WisBusiness: Favorable Summer Energizes State Utility Stocks

By Brian E. Clark

A Wisconsin Energy Corp. victory in the state Supreme Court this summer and the recent start of construction on a major transmission line in northern Wisconsin are two of the reasons why experts say shares of Wisconsin’s publicly traded energy companies are trading at or near 52-week highs.

They also say a hot summer, the shedding of questionable foreign investments and other utility infrastructure improvements have made Badger State power suppliers good investments.

In addition to Milwaukee-based Wisconsin Energy, other publicly traded state utilities include WPS Resources in Green Bay and Madison-based Alliant Energy and MGE Energy.

Wisconsin Energy closed at $39.57 yesterday, down from a 52-week high of $40.48. MGE closed at $36.89, down from a high of $38.75. WPS Resources was at $59.37, off from a high of $60. And Alliant closed at $30.16, down from a 52-week high of $30.58.

Electric utility analyst Doug Fischer lauded a June decision by the state’s highest court that cleared a major roadblock preventing Wisconsin Energy from building two coal-fired plants at Oak Creek.

“That was critical,” said Fischer, who covers Wisconsin Energy and WPS Resources for A.G. Edwards in St. Louis. “They should provide strong earnings growth when they come online in 2009 and 2010.”

He said the start of work on the American Transmission Co.’s Duluth to Wausau power line is also important. Like the Oak Creek plants, it had faced significant opposition from environmental and other groups.

When it is completed in three years, the line will be Wisconsin’s fifth high-voltage connection with neighboring states. Four of those lines link the Badger State and Illinois.

“Wisconsin utilities are building power plants and improving infrastructure,” he said. “Investors see them as good prospects, especially at a time when much of the market is going sideways. Utilities are doing well all over the country.”

Bill Skewes, executive director of the Wisconsin Utilities Association, said changes in tax law have made owning dividend bearing utility stock more attractive. He also agreed that the likelihood that more power plants will be built makes investing in Wisconsin utilities attractive.

“MG&E has a new co-generation plant operating on the UW-Madison campus, WPS got the Weston 4 coal plant approved, the transmission line is going forward and the Supreme Court gave its approval for Oak Creek – and those are all positive things from our perspective,” he said.

“There is also new leadership in the utilities that is shedding debt, sticking to business plans and eliminating unprofitable assets,” he said.

“And it’s been a good summer for demand,” he added. “Meters have been spinning, but we’ve had no reliability problems.

Kenyon Kies, executive director of Wisconsin Utility Investors, said he believes Wisconsin utilities are well run and managed.

“In my opinion, there has been good management and good regulation by the state’s Public Service Commission over the years,” he said.

He said the high court decision on Oak Creek, which is part of Wisconsin Energy’s “Power the Future” program, was positive news.

He said Power the Future is a $7 billion program to increase the state’s power supply by building five new electric generating plants that will add 2,800-megawatts to the Wisconsin power system.

“The market does not like uncertainty,” he said. “So moving forward on Oak Creek was well received. So is the construction of the Duluth-to-Wausau power line, because we’ve been constrained and had only one line coming in from the west.”

Kies said uncertainty in the markets over terrorism around the globe have made investors nervous and ready to put money in what they see as stable investments.

He also praised the decision by Alliant Energy Corp. to get out of investments in Mexico, Brazil and China and return to its more reliable local roots.

“Some companies ventured out into unregulated activities that did not turn out well,” he said. “They have now retrenched and are centering on things they do best.”

But Kies said he worries that the PSC will limit the rate of return granted to utilities it regulates.

“That could be damaging to companies if it is too low,” he said. “It could hurt bond ratings and make it cost more to borrow money and end up causing rates to go up for customers.”

Kies said the rapid rise in natural gas prices – which he said have tripled in the past year – will hammer consumers in coming months. He said Hurricane Katrina will only contribute to increasing natural gas prices.

"It’s not having a direct effect," he said. "But it is putting pressure on the cost of natural gas and oil. It’s not a big impact, but it’s being felt. And then just like any other business, higher gas prices affect utilities, too, so it’s not a helpful thing.

“Many plants are operated on natural gas and customers’ bills could go up by 50 percent or higher this winter. That will cause a lot of pain.”

Charlie Higley, who represents consumers at the Citizens Utility Board, said he believes the rates of return granted utilities by the PSC are too high.

“In a recent rate case, Alliant got an 11.5 percent rate,” he said. “That was down from 12 percent, but it was still too high.”

Higley said prices will rise for consumers because of new power plants coming into service, but they carry little risk for utilities because their investments are “guaranteed.”

But Higley acknowledged that Wisconsin needs new power plants and infrastructure.

“Our big concern is that the state has long ignored investments in renewable energy and energy efficiency,” he said. “We’ve done some stuff, but not enough.”

Higley said he hopes there will be bipartisan support in the Legislature to push for reforms.

“There is support ranging from consumer groups to the utilities themselves,” he said. “We need to do more. Energy costs are only going to rise.

“Unfortunately, I think this is going to be a tough winter – especially for people on limited or fixed incomes,” he said.