For consumers, this year's winter is looking even more frightening than a Halloween ghoul. Households heated with fuels could pay 30% to 48% more this winter compared to last year, according to the Energy Department's Energy Information Agency. That sounds like good news for utilities like KeySpan (NYSE:KSE) -- unless those high prices scare demand away.
So far this year, major oil and natural gas refiners like BP (NYSE:BP), ExxonMobil (NYSE:XOM), and Royal Dutch (NYSE:RD) have prospered from rising oil and fuel costs. But when higher crude prices lingered, consumers put a squeeze on demand, sending oil prices lower. Can the same hold true for heating fuels?
Before the hurricanes curtailed Gulf fuel outputs, I was thinking of dabbling in a few natural gas utility companies. With a boom in new housing starts in the Northeast, according to the Commerce Department, I figured utilities would be signing on more customers. KeySpan, the largest natural gas distributor company in the Northeast, piqued my interest, since it was currently shivering near two-year lows. This stock offers a handsome 5.5% dividend yield and an improving balance sheet. With an estimated 1 million residential and 150,000 business prospects for conversion to gas heating, KeySpan could add approximately $600 million to gross profits over the long haul. That would bolster its gross margins, which have been declining in recent years.
But the problems are greater than they appear. Diversified utility companies like Exelon (NYSE:EXC) and AmerenCorp. (NYSE:AEE) may prosper this winter from unregulated operations and increased electric use. However, highly regulated utilities with income largely generated from natural gas or heating oil, like KeySpan, may face obstacles in passing cost increases on to customers. This could also result in increasing debt for the utilities and more defaulted payments from their customers.
With the majority of Northeast households heated with electricity (electricity is expected to rise by only 5% this year) and heating oil, this year's record natural gas prices may lead to fewer natural gas conversions. While some diversified utility companies with unregulated operations look attractive, KeySpan, a potentially attractive long-term possibility, could see a lower share price if fewer consumers convert to natural gas and more of them turn down their thermostats.
Further heated Foolishness:
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Fool contributor M.D. Mitchell is down the street at the local junkyard looking for some good trash. He thinks all the current negative energy on the Street has made for some great long-term buys. He owns none of the above companies.
