Meanwhile, in Texas, wind developers like NextEra Resources, a division of FPL Group Inc. (NYSE:FPL), German power firm E.On AG, and United Technologies Corp. (NYSE:UTX) are getting some pushback from companies like NRG Corp. (NYSE:NRG), Calpine Inc. (NYSE:CPN), and EOG Resources Inc. (NYSE:EOG), all of which have natural gas-fired plants that the companies say hurt by new wind generation.

The Chinese have embarked on a $60 billion effort to upgrade the country’s electricity transmission system over the next 10 years. The state-owned power distribution company, State Grid Corp. of China, plans to begin the upgrades next year. Both Siemens and GE already have in place agreements with local governments and local divisions of State Grid that give them a solid hold on the higher technology area of smart grids. Chinese companies already manufacture equipment like transformers more cheaply than foreign companies can, so there is little incentive to compete for that business.

However, the sophisticated computer technology is needed to operate a smart grid. State Grid estimates that it can contribute to a 20% reduction in greenhouse gas emissions that the government has committed to by 2020 using smart grid technology.

China is likely to demand that it be able to purchase a stake in the companies that do smart grid work because it is a strategic national asset and no foreign company should be able to hold China’s power supply hostage. GE has already indicated that it is willing to enter strategic joint ventures with China to win this business. State Grid is also a customer of IBM, which opened a new energy and utilities research lab in Beijing in March.

The signal advantage of the smart grid is that it can help balance power distribution using technology to offset the variability of power generation by both wind and solar generators. And the variable nature of wind-generated electricity is at the heart of a dispute in Texas between wind developers and natural gas plants.

Texas already uses wind to generate more electricity than all the power plants in Utah, some 9,400 megawatts. Most people think that wind generated power will reduce the need to burn coal to generate electricity. That is not right. Coal-fired plants, and now some natural gas-fired plants, provide the baseload generation for electricity consumers. Natural gas has routinely been used as a fuel to drive peaking plants that can be made available at short notice to meet extraordinary demand.

Wind is not replacing baseload, it is replacing peaking generation. Not only that, in Texas, wind farms are exempt from rules that would force them to make payments to the system operator if they can’t deliver power when the wind stops blowing. Natural gas burners say everyone ought to play by the same rules.

A lot is at stake. The Texas wholesale electricity market amounted to $34 billion in 2009. Wind now generates about 6% of the state’s electricity and that number is expected to double by 2013. Natural gas’s share of the generation market has dropped from 46% to 42% in the last three years, exactly as much as wind power generation has grown.

Texas is not the only market looking to cool the enthusiasm for wind development. The Midwest system operator adopted rules in December 2009 ending wind’s exemption from penalties for failing to provide promised power. The wind companies have filed a protest with the Federal Energy Regulatory Commission, which has authority to regulate inter-state transmission rules. The state of Wyoming, which lives on gas and coal taxes, is considering taxing wind-generated electricity.

China’s central planning regime makes it fairly easy to set a course of action. The problems have always come in the execution. In the US, central planning exists primarily as a set of incentives to point industry at a preferred solution. The planning is almost always faulty, and is usually corrected in the execution. Neither is very efficient, but, after a fashion, both seem to work.

Paul Ausick

We wanted to take a look at Select Sector SPDR Trust (NYSE: XLU), Southern Company (NYSE: SO), Dominion Resources, Inc. (NYSE: D), Duke Energy Corporation (NYSE: DUK), FPL Group, Inc. (NYSE: FPL), American Electric Power Company (NYSE: AEP), Entergy Corporation (NYSE: ETR), FirstEnergy Corporation (NYSE: FE), Edison International (NYSE: EIX), Progress Energy Inc. (NYSE: PGN), PP&L Corporation (NYSE: PPL), Xcel Energy Inc. (NYSE: XEL), DTE Energy Company (NYSE: DTE) and more.

There may actually be some time for them to shine in the near future. Despite the rally market of the last month, almost none of these stocks are within 5% of their 52-week highs.  We showed the dividend yields implied here, although as with all ‘yields’ there is often some distortion.  What we did not show was a P/E ratio because of the lagging effect of that, but we did show was the closing price for March 31 as the quarter closed and compared that to the 52-week trading range and compared it to the average consensus price target from Wall Street analysts per Thomson Reuters.

So why is this sector in the spotlight?  The dividend yields should be attractive enough.  Most are 4% and higher.  This offers defensive stock positioning, dividend yields, and the hope for some upside.  Of course, some are barren of a dividend due to issues and turnarounds. That keeps investors from having to go out to REITs and take on all the risks there associated with land values and trends.  Historically, utilities have been largely considered defensive stocks in hard times.  Morningstar noted in its quarterly wrap-up, “Utility stocks were hurt in the quarter by falling commodity and energy prices, bearish earnings outlooks as firms reported earnings, and a generally negative view of the future of electricity demand.”  The problem with that call is that energy demand is not dropping any longer and some larger companies are starting to increase their power usage again.

Adobe Systems NASDAQ: ADBE) Cut to Perform at Oppenheimer.
Barclays plc (NYSE: BCS) Cut to Hold at RBS.
China Digital TV (NYSE: STV) Cut to Neutral at Piper Jaffray.
FPL Group (NYSE: FPL) Raised to Buy at Citi.
Fluor (NYSE: FLR) Raised to Hold at Citi.
GameStop (NYSE: GME) Removed from Convition Buy List at Goldman Sachs (still Buy rated).
Priceline.com (NASDAQ: PCLN) Cut to Neutral at Credit Suisse.
Toll Brothers (NYSE: TOL) Raised to Outperform at Wells Fargo.
Tyson Foods (NYSE: TSN) Cut to Neutral at JPMorgan.
T. Rowe Price (NASDAQ: TROW) Raised to Outperform at Credit Suisse.

You can join our open email distribution list which goes out several times per week to be notified of key merger news, key analyst calls, top early morning day trader alerts, along with news of IPO’s, key offerings, guru investor data on Buffett and others, mergers, and more.

JON C. OGG

Itron Inc. (NASDAQ: ITRI), for smart metering systems, was up 3% at $59.56 with a $2.38 billion market cap.  Comverge, Inc. (NASDAQ: COMV), for peaking and base load capacity solutions to electric utilities, operators, and electric markets, is up 10% at $12.95 with a $286 million market cap.  Echelon Corporation (NASDAQ: ELON) is up 7% at $14.70 with a $598 million market cap.

In the utility sector we are seeing the following moves:

• Consolidated Edison Inc. (NYSE: ED) up 0.3% at $41.47; $136 million grant vs. $11.4 billion market cap.
• Constellation Energy Group, Inc. (NYSE: CEG) up 0.4% at $32.03;  $200 million grant vs. $6.45 billion market cap.
• Duke Energy Corporation (NYSE: DUK) up 0.15% at $15.95; $200 million grant vs. $20.7 billion market cap.wins $200 million smart grid grant
• FPL Group Inc. (NYSE: FPL) down 2.2% at $50.95; $200 million grant vs. $21 billion market cap.
• NV Energy, Inc. (NYSE: NVE) up 1.3% at $11.52; $138 million grant vs $2.7 billion market cap.
• Pepco Holdings, Inc. (NYSE: POM) up 0.4% at $14.51; $168 million grant vs. $3.2 billion market cap.
• Southern Company (NYSE: SO) up 0.35% at $32.69; $165 million grant vs. $26 billion market cap.

Many of the beneficiary companies have not reported yet their awards.

Jon C. Ogg
October 27, 2009

athenahealth (ATHN) Cut to Sell at Auriga.
Charles Schwab (SCHW) Cut to Sell at Goldman Sachs.
FPL Group (FPL) Started as Underweight at Morgan Stanley.
Genzyme (GENZ) Cut to Hold at Deutsche Bank.
IMAX (IMAX) Cut to Buy at Merriman Curhan Ford.
Sonic (SONC) Cut to Underweight at Piper Jaffray.

JON C. OGG

Citrix Systems (CTXS) Cut to Perform at Oppenheimer.
Discovery Labs (DSCO) Cut to Underperform at Jefferies.
Eaton Vance (EV) Cut to Underweight at JPMorgan.
Federated Investors (FII) Cut to Underweight at JPMorgan.
FPL Group (FPL) Cut to Underperform at Credit Suisse.
Rackspace (RAX) Cut to Neutral at Goldman Sachs.

JON C. OGG

The new OUTPERFORM rated stocks are American Electric Power Co., Inc. (NYSE: AEP), Duke Energy Corporation (NYSE: DUK), Exelon Corporation (NYSE: EXC), PG&E Corp. (NYSE: PCG), Public Service Enterprise Group Inc. (NYSE: PEG), UNITIL Corporation (NYSE: UTL), Xcel Energy Inc. (NYSE: XEL).

The new more cautious PERFORM rated stocks are Consolidated Edison Inc. (NYSE: ED), FPL Group Inc. (NYSE: FPL), Pinnacle West Capital Corp. (NYSE: PNW), Progress Energy Inc. (NYSE: PGN), SCANA Corp. (NYSE: SCG), and Southern Company (NYSE: SO).

There are others that may not be included in the list today, but this is a brief summary from early this morning.  To show how the lot of utilities has performed, we looked at the iShares Dow Jones US Utilities (NYSE: IDU) ETF that tracks the sector. It closed at $67.25 yesterday, and its 52-week range is $53.15 to $100.98.

While the number of houses being foreclosed or are vacant has stayed high, that should start to abate over the next six months.  And if the economy’s green shoots start to turn into some small visible growth toward the end of the year or into next year, then the power consumption from major corporate and industrial clients should start to pick back up as well.

Many of these utilities have also underperformed in the ‘defensive stocks’ category.  This recession led to enough home foreclosures and power reduction from the industrial and manufacturing sector that it took out at least some of the stability or safe harbor characteristics of the past.  It looks like Oppenheimer expects this to improve at least some from here on out.

Jon C. Ogg

Arbitron (ARB) Cut to Neutral at JPMorgan.
Deutsche Bank (DB) Cut to Underperform at Credit Suisse.
E*TRADE (ETFC) Cut to Underperform at FBR.
FPL Group (FPL) Cut to Hold at KeyBanc.
Hexcel (HXL) Cut to Hold at Deutsche Bank.
Macy’s (M) Cut to Neutral at JPMorgan.
Smithfield Foods (SFD) Cut to Underweight at Barclays.
Under Armour (UA) Cut to Sell at Wedbush Morgan.
Zumiez (ZUMZ) Cut to Sell at UBS.

JON C. OGG

SunPower shares are up about 3.5% this morning in pre-market trading, to $28.25. The stock’s 52-week range is $18.50-$107.00.

Paul Ausick
April 23, 2009

GE’s Jeff Immelt is joining Miami Mayor Manny Diaz and Cisco’s John Chambers and the CEO of FPL for this new energy public-private alliance.  The alliance is designed to promote energy efficiency and renewable energy initiatives to give the city, county, local businesses and Miami-area residents more control over how they generate, consume and conserve electrical power.

We had a $4.5 billion outline as what the Department of Energy was allocated under the stimulus plan for modernization of the power grid, but we would stress that many estimates out there have called the opportunity for companies modernizing the power grid for the next generation as an opportunity exponentially larger than this on a financial basis.

Jon C. Ogg
April 20, 2009