Our last update for the utilities sector revealed above-target CEO annual and long-term incentive awards for 2016. This blog highlights expectations for 2017 and how the first half has fared, which could point to how incentive plans may be impacted. (For more details of our last analysis, see “Pay-for-performance update for the utilities sector: pay for 2016 performance,” Executive Pay Matters, June 27, 2017.)
It is expected that 2017 results for the sector will improve, as shown in Figure 1. Revenue declined in 2016, but is anticipated to rebound in 2017, growing at about 4%. EBIT, cash flow and EPS are all expected to grow, with more modest EPS growth after a strong 2016, and return on equity to hold steady.
Figure 1. Analysts’ growth expectations for 2017 in the utilities sector
Figure 2 shows the sector is on track to generate the improved results analysts expect. It compares the first six months of 2017 to the first six months of 2016. Overall, the scorecard shows an improving income statement and cash flow measures, with balance sheet measures generally holding steady. Revenue, EBIT, EPS growth and ROE appear to be on pace to meet expectations for 2017. However, cash-flow growth is falling well below expectations. In addition, 2017 total shareholder return (TSR) of 8% is down from 2016 which had a strong first half (24%) and with the year ending at 18%.
Figure 2. First half financial scorecard for the utilities sector
Overall, the utilities sector’s 2017 performance to date has improved. Increased revenues combined with cost control measures have contributed to positive EPS. However, as utilities finance projects move forward, debt costs will increase as the Fed has increased interest rates three times since December. Likewise, an extremely active hurricane season has adversely impacted utilities with operations across multiple states, stretching from Florida to Texas, and the impact of these storms has yet to be determined financially. However, the repeal of the Clean Power Plan may allow utilities to continue running coal plants longer than planned, which may also help with capital expenditures. For a look at the 2017 expectations and first six-month results in the broader S&P 1500, see “Pay-for-performance update for the S&P 1500: A strong first half”, Executive Pay Matters, October 5, 2017.
Looking ahead, current year performance also has implications for 2018 incentives. In our experience, goals tend to flex in strong and weak years in order to manage the probability of achieving target. If utility performance continues to align with expectations, annual incentives will likely pay out; however, TSR will be mixed given the focus on relative TSR outcomes in the sector.
Willis Towers Watson has been helping companies calibrate incentive plans goals using predictive analytics, namely with our proprietary predictive performance model (PPM). To learn more about our model, follow the link here.
Katie Lind is an executive compensation consultant in Willis Towers Watson’s Minneapolis office, and Debra Cohen is an executive compensation analyst in the company’s Montreal office. Email email@example.com, firstname.lastname@example.org or email@example.com.