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Analyst: Utilities 'Desperation' Creates Value

Analyst: Utilities 'Desperation' Creates Value

The "desperation" by utilities to consolidate, mutate or get out of the business altogether is a good thing, said utilities analyst Daniel Ford of ABN AMRO, because this fear is where most of the stock values are now being created. Ford, a keynote speaker at last week's PowerMart 2000 in Houston, called investors a "fickle bunch," but added they are sticking with utility stocks.

One of the things investors like the most is change, said the managing director of utility research for ABN AMRO. "Companies have to change their strategies to fit what investors want. That is exciting."

Investors invest in "themes," said Ford, and suggested that utilities looking for better stock performance look for new ways to enhance their business. To make the stock more exciting, Ford recommended one of two paths: develop a substantial non-regulatory growth business, or sell it for cash.

"On the non-regulatory side, we see that happening more and more," he said. These are the companies that are having the best stock performance. If they can't expand their businesses, then he recommended they sell them.

"What doesn't work are paper mergers, rate cases and leverage," Ford said. "Companies that have overextended their balance sheets are not going to last."

Most of the outstanding growth in utility stocks is coming in three areas, through telecommunications infrastructure; independent power and convergence; and in the electro-technology fields. If a company has not already begun to invest in telecommunications, Ford said, "frankly, that was last year's story. It's almost too late to get into that now." He said the story now is in bandwidth, and companies willing to change already are filling that marketplace.

The electro-technology field includes the small niche "cottage industries," said Ford, and these attract a lot of attention from investors. If a utility finds the right type of technology to invest in and make a part of its business, then these can add stock value.

Most of the attention is in the growth of independent power and in convergence, he said. "There is a lot of opportunity there." Calling electricity the "most volatile market the world has ever known," Ford said that there aren't many players in this market, and the United States needs more resources, starting with generation.

"Turn out the lights in the U.S. if we don't do something quickly," said the analyst.

Only a few "meaningful" power companies are now traded in the United States, he said, mentioning Calpine, AES, Dynegy, NRG, El Paso and the utilities with large IPPs. "These are very attractive to investors."

Ford said that natural gas, already a huge growth area, would continue to stay on an upward path - but it's continued strong growth actually may depend on who is elected president in November. A win, he said, by Vice President Al Gore (D), would guarantee more natural gas production. "He will get the gas plants." He didn't mention what Republican nominee, Texas Gov. George W. Bush, might do.

Ford also said to be prepared for winter natural gas spikes of $6 to $7 in the next few months if the season is normal. "Gas plays right now are incredibly attractive."

Carolyn Davis, Houston

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