Home > Stock Analysis

Electric Utilities: Year In Review

Posted: Dec 16, 2009 09:47 AM by Greg Sushinsky

Tickers in this Article: AEP, DUK, ED, EIX, SO

While the last year hasn't been one to remember, at least positively, for most industries in terms of profitability, sometimes there are positive signs for companies other than current revenues and earnings. Electric utilities are one such group, as in spite of the lower demand for energy by industrial and residential customers due to the economy and the indicators that growth will be slow for all sectors, utilities have found ways to cope. (Learn more about utilities, see Trust In Utilities and Utility Funds: A Bright Choice In Bear And Bull Markets).

Get Free Stock Analysis By Email

IN PICTURES: Eight Ways To Survive A Market Downturn

Low Interest, Cheap Borrowing
In the low interest, low inflation economy that comes with recession, borrowing costs have been pushed down for most utilities. Duke Energy (NYSE:DUK), the large, diversified, multi-line utility that delivers both electricity and natural gas, has recently found this favorable climate to its liking, as it sold $750 million in bonds at 5.337%. Utilities are in a position where they often have to continually borrow, so if you have to borrow, at least lower rates help.

Glimmers Of Economic Upturn
Edison International (NYSE:EIX), through its subsidiary Southern California Edison, has received approval from the California Public Utilities Commission for a 150 mile, $537 million project. While the Devers Palo Verde 2 line project was scaled down from the original proposal of 270 miles (due to Arizona declining to be a part of the project) it is still a significant project that will increase the transmission capabilities for electricity in the state.

American Electric Power (NYSE:AEP), a midwestern electric utility, will receive a Department Of Energy grant for its carbon recapture project in West Virginia. In addition to this, AEP along with other utilities such as Southern Company (NYSE:SO) will receive a total of $979 million in federal stimulus funds for retrofitting coal-fired power plants, so there are big dollars in cleaner coal and carbon projects.

These projects, when finished, will one day contribute real revenue while the funds will help companies ride out upgrading costs as the economy and the companies head into recovery.

Darkness For The Light Companies
The financial downside of the carbon retro-fitting grants is that the companies still have a lot of work to do to upgrade their coal-burning plants in the coming years. There are always environmental issues with utilities, whether it's coal, nuclear or dealing with angry protesters.

There is also the over-arching prospect of the "anemic recovery," spoken of by Duke's CEO, Jim Rogers. His pessimistic view is that this will be a "long period," with electricity sales liable to be "flat" or slightly above for the next five years. Indeed, initial estimates for next year for Rogers' own company look just like that.

Utility Stocks
Many experts are predicting a slightly better slow-growth recovery than Duke's Rogers, and utilities are still expected to draw interest from investors, for income and relative safety. The high debt, regulated business model of the electric utilities is never going to produce flashy growth, and for some, their financials have certainly been pressured by this recession but they still have their strong points. Duke Energy was yielding well over 5% near the end of the year, as was Consolidated Edison (NYSE:ED) and several others.

The Bottom Line
Duke and some of the others were trading at historically higher multiples due to flat or depressed earnings, so these PEs may fall even if the economy slowly recovers, and if there's any real upsurge in the economy, the stocks may even get a bit of an unexpected boost.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

By Greg Sushinsky

Greg Sushinsky is a passionate independent investor, who has done his own research, analysis and investing for 20 years. One of his earliest investing memories was when he first saved and bought U.S. Savings Bonds with his own money as a small child. From there, he studied investing on his own and made small stock purchases as he grew as an investor.

Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.

Filed Under: Stock Analysis,Stocks

Rate this Article: Your Rating: Overall Rating: Vote Now!