Investors generally buy utility stocks for their hefty dividends and perceived safety. In many cases, that’s a sound strategy.
But not all utility companies are so secure. Three that carry a good degree of risk are Exelon, Entergy, and PP&L. Here’s what you need to know before investing.
Exelon (Ticker: EXC)
Exelon may benefit in the long run from being the largest nuclear plant operator in the country. But for obvious reasons, that’s probably not going to do it much good in the short term.
U.S. nuclear plants face new regulatory requirements as safety measures and processes across the industry are reviewed in the wake of Japan’s nuclear crisis at the Fukushima plant, Exelon Chief Executive John Rowe said during a conference call.
"Fukushima is a series of events that simply weren't supposed to happen," and that’s a "challenge that is very serious" for Exelon, he said.
The company has relied heavily on a reactor design similar to the General Electric model used at Fukushima, Hugh Wynne, an analyst for Sanford Bernstein, wrote in a note to clients, Bloomberg reports.
Exelon’s fourth-quarter earnings fell 9.8 percent from a year earlier, thanks to hedging losses and lower earnings at the company's Pennsylvania and Illinois units. The stock produced a negative total return of 10.5 percent last year.
Entergy (Ticker: ETR)
Entergy also may suffer from Japan’s nuclear woes. It’s the second biggest nuclear reactor operator in the country and could be in for an extended regulatory delay as it seeks to renew licenses for four of its reactors, says Wynne.
Entergy operates 12 reactors at 10 sites in New York, Arkansas, Louisiana, Massachusetts, Nebraska, and Vermont.
The New Orleans-based company faces another risk too: its operations are in areas vulnerable to natural disasters.
Entergy’s earnings slid 27 percent in the fourth quarter from a year ago, hurt by increased operational and maintenance expenses and higher income tax and interest expenses. The stock generated a negative total return of 9.49 percent in 2010.
PPL (Ticker: PPL)
Earlier this month, Standard & Poor's lowered its rating on PPL Corp. to just two levels above junk territory and warned of possible further downgrades after PPL agreed to buy German firm E.ON AG's U.K. electricity power distribution business for 4 billion pounds ($6.53 billion).
S&P cut its rating on PPL by one notch to BBB. S&P also said it would consider further downgrades to the rating related to the "execution of the financing plan for the acquisition, which includes a commitment by the company for a substantial issuance of equity."
PPL will assume 500 million pounds ($816 million) of debt in the purchase, and it may have overpaid. E.ON is getting a 30 percent premium to the value of the assets assigned by the regulator, Mark Freshney, an analyst at Credit Suisse Group, told Bloomberg. That exceeds the premium of up to 25 percent that Electricite de France received when it sold its U.K. grid last year, he said.
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