Dory Gasorek & Jeff Resnick, Rating Research
The electric power industry has experienced widespread tumult in the last two years. Events have distracted management, resulted in revisions to corporate strategy, heightened consumer unrest, and led to an onslaught of negative media coverage. It is, therefore, surprising that industry insiders believe the reputation of the industry has remained stable. While some of the old notables such as Duke Energy of Charlotte, N.C., and TXU Corporation of Dallas, Texas, have declined in stature, other companies such as Dominion Resources of Richmond, Va., have dramatically improved.
Among industry insiders, company reputations are hard-earned and not subject to change from PR campaigns or one-off events. Rating Research (RRC) surveyed these insiders to determine how the 18 leading companies stack up against each other and to see how their reputations have changed over the last two years. Interestingly the variables that drove reputations in the electric power industry have remained essentially the same over the two years. Matters of ethics, public trust and financial disclosure remained the most important, followed by various measurements of leadership and management.
Two of the former industry leaders, Duke Energy and TXU, have fallen from grace, as viewed by both industry executives and financial analysts. Since 2002, Duke Energy had faced inquiries resulting from the role of its trading operation in the California energy crisis, as well as questionable reporting of natural gas prices. TXU discontinued its European operations and took a $4.2 billion charge during this time period. Industry executives scored both companies below-average in financial disclosure, and Duke Energy earned a last-place position in maintaining positive vendor relationships. Financial analysts were particularly negative on these fallen angels with regard to their ethical business practices, ranking both near the bottom of the companies studied.
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Southern Company of Atlanta, Ga., and FPL Group of Juno Beach, Fla., continued to perform strongly and rank near the top of most categories studied in the executive survey. Both companies also earned solid scores from financial analysts, although Southern showed significant weakness in its reputation for environmental support. Despite this anomaly, the analyst community and industry executives were in agreement on their willingness to invest in these companies, with each generating scores near the top in the study.
Dominion Resources was the most improved company in the survey, with a 12-point increase in its reputation score to a solid 53. This improvement reflects a major increase in the reputation of senior management and solid advances across a number of marketing and customer-relationship measurements. Likewise, financial analysts regard the company highly, giving it many top scores. Consistent with these strong results, Dominion also achieved solid support from both groups surveyed on their willingness to invest in it.
FirstEnergy of Akron, Ohio, earned a very low reputation score from executives for a second time. The weak results reflect in part operational difficulties manifested by the August 2003 power blackout. It ranked last in this year’s survey on infrastructure investment and plant safety. Likewise, financial analysts were least willing to invest in FirstEnergy among the companies in the study, a marked deterioration from their view two years ago. CMS Energy of Jackson, Miss., joined FirstEnergy at the bottom of the rankings. The collapse of energy prices and the ongoing repositioning of its business negatively affected CMS Energy across almost all reputation components surveyed. Despite extensive asset sales and debt reduction, CMS Energy garners distinctly lower scores, in particular, on components focused on financial and management quality. On a modestly positive note, financial analysts view the company slightly better this year on their willingness to invest in it, up from the negligible scores the company received in 2002.
The reputation scores of Edison International of Rosemead, CA, and PG&E Corporation of San Francisco, CA, converged significantly from their wide divergence in the 2002 study. The reputation strength that Edison showed in 2002 even in the face of its financial problems after the California energy crisis was surprising when compared to the poor reputation results for similarly troubled PG&E. Although this divergence was initially thought to have derived in part from Edison International’s decision to pursue a financial reorganization outside of bankruptcy, unlike PG&E, any “halo” has subsequently diminished across most reputation components. PG&E’s improved position reflects its recent emergence from bankruptcy. Executives and analysts held similar views on their willingness to invest in Edison, but deviated on their views of PG&E. Very few executives were willing to invest in PG&E, whereas the company garnered stronger support, albeit it still below industry averages, from analysts.
The reputation among executives of Xcel Energy of Minneapolis, Minn., declined dramatically as a result of industry concerns surrounding ethical business practices and financial security. Similarly, industry executives are far less willing to invest in Xcel Energy this year, with the company generating less than half the support it received two years ago. Interestingly, financial analysts’ perceptions of Xcel Energy remained essentially the same as two years ago, with about one-third willing to invest in it.
While the overall reputation of the electric power industry has remained essentially stable, with an average company score of 41, a number of company reputations have shifted dramatically as a result of the events cited above. Financial analysts’ opinions appear to be more short-term in focus and volatile than industry executives, who tend to give credit to factors driving longer-term sustainable competitive advantage and organizational culture. Perceptions of both have value and should be actively monitored and managed by their executive teams accordingly.
Gasorek, CFA, is committee chair with Rating Research. Resnick is their chief research officer.
Rating Research conducted telephone interviews with over 300 senior industry executives and over 50 financial analysts who specialize in the electric power industry on approximately 40 component questions. The studies were conducted in January and February of 2002 and 2004.