Regulated Utilities Benefit from Lower Power-Generation Cost and Higher Capital Expenditures: Happy Customers Means Happy Regulators Means Happy Investors Says Best on the Street Equity Analyst

Wall Street Transcript

67 WALL STREET, New York - November 26, 2012 - The Wall Street Transcript has just published its Oil and Gas Investing Forecast Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Oil & Gas Investing

Companies include: PG & E Corp. (PCG), SCANA Corp. (SCG), Dominion Resources, Inc. (D), Duke Energy Corp. (DUK), Southern Company (SO), Northeast Utilities (NU), Exelon Corp. (EXC), NRG Energy, Inc. (NRG), CH Energy Group Inc. (CHG) and many others.

In the following excerpt from the Oil and Gas Investing Forecast Report, an expert analyst discusses the outlook for the sector for investors:

TWST: You cover several segments within the utility industry. Which one are you most bullish about at the moment and why?

Mr. Winter: We break the utility universe into electric, gas and water; and then further break the electric utility industry into distribution utilities, wires and pipes companies, traditionally, utilities with power generation, distribution and transmission in regulated states, hybrids or traditional/merchants, which are larger traditional utilities that also own merchant generation or nonregulated generation in deregulated states; and then, finally, the high-risk/high-reward pure merchants, which are independent power generation companies.

We also break the gas utility industry into local distribution companies, LDCs, which are fully regulated, and integrated gas utilities, which includes gas utilities that also own nonregulated gas businesses, such as exploration and production, E&P, and midstream gas-gathering processing.

Each of those groups has a different risk/reward profile. We continue to prefer the lower-risk and higher-quality traditional and wires and pipes utilities and the gas distribution utilities, primarily given a stronger near-term earnings growth profile. However, there are individual companies with specific situations that offer unique total return potential.

TWST: Why are those your preferences at the moment?

Mr. Winter: Assuming our six- to 18-month time horizon, the nonregulated energy businesses remain challenged by low gas prices and oversupply of natural gas. Regulated utilities are less sensitive to low gas prices, and actually are positively exposed to low gas prices. The United States energy industry is rapidly evolving or undergoing a significant revision to its landscape driven by a sudden abundance of natural gas. As a result, natural gas prices have fallen from over $10 per MMMBtu to as low as $2. So it's become cheap at the same time that EPA regulations are making many older coal plants uneconomical. The biggest beneficiaries are regulated utilities and U.S. consumer.

On the other hand, low gas prices result in lower margins and earnings for utilities that have nonregulated exposure to gas prices or power prices. Because gas prices set the price of power in most deregulated states or regions, the price of power has also fallen and resulted in lower nonregulated power margins. Given the dynamics associated with the abundance of gas, we believe it will take at least six months, if not 18 months, to economically work our way back into a more normal supply/demand equilibrium. Now, economics tends to work out over time so we think we will get there...

For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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