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Off Peak

Fortnightly Magazine - April 15 1998


According to PaineWebber's report, Power Book, utility stocks "are likely to continue to lag the market." Of the 66 electric utilities surveyed, only 9 earned a "buy," or "1," recommendation, and six scored "unattractive," or a "4" rating (see table). The rest fell somewhere between, their stocks labeled either "attractive," or "neutral."

While a merger can bolster a company's potential, it isn't a sure bet. Cinergy Corp. (formed October 1994 when Public Service Company of Indiana and Cincinnati Gas & Electric merged) garnered a "1" for being one of the first companies to realize the need to consolidate in a competitive environment. Cinergy earned another feather for being a non-nuclear, low-cost producer; the company's average retail rate was 5.4 cents/kWh in 1997.

However, the "4" ratings given Centerior Energy and Ohio Edison did not change when the two companies merged to form FirstEnergy. Centerior brought weak finances and high competitive risk to the table; Ohio Edison offered a hemorrhaging industrial-customers base.

Atlantic Energy's "4" rating reflected its recently approved merger with Delmarva Power & Light Co. to form Conectiv; PaineWebber does not see either company benefitting from the union.

International expansion fueled some utilities' earnings potential and ratings. CMS Energy is projected to have the strongest earnings and dividend growth of the utilities surveyed, due in part to its growing international business. Edison International's ventures in the U.K., Australia, Indonesia and Italy are expected to boost corporate earnings. And GPU Inc. has made several international investments in the past three years in Australia, the U.K. and in South America. All three companies are rated buys.

A strong national market base bolstered other utilities. Duke Power earned a buy for positioning itself to become one of the leading total energy marketers in North America with competitive retail rates. FPL Group was commended for being a low-cost producer and for its location (em Florida, which is experiencing population and economic growth.

New Century Energies, which resulted from a merger between Public Service Company of Colorado and Southwestern Public Service Co. combined two of the lowest-cost, non-nuclear electric utilities in the West. This merger created a larger, more powerful company to compete under deregulation, according to the survey.

Regulatory holdups hurt other utilities. For instance, Northeast Utilities remained unattractive because of lagging regulatory proceedings that could hamper its subsidiary Public Service Company of New Hampshire. Its earning prospects are limited because it may have to cut rates without the benefits of deregulation.


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