Fool.co.uk - Investments

In uncertain economic times, some utilities can offer sound defensive qualities in the form of inflation-beating dividends and potential capital appreciation. Here are three worthy of closer inspection.

United Utilities (LSE: GB0006462336.L - news)

United Utilities Group (LSE: UU), valued at £3.4bn, manages and operates the regulated electricity distribution, water and wastewater networks in north-west England. It produced full-year pre-tax profits for the year ending 31 March 2009 of £568.7m, up 19% on the previous year.

This was good going considering that the company is regulated in terms of both price and performance by an independent body, Ofwat, which sets price limits every five years for the water sector in England and Wales. Current price limits were fixed in 2004 and cover the period up to March 2010.

Ofwat is expected to set out its initial thoughts on its price limits for 2010-2015 this month and then publish its final determination in November.  A lot depends on this and it makes sense to see what Ofwat has to say before taking the plunge here.

Net debt, including derivatives, at 31 March 2009 was £4.9bn, an increase of £2.0bn on last year. This movement principally reflects expenditure on the regulatory capital investment programme, payment of dividends and payments of interest and tax, partly offset by operational cashflows.

The business is expected to deliver a dividend yield of 7.1% for the forthcoming year.

International Power (LSE: IPR.L - news)

International Power (LSE: IPR) is a wholesale power generator and developer, providing electricity to millions.

In 2008, revenues were £3.8bn (2007: £2.3bn) and pre-tax profits were £915m (2007: £483m). It also managed to deliver free cash flow (after maintenance capital expenditure, interest, and tax) of £513 million.

Despite the recession, demand for electricity remains solid. Its international footprint, diversified fuel base and balance of contract across developed and developing markets offers good security too.

In a May update, it also revealed that group performance had been in line with expectations, although profits this year are expected to be below those achieved in 2008. It expects to continue to deliver strong free cash flow in 2009.

International Power will report financial results for the six months ending 30 June 2009 on 11 August 2009. It is on a forward P/E of 8.4 and a prospective dividend yield of 4.9%. I'd be inclined to wait for the next set of results, as they are less than a month away.

Centrica (LSE: CNA.L - news)

In 2008, revenues at British Gas owner Centrica (LSE: CNA) were £21.3bn, up 31% on 2007's total of £16.2bn. However, profits were substantially down at £449 million compared with £2.1 billion the previous year.

Centrica also suffered from volatility in energy prices, having to pay over the odds on the wholesale energy markets. Indeed, the fall in reported profits reflects a £1.4bn charge for revalued energy contracts that are priced above the current wholesale market price.

Centrica's £2.3 billion acquisition of 20% of British Energy (LSE: BGY.L - news) from EDF (Paris: FR0010242511 - news) was a good strategic move. It reduces its existing exposure to short-term movements in wholesale energy costs through increased integration. 

The deal also buys it a piece of the nuclear energy action in the UK. Indeed, Centrica and EDF plan to build four new nuclear plants on existing sites as part of the UK government's plans for the country to get more of its electricity from nuclear generation. Re-launching nuclear power is vital if the UK is to meet its long-term climate change obligations and energy security needs.

Management is also aggressively trying to add value by acquisition and the recent £1.3bn hostile takeover offer for Venture Production (LSE: VPC.L - news) (LSE: VPC), the North Sea gas producer, is quite a daring move.

At 230p per share, Centrica represents a good bet for the future and also provides a decent income, with a prospective dividend yield based on consensus estimates for 2009 of 5.8%.