Rounding Up the Big Utility Winners of 2013

 | Jan 04, 2014 | 1:30 PM EST
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In 2013, three utilities hit home runs. The biggest winner was MDU Resources Group (MDU). Including dividends, investors saw year-over-year returns of approximately 41%. The prinary focus of MDU, which has a market capitalization of $5.5 billion, is delivering natural gas and electric power.

In the regulated portion of its business, MDU owns four separate electric and natural gas distribution companies: Montana-Dakota Utilities, Great Plains Natural Gas, Cascade Natural Gas and Intermountain Gas. In the pipeline business, MDU owns and operates more than 3,700 miles of natural gas transmission, gathering and storage lines in Montana, North Dakota, South Dakota and Wyoming.

In the non-regulated portion of its business, MDU owns and operates gathering pipeline assets in Colorado, Kansas, Montana and Wyoming. These facilities include more than 1,900 miles of field-gathering lines and 86 owned or leased compression facilities, some of which interconnect with MDU's transmission system.

With year-over-year returns of approximately 39%, Black Hills (BKH) is the next winner. The firm has a market cap of approximately $2.2 billion, and it delivers natural gas and electric power in Montana, South Dakota, Colorado, Nebraska and Wyoming.

Black Hills owns three regulated utilities. First, Black Hills Energy provides electric and natural gas service to more than 600,000 customers throughout Colorado, Iowa, Kansas and Nebraska. Black Hills Power provides electric power to nearly 70,000 customers in South Dakota, Wyoming and Montana. Finally, Cheyenne Light provides electric and natural gas service to nearly 40,000 customers in Wyoming.

Black Hills owns three deregulated energy producers. One is oil and gas, another is coal and the third is contracted power generation. The company's oil-and-gas unit is Black Hills Exploration & Production, which has more than a 1,000 oil-and-gas wells in nine Rocky Mountain States. Its coal unit is Wyodak Resources Development, the nation's oldest operating surface coal mine. In addition, Black Hills owns more than 1,000 megawatts of power plant capacity, under long-term agreements with other utilities. These contracts generate consistent, predictable cash flows and a reliable earnings stream.

NiSource (NI) is the third winner. With a market cap of more than $10 billion, NiSource is mostly a gas-distribution company with some electric-power capabilities. It owns six gas distribution utilities: Columbia Gas of Kentucky, Columbia Gas of Maryland, Columbia Gas of Massachusetts, Columbia Gas of Ohio, Columbia Gas of Pennsylvania and Columbia Gas of Virginia. NiSource also owns Northern Indiana Public Service, an electric and gas utility, as well as Columbia Pipeline Group.

The latter unit operates a network of approximately 15,000 miles of interstate natural gas pipelines that serve 16 states and the District of Columbia. It also operates one of the nation's largest underground natural gas storage systems, which can hold more than 600 billion cubic feet of natural gas.

Earning honorable mentions in order of performance are Sempra Energy (SRE), Atmos Energy (ATO), Dominion Resources (D) and NextEra Energy (NEE). All four companies delivered 26% to 29% year-over-year returns.

Al these winners owned natural gas assets. Most companies also owned electric distribution assets. An overwhelming majority of all these assets were regulated.

There are interesting patterns to be found among these winners. One is size: This apparently does not matter. While large-cap companies like Dominion, NextEra and Sempra did well, their results were not as impressive as those of smaller utilities (see graph).

The second pattern lies in geography. It appears that the Midwest and the Rocky Mountain states, including Montana, North Dakota, South Dakota and Wyoming, provided investors with the highest returns.

A third pattern entails diversification. With one exception, all seven of these companies own regulated gas and electric utilities.

As far as this pattern is concerned, the exception is Atmos, one of the country's largest natural-gas-only distributors. Atmos serves three million natural gas distribution customers in eight states, including those in the Midwest and Rocky Mountain region.

The fourth pattern comes in the form of transportation: With one exception, all of these companies focused on transporting energy. Rarely do these companies take any commodity risk -- though, as discussed above, Black Hills is an exception here.

The last pattern, finally, lies is government regulation. Most assets owned by these firms are regulated by federal or state governments. The beauty of a regulated asset is risk mitigation, as the owner assumes little financial risk in these cases. Instead, government regulations put the risk on the companies' consumers through the rate-making process.

Obviously, the past provides no guarantee for the future. Nevertheless, investing in big names may be profitable, but quieter companies can provide impressive results.

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