One Utility No Longer Fits All


While the share prices of the two large investor-owned California utilities,

Pacific Gas & Electric Corp. (PCG) and Edison International (EIX), have tanked during the Golden State's power crisis, other utility stocks seem to be on a roll. Since early January, when PG&E and Edison plunged to lows of $9 and $6.25, respectively, the Dow Jones utilities index has actually increased by a healthy 5.9%. PG&E and Edison's shares have come back somewhat in the past month, too, but they still trade at only a fraction of their peak prices last year.

What's going on here? In a nutshell, utilities aren't the staid monoliths they once were. In the old days, utilities were local monopolies that basically generated power and delivered it to customers. But when states began to deregulate electricity markets, opening the door to competition, utilities had to think about ways to retain and attract new customers. The companies started pursuing widely disparate strategies. Today, a look at the Dow Jones utilities index reveals companies that explore for and produce natural gas, generate and sell power in deregulated markets in Europe and elsewhere, and trade a variety of commodities, such as paper, coal, chemicals -- even fiber-optic bandwidth.

YEAR-ROUND POWER. Most important, many of these born-again utilities are positioned to benefit from the deregulation, soaring demand, and rapid switch to natural gas that are clobbering their California rivals. In case you've been living in a cave the last few months, U.S. demand for natural gas is soaring, largely because these days it not only generates heat during the cold months but is used to make power year-round. And when energy companies consider building a new plant, they turn to natural gas because it's cheap and clean compared to coal.

That's why utility experts are high on gas-distribution and pipeline-company stocks. "All the new electricity generation is powered by gas. And someone has got to move it," says Lowell Miller, fund manager of the $400 million Flex-Funds Total Return Utilities fund, which recorded a return of 20% in 2000.

Among the gas-distribution and pipeline companies, Miller likes NiSource Inc. (NI), based in Merrillville, Ind. Since the acquisition of natural-gas giant Columbia Energy Group last year for $6 billion in a hostile takeover, NiSource has become the distributor of natural gas and electricity to markets that include the Midwestern, Mid-Atlantic, and Northeastern states. Plus, NiSource bought Columbia Energy Group for a great price, Miller contends. NiSource currently trades around $27, a bit off its peak of $31.50 on Dec. 26, but more than double the price in February, 2000, when most utilities shares bottomed out.

NATURAL-GAS COUP. Miller also points to Questar Corp. (STR), a Salt Lake City-based gas distributor that serves the Rocky Mountain region. The company has captured Wall Street's attention for the success of its natural-gas-exploration program. Questar, for example, recently hit pay dirt in Wyoming with one of the largest natural-gas finds in the continental U.S. in decades. "They've doubled revenue and reserves in the last four years," Miller adds. In the nine months that ended on Sept. 30, the company's earnings jumped 27%, to $103.7 million, on revenues that also were up 27%, to $814.4 million. And its shares have more than doubled since last February, to around $28.

The fund manager also likes UtiliCorp United (UCU). Based in Kansas City, Mo., it provides electricity and natural gas to customers in the U.S., Canada's British Columbia, and New Zealand. And with the spin-off of its power marketer, Aquila Energy, UtiliCorp's value should be unlocked. Its shares now trade at around $28.

Another notable stock in the Dow utilities is TXU

. Its shares trade around $37.50, off 17% from their late December high. The company's efforts to keep its traditional utility business -- plus ventures not usually associated with power companies -- illustrate how utilities are changing in the face of deregulation. Texas is expected to deregulate its utilities in about a year.

NEW REVENUE STREAMS. TXU serves customers in three regions: Texas, Europe, and Australia. Like other utilities, the company went abroad in search of new revenue streams and to gain experience doing business in deregulated markets. Much of Europe has moved faster on power deregulation than the U.S.

The company also has begun offering select customers packages of services that include electricity, gas, telephone, cable, and home security -- all from one utility, all on one convenient bill. The thinking behind the bundle model is that utilities already have access to a base of local customers, so why not exploit that? "There's no reason why you can't, if you're a good marketer, add lots of things to the bill," says fund manager Miller.

The possibilities of this strategy are enticing. Telephone and Internet access offer higher profit margins than natural gas and electric rates. And increasing customer loyalty with many services means it's less likely that customers will switch to a competitor. Construction also would be easier. Utilities can lay electric, gas, and fiber-optic lines in the same trench. "The bundle model hasn't been tested, but it's a long-term version of what a utility can be," Miller says.

BRAND BUILDING. TXU also has ventured online. In the fall of 2000, it unveiled a new Web site, myHomeKey.com, for customers' home-repair and improvement needs. While the online venture isn't making any money now, Mike McNally, TXU's chief financial officer, says the site is about building the company's brand. "I don't know if it's a loser, but I don't know how big of a winner it's going to be," says Linda Byus, a utilities analyst at Dresdner Kleinwort Wasserstein.

Additionally, the company's earnings and cash flow four years ago stemmed from the regulated side of the utilities business -- delivering electricity, McNally says. Today, he adds, half of TXU's revenues come from the regulated side, and half from its unregulated businesses including ventures abroad. In short, TXU is ranging far wider than it once did. And it isn't the only utility doing so. By Heesun Wee in New York


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