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  • lioninwinterman lioninwinterman Oct 2, 2008 5:22 PM Flag

    An Actual AEE Post

    Typically the cycle of the economy works like this..the economy overheats, grows too fast, demand outpaces supplies, therefore we see inflation, rising interest rates, the fed hikes to slow growth.

    In the above environment Utilities normally underperform, because the rates being offered by treasuries and other debt instruments offers a more attractive return than the Utility dividend.

    But the present environment is a slowing economy, Fed is lowering rates, treasuries returns falling like a rock. The 5 year treasury is now yielding 2.65% compared to AEE's dividend yield of 6.6%. Typically this is the time you buy utilities.

    But in this crazy economy, nothing makes sense anymore. Here are some possible reasons for AEE's decline:

    1)Although treasuries are yielding nothing, other more risky debt instruments are yielding quite a bit more because of the credit crisis. So there is competion for AEE as far as high yield.

    2)AEE finances its growth, operations, through debt. If GE is having to pay 10% to find capital, you know the cost of doing business (in a financing sense) for AEE is going up.

    3)From what i read AEE charges much less for it services than the majority of utilities, 40% less in some cases. Good for consumers bad for AEE. As the economy falls into recession it will be difficult for AEE to pursuade the govt to increase rates, increases that are necessary to make up for the short fall.

    4)It looks like this is shaping up to an ugly recession, therefore less usage of electricity, natural gas, more people not paying their electric bill et cetera. Not good for profits.

    5)Although coal, natural gas, oil, are going down in price, which is a good thing for AEE because that lowers their cost to produce electricity, AEE might of hedged that benefit out of the equation. They probably made the assumption prices would remain high and positioned themselves accordingly.

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