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Hallmarks of Success for Utility Companies
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Though most Investors should treat utilities with caution given the changing regulatory structure, there are solid companies in the industry that could make for good investments if bought at the right price. Look for the following characteristics.

Stable, Favorable Regulatory Structure

Utilities that operate in states where competition is minimal are positioned much better than those operating in states where deregulation has opened markets. In general, this means the Southeast and the Plains states are the most attractive because they are the furthest behind in deregulating and are in no hurry to do so. On the other hand, the Northeast and Southwest are the least regulated and least stable for utilities. For example, Southern Company, "which operates primarily in the Southeast and has good relationships with its regulators, is much more attractive to us than a company such as Southern California Edison, which must deal with the volatile California regulatory and political environment that already bankrupted it once.

Strong Balance Sheet

Having large amounts of cash and comparatively lower debt levels is always attractive, but it is of great importance when going through turbulent change as the utility sector is. The average utility has a debt-to-total capital ratio of 60 percent, and we'd prefer to own companies with less debt.

Sticking to the Basics

We've noticed that companies that have attempted to enter industries outside their core businesses have tended to do much worse than companies that stayed focused. Ventures into areas such as building international power plants, speculative energy trading, and telecommunications services have nearly bankrupted several utility and energy companies. Utility companies that were comfortable with their identities as utility companies and stayed focused on what they did best have tended to do much better.

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