These would seem to be hard times for the utility business. The effects of April's nuclear plant disaster at Chernobyl in the Soviet Union were felt in the United States by utilities dependent on nuclear energy, and especially those involved in nuclear construction. Investment analysts began to view them with greater caution.
In some states, public regulators are beginning to favor ratepayers over investors in deciding who should pay for construction of new power plants and improving inefficient facilities.
In New England, the Boston Edison Company has been criticized by the Nuclear Regulatory Commission for alleged mismanagement at one of its nuclear power plants and has been taken to task by state regulators for not pushing conservation and alternative energy.
Despite these negatives, a rare combination of economic cycles, falling fuel costs, and corporate strategies is making utility stocks attractive to many analysts and investors. While most of the attention is going to nonnuclear utilities, a few with nuclear plants that are completed and in full operation are also favored.
Many utilities, however, aren't doing any construction, nuclear or otherwise. For the past few years, lower energy demands have made that unnecessary. So in addition to generating power, they are generating cash.
``The fortunes of many utilities are tied to construction cycles,'' says Nancy Fertig, first vice-president and utility industry analyst at Dean Witter Reynolds. ``Right now they're out of the construction cycle.''
``If a company is currently building [a nuclear plant], it could be at a disadvantage,'' says John Slatter, an analyst at Prescott, Ball & Turben, a Cleveland brokerage. ``But if they built their plant 10 years ago, it may not be a disadvantage. In fact, because the plant was built at a far lower cost, it could be an advantage.
``Once a company has finished its building program, it may not be looking toward another building program for five or 10 years,'' he adds.
A recent report by Prudential-Bache Securities notes that ``most electric utilities have not begun construction of any new power plants for several years, and when current projects are complete, there are no plans for new building projects to commence until the early 1990s.''
Partly because of this, the report says the overall level of internal cash generation for the industry would be 86 percent over the 1986-88 period, better than any other three-year period in the past 30 years.
The report lists several utilities that have strong internal cash flows and are expected to maintain or raise their dividends through the next two years: Kentucky Utilities, Portland General Corporation, Wisconsin Public Service, Minnesota Power & Light, and Southwestern Public Service.
Like many Americans, utilities are also benefiting from lower interest rates. During much of the heavy construction cycle, utilities had to borrow money at 12 to 18 percent. Today, they can borrow at lower cost or redeem higher-yielding bonds for those carrying lower rates, much like a homeowner refinancing a mortgage.
Many bondholders, in fact, have been unpleasantly surprised as utilities have redeemed some of their bonds at par, which could be 7 to 14 percent less than investors paid for them.
Utilities may do this or spend more on maintenance and replacement. Before getting hit by an early redemption, bondholders should read the fine print on their bonds to see if they carry this provision. If so, you may want to talk to your broker or financial adviser about selling them in exchange for bonds without an early-redemption clause.
Besides retiring debt or calling in old bonds, some utilities have used the extra cash to buy back some of their own shares. Having fewer shares boosts earnings for those still outstanding.
Utilities have also been helped by lower prices for oil and natural gas to fuel their conventional power plants.
All of these factors have combined to give investors a nice boost on their utility stocks. One analyst expects the total return from utility stocks to increase by as much as 20 percent in the next year.
Still, the experts say, utilities involved in nuclear construction probably won't see these kinds of returns. The absence of current nuclear construction projects was one factor used by Mr. Slatter in putting together a portfolio of six utilities, including some nonelectrics. Another factor is that all six send out income checks twice a month.
``You're used to getting a paycheck twice a month,'' he says. ``So people like the idea of getting a check like this twice a month, too.''
The six he chose cover all four segments of the public utility sector: Indiana Energy, Duke Power, Laclede Gas, Northern States Power, Southwestern Bell, and American Water Works.
Duke Power in North Carolina, he says, is an example of a utility that does not have to hurt investors just because it is involved in nuclear power.
Although it is not building any plants now, Duke builds all its nuclear plants itself, using its own employees, not outside contractors. When a plant is completed, those same workers move to the next plant.
``They build them quickly, at low cost, and they do it right,'' Slatter said.
For now, however, many other analysts are avoiding all utilities involved in any kind of nuclear power.
Despite the more natural economic and energy forces helping utility stocks, there is a less-natural event that might cloud their near-term outlook: tax reform.
Utilities that have relied on the investment tax credit and allowances for construction could find their cash flow cut by as much as 20 percent if the current tax reform proposals become law. How much each utility gets hit will depend on how much it has been using tax credits and depreciation to boost earnings, says James Healy, an analyst with Montgomery Securities in San Francisco.
``I put utilities in two categories,'' he says. ``Those who are hiding earnings and those who are paying their fair share of taxes. As I interpret the tax bill, those hiding earnings are no longer going to be able to do so. . . . The shareholders in these companies are the ones who are going to suffer.''
Like many investments, Mr. Slatter at Prescott says, there are utilities with low earnings, respectable earnings, and unbelievably high earnings. He, of course, favors the middle ground.
``The higher the yield,'' he says,``the more I stay away.''
Most of the utilities on his list are earning 6 or 7 percent; at the most, 8 percent. ``If it's over 9 percent, you can be sure they're in nuclear construction.''
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