Back from the Brink

08/19/2010 1:00 pm EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Roger Conrad, editor of Utility Forecaster, tells about a utility that almost declared bankruptcy a few years ago, but now has refinanced its debt and is financially strong.

Here in summer 2010, a lot of investors are certainly worried about a lot of things. A good bit of the angst is political, particularly concerning what taxes are going to be in 2011.

Today’s easy credit conditions, however, are 180 degrees distant from the freeze of late 2008 and 2009. Southern Company’s (NYSE: SO) ten-year debt no longer yields less than ten-year Treasury notes, which currently dish out just 3.06%. But their yield to maturity is still barely 4%. And after slacking off earlier this year, bond-issue volume is surging again.

The economy isn’t rebounding as quickly as Wall Street expected earlier this year. But here, too, the direction is positive and, despite quite high unemployment in many states, the picture is undeniably brighter than it was a year ago.

Then there’s [the] systematic deleveraging of balance sheets, the virtual elimination of near-term debt refinancing risk, and continued reduction of operating risk. The upshot is—even on the increasingly remote chance we do see a 2008 reprise—our companies will be in better shape than ever to handle it.

In late 2002, Xcel Energy (NYSE: XEL) was on the brink of Chapter 11 [bankruptcy protection]. That’s when management negotiated a severing of “cross-default” arrangements with its bankrupt power-generation unit NRG Energy.

Ever since, the company has been squarely focused on the core 11-state electric and gas utility, repairing relations with regulators, [and] cutting debt and operating risk. Its success implementing energy efficiency and renewable power initiatives while boosting rate base, earnings, and dividends has been particularly remarkable.

That includes last month’s commissioning of the first US combination coal-fired/solar thermal electrical generation power plant in Colorado. The investment will improve plant efficiency, reducing the amount of coal needed while boosting output in a cost-effective manner. And it features numerous and profitable smart grid investments as well.

It’s relatively rare for skittish credit raters to upgrade any entity these days. But in late June Xcel’s rating was boosted to A- by Standard & Poor’s, with an “excellent” business risk profile. The rater cited “supportive” regulation, demonstrated ability to handle large projects, and strong finances—all reasons I’ve been consistently bullish on the company for low-risk growth as well.

I’ve generally shied away from holding more than one security from the same company, [but] Xcel Energy is [an exception]. The common stock promises to get more benefit from projected annual earnings growth of 6% to 7%, particularly with regular dividend boosts. Xcel Energy $4.16 Preferred E’s (NYSE: XEL-PE) yield is slightly higher and also pays a dividend that’s qualified for tax purposes.

Buy Xcel Energy and Xcel Energy $4.16 Preferred E up to $22 and $80, respectively. (The stock closed above $22 Wednesday, while the preferred closed above $87—Editor.)

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