Cold Weather Fuels Utility Earnings

Despite the front page news of California’s two financially troubled utilities, the lion’s share of U.S. utility companies will have strong first-quarter results as cold weather created favorable dynamics for both natural gas and power producers.

“A vibrant and volatile natural gas market, combined with strong electricity and heating demand in the Midwest because of cold weather, led to very favorable power and gas dynamics well beyond the California market,” said James Yannello, analyst with UBS Warburg.

Utility earnings will provide a beacon to investors amid a stormy sea of profit warnings and are expected to continue to outshine the overall market into 2002, analysts said.

“Overall we expect everyone to do very well. For the most part, those who have extra power to sell in wholesale markets or have wholesale trading operations will do quite well,” said Paul Patterson, analyst with Credit Suisse First Boston.

“Dynegy Inc. [ticker symbol: DYN] did very well in its Midwest generation portfolio given how cold it was in the first quarter,” he said.

Lower winter temperatures helped push average spot natural gas prices for the quarter to $6.45 per million British thermal units (mmBtu) versus the $2.46 averaged in the first quarter of 2000. This winter was 24% colder than last year, which was unseasonably warm.

Enron Corp. (ENE), North America’s biggest buyer and seller of electricity and natural gas, also is seen reporting sterling quarterly results. The Houston-based company’s Web-based trading system, EnronOnline, completed its first full year of operation in 2000, executing about $336 billion of trade.

“It would be very difficult for Enron not to have a strong quarter,” Yanello said.

Wholesale merchants and traders PPL Corp. (PPL), Entergy Corp. (ETR), Exelon Corp. (EXC) and Wisconsin Energy (WEC) all will post solid results, Patterson said. (All of these stocks rallied Tuesday, helping to drive the Dow Jones utility average up more than 3%.)

Already Pennsylvania-based PPL said it expects earnings this year and in 2002 to meet or beat estimates while New Orleans-based Entergy has said it expects to best first-quarter analyst estimates by 10 to 15%.

Market research firm First Call/Thomson Financial says while estimates call for earnings of the S&P; 500 as a whole to fall by 8.6% for the first quarter, it expects utility profits to grow 11%.

“I suspect that the utilities will be beating estimates by more than usual based on the last four quarters,” said Chuck Hill, director of research.

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Power Surge

Utility stocks have rebounded on reports that the nation’s cold winter will result in strong first-quarter results for many power companies--the problems of California’s utilities notwithstanding.

Dow Jones utility average, weekly closes and latest

Tuesday: 386.57, up 12.78

Source: Bloomberg News