Electric Utilities
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HE $13
28 Aug 2023 |
Maui County sued Hawaiian Electric for the deadly wildfires; the utility is firing back
When I first got in the business, I recall making phone calls to clients or prospective clients about various investments. One broker I would often make these calls with began his greeting in a way that would make me put my hand over my eyes and shake my head: “Aloha, Mr./Ms. Smith! You may be wondering why I greeted you that way….” I still wince when I think of it. He was pushing shares of Hawaiian Electric (HE $13), provider of electricity for the five islands. In addition to hoping the utility would conjure up images of the tropics in their minds, this broker sold the concept of owning a strong, regulated utility company with a fat (around 7% at the time), safe dividend yield. Who could argue with that logic? Unfortunately, nothing is certain in the world of investments. Case in point: Consider the breakup of the stalwart Bell System in the early 1980s and the tumult which ensued. As for Hawaiian Electric, it had been a relatively stable performer for decades, with a rock-solid dividend. All of that changed virtually overnight with the tragic Maui wildfires. Before Maui County had even concluded its own investigation into the disaster, it sued the utility for negligence, claiming that power should have been shut down well before it was. In short, it blamed the company for the deaths which ensued. In a matter of days, HE’s share price dropped from $40 to $15; by Friday the 25th, shares had dropped to $9.06—their lowest level since 1985 and off 76% since the start of the year. The company immediately suspended its dividend, and a Forbes article opined that a Chapter 11 bankruptcy was “the most plausible path forward.” By the following Monday, news hit that Hawaiian Electric did, in fact, “de-energize” its power lines in the region more than six hours before the fire which destroyed the town of Lahaina had begun. Furthermore, an earlier fire caused by a downed line had been quickly extinguished by the local fire department. The company turned the blame back to the county, and HE shares responded with a 40% surge within seconds of the open. It's too early to predict what will ultimately happen in the courts, but the tragic incident should serve as a reminder to investors that even seemingly conservative investments can be hammered by unexpected events. Then again, anyone who had a large portion of their portfolios in the “safe” bond market in 2022 had already learned that lesson. Utilities are the worst-performing sector over the past twelve months, off some 14%. When interest rates are relatively high, conservative investors tend to migrate out of utilities and into bonds for their income stream. However, virtually every portfolio should have at least a small portion allocated to this sector for proper diversification. We own several utility companies in the Strategic Income Portfolio and the Penn Global Leaders Club, and a 3% position in XLU, the Utilities Select Sector SPDR, within the Dynamic Growth Strategy. |
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SO $68
25 Aug 2023 |
More than three decades later, a new nuclear power plant enters operation
It was seven years late and $17 billion over budget, but the first built-from-scratch domestic nuclear power plant in over thirty years is up and running. Georgia Power’s Plant Vogtle Unit 3, southeast of Augusta, will generate 1,100 megawatts of electricity, or enough to power 500,000 homes and businesses. Vogtle Unit 4 is also nearing completion, with expectations for a March 2024 production date. Construction on the new plant began back in 2009 and has been marred by setbacks, including the 2017 bankruptcy of plant maker Westinghouse. The delays have taken a toll on Georgia Power’s parent company, utility giant Southern Co. (SO $68). That said, SO has outperformed the industry this year, down just 1.75% as compared to the Utilities Select Sector SPDR’s (XLU $64) 8.3% loss. As for the future of nuclear power, while there are around 100 reactors planned or on order and another 300 proposed around the world, none are in the US. However, while there may not be any more of these massive Gen 3+ reactors built on US soil, the industry is betting on advanced, small modular reactors (SMR) known as Gen 4 units to carry it into the future. Oregon-based NuScale Power (SMR $6) has an agreement to build a first-of-its-kind modular reactor in Idaho, set to begin commercial operation by the end of the decade. Privately held TerraPower is working on another new reactor design, known as Natrium, which it is testing at a retired coal plant in Kemmerer, Wyoming. While we expect Vogtle Units 3 and 4 to be the last of the traditional nuclear power plants built in the US, and the regulatory hurdles for the Gen 4 plants will be high, we still believe the industry has a critical role in the future of “green” energy in the country. While an investment in SMR would be highly speculative, the Global X Uranium ETF (URA $23) is an interesting way to play the uranium-mining angle. It holds 49 of the world’s top uranium miners, with a 24% position in Cameco Corp (CCJ $36), arguably the world’s largest producer of the heavy metal. From a utilities standpoint, two companies with the largest exposure to nuclear power generation are Southern Co. and Entergy Corp (ETR $95), each with a 4.5% dividend yield. |
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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
D |
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.