly I think 2008 is going to start a turndown," she said. "With a recession on top of all these capital expenditures, it's almost got to go in that direction. In 2008 we'll see a softening of the numbers but it's 2009 where it will really begin to show up."
We asked Rollins about other trends. M&A, for instance, was all anyone could talk about several years ago.
"The regulatory conditions for regulated utilities create a lot of ambiguity around the decision on who you're going to buy. The question you have to ask is, what can you expect out of the regulators? The last thing you want to do is acquire a utility in a state with what are considered ?bad' regulators. And certainly until the change in administrations, things will be deathly quiet."
Price increases are another inescapable trend. "We have had stable prices for electricity for a long time, but now we'll hear a lot about inflationary pressures on all of the raw materials and goods. There is no place for prices to go but up," said Rollins. "You will start hearing war cries come out of consumer councils. I don't think we've seen anything yet." The challenge is how to let consumers know this is going to happen and manage the process.
In the end, Rollins said, you have come back to the heart of the matter. "The bottom line is these companies have to meet earnings expectations from Wall Street, they've got to maintain their dividends and they've got to keep a healthy balance sheet."
[Editor's note: Some of the tables in this industry report vary from tables we have published in previous Utility Financial Rankings reports. The C Three Group made some changes starting with the 2007 data to present a more accurate picture of each company.]