Look for Utilities with Good Regulators
08/10/2009 1:00 pm EST
Roger Conrad, editor of Utility Forecaster, says some regulators will crack down on big utilities over the next few months, while others will all but guarantee good returns.
For the next 12 to 18 months, deteriorating regulation will be the biggest potential risk for utility business health. Despite surging unemployment, relations in most states remain extremely positive to date.
This summer, for example, the state of Ohio approved a comprehensive regulatory plan for DPL (NYSE: DPL) and an amicable rate hike for Duke Energy (NYSE: DUK). Nevada officials signed off on a much needed rate hike for NV Energy (NYSE: NVE). Missouri passed a bill allowing utilities to put the cost of conservation initiatives into [the] rate base.
On the other hand, Connecticut regulators rejected a rate increase for a unit of Iberdrola(OTC: IBDRY). And opposition to rate boosts is rising in other states. Wisconsin Energy’s(NYSE: WEC) largest customers, for example, are already lining up to oppose its proposed 7% rate hike.
Worst of all, Constellation Energy Group (NYSE: CEG) may be headed for a showdown with Maryland Governor Martin O’Malley and state regulators over its proposed nuclear power venture with Electricite de France(OTC: ECIFF).
All utilities need favorable regulation. NV Energy lacked it for decades. Now that’s what’s keying its continued recovery, despite Nevada’s worst economic pressures in history.
In late June, state officials answered any lingering doubts about their support, granting a two-step, 6.9% ($221 million) rate boost and 10.5% return on equity. Two new gas-fired facilities are now in rate base on schedule and—coupled with no near-term financing needs—NV Energy is set to ramp up renewable energy, now 10% of its total production.
The next step is getting regulators’ approval for an Integrated Resource Plan (IRP), including a 500-kilovolt power link between wind-swept and geothermal-rich northern Nevada and the sun-drenched and power-starved south.
The IRP also proposes power purchases from two solar projects, development of the China Mountain wind and Amargosa solar facilities, and three new utility-scale solar power plants. All and more will be needed to meet Nevada’s aggressive goal of deriving 25% of power from renewables by 2025. The cost will boost rate base in coming years, increasing earnings and dividends (raised 25% this year) and strengthening the balance sheet.
I currently have two NV Energy bets in the Portfolio. The common stock offers faster growth, while Sierra Pacific Resources 7.803% Note of 06/15/12 (CUSIP: 826428AJ3) is a risk-free way to earn 6.6% over the next two years.
Buy NV Energy common up to 12. (It closed just below that Friday—Editor.)