Electric Utilities
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PCG
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Investors need to be very leery of buying into a "safe and regulated" utility company operating out of California. (14 Oct 2019) Precisely two years ago, PG&E (PCG $5-$8-$49) was a $35 billion large-cap value utility selling at $70 per share and offering investors a 3% dividend. Now, the company is worth $4 billion, has a share price of $8, and offers no dividend yield. Such is the world for an electric utility company operating in the dangerous environment—both literal and political—of California.
After a series of devastating wildfires hit California, due to a deadly combination of heavy winds, dry land, and sparking power lines, the state passed a series of laws holding companies liable for property damage if any evidence can point back to the assets of the respective utility. As a direct result of those laws, power providers like PG&E came up with a seemingly-draconian plan to tactically cut off power to certain regions when dangerously high winds are present. Most recently, this program was used as the mechanism to cut off power to some 700,000 customers across 34 counties as winds up to 60 MPH hit the Bay area. In addition to causing understandable anger among customers, the economic impact of the rolling outages is nearing $3 billion. Imagine a grocery store, for example, losing the power needed to keep its perishable food items cold or frozen, and then extrapolate that out to tens of thousands of businesses in the 34 counties. Governor Gavin Newsom, the prototypical leader for modern-day California, has excoriated PG&E for implementing the rolling blackout program. The irony in his feigned outrage is laughable. One of the very politicians who helped put the utilities on the liability hook for the wildfires now lambasts them for taking preventative action. What a shame. Such a beautiful state soiled by a combination of feel-good policies (like not being able to clear-cut dead trees in heavily-wooded regions), arrogant politicians, and corporate mistakes. It has to be a tough time to be a small business owner in California. I once inherited a client with a roughly $1 million portfolio, nearly all of it in telecommunications stocks. From her handwritten ledger, I could see that the portfolio was once worth $3 million. When I asked her about it, she explained that her husband was a longtime AT&T employee, and they had been conditioned to keep all of their investment assets in "safe and regulated phone companies." Paradigms are made to be shattered. Investments once considered safe can turn lethal almost overnight. It is of critical importance to keep up with the changing landscape and be prepared to move quickly. |
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PCG
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PG&E announces plans to file for bankruptcy in wake of California wildfires, CEO resigns, shares plummet. (14 Jan 2019) Three months ago, California’s largest utility, PG&E Corp (PCG $9-$9-$49), had a market cap of $35 billion and a healthy dividend yield of over 4%. A regulated utility with a fat dividend—why on earth wouldn’t a conservative investor pick up some shares for the income stream alone? If investors needed to feel better about a purchase, they only had to look at some of the glowing industry analyst reports on the company. Then the California wildfires hit, with evidence pointing to sparks emanating from faulty Pacific Gas & Electric-managed power lines sitting at ground zero. The company’s market cap shot down to $12 billion, and shares were slashed in half, from near $50 to $25. Fast forward to Monday the 14th of January, and we have the surprise announcement that the company would file for Chapter 11 bankruptcy protection. After that announcement, PG&E’s market cap fell to under $5 billion, and shares were down 50%, to under $10 per share. The company also announced that CEO Geisha Williams was stepping down, effective immediately. We discuss the case of PG&E further in the next issue of The Penn Wealth Report, but it points to the need for investors to understand the stocks they are adding to their portfolio—or rely on a financial professional to that end. PG&E has been down this path before—they went through a bankruptcy back in 2001. Furthermore, a large percentage of the California legislature had been gunning for the company even before this latest round of disastrous wildfires.
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SCG
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Scana investors and South Carolina residents made out like bandits on the Dominion deal, everyone else lost
(03 Jan 2018) It made perfect sense for Scana Corp (SCG $37-$48-$74) to desire a merger with much larger Dominion Energy (D $71-$77-$85). After all, following an enormously-costly and ultimately abandoned nuclear power plant project which cost the firm about $10 billion, Scana was on the skids. Despite being a "regulated" supplier of electricity, the company's share price had dropped nearly 50% within the past year. When Dominion struck a deal to buy Scana, the latter's share price spiked 23%. Not only are shareholders celebrating, South Carolina residents are as well—Dominion has agreed to pay them $1,000 per customer, in cash, within 90 days. Dominion's shareholders are left scratching their heads. Their company has just agreed to absorb all the costs of the failed nuclear power plant foray. Dominion's share price fell 4% on the news, and is down about 10% since rumors began circulating. |
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EIX
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How a California wildfire made a $25 billion regulated utility company plummet
(07 Dec 2017) There's a great lesson in this story for conservative, income-oriented investors. Edison International (EIX $68-$69-$83) is a rather large (currently $22 billion market cap), regulated utility which generates and distributes power for Southern and Central California. It has a steady dividend of over 3%, and a quick glance at the company's stock chart shows nice, steady growth—at least until the 5th of December. Shares of EIX have now plunged over 15% in a matter of a few days due to factors completely out of the company's control. The wildfires causing devastation in Southern California are squarely in Edison's territory, and California law states that utilities can be held liable for property damage if any evidence can trace the cause of the damage back to the company. Odds are extremely slim that this was the case with the wildfires currently raging in California, but it was enough to spook investors and lower EIX's market cap by $3.5 billion. |
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EXC
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(01 Mar 2017) Profit taken on Exelon in Global Leaders Club. We took a nice gain off the table by selling electric utility Exelon (EXC $29-$36-$38) in the Penn Global Leaders Club. While it has a nice dividend yield, and it was undervalued when we purchased it, the current price was about $5 over what we consider to be the fair market value. Exelon serves 10 million power and gas customers from Illinois to New Jersey, and owns 11 nuclear power plants throughout North America. Looming interest rate hikes also played a role in our decision.
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California Power Station Attack Should be a Wake Up Call
(06 Feb 14) Consider everything we take for granted on a daily basis, from turning on our computer, to getting cash from an ATM, to shopping at the local mall. Last year's organized attack on a California power station needs to be a wake up call--not that we should live in fear, but that we need to be aware of an ever-changing environment. Unfortunately, our government seems to live in a reactionary state, telling us about fancy new systems put in place after an attack. I am reminded of a confident Target CEO reassuring his customers how secure it is to shop at the retailer now. Would he have said anything different leading up to the cyber attack?
Here's the synopsis of what happened to a small part of the Western grid last year. At about 1 a.m., attackers cut underground AT&T fiber-optic cables. About half-an-hour later, bullets began riddling the transformers in a PG&E substation near San Jose, knocking out 17 of them. The transformers were hit tactically, with the bullets aimed at the coolant systems rather than parts which would have caused a series of explosions.
Just before 2 a.m., the local sheriff's department received a 911 call reporting gunfire. A few minutes later, the first bank of transformers crashed, sending out equipment failure alarms to PG&E headquarters. When law enforcement officers arrived around 2 a.m., they saw nothing unusual inside the locked fence and left. In the morning, around 100 ammo shells were found outside the perimeter of the complex. PG&E issued a news release stating that "vandals" had hit the station. 17 transformers out, 100 casings, cables cut, and the company expects us to believe that a couple of joy-riding vandals were just looking for something to do after hitting the bars. Please.
We live in an extremely open society, which is an understandable aspect of having the personal freedoms we enjoy thanks to the U.S. Constitution. That does not mean, however, that governments at all levels, along with public and private companies, can abdicate responsibility for keeping their systems and their people as safe and protected as possible. Just as warnings streamed in during the years leading up to 9/11/2001 (remember that the Twin Towers themselves had been previously attacked by terrorists), security experts are witnessing new threats that should put government officials and senior corporate executives on high alert.
Consumers do not want to hear about Target's prior study to embed chips in their credit cards to increase security, and homeowners do not want to hear about the re-routing capabilities of utility companies to avoid blackouts. Those hollow comments go only as far as the next unanticipated attack. We need to begin to see real, proactive steps taken to prevent or eliminate future threats. We also need to take personal responsibility to reduce the threats to our families' security. From identity theft protection, to reliable home security systems, to personal protection, we must analyze the most likely threats and take action now--before something happens. We may not be able to force inept government or private sector individuals to act, but current technology gives us a lot of leverage we did not have a few short years ago. If nothing else, we will enjoy the peace of mind that comes with knowing we are taking steps to help assure our personal safety.
(06 Feb 14) Consider everything we take for granted on a daily basis, from turning on our computer, to getting cash from an ATM, to shopping at the local mall. Last year's organized attack on a California power station needs to be a wake up call--not that we should live in fear, but that we need to be aware of an ever-changing environment. Unfortunately, our government seems to live in a reactionary state, telling us about fancy new systems put in place after an attack. I am reminded of a confident Target CEO reassuring his customers how secure it is to shop at the retailer now. Would he have said anything different leading up to the cyber attack?
Here's the synopsis of what happened to a small part of the Western grid last year. At about 1 a.m., attackers cut underground AT&T fiber-optic cables. About half-an-hour later, bullets began riddling the transformers in a PG&E substation near San Jose, knocking out 17 of them. The transformers were hit tactically, with the bullets aimed at the coolant systems rather than parts which would have caused a series of explosions.
Just before 2 a.m., the local sheriff's department received a 911 call reporting gunfire. A few minutes later, the first bank of transformers crashed, sending out equipment failure alarms to PG&E headquarters. When law enforcement officers arrived around 2 a.m., they saw nothing unusual inside the locked fence and left. In the morning, around 100 ammo shells were found outside the perimeter of the complex. PG&E issued a news release stating that "vandals" had hit the station. 17 transformers out, 100 casings, cables cut, and the company expects us to believe that a couple of joy-riding vandals were just looking for something to do after hitting the bars. Please.
We live in an extremely open society, which is an understandable aspect of having the personal freedoms we enjoy thanks to the U.S. Constitution. That does not mean, however, that governments at all levels, along with public and private companies, can abdicate responsibility for keeping their systems and their people as safe and protected as possible. Just as warnings streamed in during the years leading up to 9/11/2001 (remember that the Twin Towers themselves had been previously attacked by terrorists), security experts are witnessing new threats that should put government officials and senior corporate executives on high alert.
Consumers do not want to hear about Target's prior study to embed chips in their credit cards to increase security, and homeowners do not want to hear about the re-routing capabilities of utility companies to avoid blackouts. Those hollow comments go only as far as the next unanticipated attack. We need to begin to see real, proactive steps taken to prevent or eliminate future threats. We also need to take personal responsibility to reduce the threats to our families' security. From identity theft protection, to reliable home security systems, to personal protection, we must analyze the most likely threats and take action now--before something happens. We may not be able to force inept government or private sector individuals to act, but current technology gives us a lot of leverage we did not have a few short years ago. If nothing else, we will enjoy the peace of mind that comes with knowing we are taking steps to help assure our personal safety.
Any opinions expressed are those of Penn Wealth Publishing, LLC and are current only through the date posted. These views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed. Past performance is no guarantee of future results. Always consult your investment professional before investing any money.