Excerpted from August 3, 2007, Solutions News Extra
In March, global investment and finance leader Lehman Brothers announced the creation of a new division to cover the electric utility and power generation sector. This week, Lehman published its first report on the electric power industry, “The Power Switch Is On!”
The report contains company overviews and recommendations on 34 electric utilities and CFC. Lehman’s value recommendation for CFC said, “We believe that NRUC (CFC) is extremely well managed, that its business model is conservative and that the company is poised for continued credit improvement. We believe that the Collateral Trust Bonds offer particular value. We believe that investors should Overweight NRUC debt.”
The Lehman report also said, “CFC’s loan asset quality is superior considering its geographic diversity, its strong collateral and outstanding loan loss history.”
Lehman’s overall electric utility sector recommendations included:
- While the financial markets have experienced unprecedented volatility over the past week, the utility sector is the only sector within the Lehman Brothers Index that continues to post a positive year-to-date excess return, and the electric utility sector has outperformed relative to the Index. As a result, Lehman’s sees a “flight to quality” to this sector.
- Despite the TXU announcement, Lehman believes that the risk of additional leveraged buyouts is minimal in the regulated electric utility industry, in part because financial buyers will have a tougher time financing new deals and making the numbers work to get the returns they need.
- Although Lehman expects the utility sector to outperform the corporate market in general, it does expect spreads in the utility sector to be pressured by the significant amount of financing that is expected over the next few years to fund capital expenditures. Lehman puts those capital expendtures at $63 billion and believes those financing requirements will limit the upside return in the sector.
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