Financial performance assessment of electricity companies: evidence from Portugal

The assessment of the efficiency performance of the electricity sector has been the focus of attention of several studies, but there is a lack of scientific literature specifically addressing the financial performance of electric utilities during the period mainly impacted by the financial turmoil in the world's financial markets. Hence, this paper is aimed at assessing the financial performance of regulated companies operating in the Portuguese electricity market from 2010 to 2014, a period particularly marked by the financial assistance provided to the Portuguese government. With this objective in mind, we propose a modelling framework which combines the use of the generalized method of moments estimation method with data envelopment analysis. The generalized method of moments estimation method allowed us to select the intrinsic corporate variables that were then used to assess the financial performance of electricity companies through the slacks-based measure model. In this framework, the return on equity, the leverage and the cash flow to total assets were selected as outputs, while the values of depreciations and amortizations to total assets have been regarded as inputs. Our findings suggest that both in 2010 and 2014 the majority of non-efficient companies should foster the investment in new fixed assets in order to become efficient. Additionally, in both periods, the majority of inefficient electricity companies should further increase their return on equity in order to become efficient, highlighting the role of this financial indicator in the explanation of financial efficiency. Moreover, in 2014, non-efficient companies are able to efficiently generate cash flows since almost no adjustments are required regarding the cash flow to total assets values attained for these companies. Finally, the need to promote leverage in order to increase financial performance is more evident in 2010 than in 2014, signalling the need to reduce the level of debt of these companies in this period.