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A good year by any measure
by Nancy Spring, managing editor
Astronomic. Phenomenal. In 2005, the adjectives were “boring” or “stable” but for 2006 things became exciting. This was a year with real character.
The utility financial rankings is one of our most popular industry reports, and for good reason. Tracking this industry is like taking a roller coaster ride if you look at it over the long haul. In 2005 things were quiet, and, well, boring; in 2006 it grew at a phenomenal rate. 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 to shed light on the numbers and the trends in the industry; previous reports are available at elp.com.
Click here to view Utility Rankings Table.
Let’s start with revenue
“If you look at the top five or six companies in the total revenue rankings, you’ll see that basically, the same group of players are on top,” said Rollins. (See Table 3: Total Revenue Rankings.) FPL Group Inc. has moved up substantially though, the company’s growth primarily driven by wind holdings and customer growth in Florida. Edison International has also seen significant growth in its service territory and its nonregulated businesses.
Rollins points out that PG&E’s move from No. 14 in 2005 to No. 9 in 2006 is almost all the result of growth in the utility’s service territory.”They really don’t have substantial nonregulated holdings any longer,” said Rollins.
In northern California and the Sun Belt there has been substantial growth, said Rollins, and pointed out that almost every company in the top ten of revenue rankings serves in those regions. “Southern Co. announced that last year was one of their highest growth years, especially on the electric side, in kWh useage per customer and customer growth. These numbers are astronomical. It’s a combination of air conditioning and computers and all the new widgets.”
Gas companies, on the other hand, have done a really good job with energy efficiency, so most gas companies are seeing per customer useage decreasing measureably. “We have gotten much more efficient with insulating homes and increasing the efficiency of heating, which is the primary use of natural gas,” said Rollins. “That’s led to the big trend in the gas industry, decoupling, removing the volume from the pipes charge.”
There was 5 percent growth in revenue for all the combined companies in 2006 and Rollins said that trend still looks positive for revenue growth. (She notes that this is a “subset.” For example, it is impossible to calculate a compound growth rate from previous years to 2006 because there have been too many acquisitions.) “One of the areas where we’ve seen phenomenal growth, largely driven by the tax implications, has been in renewable energy.”
And Rollins doesn’t see it stopping any time soon. “I don’t think it will pop in 2007, although a lot will depend on whether we stay out of a recession or not.”
What was once hot is not, namely the merger and acquisition trend. “It’s going to stop dead, especially any of the leveraged buyouts. It’s interesting that people call it “private equity,” but it’s not. What KKR (Kohlberg Kravis & Roberts) is doing is leveraged buyout, pure, plain and simple. That kind of acquisition is pretty much stopped in its tracks, probably until after the election.”
The numbers for market capitalization (see Table 2) take us through year end 2006, but since then “the market has just collapsed,” said Rollins. “They’ve given back all the gains they made in 2006, with the notable exception of Exelon. I think the market has rewarded Exelon because the PSEG (Public Service Enterprise Group Inc.) deal did not go through.”
No. 2 Dominion is shedding a significant number of its nonregulated businesses and has maintained its market cap. “The stock market continues to applaud its moves.” No. 3 Southern Co. is always in the top three or four, just because of its sheer size. Rollins said that Georgia Power has a rate case pending and that will have an impact on Southern’s stock.
No. 4 TXU-“We know what it is valued at by KKR, and that’s reflected in its current stock price.” No. 5 Duke spun off Spectra this year. “The market was almost neutral on that,” said Rollins, “Duke was rewarded a little but then it’s taken back.” No. 6 FPL continues to grow its nonregulated business, primarly the renewable energy portfolio, and No. 7 First Energy, “actually surprised me,” said Rollins, “because they have some real troubled companies.”
No. 9 PSEG is the interesting one to Rollins. “I don’t have a real explanation except the “ËœWe-didn’t-merge-with-Exelon premium.’ “
Luckily, the sector hasn’t been hurt as badly as housing or automotive. “For the past three or four years, there’s been a love affair with utilities. That’s reflected in how much the market cap grew from year end 2005 to year end 2006: 14.2 percent. 2006 was a very, very good year for utilities.” (See percentage increase columns in Tables 2, 3 and 4.)
Companies have started to increase capital expenditures, (see Table 4) and the two main drivers for that are environmental issues and the need to meet growth. In 2006, capital expenditures for this group of companies finally exceeded 1999 capital expenditure levels. There’s been a substantial increase: as a whole, a 22 percent increase year-over-year.
“I think that trend is probably going to hold at least through 2010 or 2011. It will go up in 2007, then flat, then down in 2012. There’s a lot of transmission and quite a bit of capacity addition. Southern, Duke, AEP and Entergy come to mind.”
What’s most interesting?
For Rollins, some of the most interesting numbers are in Table 1. First, she said that the industry has more than recovered from the Enron hangover. “That’s history now for most of these companies.” Then she points out that some of the most amazing results are the basic productivity numbers, down at the bottom of the chart.
“In 2001, we were down to 204 customers per employee, then 251 in 2003. Now we’re back up to 287 customers per employee. In the last seven years, we’ve shed close to 150,000 people, and the people remaining are doing a lot more.”
Look at assets per employee, now breaking the $2 million mark, and revenue per employee. “In the productivity numbers, we see a substantial increase,” said Rollins. “Look at the revenue per customer. We haven’t been seeing that kind of growth and if we segregated out all the electric companies, instead of the mixture of electric and gas and pipeline companies we have here, I think you would see a lot higher growth per customer.
“That’s what really jumped out at me. Productivity in the industry has increased so much.”
The industry is investing in itself, too. For the past three years, these companies have been buying back their stock at a substantial clip. “They’re saying there’s no better place to invest their money, that it’s the best investment out there.”
By any measure, 2006 was a very, very good year for the industry.