A Utility That Profits from Mining

03/30/2009 12:47 pm EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Roger Conrad, editor of the Utility Forecaster, says a utility based in Nevada should hold up well despite the housing meltdown and the falloff in tourism.

Investors are now focused on the potential perils of 2009. Happily, the best clues to how companies will fare are in the fourth-quarter numbers-not the headline figures like earnings, but the "inside" numbers that reveal the strength of balance sheets and key operations.

Because full-year filings are subject to numerous regulations, we won't have results for some of our holdings for some weeks. But there are enough numbers to get pretty good reads on many companies.

Fourth-quarter 2008 was the first in which stalling customer growth, rising bad debt expense, higher interest costs, and falling industrial sales really showed up in electric company profits. Those weaknesses, however, continued to be offset by the wholesale business, particularly for nuclear- and renewable-focused companies.

"Utes" also continued to add to [their] rate base with capital spending on transmission efficiencies, renewable energy, and environmental cleanup. Falling oil, gas, and coal prices helped cut costs, as did continued debt reduction. The result: no real power-sector earnings disappointments for us in the fourth quarter.

Gaming, mining, and climate are three big reasons Nevada continues to grow (although the housing meltdown and debt problems at some major casinos has hit Las Vegas hard-Editor). That's increasingly benefiting the state's regulated power utility NV Energy (NYSE: NVE), formerly Sierra Pacific Resources.

In 2002, regulators nearly drove the company into bankruptcy by disallowing its spiking purchased-power costs. Since then, however, officials and utility have learned to cooperate.

The result is a tripling of in-state generation in three years, efficient development of renewable resources, and a return to near-investment-grade bond ratings for NVE. Nevada's economy has slowed sharply since 2007.

NVE, however, continues to benefit from the state's thriving mining sector. Industrial users in 2008 rose 3.8% in southern Nevada and 4.5% in northern Nevada. Demand from the casino industry also continues to rise, as it depends on capacity rather than visitor traffic. And even residential customers are still rising.

NV's biggest challenge for 2009 is winning a fair share of its 14.9% rate hike request, mostly to pay for building one plant and buying another last year at a total cost of $910 million. A decision is due in the second quarter.

If the company is treated fairly, it will have cash flow to keep building while cutting debt and boosting dividends (up 25% last year). The risk of a negative ruling is why NVE is an aggressive holding. But at just 76% of book value, the bar is low and upside is substantial. Buy NV Energy up to $12. (It closed below $10 Friday-Editor.)

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