Readers Ask for More on Top Utilities for '99

Plus, just how much of a Y2K problem do utilities have, anyway?
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It's your turn. We recently

asked how utilities could power your portfolio higher and what issues might confront the power industry in 1999. Of course, we opined with our "10 to watch" -- some of you agreed with our assessment, and others didn't.

Your issues are many and varied. So, without further haste, the electric mailbag, please.

Jump Right In, Get Your Feet Wet

Frequent reader

Gary Hutchenson

of Dickson, Tenn., offers his own list of 10 top utes to follow in the coming year.

My top 10 utility picks are chosen for two reasons: 1) I like water. It's very hard to transport, and people have to use it; and 2) avoid companies with nuclear-power exposure. So, here goes: 1) American States Water (AWR) - Get Report; 2) American Water Works (AWK) - Get Report; 3) Black Hills (BKH) - Get Report; 4) California Water Service (CWT) - Get Report; 5) Consumers Water (CONW) ; 6) KeySpan Energy (KSE) ; 7) SJW (SJW) - Get Report; 8) Southwest Water (SWWC) ; 9) Teco Energy (TE) ; and 10) UtiliCorp (UCU) .

Gary, you're all wet. (Just kidding!) While not providing the dramatic growth opportunities of electricity and gas, water is an absolute necessity. And, you're right, it is not as transportable as gas or electricity. In that sense, growing population centers -- California, Georgia and northern Texas -- provide good long-term opportunities for water companies.

But I think the nuclear-power issue may surprise investors on the upside in 1999. While liabilities are significant, consolidation of nuclear generation could prove profitable. With many companies holding nuke assets eager to sell, two utilities --

PECO

(PE) - Get Report

and

Entergy

(ETR) - Get Report

-- have emerged as consolidators and think they can make a nice profit with nukes. It'll be an interesting year for the nuclear industry.

A Power Fund?

Reader

Zeke Seligsohn

writes,

Take a look at the holdings of the (CUTLX) Colonial Utilities fund. Best 1998 record in the Colonial Family and maybe among all utility funds. Its winning holdings may be the clue to 1999 winning stocks.

The Colonial Utilities fund was a good performer in 1998, gaining 22% vs. 18% for the

Lipper

average. That was only good enough for 34th out of 101 utility funds. Leading the utility parade was

(FSUTX) - Get Report

Fidelity Select Utility Fund with a gain of 43%. Following closely behind were

MSDW Global Utilities

, gaining 39%, and

Fidelity Advisor Utilities Growth

, gaining 32%.

Comparing utility funds is more challenging now than in the old days when all utilities were regulated. Today, utility funds may own a mix of electric, gas, water and telecom stocks. Funds that owned telecom and technology companies performed much better than those heavy in electric and gas companies. Look carefully at the holdings of the fund and the prospectus to determine its investment parameters.

As for Colonial, its top holding is a Florida-based electric,

FPL Group

(FPL) - Get Report

. Other electrics in the top holdings include

DPL

(DPL)

,

Texas Utilities

(TXU)

and

Cinergy

(CIN)

. Overall, electric utilities make up 48% of the fund, which is on the high end for most utility funds.

A Boondoggle for Bonneville?

Jim Frost

from Olympia, Wash., raises an interesting issue about quasi-federal power agencies in an era of deregulation.

I'm interested in the potential effects of deregulation on the Bonneville Power Administration. Does deregulation eventually render BPA obsolete?

Bonneville is one of five federal power marketing agencies. Along with the

Tennessee Valley Authority

(TVA), the

Southwestern Power Administration

, the

Southeastern Power Administration

, and the

Western Area Power Administration

, these federally sponsored corporations generate and sell power to municipalities and electric cooperatives. TVA also operates a nuclear plant.

These agencies have long been under attack by investor-owned utilities because government subsidies allow the sale of power to municipalities and cooperatives at below-market prices. With deregulation on the horizon, there have been calls in

Congress

to either privatize or sell these entities to other utilities. For example, the

Alaska Power Administration

was sold to Alaska cooperatives last year.

The future is uncertain. However, privatization should gain steam in 1999 while quiet negotiations with major utilities to purchase the agencies are launched. Major generation consolidators and marketers, such as

Enron

(ENE)

,

PG&E

(PCG) - Get Report

,

Southern

(SO) - Get Report

and privately held

Sithe Energies

, appear interested, if the price is right. Look for the most significant interest to be in Bonneville, a major power supplier in the Pacific Northwest.

Turn Out the Lights. The Century Is Over!

Many of you want to know if the lights will be on when you come home from a night of New Year's revelry in 2000. For example,

Jan Schott

writes:

I wasn't worried about Y2K until I began to see articles on TSC by Jim Seymour followed by guest after guest on CNBC. There seems to be general consensus that electric utilities are the least prepared. I'm not someone who overreacts, but I certainly would not put any money in utilities until after 2000.

Added

Rick Incitti

, referring to my list of 10 utes to watch in 1999:

Before I got involved in the 10 utilities to watch, I would want to know what each one has done to prevent any problems after Jan. 1, 2000.

Thanks, Jim Seymour! You raise an important issue. From safety mechanisms in generating plants to load-timing devices at switching substations, utilities have significant Y2K issues.

How are they doing? "I think the industry as a whole is pretty well prepared," said Michel Philipp, a spokeman for

Western Resources

(WR)

. "However, if only one or two utilities have a problem, it could have a widespread impact. We are all interconnected."

The

North American Electric Reliability Council

released a report this week saying utilities are making progress on Y2K issues. While problems exist, Philipp thinks the doom-and-gloom scenario is overdone, adding that "Come Jan. 1, 2000, you're going to have lights."

Now, that's illuminating. More on Y2K throughout the year.

-- Staff reporter Joe Bousquin contributed to this report.

If you have an electrifying question or comment about any utility issue now or in the future, shoot me an

email. Whether it's the Y2K issue or the numbers on your electric bill, I'll do my best to enlighten you. And remember this, nothing will "shock" us.

Christopher S. Edmonds is the president of Resource Dynamics, a private financial consulting firm based in Atlanta, Ga. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At the time of publication, Edmonds' firm owned shares of Western Resources, though these holdings may change at any time. While he cannot provide investment advice or recommendations, he welcomes your feedback at

invest@cjnetworks.com.

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