Northeast Utilities, Teco Energy, And Other Utility Companies

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Today we will focus on Northeast Utilities (NU) and how it compares with three other utility companies, Teco Energy (TE), Black Hills Corp (BKH), and Wisconsin Energy (WEC). All are listed on the NYSE and trade at between 16 and 18 times earnings. NU, as can be surmised by the name, serves residents in the Northeast, namely a major portion of New England. TE is located in the Tampa, FL area and counts Central Florida customers as its service area. Both BKH and WEC service customers in the upper Midwest. All four companies have long histories, and service major customer basis, but the paths they have/are taking are vastly different.
This report will illustrate the path of NU and how it compares and contrasts with the other companies mentioned. All forward looking assumptions being made are being done without proprietary knowledge of company intentions and working off of readily available documents online. This is not a solicitation to sell, or buy shares of any of the aforementioned shares, and is being written as an exercise in a graduate level college course.
The chart below illustrates the last 5 years of stock movement for the four companies on a linear basis, showing the relative performance of each relative to the other. As you can clearly see from the chart there is a correlation in movement among the companies, but recent events (last 2 years) have led to a divergence more extreme than any others noted. There are several factors that can be attributed to this and we’ll entertain a few of them in this report.

Over the 5 year measurement period shown above WEC has clearly been the top performer, with NU a clear cut 2nd best. The major change comes around mid 2011 for that divergence, and that coincides with the announced acquisition of NSTAR by NU, which was mainly done as an equity issuance event, causing overall dilution for current shareholders. Major acquisitions can be financed in a variety of ways, and NU management decided to leverage their strong capital structure and equity value to fund an investment that would pay off in the long run for its investors. Typical equity performance in these types of events will amount to a retrenchment in price as general uncertainties around the execution of the integration associated with such a merger/acquisition will tend to alert more risk averse investors and cause them to adjust positions to a more stable and/or certain revenue stream. These actions are relatively short-lived, especially with well executed integrations, and NU has given indications of performance results that suggest investors who have waited patiently for the integration activities to afford the synergies and growth intended will be well rewarded. Management has signaled as much with a continued pattern of dividend increases, indicating that the financial structure is strong and cash flows will continue to increase. WEC, BKH, and TE have all shown modest overall share count changes over the past several years, indicating that they have chosen not to leverage their equity positions significantly as they look at growth opportunities. While those efforts have helped to reduce any concerns related to dilution that NU faces, it also helps to set NU aside as an investment that may realize a more advanced growth as we look to the future.
In looking at the overall capitalization structure of the companies in this report it should be noted that NU, WEC, and BKH all hover around 65% Equity and 35% debt. TE is the outlier in this group, more heavily laden with debt at around 45%, leaving 55% of the capital defined as equity. This factor, along with BKH’s high cost of equity calculations mark each of those companies as experiencing higher WACC (weighted average cost of capital) percentages than NU or WEC. With both being north of 5.5% and NU and WEC both hovering around 5%, taken against the backdrop of stock performance, it is clear that the market is looking at WACC as a key measure
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