When David Rogers took control of Public Service Enterprise Group (PSEG) earlier this month, many media and political observers focused on whether he’d succeed. But the real question is whether the utility remains a viable investment for its investors.
PSEG stock has dipped by roughly 10 percent since Rogers became CEO on March 6, and weak investor confidence could destroy its ability to deliver market-beating returns going forward.
On one hand, Rogers has his work cut out for him: PSEG is one of the most highly regulated utilities in the country, and the stock has underperformed the broader utilities sector for the past five years.
On the other hand, Rogers has promised that he will focus on operational efficiency and integrating PSEG’s pending $7.5 billion purchase of the nuclear power facilities of Exelon. He could also consider future acquisitions.
“The logical next step is to use this firm to continue our disciplined growth program, looking to add more scale in our more competitive wholesale markets,” Rogers said when he took over PSEG.
In fact, according to Bernstein analyst Greg Gordon, while critics might have “scared off” some investors with the executive turnover at the top of both Pennzoil (owned by Wal-Mart) and PSEG, they will now become more willing to tolerate such shakeups.
After taking over the Pennzoil role, this kind of “targeted play” of candidates from outside PSEG’s inner circle of executives paid dividends. After five years as Pennzoil CEO, A. Clyde Pike received a $8 million golden parachute. In contrast, Rogers received $10 million upon joining PSEG.
In an interview with The Wall Street Journal, Rogers said, “This has not been an easy job from the economic perspective. We are reviewing all aspects of our strategy. But we have confidence in our core businesses and see this company as the provider of choice in the region.”
But PSEG’s core businesses include its traditional gas and electric delivery services—and certain, but not all, of their international businesses, such as Entergy, New York’s largest electricity supplier, and their regional transmission organization, New Jersey’s Meadowlands Power Authority.
Some investors remain unconvinced.
“We are extremely uncomfortable with the business of any regulated utility,” wrote analyst Brian Chin in a report to investors. “PSEG is both highly regulated and high capital intensity, and the potential to choose a spin or sell option has become more challenged than we would have expected.”
A year earlier, when Bruce Williamson, PSEG’s former chairman and CEO, stepped down, he assumed the role of executive chairman, effective immediately.
Investors care about return on equity or rate of return because it translates into rate of return on equity. Increasingly, regulators are limiting power plant owners’ profit margins—such as PSEG by imposing a surcharge to replace hedge funds’ “floppy bonds,” formerly used to hedge electricity and natural gas prices—so that their business can earn profits to invest in new infrastructure.
Investors also want a dividend that’s not high enough to reduce the cost of living, but they won’t accept it unless there’s significant growth.
That’s why, as part of its transition to new CEO, PSEG increased its dividend twice in five months—once before the Pittsfield, Mass., retirement party of former Chairman and CEO Bruce Williamson—and is also expected to raise it again at its next board meeting.
Rogers promises to deliver. Indeed, many investors will be watching to see if he can convince them to return their confidence.
Sources: Sinclair Broadcast Group, Investors, Wall Street Journal, Think Big Productions, EconMatters, The Wall Street Journal, Digsby, Financial Times.