Wednesday, July 22, 2009

Electric Utlities And Political Discounting

The cap-and-trade bill is being hurried through Congress; as might be expected, two electric utilities are spending millions each to lobby for changes. The Low P/E bin has six electric utilities, not including a company that's misclassified as one. All of them will potentially take a hit from the coal tax provision, although the size of the hit will vary. These six companies are:

- Alliant Energy Corporation. P/E: 10.09. Yield: 5.76%.
- Ameren Corporation. P/E: 8.61. Yield: 6.26%.
- American Electric Power Company. P/E: 10.42. Yield: 5.52%.
- CenterPoint Energy Inc. P/E: 10.19. Yield: 6.60%.
- Edison International. P/E: 8.89. Yield: 3.98%.
- First Energy Corp. P/E: 10.53. Yield: 5.40%.

With the notable exception of Edison, all of these stocks yield between 5 and 7%. CenterPoint has the higest payout ratio; Edison has the lowest.

All of these six stocks dropped today in regular trading. Alliant was down 0.19%, Ameren was down 0.69%, American Electric was down 1.72%, CenterPoint was down 0.35%, Edison International was down 0.95%, and First Energy was down 1.04%. Interestingly, all six stocks were either unchanged or up in after-hours trading. Ameren and Edison managed to either eliminate or reverse their day's losses.

It's no secret that the carbon-tax component of the cap-and-trade bill will affect the electric utilities, even if they have the right to pass the added cost on to their consumers. People can still reduce their electricity consumption if the price gets jacked up.

Some of these companies can be expeditiously handicapped; others don't explicitly break down their power-generation percentage by source. Of the latter, Ameren seems to have the highest percentage of generating capacity powered by coal. Given American Electric's lobbying efforts, though, it might be the highest - although its position as the industry's lobbying co-leader could result from it being one of the biggest in the industry.

Alliant gets about 55% of its electricity from coal. First Energy gets about 53.5% from coal. Edison International has the highest proportion of nuclear, hydro-electric and natural-gas-fired electricity generation sources. Therein lies a disappointment: Edison is also the company with the lowest yield, by far, of all six. Its operations are located in southern California.

If the cap-and-trade bill does pass and get signed into law with the coal-tax part unaltered, then this is one of the sectors to watch for panic bargains. It would be ideal if Edison were slammed down along with the rest of them, but a panic drop seems unlikely for it. Of the six, the long-term financials show Edison with the highest 10-year return on equity - 12.12% - but American Electric with the highest EPS growth rate: 9.78%, as calculated by logarithmic regression.

My own hunch says to watch the ones with the highest amount of coal generation. Although the cap-and-trade bill will impact their fundamentals, a panic sell might very well overdiscount them. Ameren has the lowest P/E and highest yield, with a not immodest payout ratio of 53.9%. Its operations are in Missouri and Illinois. As noted above, it seems to be the most coal-saddled of the six.

Of course, if nuclear- and hydroelectric-rich Edison is beaten down simply because it's an "electric utility"...

Postscript: The natural gas utilities didn't show that pattern. If cap-and-trade is currently being discounted, then this article explains why. [Note: the article's pro-AGW.]

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