By Brian K. Schimmoller,
The pace of change in our industry, while still accelerated relative to five years ago, has noticeably slowed the past year, as companies are going “back to basics” and refocusing on core strengths. State deregulation efforts have also slowed markedly, with retail competition stalled or terminated indefinitely in several states.
The timing of these events roughly correlates with the dot-com demise and the weakening of the U.S. economy, which served as bellwether indications to corporate leaders in the energy industry that they needed to reconsider their strategic approach. Back to basics may not be the terminology these leaders would use to describe this retrenchment, but it’s clear that many are adopting a less-aggressive posture and reverting to a more conventional, integrated business model. In other words, they are going back to what made them successful ahead of the dot-com disaster and the economic downturn.
UtiliCorp United, for example, decided in late 2001 to buy back the 20 percent of Aquila it spun off in early 2001. “The recent significant changes in the merchant energy sector, the general economy and the impact of these changes on the capital markets were definitely factors in the board’s decision,” said Richard C. Green, Jr., chairman and chief executive officer. “The most significant influence, however, was the realization that greater shareholder value could be obtained by recombining the financial strength of UtiliCorp with the growth opportunities that lie ahead for Aquila. With its larger asset base, earnings potential and cash flow, the combined company will have more efficient access to capital to execute its ambitious plans.” Translation: We let go of a good thing and now we want it back.
Allegheny Energy didn’t make it as far as UtiliCorp, but had planned an IPO for a new holding company that would own an unregulated generating subsidiary called Allegheny Energy Supply. Under current market conditions, however, the company stated that it would not proceed with the IPO. “The Company will remain integrated until market conditions are such that demonstrated value can and will be created for its shareholders.” Translation: The giant dollar signs dancing around in our heads six months ago are a lot smaller today.
Enron simply didn’t pay enough attention to its business basics. The forward-thinking media darling sadly overplayed its “out-of-the-box” mentality and mandate, realizing too late that the investment community had rediscovered its need for sound, transparent economic and business principles. Translation: Media savvy, aggressive marketing and creative thinking are insufficient to maintain corporate credibility unless supported by a firm foundation and above-board ethical principles.
Admittedly, there are exceptions. The IPO spin-off of Southern Company’s Mirant Corp. has been quite successful, despite a hit to its stock price, and many energy companies are continuing expansion, acquisition and development plans. Regardless of the success of these ventures, however, I think you would be hard-pressed to find a corporate boardroom that has not had a frank discussion about its business strategy and whether or not they were sticking to defined objectives.
The danger with a back-to-basics approach, of course, is that companies and employees are lulled into a false sense of security, an expectation that life will return to the way it was in the age of PUC-controlled vertical integration. Those days are gone – forever – particularly for the power generation sector, notwithstanding FERC’s leaning toward a more hands-on approach under Chairman Pat Wood.
A back-to-basics strategy involves a renewed commitment to sound business principles, a candid assessment of company strengths, and the translation of these strengths into ambitious but reasonable business objectives. But a back-to-basics strategy is not static. It incorporates modern risk mitigation and portfolio management tools that can streamline operations and enhance profits. It also recognizes that ups and downs in stock price and company valuations are the price of doing business.
In my April 2001 opinion, I asked the following question: Will Enron be able to prosper in the long term in the historically asset-centric energy industry? We’ll never know now for sure since Enron’s asset-minimization strategy wasn’t the primary factor in its downfall, but I can’t subscribe to the theory that Enron’s demise invalidates an asset-minimization approach. Enron did not falter because it embraced change, danced to the beat of a different drummer and made waves. Enron failed because it did not temper these innovative impulses with sound business principles.
Translation: Rocking the boat and taking on water is fine, but all the buckets in the world won’t bail you out if the hull can’t absorb the waves.