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Where successful money managers invest fresh capital can be far more revealing than where their current assets lie. Examination of new purchases can telegraph where the manager’s current thinking lies concerning specific stock opportunities, and many non-fund holders can benefit from a successful manager’s expertise by reviewing the quarterly investment moves.

Last week, Mr. Mario Gabelli released the schedule of investments as of 9/30 for his Gabelli Utilities Fund (GABUX) with net assets of $2.225 billion.A few weeks ago, Gabelli published his 3rd quarter Shareholder Comments.Taken together, these offers an intriguing look into his utility investment strategy.The fund holds about 218 positions, with a tilt towards mid-cap value. The fund also takes advantage of the long-term sector consolidation trend. Even with a hefty and growing cash hoard, during the most recent quarter the fund increased its share count in over 55 companies, started new positions in 6 companies,while reducingjust5 positions.Every one of his top ten holdings received his vote of confidence by increasing share counts.

Most of the investments were in integrated electric utilities and increased the fund exposure in this sub-sector over the quarter from 27% to 30%. Natural gas integrated and natural gas utilities share counts also rose and combined investments remained steady at 16% of the fund. There were a few purchases in the communications sub-sector.Of note,with the exception of a 27% increase in share count of Canadian oil and gas firm Talisman Energy (NYSE:TLM), there was no additional purchases of global utilities, and the sub-sector’s percentage of the fund dropped from 3.0% to 2.3%. In addition, there were no new investments in alternative energy.

The fund’s investment in very short-term Treasuries grew from $213 million on 12/30/10 to $372 million on 6/30/11 to $454 million on 9/30/11.These represent 14.1%, 17.1% and 20.1% of NAV respectively. The fund's current NAV of $6.00 incorporates about $1.20 in cash.

During the quarter, the fund added to its largest position in National Fuel Gas (NYSE:NFG) by 15% and now owns 1.85 mil shares representing 4.0% of NAV. While the share price reacted negatively to the company’s announcement not to seek a joint venture partner for the development of its vast Marcellus shale-gas acreage, Gabelli finds long-term value in these assets. His investment thesis on NFG as described in his Shareholder Commentary is very sound:

National Fuel Gas Co. (NFG) is a diversified natural gas company. NFG owns a regulated gas utility serving the region around Buffalo, NY, gas pipelines that move gas from the Midwest and Canada down to New York City and to New England,and an oil and gas exploration and production business. NFG’s ownership of 800,000 acres in the Marcellus Shale,including 745,000 acres in the shale fairway of Pennsylvania, holds enormous natural gas reserve potential that was made recoverable by recent advances in drilling technology. We expect significant earnings and cash flow growth from gas production and believe the position could be worth well over $4billion based on recent comparable transactions. NFG’s August 2011 decision not to sell an ownership position or joint venture that could have accelerated shareholder value creation was disappointing, but we remain excited about the company’s unrecognized value. The company has increased its dividend for forty consecutive years.

Gabelli increased share count in his second largest holding, NextEra Energy (NYSE:NEE) by 34%.His comments on NEE:

NextEra Energy Inc. (2.3%) (NEE - $54.02 - NYSE) is the holding company for Florida Power & Light (FP&L),the largest electric utility in Florida,and NextEra Energy Resources (NER),a leading wholesale power generator. We consider FP&L to be one of the premier utility franchises in the nation with favorable long-term demographics and above average rate base growth potential. NextEra Energy Resources owns 18,800 megawatts of generation, including the nation’s largest wind portfolio. We regard NextEra Energy as one of the better positioned power companies for growth in the evolving and “greening” environment. With over 8,000 megawatts of wind generating capacity, 2,600 megawatts of nuclear capacity, and a leading solar pipeline, NEE owns one of the nation’s cleaner asset portfolios. We expect the addition of 1,400-2,000 megawatts of wind and solar projects per year over the next several years, with a significant development pipeline of potential projects.

Great Plains Energy (NYSE:GXP), while considered by many on the street to be currently fully valued, rose to the 11th largest holding with the addition of 27% more shares:

Great Plains Energy Inc (NYSE:GPX) is a mid-sized traditional regulated utility serving eastern Kansas and western Missouri as Kansas City Power & Light and KCP&L Greater Missouri Operations (NYSEMKT:GMO). In mid 2011, GXP received Missouri rate recognition of its recently completed clean coal plant, Iatan 2. Recognition of this highly efficient plant and other investments in environmental equipment are expected to lead to strongly enhanced earnings power. Over the long term, GXP has significant opportunity to invest in wind generation and transmission lines given its strategic location in the wind rich Midwest. Shares of GXP offer an attractive current return (yield) and solid near and long-term earnings growth potential.

Other positions with a 20% or greater increase in share count over the quarter include:

Electric Utilities:

Ameren Corp (NYSE:AEE)

Edison International (NYSE:EIX)

Hawaiian Electric (NYSE:HE)

Westar Energy (NYSE:WR)

Wisconsin Energy (NYSE:WEC)

Natural Gas & Resources:

Apache (NYSE:APA)

ONEOK (NYSE:OKE)

Consol Energy (NYSE:CNX)

Southwest Gas (NYSE:SWX)

Talisman Energy (TLM)

Communications:

Charter Communications (NASDAQ:CHTR)

AT&T (NYSE:T)

Loral Space (NASDAQ:LORL)

Telephone & Data (NYSE:TDS)

In non-traditional holdings for a utility fund, substantial shares were added to positions in oils services firm Weatherford International (WTF), diversified industrial firm ITT Corp (NYSE:ITT), oil exploration firm Tullow Oil (OTCPK:TUWOY), railroad car manufacturer Trinity (NYSE:TRN), along with electric component manufacturer Thomas and Betts (TNB).

One interesting sub-sector of the utility sector is transmission and distribution of electricity. Companies that are focused on transmission include American Electric Power (NYSE:AEP), CH Energy Group (NYSE:CHG), Con Edison (NYSE:ED), and Northeast Utilities (NYSE:NU). Gabelli lays out the most basic of investment strategies concerning the higher profitability of transmission assets:

Growing the Nation’s Power Highway: Expanding the archaic U.S. electric grid to free up existing “bottlenecks” in the system, as well as moving power from unpopulated wind regions to load centers, represents one of the better investment opportunities for the sector.The FERC, not state public utility commissions, regulates transmission, and it wants more investment in the grid. Transmission investment generally receives higher profit levels, more incentives, and easier recovery than investment in the jurisdictions regulated by state public utility commissions.Utilities are building and have proposed billions of dollars in projects for longer “power highways” that will enhance future earnings growth potential.

Most utility investors should take time to read Gabelli’s Shareholder Commentary as it provides insight into underlying trends within the sector. Investors can do far worse than following Mario Gabelli’s lead. These names should be on an investor’s research list if they are seeking to diversify their utility portfolio with mid-cap value selections. Keep in mind seven of Gabelli’s holdings, with an investment value of over $166 million, are currently in various stages of being acquired.

Mario Gabelli’s recent Shareholder Commentary for the third quarter is here (pdf).

The recent schedule of investments for GABUX is here (pdf).

As always, investors should conduct their own due diligence, should develop their own understanding of these potential opportunities, and should determine how it may fit their current financial situation.



Disclosure: I am long HE, APA, TNB, AEP.

Additional disclosure: Author has been a shareholder in GABUX since 2011, HE since 1995, APA since 1997, TNB since 2006 and AEP since 2009

Source: Gabelli Fund's Q3 Utility Stock Purchases