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TWST: We're more than halfway through the year. What's gone on in the utility
group from a business perspective so far?
Mr. Worms: Fundamentally, the utility industry remains very strong. Regulation
has been constructive and balanced, generally speaking, throughout the country.
Companies are being allowed to expand their rate base through transmission,
distribution, and environmental spending. Selectively in some states, companies
are being allowed to construct new power plants. We have seen and I presume will
continue to see a relatively steady rate base growth environment on the
regulated side of the business.
As for the wholesale market, where companies own deregulated generation, higher
commodity prices have increased electricity prices, and those higher market
prices should generate relatively steady and predictable earnings streams for
wholesale generators. I believe most of the expected output from these power
plants for 2007 has already been pre-sold at relatively strong prices, which
should support continued earnings growth through next year. As a result, we
project a fairly attractive environment for utilities, weather aside, at least
through 2007 and perhaps into 2008, promulgated by rate base growth and
increasing wholesale margins. TWST: What can go wrong?
Mr. Worms: There is always the possibility that the regulatory climate changes
or politicians intervene, although there is no evidence of that currently. From
a performance point of view, electric stocks are up about 9% year to date,
outperforming the major market indices: the Dow Jones Industrial Average is up
5.9%, while the S&P 500 has risen a modest 4% over the same time period. Should
the overall market continue to accelerate on positive political and/or economic
news, I would imagine that there could be some near-term weakness in the utility
sector. In our opinion, non-traditional utility money has come into the utility
sector, as the group is often viewed as a relatively safe haven for investors
during periods of uncertainty. If market conditions improve and the
uncertainties abate, some of that money would likely be moved out of utilities.
Tickers included in this excerpt: D, DTE, EXC, FPL, SRE
For more information call (212) 952 7433. The
Wall Street Transcript does not endorse any of the comments made by interviewees, and does
not make stock recommendations.
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