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Electric utilities are taking divergent actions, such as expansion, contraction, and investment in nonelectric operations in order to meet the changing retail environment due to deregulation in a growing number of states. Management mind-sets, regulatory practices, financial strength, and company size are factors which determine which course each company takes. Investors need to evaluate individual stocks in this industry as the new environment is changing the industry's approach to doing business.

The electric utility industry is expected to be one of the worst performers over the next 6 to 12 months. In an effort to create more competition in the electric utility industry, some states have signed retail restructuring plans into law. Regulators and legislators alike want to break down monopolies, maintain system reliability, decrease pollution and bring rate relief to residential customers. Among central-US utility companies, CIPSCO Inc. is a favored investment, due to its dividend growth prospects, large customer base and modest debt burden.

Electric utilities, with only a few exceptions, appear to offer very little rewards for investors in the coming years until the middle of the next decade. With federal and state deregulation almost a certainty, electric utility administrators have been attempting to cut costs and diversify in order to achieve better capital gains and provide favorable returns. A few diversified companies may attract some investors, but the industry as a whole carries a low rating.

The electric utility industry will face an important year in 1997 when the issues of stranded cost recovery and jurisdiction over transmission and distribution are dealt with by Congress. The playing field between private, federal, and other utilities will also be leveled, and many utilities are taking steps to improve their economic structures. Only stocks with strong finances and stable operations should be considered by investors.

The economic crisis has been blamed for the sale of Baltimore, Maryland-based Constellation Energy Group to MidAmerican Energy Holdings Inc., but mezzanine financing also helped finance the transaction. Mezzanine lenders are seen to have replaced banks in financing businesses. Mezzanine firms usually demand 20 percent from transactions.