Pension woes, mild weather to hit U.S. utilities

Indeed, fourth-quarter earnings are expected to provide little cheer to investors in the sector, thanks largely to mounting pension costs coupled with milder than normal weather in many regions of the U.S.

Overall, fourth-quarter earnings in the utilities sector are expected to be down 5 percent from the same period a year earlier, according to a Deutsche Bank research report.

Rising pension costs are a growing problem for utilities because like other old economy companies, they are home to a strongly unionized work force and offer defined benefit pension plans, said Glenrock Associates analyst Paul Patterson.

Defined benefit plans guarantee retirees fixed yearly payouts.

Pension woes had already started eating into profits at many companies early last year and are expected to continue hurting them this year, although the pain could be muted if the stock market continues its ascent, analysts say.

These higher pension costs, which have hit U.S. corporate earnings in recent quarters, are hitting the industry just as it slowly scrambles back onto its feet. Ambitious plans by power companies to expand into telecoms and other unregulated businesses went awry following the collapse of Enron, and a credit crunch has since sent many top players into a tailspin.

BARRIERS TO RECOVERY

"You've turned things around, you're back on track and wham, hitting you in the face are pension issues, and health care issues and insurance costs through the roof," said Crowell Weedon analyst Doug Christopher, referring to the scenario faced by power companies.

Last week, for example, Southeast utility Progress Energy Inc. (PGN.N: Quote, Profile, Research) reported a drop in fourth-quarter profit, citing higher pension costs, among other reasons. Consolidated Edison Inc.(ED.N: Quote, Profile, Research) , which supplies electricity to the New York metropolitan area, also cut its earnings forecast for this year citing higher insurance premiums, pension and other post-retirement benefit costs.

Other drags on quarterly earnings in the power sector include unusually warm weather, especially since colder-than-normal weather prevailed in the same quarter a year earlier. The U.S. Northeast, for example, experienced 4 percent to 7 percent milder than normal weather in the fourth quarter, according to a Prudential Securities research report.

But power prices in the Northeast and South remained high in the fourth quarter because of high natural gas prices, providing some respite to power companies.

Several companies are also expected to see earnings diluted from additional shares outstanding, since many had resorted to issuing stock during the credit crunch following Enron's collapse.

One bright spot for some utilities at least, is the deep freeze that has engulfed the U.S. Northeast in the past couple of weeks, which is expected to boost profits for the first quarter, analysts say.

"If it keeps up, it certainly has the potential for strongly affecting the companies in a positive way," said Patterson. "As each week goes by, it's more of an impact."