Caution Is the Watchword for Utilities

03/05/2012 12:15 pm EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

There is a lot of action happening in the utilities sectors in the coming weeks and months, but now isn't the time to get overly anxious about buying into the action says Roger Conrad of Utility Forecaster.

President Obama has forced TransCanada Corp (TRP) to resubmit its application to build the 1,661-mile Keystone XL Pipeline, the latest evidence the administration will mix politics with regulation of essential service industries to avoid angering key constituents in this election year.

Keystone XL, for example, is supported by labor unions but bitterly opposed by the environmental lobby. Both are key pieces of the Democratic Party base, making a non-decision now by far the best course politically.

The good news is TransCanada has a full plate of new projects to fuel growth while it waits. Take advantage of any weakness to buy TransCanada up to $43.

Passing first-ever restrictions on carbon dioxide emissions was a key Obama administration goal earlier in the term. Following the failure of legislation, the president charged the Environmental Protection Agency (EPA) with formulating rules. But last month the EPA effectively delayed any action until after November elections, dodging another potential union-environmentalist battle.

As for the EPA’s air toxics standards announced in late December, even Southern Company (SO) has time to comply in a cost-effective way. In fact, given its strong regional regulatory support, it will increase rate base—and therefore earnings and dividends—as it sharply reduces emissions of mercury, particulate matter, and acid rain gases in coming years.

This also appears to be true for American Electric Power (AEP), though its generation competes more directly with natural gas, making cost recovery less sure.

Pending federal approvals of utility mergers and nuclear power plant licensing are still likely to face delays. But even here there are hopeful signs.

The Nuclear Regulatory Commission (NRC), for example, has approved the AP1000 design for new plants. The Dept of Justice, meanwhile, OK’d the Exelon Corp (EXC)-Constellation Energy Group (CEG) merger and AmeriGas Partners LP’s (APU) purchase of Heritage Propane from Energy Transfer Partners LP (ETP) last month.

That’s reason to expect the Duke Energy (DUK)-Progress Energy (PGN) merger will go through long before the parties’ new extended deadline of July 8, a well as speedy licensing of AP1000 nukes planned by Southern Company and SCANA (SCG).

Until there are results, however, I’m keeping it conservative with buy targets for all of these companies.

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