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October 04, 2002
Utilities: They're Not Just for Widows and Orphans Anymore
by William Baue
Utilities may represent a wise investment in this bear market, especially for socially responsible
investors seeking to capitalize on companies that have the best environmental records.
SocialFunds.com --
Conventional wisdom says that utilities stocks are for "widows and orphans" because these
investments have historically been a safe source of dividends and returns. This year, however, the
Dow Jones Utility Index (DJU) is down 31.76% in part due to the effects of the Enron scandal,
lawsuits related to the California power crisis in 2001, and problems related to unregulated
merchant power. Yet, this downturn in the market may give social investors an opportunity to
invest in utilities that have been careful to maintain their balance sheets while continuing to
address air pollution, global warming, and the supply of renewable and efficient energy.
 "Looking forward, we have to assume that a substantial
rally may occur at any time," said Miller/Howard
Investments President Lowell Miller. "We can't tell when a snap-back will occur, but we're
more than in the zone right now." Miller/Howard's Better Than Bonds/Utilities portfolio is based
on research that shows utilities are, over time, a better total return vehicle than bonds. "Our
portfolio holdings are at attractive levels for private market buyers. The return on capital and
return of capital to an 'owner' is terrific right now. As earnings come in and scandals
recede, these stocks will be found attractive by public market buyers as well."
Utilities
have historically bounced back from down periods exceptionally well, according to Mr. Miller. For
example, in 1974, after two successive down quarters, the Dow Jones Utilities Index (DJU) gained
almost 40 percent in the three subsequent quarters. Similar rebounds occurred in 1987 and in 1994,
Mr. Miller noted.
Miller/Howard also sub-advises the only socially responsible utilities
mutual fund, the Flex-Funds
Total Return Utilities Fund (ticker: FLRUX). In addition to screening for environmental issues
such as greenhouse gas emissions and violations of the Clean Air Act, the fund screens for
militarism, nuclear energy production, and employee relations.
"Utilities have been
traditionally strong in the areas of diversity and employee relations," Miller/Howard Director of
Social Research Irina Branzburg told SocialFunds.com. Social investors' concerns over utilities
primarily have to do with the environmental impact inherent in this sector.
In June, Innovest Strategic Value Advisors released
research that suggests that environmentally responsible utility companies outperform electric
utilities with poor environmental practices. The study rated the environmental performance of 28
electric utility companies.
"We have abundant research showing that environmental leaders
outperform in the stock market," Innovest Managing Director Frank Dixon told SocialFunds.com. "In
this case, the 14 electric companies with above average environmental ratings outperformed the
below average group by nearly 3000 basis points over the past three years. Our top-rated companies
were FPL Group (FPL) and Pinnacle West (PNW)." (Ed. note:
FPL and Pinnacle West own and operate nuclear power generating facilities)
Mr. Dixon noted
that consumers' increasing environmental awareness and more stringent government regulation of
utilities, especially from states, might create strategic profit opportunities for social investors
interested in utilities.
"For example, renewable energy and distributed generation
technologies have the potential to gain significant market share in a deregulated energy services
market," said Mr. Dixon. "Large opportunities also exist to help customers improve energy
efficiency, and consumers are becoming increasingly interested in green power options."
Both Innovest and Miller/Howard expressed concern about utilities involved with nuclear power.
"What perplexes us is why most investors are still willing to tolerate the enormous
potential liability, costs, and scientific uncertainties that are unique to nuclear power," said
Miller/Howard Research Analyst Gideon Moor. "Furthermore, we wonder whether the investing
community honestly believes that new nuclear power plants can live up to their historical
reputation as the lowest-cost-provider in an age of accelerating electricity deregulation and
commoditization [sic] accompanied by stricter environmental and public safety regulations and
concerns."
©
SRI World Group, Inc. All Rights Reserved.
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