Utility Favorites

08/22/2003 12:00 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Roger Conrad, editor of The Utility Forecaster, is an expert not just in traditional utilities, but also in a wide variety of sectors ranging from water and natural resources to communications and energy distribution. In addition to general coverage of these various sectors, each issue of the newsletter features a growth spotlight and an income spotlight stock. Here are the latest top picks.

Here's the latest Growth Spotlight from the Utility Forecaster : "Mired in recession, drowning in deficits, and contentious as ever, California seems an extremely unlikely place to find a utility bargain, particularly a bankrupt one. But gains of at least 20% to 25% lie ahead in six months for buyers of Pacific Gas & Electric's 5.5% Preferred B (PCG-B NYSE). In early 2001, Pacific G&E became only the third regulated utility since the Great Depression to file Chapter 11. The catalyst was the vicious spike in California's power costs and a state law requiring the ute to buy through the mismanaged Independent System Operator. Frustrated by sluggish state efforts at resolution, the company declared war, filing a controversial plan to shift its regulation to the federal level. The ironic result: a newly inked deal with regulators restoring Pacific's financial health and regulated monopoly in northern California. The full Public Service Commission will hold hearings starting September 10, taking a final vote December 18. If approved, Pacific will emerge early next year. For holders of the Preferred B, that means payment of three years of accumulated back dividends, a total of 4.125 per share. With a tax-advantaged payout and no call price, the Preferred should also move above 25 in short order. Political risk is critical to watch, particularly with regard to rate increases. At worst, however, the preferreds' payout will only be delayed, as ending the Chapter 11 is in everyone's interest. Aggressive investors can buy Pacific Preferred up to 24.50.

Here's Conrad's latest Income Spotlight:  "Rarely do dividend cuts make stocks better investments. But these aren't normal times, and NiSource (NI NYSE) is no typical company. The ute's 20% cut in its payout last month was a key step in its now-complete transition back to a financially healthy regulated service provider. Other steps included selling its remaining unregulated operations in power and gas, cutting debt $510 million, and boosting efficiency. Success was underscored by simultaneous credit outlook upgrades from S&P and Fitch and Moody's, which had threatened a downgrade to junk. Almost completely operating in favorable states--particularly Indiana and Massachusetts--the new NiSource's earnings are steady and predictable. That should allow relatively smooth debt reduction even if, as the raters predict, the power market stays weak. By 2005, I look for a common dividend boost. Meanwhile, the post-reduction dividend's after-tax worth is about the same as the pre-reduction payout was before the Bush tax cut. NiSource's marquee asset is the Columbia Pipeline system, which it acquired in 2000. The system includes 16,062 miles of critical gas pipe, connecting the Gulf of Mexico to Lake Erie, New York. With the stock selling for little more than book value and the company's credit questions resolved, it's likely to attract suitors, particularly combined with 3.7 million gas distribution customers in nine states and 470,000 power users. That's the icing on the cake for this now very solid dividend play. Buy NiSource up to 20."

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