Promising Investment Opportunities Seen in Larger, Competitive Utilities

Article excerpt

For years electric utilities have produced energy with little fear of much changing except how much the regulators allowed them to earn, and investors have counted mainly on a steady dividend.

But the industry is rapidly changing. Analysts see investment opportunities among the bigger, more competitive utilities, but they caution that many of the smaller ones will not survive.

Essentially five forces are transforming the industry: a bigger cash flow for many utilities; deregulation; acid rain legislation; diversification, and increased competition.

The industry, which has overcapacity in the power it can supply, has slowed plant construction, a trend expected to last for the next several years. As a result, it needs few new capital investments.

``Their cash flow is higher because they are not putting so much into asset investments because construction of new plants has fallen off dramatically,'' said Thomas Halligan, an analyst with Duff & Phelps.

Some utilities with large amounts of excess cash have bought unrelated businesses, to raise their return on equity.

For example, Pinnacle West Capital, an Arizona utility, bought Merabank, a mortgage banker, and Florida Power and Light bought Colonial Penn, an insurance company. Both diversifications have been problematic, analysts say.

``For the past 10 or 15 years, stopping basically in 1984, electric utilities were primarily construction finance companies,'' said Edward J. Tirello, Shearson Lehman Hutton's utility analyst.

``Now except for companies finishing up big projects, everyone has pretty much stopped building big power plants. They have become totally different. They have become big net cash generators.''

But that is not the whole story, he said. The smaller utilities are struggling with new competition that did not exist only six years ago while gearing up for the passage of acid rain legislation with an annual compliance price tag of $2 billion to $6 billion over 20 years.

``Competition is the newest element,'' Tirello said. ``We feel the electric industry is going the way the gas industry did to some degree. We see equal access to transmission lines and nondiscriminatory wheeling of power. Needless to say, the industry is violently opposed to this.''

Some analysts believe that some form of equal access to transmission lines is inevitable in the electric business, and this alone would mean an enormous change.

It would effectively give the independent power producers, which serve both the utilities themselves and large manufacturers, a bigger edge in their competition with the established utilities. …

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