Three Electric Utilities to Own, Three to Avoid

|
 |  Includes: AEP, DUK, EXC, IDU, NRG, SO, SRE, UTH, XEL, XLU
by: Bill Paul

Officially, U.S. electricity demand in 2009 is expected to be up about 1.2%. But well-known electric utility analyst Daniel Scotto’s own forecast is for demand growth to be no better than 0.2% this year. Moreover, Scotto told EnergyTechStocks.com in an exclusive interview that the U.S. electric utility industry could experience negative growth for the first time since the 1950s.

Revenue from commercial power users “is starting to collapse,” Scotto said, while industrial-customer revenue “is weakening.”

utilities-up-down330.jpg

Scotto went on to list the three electric utility stocks he thinks might be the best to own, as well as three investors might want to avoid, during what is shaping up as the worst business climate for the industry in half a century.

At the top of Scotto’s list is NRG Energy Inc. (NYSE:NRG), the New Jersey-based power producer that giant Exelon Corp. (NYSE:EXC) has been seeking to acquire in what has turned into a hostile takeover attempt.

Scotto said, “This is as easy as it’s going to get” to make money in the electric-utility sector, based on his belief that, as he put it, “I don’t think NRG will be able to squiggle out” of getting acquired. But it’s going to take a sweetened offer by Exelon, Scotto believes, which is why he thinks NRG shares will ultimately be worth more than they are now.

While NRG’s attractiveness in Scotto’s eyes has nothing directly to do with the recession, the other two utilities the veteran 30-year utility analyst thinks investors should own – Sempra Energy (NYSE:SRE) and Southern Co. (NYSE:SO) – are both due to their ability to withstand the current downturn.

Scotto said Sempra is a more well-balanced company than many utilities and thus better able to withstand a sharp falloff in retail revenue. Sempra’s earnings “keep coming through,” he said, adding that the company has a “strong management.”

Scotto described Southern as a “plain old vanilla utility” with a steady stream of regulatory-protected revenue. He noted that while several other utilities are dependent to a significant extent on revenue from generation (which is falling), Southern has become “the great wire company” whose regulators aren’t going to let slip into danger.

While he indicated that he doesn’t think there is any reason to sell, Scotto said the three electric utilities investors should avoid are Duke Energy Corp. (NYSE:DUK), American Electric Power Co. (NYSE:AEP), and Xcel Energy Inc. (NYSE:XEL).

Scotto described each as a “mega-utility” that is heavily deregulated. Thus, he said, the profit outlook for each has a high correlation to the slowdown in the economy.

Scotto said AEP has a lot of commercial and industrial demand that is going to be affected. He further said that Duke and Xcel have a high cost basis that makes them less able to withstand a falloff in revenue.

Reminded that Duke and Xcel are leaders in energy efficiency and smart grid development, and that the Obama administration could alter rules so that utilities could profit from making their customers more efficient, Scotto said that “decoupling,” as it’s called, could benefit Duke and Xcel, but probably not that much.

For electric utility investors who own electric utility stocks other than these six, Scotto said, “Stay in there” if a company is paying a good dividend, but remember that the industry offers “a lot less security” than it used to.

Disclosure: In keeping with EntergyTechStocks policy to be solely a news source, this article is presented for information purposes only.