Deregulation adds spark to utilities revival

With all the uncertainty swirling around the market these days, it should come as no surprise that utility stocks are doing well.

But utility companies, especially those that have resisted the temptation to get into the telecommunications business, are benefiting from more than a change in the economic climate.

They are receiving an extra boost this year from deregulation.

Firms are increasing profits because they have more flexibility to manage and in some cases can trim employment rolls.

The combination makes utilities the third-best sector in performance, according to Wiesenberger, a division of Thomson Financial.

Year-to-date as of Oct. 31, utilities funds had an average return of 6.58%, a one-year return of 12.65% and a three-year return of 17.68%, according to Wiesenberger.

That’s much better than domestic stock funds. Year-to-date, they had an average return of 1.54%, a one-year return of 7.07% and a three-year return of 10.18%.

telling examples

Rodney Collins, a managing director with J. & W. Seligman & Co. in New York who oversees a number of growth-oriented funds with about 5% of assets in utilities, says he can see where deregulation has made a difference in a number of companies.

For example, Exelon Corp. in Chicago, one of the nation’s largest utility services companies, didn’t even exist a year ago.

It was formed last year after Peco Energy Co. in Philadelphia and Unicom Corp. in Chicago, the parent company of Commonwealth Edison, went through deregulation.

“That’s a stock that’s been doing well partly in response to the success of the group as a whole, but also because it’s a very strong growth story,” Mr. Collins says.

“They’re able to buy nuclear assets at lower prices, operate them better and improve their margins.”

Mr. Collins says deregulation allowed Exelon to move its power-generating assets, mostly nuclear, out of the regulated part of its business.

That has allowed the company to grow faster and sell excess capacity at more competitive prices, he says.

Despite an impressive run that saw Exelon’s stock rise to a high of $62.56, from a low of $30.73 over the past year, it was trading off that high at $58.88 Wednesday.

Although not a large dip, it reflects what one portfolio manager says is a pitfall associated with deregulation.

Mark Luftig, a vice president of W.H. Reaves & Co. in Jersey City, N.J., and a manager of the $260 million Strong American Utilities Fund, offered by Strong Investments Inc. in Menomonee Falls, Wis., says Exelon is a good company, but regulatory issues in Illinois could still cost it a lot of money.

Mr. Luftig says he prefers Dominion Resources in Richmond, Va. Dominion’s strategy is to be a leading provider of electricity, natural gas and related services to customers in the energy-intensive Midwest, Middle Atlantic and Northeast regions of the United States.

Deregulation gave the company the flexibility it needed to buy Consolidated Natural Gas in Pittsburgh, a natural gas utility system.

Dominion is now installing gas-fired turbines on top of CNG’s pipeline, allowing the company to sell electric power in the summer and gas in the winter, he says.

Another utility Mr. Luftig says he likes is Duke Energy Corp. in Charlotte, N.C. It bought Panhandle Eastern Pipe Line Co. and later sold it to CMS Energy in Dearborn, Mich., for $2.2 billion.

strong price move

Dominion Resources stock has performed well although it lost some value last week.

In the one-year period ended Nov. 8, its stock had risen to a high of $61.19, from a low of $34.81.

It closed Nov. 8 at $57.75. Duke stock had risen to a high of $89.75, from a low of $45.75, and closed at $85.12.

Mr. Luftig says the fact that the stocks are trading slightly off their highs is nothing but a blip in the market.

Given the defensive nature of utilities and the widespread belief that the economy is slowing, he believes that they will continue to show strong returns.