Stability was the key word in 2005. Utilities settled down and surprises were few and far between. But boring is good.
There’s just one way to sum up 2005: boring.
Stability was the name of the game. “Everybody has gotten their balance sheets cleaned up,” said Jean Reaves Rollins, founder of the C Three Group, the Atlanta, Ga.-based consulting and advisory group that provided the data for this report. “They’re getting their strategies straight.”
No big surprises. No big numbers. And not only was 2005 flat and generally uneventful, the excitement most analysts predicted-merger mania-never materialized. “There’s a lot of background noise going on about M&A, but that’s all,” said Rollins. “I expected more announcements.” Click here to view tables…
It was not a huge year in the stock market for the average utility, but neither was it a bad one. Stability was the result, exactly what the stock market had predicted.
“If you look at year end numbers for 2005, the industry still outperformed the S&P 500, but it didn’t have that huge uptick that it had the year before,” said Rollins. (See Table 1, Industry Totals and Averages.) “It was up about 8 or 9 percent for the year.”
A lot of the smaller companies cleaned up their balance sheets and consequently saw their stock increase. Rollins noted that Duke also experienced a sizeable increase in 2005, after straightening out its balance sheet.
At the end of last year’s report, we could not even speculate on the extent of the damage from Hurricane Katrina and its cost to the industry. Losses have still not been completely totaled but the impact on some companies can be measured. While Entergy, for instance, literally lost hundreds of thousands of customers who may never come back, Rollins said Entergy’s stock has done fine. “Wall Street knows that they will get their money back and be made whole. Their stock took a plunge in September but trading came on strong this summer, and now they’re above where they were before Katrina.”
One of the few worrisome things about the 2005 totals was cash flow, which was negative. Although a number of companies had extremely strong cash flow, “On average, the industry outspent its cash flow and we saw a general weakening year-over-year,” said Rollins. It was like a bill coming due, though, as companies had to invest in infrastructure. Expenditures in that category increased almost $6 billion last year, while operating cash flow was down.
Net income was flat. Operating income was flat. Revenue growth was good-but it’s hard to say how much of that was just an increase in fuel costs, Rollins said.
The average dividend did go up, from $1.15 to $1.21, per share, but it’s not a radical trend, just a gentle increase.
Common stock issued: flat.
Common stock repurchasing: flat.
Debt issue, debt retirement: flat.
“Again, it was a very stable year from a balance sheet perspective.”
What about rankings? Anything dramatic?
The market capitalization rankings (see Table 2) reveal stability. No company moved up or down in the rankings more than a few places from 2004 to 2005, until you come to Allegheny Energy Inc., which moved up to No. 30 from its No. 42 rank in 2004. Piedmont Natural Gas fell from No. 39 to No. 64; Aquila moved up from No. 93 to No. 69.
Compare that with market cap rankings in 2004, when TXU made a dash from No. 15 in 2003 to No. 5, a position it held onto in 2005.
Results for total revenue rankings (see Table 3) in 2005 are a little more interesting. ONEOK Inc. moved up from No. 30 to No. 6. AEP dropped from No. 3 to No. 9; NiSource lost ground, moving from No. 26 to No. 46. But once again, we don’t see much radical movement.
AEP moved from No. 7 in 2004 to No. 2 in the Capital Expenditure Rankings (see Table 4). Other companies that made big moves include Williams Companies (No. 14 in 2005 after sitting toward the bottom of the list in 2004 at No. 96); Avista Corp. (No. 72 in 2004, No. 60 in 2005); and Reliant Energy, which dropped from No. 63 to No. 81.
The Trends, the Deals
As far as the aforementioned expectation of myriad mergers and acquisitions, it’s apparent that the influence of state regulators was underestimated. But there’s another trend to watch-privatization.
“I don’t know if the two or three that have been announced can be called a trend, but it’s huge in other industries,” said Rollins. “There’s a lot of money looking for deals internationally, and this industry is probably behind the curve a little bit compared to other industries where private equity has really been hot.”
Rollins doesn’t see it as a “huge” trend but one more aptly described as “opportunistic.”
She noted, however, that the one or two private equity deals that were announced a couple of years ago both crashed because of state regulatory issues. Private equity has been huge in generation (Goldman Sachs starting that trend a number of years ago), but in terms of regulated utilities, Rollins said private equity will face the same issues M&A has faced.
What’s on the horizon? “Companies are starting to make noises about growth strategy again, but so far the noises are quiet, nothing big. Looking at M&A activity, again I have to say that while a lot of companies are looking and talking there haven’t been as many announced as I expected.”
The overall health of the industry is, well, flat.
“It was a quiet year.”