Utilities In The News

12/31/2012


Utilities have grabbed a lot of headlines in recent months. Today we devote some space to weather woes, worries about nuclear power, and the fall of a giant. Specifically, we address how these news stories affect your investment portfolio.

Nuclear fears

Last year's nuclear accident in Japan after a huge earthquake reignited many Americans fears' about nuclear power. Hurricane Sandy fanned the flames earlier this year, though U.S. nuclear plants avoided disaster.

The advantages of nuclear power are obvious. It's clean, and it does not require depletion of natural resources. Nuclear plants generate about 19% of U.S. electricity, and the U.S. operates more than 100 reactors in 31 states, accounting for more than 30% of the world's nuclear power.

Given the country's mounting concerns about pollution and the use of fossil fuels, today would seem like a good time to be building and running nuclear plants. Yet there is only one plant currently under construction in the U.S., and the last one built was completed in 1996. In addition to being unpopular with the public, nuclear power plants are expensive to build and maintain. Utilities usually recoup those construction costs through electric bills, setting up many nuclear utilities as high-cost producers.

Last year, the Nuclear Regulatory Commission overruled attempts by the states of Massachusetts and Vermont to block renewals of licenses for nuclear plants. Opposition continues, and while few people expect the NRC to suspend licenses for fear of compromising the power grid, utilities that use nuclear power continue to take a public-relations beating in many parts of the country.

Our take: The Nuclear Energy Institute has identified 16 utilities with majority ownership of at least one nuclear plant. The median utility in that group returned 2.7% over the last year, versus 3.4% for the sector. Over the last three years, the median nuclear utility managed an annualized return of 12.1%, versus 12.7% for the broader sector. While nuclear utilities underperformed, the difference was not enough to point to nuclear exposure as the culprit. One nuclear utility — NextEra Energy ($70; NEE) — is among the highest-returning stocks in the Top 15 Utilities portfolio over the last year.

 

The decline of Exelon

Four years ago, Exelon ($30; EXC) was doing so well that it considered an audacious, almost unheard-of plan: building a new nuclear plant.

However, the shares have dipped nearly 70% from 2008 highs, dragged down by a mix of factors, only some of which the company could control. The consensus projects profit declines of 32% this year, 11% next year, and 17% annually over the next five years. Exelon provides electric service to 6.6 million customers in Pennsylvania, Maryland, and Illinois (3.8 million in the Chicago area alone).

Earlier this month, after a bidding process, Chicago selected Integrys Energy ($53; TEG) to provide electricity for about 1 million residents. The deal locks in lower electricity prices through May 2014. The city expects an 11% decline in the electric bill of the average single-family household. ComEd's rates are high in part because of its nuclear plants. The contract requires Integrys to match or beat ComEd's rates, which are slated to decline in June.

Exelon's yield of 7.1% is probably its biggest selling point. But the payout represents 83% of expected 2013 profits. And in each of the last two quarters, Exelon has earned less than it paid out in dividends. The company's debt load has risen by more than $6 billion since the start of the year, presumably to help cover dividends and increased capital spending. And Chicago's power deal won't make things easier. A dividend cut is possible. We rate Exelon C, or below average, and investors should steer clear.

Our take: With states and municipalities under pressure to limit utility costs, regulators in other jurisdictions could follow the lead of Chicago and Illinois and play hardball with their utilities. Many municipalities already allow consumers to choose electricity providers. But the involvement of a large city and its influence in such negotiations changes the game.

Most at risk, in our view, are high-cost utilities serving large, slow-
growing cities in states particularly hard hit by the recession, such as Detroit, Cleveland, and Dayton, Ohio. Former Top 15 Utilities component American Electric Power ($43; AEP) serves much of Ohio, though not Cleveland or Dayton. We are downgrading AEP this week, in part because it seems vulnerable to Exelon-style competition. CMS Energy ($25; CMS) provides electricity to most of Michigan, though not the Detroit metro area.

Sandy's hangover

Public sentiment swung against utilities after Hurricane Sandy's landfall Oct. 29. With more than 8 million customers losing power, tensions ran high. Individuals and municipalities accused utilities of miscommunication and negligence, in some cases calling for criminal charges. But today, more than six weeks after the superstorm petered out, the picture looks more positive.

According to an Associated Press analysis, utilities' response time after Sandy was comparable to — and in many cases faster than — the response after other huge storms. The AP said New York utilities restored power to 95% of customers 13 days after outages peaked, with New Jersey accomplishing the same feat in 11 days. In contrast, hurricanes Katrina, Rita, and Wilma in 2005 and Ike in 2008 all caused longer outages.

Shares of utilities in New York, New Jersey, and Connecticut have lagged the industry since Sandy's landfall, but not by much. The median utility stock in those states has dipped 3.0%, versus a nationwide median decline of 1.7%. The Top 15 Utilities portfolio contains only one utility from the hardest-hit states — New Jersey's Public Service Enterprise Group ($31; PEG), which is down 3.8% since landfall, underperforming the sector median by more than two percentage points. Market expectations for Public Service Enterprise Group are low, and the stock seems capable of exceeding them. The stock remains in our Top 15 Utilities portfolio.

Our take: While the cleanup and repairs will take months, investors shouldn't worry about the long-term picture for utilities in New York, New Jersey, and Connecticut. Over the last 90 days, the median utility's consensus profit estimate for 2012 has risen 0.1%. The median utility in the hardest-hit states has actually seen a 0.5% increase.

We'll see plenty of charges against earnings in coming quarters. But in the long run, the market shouldn't hold Sandy against these utility stocks.


Top 15 utilities Portfolio

Div.
Yield
(%)
Stock-
Market
Value
($Bil.)
Total Return
Quadrix Scores
Sector-Specific
------ Scores ------
Company (Price; Ticker)
3
Mos.
(%)
6
Mos.
(%)
Value
Overall
12-
Factor
Sector
Reranked
Overall
Amer. States Wtr.
($48; AWR)
3.0
0.9
9
28
49
82
76
99
CMS Energy ($25; CMS)
3.9
6.5
6
8
47
59
63
86
Entergy ($64; ETR)
5.2
11.4
(6)
(1)
75
45
24
73
Idacorp ($44; IDA)
3.5
2.2
2
11
65
80
69
97
NextEra Energy
($70; NEE)
3.4
29.6
2
6
46
56
83
76
NV Energy ($18; NVE)
3.7
4.3
2
8
64
85
94
100
OGE Energy ($56; OGE)
3.0
5.6
1
13
49
45
82
54
Plains All American
($45; PAA)
4.8
15.1
1
19
48
60
38
47
PNM Resources
($21; PNM)
2.8
1.7
(1)
11
70
76
100
94
PPL ($29; PPL)
5.0
16.8
1
8
78
63
97
92
Public Service Ent.
($31; PEG)
4.6
15.5
(3)
(1)
71
38
49
41
Sunoco Logistics
($50; SXL)
4.2
5.1
6
47
55
88
55
79
UGI ($33; UGI)
3.3
3.7
5
18
68
73
92
96
Westar Energy
($29; WR)
4.6
3.7
(2)
1
61
56
52
87
Wisconsin Energy
($37; WEC)
3.2
8.6
1
(2)
46
60
37
66
Portfolio Average
3.9
8.7
2
12
59
64
67
79
Note: Quadrix and sector scores are percentile ranks, with 100 the best.

Our Top 15 Utilities portfolio has returned 11.1% so far this year, versus 2.2% for the S&P 1500 Utility Sector Index. The portfolio's 55.1% return since its inception in 2007 tops its benchmark by 29 percentage points. This week, we are dropping American Electric Power ($43; AEP) and adding UGI ($33; UGI). For more on the switch, see Portfolio Review.


Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com