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Wanted: Top Utility CEOs

By Richard Stavros on November 20, 2015

Every November, there’s a special event for utility insiders that sets the stage for the coming year. And we were there.

Last week, utility executives, investment bankers, and your intrepid Utility Forecaster analyst converged upon Miami to talk about all things electric at the annual Edison Electric Institute Financial Conference.

One of the topics that came up repeatedly was which utilities have the best management teams.

That’s because the Federal Reserve is poised to finally hike short-term rates. And a rising-rate environment will reveal which utilities have been effective stewards of capital and which have been spending simply for the sake of spending.

After all, it’s much easier for utility executives to look like geniuses when the cost of borrowing is low and investor demand for their stocks is high. But the operating environment is about to get a lot more challenging.

And these days, all eyes are on management.

To that end, at the conference I met with three top utility CEOs to discuss the strategies that will drive long-term earnings and dividend growth.

These exclusive interviews will be featured in a special “Insider Issue” of Utility Forecaster that will be published next week.

As income investors, we like to see a steadily rising dividend. But that could prove difficult for debt-laden companies with huge infrastructure investments still ahead.

And rising rates are just one area of concern. Utilities must also contend with threats to their century-old business model, ranging from distributed generation to regulatory momentum toward cleaner energy.

Only the best-managed utilities will be able to adapt to these challenges.

Conventional Wisdom from the Cocktail Circuit

While at the conference, I went to a cocktail party where I had polite debates with several fund managers about utility spending plans.

They spoke glowingly about the massive capital expenditures at various utilities, as though nothing could ever go wrong.

In some cases, it seemed like they practically idolized these firms. I found that rather disturbing, especially since a lot of utility expenditures these days seem neither economic nor prudent.

And I write from experience: I’ve been through multiple boom-and-bust cycles in the utility sector.

When I was an analyst for an investment bank in the early 2000s, I attended debt-restructuring conferences in Manhattan to discuss the future of bankrupt merchant generators that had to hand over the keys to their power plants.

As a result, I take a “trust but verify” approach to management promises, putting greater emphasis on financial performance, fundamentals and track record.

When I Was Your Age …

At the conference last week, I had a run-in in with a banker I knew from those days, and our conversation reaffirmed my view.

The banker said he remembered a time decades ago when cost overruns and mismanagement in the utility sector were so rampant that the question was which utility would be next to cut its dividend.

While history is instructive, times have changed. Although utilities are dealing with significant headwinds, on balance the industry is being well managed.

Even so, the average won’t hold true for the particular. In the years ahead, utility investors will have to scrutinize management much more closely to identify the best investments.

The rating agencies are already on the case. And there’s good news. As Moody’s Investors Service recently observed, “Most utilities are protected by a broad suite of recovery mechanisms that factor interest rates into base rates, by long-dated maturities, and by the expectation that rates will rise slowly.”

However, Moody’s also found that cost recovery puts U.S. regulated utilities in a more favorable position than unregulated utilities. Meanwhile, some regulated utilities are more exposed than others.

Of course, high debt levels don’t always mean a utility has been poorly managed, as long as the investments have been prudent and the utility can earn on its allowed return.

But to be a high-performing utility, you’ll need high-performing CEOs.

We hope you’ll join us for the special Utility Forecaster “Insider Issue.” We believe it sheds light on what true utility CEO leadership means, and how that creates long-term value for shareholders.


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