Energy Biz - September/October 2008 - (Page 20) » Financial Front We see potential for 15 percent gain in the average price-earnings ratio of natural gas distribution utilities companies have potential for gains as 2008 fades into 2009. Distributor-generators Edison International and Sempra Energy both are flourishing with expanding rate bases in a supportive California regulatory environment. Paul B. Fremont, an analyst with broker Jefferies & Co., recommended in June that investors buy shares of Edison International at the then-current price of $51.58 with the expectation that the price could reach $65 in a year. That would come to more than a 25 percent return including dividends paid. Behind the growth at Edison International is a good old-fashioned rate case. At a recent investor conference, John Bryson, the chief executive officer, described his local delivery company, Southern California Edison, as operating in a “benign regulatory environment” that involved “three-year forwardlooking rate cases.” The most important is the general rate case pending before the Public Service Commission of California to add $858 million to projected 2008 revenue. A separate rate case involving multi-year return on invested capital will soon be decided that could lock in an 11.5 percent return through 2010. Big investments in solar and wind energy also bode well for Edison International. And profits from its unregulated generation and energy sales unit, Edison Mission Energy, are tied to commodity prices and the company’s hedges. Sempra Energy has gas and electricity distribution companies in and around San Diego and both have agreed to rate case settlements that will add $197 million in 2008 and $96 million more each year thereafter until 2011. Sempra also has a pipeline and storage business, including liquefied natural gas terminals in Louisiana and Mexico whose services and revenue are already heavily booked, locking in revenue, says S&P’s Muir. “It doesn’t matter if the LNG flows through, they still will get paid.” Sempra should also profit from its commodities trading venture with Royal Bank of Scotland. Under September/October 2008 the agreement, Sempra receives $350 million of the first $500 million in pretax earnings on the invested capital. “I like that and think that will be an important growth driver,” Muir says. He set a target price of $70 for the company’s shares when it was trading at $56.26 in early July. One often-overlooked factor in a utility stock price is the local economy in which it operates and the willingness of regulators to pass on fuel price increases to consumers. While many states have automatic fuel price adjustment clauses, no two states are the same. Wall Street rarely recognizes the differences in local economies and regulatory relationships con- Gatherings FINANCIAL FRONT www.energycentral.com/events To view any of these events, please go to www.energycentral.com/ ) into the quick link box. quicklink and type the quick link code ( OCTOBER 6-7 California Power Market Forum San Francisco 6-8 8-9 13-15 17 20-21 20-23 | | Opportunities in Midwestern Renewable Energy | Dow Jones Clean Tech | EMACS | N.J. Clean Energy | Financing U.S. Power | Utility Payment E18691 Minneapolis E18750 Frankfurt, Germany E18562 Austin, Texas E18601 Jersey City, N.J. E18471 New York E18709 Portland, Ore. E18017 NOVEMBER 2-5 EEI Financial Phoenix 5-7 9-11 | | Risk Management Executive Symposium | Forbes Global Energy Forum Houston Doha, Qatar E17098 E18430 E18426 20 E n E rgyB i z http://www.energycentral.com/events http://www.energycentral.com/quicklink http://www.energycentral.com/quicklink
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