Electric Utility Stocks Generate Heat of Their Own
The heat wave in California is nothing compared with the sizzling stocks of the power companies trying to cool everyone down.
Share prices of many electricity utilities, power generators and even makers of generation plants and equipment are soaring. The gains are in response not only to the current heat wave sparking power shortages and higher wholesale electricity prices in California, but also to deregulation here and in other states, along with surging demand for electricity for air conditioners and a plethora of other electronic products.
It’s an abrupt revival for electric utility stocks, which were hammered last year amid initial confusion about deregulation’s effects, the companies’ own restructuring efforts to adapt to the new open-market structure, and investors’ ardor for technology stocks instead of older, more staid utility shares.
No more. After tumbling 23% in 1999, the Standard & Poor’s index of electric company stocks has jumped 17% so far this year, compared with a 0.4% decline in the bellwether S&P; 500 composite index and a 7% drop in the technology-laden Nasdaq composite index.
And investors are attracted not only to the electric utility stocks’ more favorable operating trends, but they’re also finding favor again with the stocks’ traditional high-dividend yields, which boost the investors’ total returns. Edison International, for instance, sports a 5.4% yield.
Also, the dynamics shaping today’s rally in electric utility stocks bode well for the shares long after it finally cools down in California, some analysts said.
Those trends include the industry’s deregulation, the prospects for more utility mergers, and an expected long-term imbalance between supply and demand. There’s a lack of new generation facilities expected to come online soon, yet demand for electricity keeps growing 2% to 3% a year because of the robust U.S. economy and increased usage of air-conditioning units, personal computers and other electronic gadgets in homes and offices that devour electric power.
For the moment, most California consumers are sheltered from the spike in electricity prices because, under deregulation, their rates are still capped. Even so, “these stocks will stay very much in favor with investors because their fundamentals are doing better and the stock market is only beginning to notice those improvements,” predicted Barry Abramson, an analyst with PaineWebber Inc. in New York.
“Even the basic, old-fashioned utility businesses seem to be growing faster, and that’s because of better growth in electricity demand,” he said. “And I’m not talking about hot-weather-related demand. It’s underlying demand that’s improved because of steady economic growth and the way people are using more energy.”
The current gains in electric utility stocks are spread across all sectors of the industry, but the biggest winners include the producers of wholesale electricity for use in California, which are enjoying higher prices because supplies are thin.
Several of these producers aren’t headquartered in California; they’re primarily companies that operate in other regions of the country. But they bought many of the power-generation plants that California utilities were forced to divest under deregulation.
Under the state’s deregulation, power from those plants and other electricity is now sold either under separate contracts to big users or to California’s Power Exchange, an electricity trading market where the conventional utilities buy power for transmission to their customers.
For instance, the stocks of two Houston-based companies, Enron Corp. and Reliant Energy Inc., have jumped 76% and 55% so far this year, respectively. AES Corp., based in Arlington, Va., is up 41% year to date, and Duke Energy Corp. of Charlotte, N.C., has climbed 35%.
Another independent producer whose stock has been a highflier is Calpine Corp., based in San Jose. The stock not only has more than doubled in price so far this year, but it’s nearly quadrupled in the last 12 months, and it now sells for a lofty 50 times the per-share earnings Calpine is expected to report for 2000.
Power-gear manufacturers are also benefiting. Capstone Turbine Corp., whose stock went public at $16 a share in June, closed Friday at $44.69, up another $3.69 on the day, on the Nasdaq market.
But even stocks of conventional utilities in California--the ones that distribute the power and whose bills land in consumers’ mailboxes--are showing new luster, because of the companies’ diversification moves and despite having to shed their power plants because of deregulation.
The stock of Edison International, after plunging in March because of disappointing earnings, has since come back 35%. Shares of PG&E; Corp., the parent of Pacific Gas & Electric, have risen 39% this year. And Sempra Energy, which runs Southern California Gas Co. and San Diego Gas & Electric, has jumped 13% in the last five weeks as the power crisis worsened in California.
But some analysts warned that with the stocks rallying so sharply, they could reach prices that outpace even the increasingly favorable trends in the electric power industry. That could make for a sharp, albeit temporary, pullback in the stocks’ prices down the road, they said.
“The high stock prices and the high P/Es [price-to-earnings multiples] introduce more risk into these stocks,” said Douglas Christopher, an analyst at the investment firm Crowell, Weedon & Co. in Los Angeles. That’s on top of the deregulation of the industry, which itself “introduces less predictability” for the companies’ growth, he said.
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Power Surge for Utilities
Power shortages have helped revive investors’ interest in electric utility stocks this year, pushing the Standard & Poor’s index of 28 major utilities up sharply. The stocks were volatile for much of the late 1990s as deregulation shook up the industry.
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Quarterly closes and latest for the S&P; electric utility stock index
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Friday: 90.29
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Source: Bloomberg News
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Hot Times for Electric Stocks
Stock prices for electric utilities, power generators and producers of generating equipment have surged this year in response to supply shortages and strong demand for electricity. How some of the stocks have fared:
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Annualized Ticker Friday YTD price dividend Stock symbol close gain or loss yield AES AES $52.81 + 41% NA Calpine CPN 73.25 +129 NA Duke Energy DUK 67.75 +35 3.3% Edison International EIX 20.63 -21 5.4 Enron ENE 78.00 +76 0.6 PG&E; PCG 28.44 +39 4.2 Reliant Energy REI 35.56 +55 4.2 Sempra Energy SRE 19.31 +11 5.2 Standard & Poor’s 500 index 1,462.93 -0.4 1.1
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NA: not applicable (does not pay a dividend)
Source: Times research, Bloomberg News
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POWER DRAIN
Two Southern California power plants failed, leading to a Stage 1 electricity emergency. A12
