Energy Biz - September/October 2008 - (Page 18) » Financial Front Hot Utility Stocks RENEWABLES HAvE MixEd iMPACT By RiCHARd KORMAN aT a shareholder MeeTing in May, FPL Group Chief Executive Lew Hay III told investors that pending carbon legislation could within a few years boost the company’s annual earnings by $690 million a year, depending on how greenhouse gasses are priced. FPL is the country’s biggest supplier of wind and solar power and a favorite of analysts. But all the potential in the world can’t reverse a general business slowdown. FPL’s share price was basically flat in the first half of 2008. Ironically, the utility with the biggest share price gain in the second quarter of 2008 was TECO Energy, which rode the increase in coal prices via its coal production businesses and unhedged coal positions. For green energy as an earnings driver, it’s wait until next year. Once the slow-moving steamships of asset classes, utilities have used their return to financial prudence, steadily rising demand for energy and profitable deregulated businesses to transform themselves into growth stocks while keeping some of the old aura of reliability. The sector can “no longer virtually guarantee steady returns or a safe haven,” writes Don Dion, a fund manager and publisher of the Fidelity Independent Adviser newsletters, in a recent blog. But it does “have the potential to continue growing.” Caught between two conflicting identities during a precarious period on Wall Street, it’s not easy to tell which companies will win investors’ hearts in the coming year. Roger Conrad, editor of the Utility Forecaster newsletter, says investors tend to look NewsFlash at the industry monolithisan antonio cally without realizing that spuRs WinD “no two are the same.” The AT&T Center, home While new and retooled to the San Antonia Spurs generating plants, valuebasketball team, will tap west Texas wind power chain enhancements and for all its electricity in the promising handholds next two years. It will become CPS in renewable energy Energy’s largest buyer of all appeal to investors, wind power. The center spends between another appealing story, $1.2 million and one that Conrad likes to $1.5 million annually on electricity. tell, is the in-it-for-theSeptember/October 2008 long-haul, basic blocking-and-tackling strategy of expanding the local rate base. And dividends? Perhaps nothing will help utilities more than continuing the 15 percent tax rate on dividends past 2010. Since adoption in a 2003 tax act, that rate has allowed utilities to raise dividends, attract investors and put debt and equity back in rough balance. Duke Energy pays one of the highest dividends, 5.4 percent. With blood flowing in the financial sector, “I don’t think you’ll see anyone slashing dividends in utilities,” says Christopher Muir, chief gas utility analyst at Standard & Poor’s. There are worries in addition to the housing and financial troubles and general economy. Over the long run, rising fuel and commodity prices will put some pressure on earnings. For the past three years, the Dow Jones Utility Average returned 9.2 percent through July 15, almost eight full points better than the Dow Jones Industrial Average and seven points better than the S&P 500. But the Dow Jones Utility Average was down 3.9 percent for the year, through July. And as a group, analysts believe the good times are done for a while. “We are primarily neutral on the utility industry now as far as dividend yield and capital appreciation,” says Jon Kolb, a senior equity analyst for Zack’s Inc., the investment rating company. “Utilities should benchmark the broader S&P.” That said, analysts believe the shares of several 18 E n E rgyB i z http://www.energycentral.com
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