In the heady days of post-World War II America, a job at a blue chip company was considered the ideal for white- and blue-collar workers alike. Anchored in a solid, recession-proof organization, a career of climbing the company ladder meant prosperity and security at the end of the road--retirement.

The key to this paternalistic relationship was the pension system. Every year, a portion of each worker’s wages was matched with company contributions to build a base of assets. After retirement, these assets were distributed to pay the worker a salary and, in most cases, health care costs. In general, the more powerful the company, the more lavish the benefits.

Unfortunately, many of America’s corporate icons have since fallen on hard times. The bad times started in the 1970s, with the demise of the steel and auto industries. They’ve continued in recent years with the bankruptcies and near-defaults in the airline industry and elsewhere. Even some of the giants of the technology age--IBM, for example--have been forced to make major adjustments to survive.

All of these giants were essentially faced with the same problem: Smaller, more nimble and lower-cost competition in this country and from overseas forced them to cut costs or go bust. And a major part of those costs came from the same pension system put into place back in the 1950s and now burdened by rising health care costs.

The Pension Benefit Guaranty Corporation (PBGC) is a federal agency created to defend the integrity of companies’ pension plans by pledging to make good on any that should go bust. The idea is similar to the Federal Deposit Insurance Corporation, which was created to prevent bank runs by ensuring all savings in banks up to $100,000.

Unfortunately, like the Resolution Trust Corp of the late ‘80s and early ‘90s (which bailed out the failed savings and loans system) the PBGC is finding itself severely stressed. This week, the agency took on $1.4 billion of $2.9 billion in underfunded assets from United Airlines’ pension plan. Declaring it could no longer make good on the payments to the plan, United terminated it and converted to much less expensive defined benefit plans similar to 401-Ks.

By taking on the United obligations, PBGC is hoping to limit its legal risk when the airline’s bankruptcy issues are resolved. That will add to an already hefty $23 billion deficit, which is likely to grow going forward. It also raises the possibility that the US government could be forced to plough in hundreds of billions to prop up the system in the event of a real economic slowdown, just as it was forced to do for the savings and loan bailout during the administration of the first President Bush.

The good news for utility investors is the industry’s pension system is generally sound. Some companies--notably FIRST ENERGY (NYSE: FE)--had fairly large deficits going into this year. But most companies have been able to ride favorable stock market trends to close their gaps. Others have been able to pony up funds with the help of rate increases. As regulated entities, transmission and distribution utilities in particular have been able to pass along their pension costs and should continue to be able to do so.

Utilities, and in fact all US corporations, however, could be on the verge of either relief or a greater burden. The key is a court case pitting IBM against about 130,000 former and current employees. Basically, faced with cutthroat competition and focused on cutting costs, Big Blue changed its pension plan’s calculation of benefits in 1995 and again in 1999 from a more traditional plan. Under the traditional plan, benefits were calculated based on an employee’s salary during the last year of service, typically their fattest paycheck. Under a cash balance plan--which IBM is using--pensions are calculated by compounding amounts credited to employee accounts during their careers.

Under some studies, IBM has cut its pension payout by up to 40 percent under the cash balance plan from the traditional plan. The employees are suing on the basis of age discrimination, saying older employees don’t have the time to enjoy the benefits of compounding that younger ones do. The case is being closely watching in Corporate America as well as by Congress.

If IBM is victorious, we could see more companies adopt this type of plan, as XCEL ENERGY (NYSE: XEL) has already done. If not, the cash balance companies will have to come up with more cash. Unlike IBM, however, Xcel would almost certainly be able to recover the money from regulators in rates.

The next batch of data on utility and other corporate pension plans will be available with the 10-K reports filed with the Securities and Exchange Commission in the first quarter of 2005. Given the repair job on utility industry finances and favorable returns in the stock market--especially for utility stocks--I expect to see deficits narrowed and assumptions made more conservative.

That won’t safeguard every pension plan for all time. But at least for the utility industry, employees and investors alike appear to be on solid ground. That’s one less thing to worry about as we enter 2005, and one more reason to favor the group over less certain rivals in other industries.

WATCH THE DOLLAR

One of the benefits of working in a diverse shop of analysts is the ability to gain additional insight from a colleague’s research. This week, the US dollar has again taken center stage, mainly by resuming its slide against other major currencies.

The Bush administration has publicly stated that it’s content to let the dollar drop, as it makes US exports cheaper overseas and stimulates sales. Unfortunately, a falling buck also exacerbates our twin budget and trade deficits by making such vital imports as oil more expensive. That means an increasing supply of dollars in the hands of foreigners.

Countries’ holding each other’s currencies is a fact of life in the global economy. The problem results when a flood of supply threatens to overwhelm demand. Thus far, the US dollar’s decline has been relatively orderly, thanks in part to foreigners’ buying of US bonds--which are conveniently abundant given the record US government budget deficits and our mounting national debt.

Unhedged foreign buyers of bonds, however, have been losing a lot of money with the dollar’s decline. The question is at what point such buyers demand a higher yield on US bonds to compensate for the ongoing drop in the buck. As my colleague Ivan Martchev points out, no one knows if or when such a point will occur, or what sort of yield will be demanded. But the more the dollar sells off, the greater the risk it will.

If foreign buyers begin to demand a higher return on bonds, the result will be a jump in interest rates. In the spring of 2004, a rate spike slowed the US economy’s then-torrid rate of growth and triggered a pronounced selloff in the US markets. As the latest issue of Ivan’s email letter Global Viewpoints (www.globalviewpoints.com, free to Utility & Income subscribers, next issue Tuesday, January 4) show, that’s a real risk this time around as well. In fact, for the past few weeks, rates have risen even as the dollar has continued to fall, a possible warning the rate spike could be a lot worse than most now expect.

Rising rates would be an immediate negative for utilities and other income investments. The most vulnerable in the near term would be those that have performed the best since the NASDAQ peaked in spring 2005 and investors began to turn to back to income investments. That’s certainly what happened in spring 2004, as well as in summer 2003.

The good news for income investors is any jump in rates is likely to be self-correcting. The typical Wall Street line today is that rising interest rates in 2005 would be a good thing, as they would reflect a faster growing economy. But as Global Viewpoints makes clear, even at today’s relatively low rates, the economy’s rate of growth is far from robust. The labor market remains slack and consumer spending seems to be slowing as well. Rather, a spike in rates would almost surely slow things down. That, in turn, would cap and almost surely reverse any rise in rates.

The key at that point will be sticking to quality. That means investing in securities of companies that are gaining financial strength, whose declining credit risk offsets the risk of volatile interest rates. The sector I remain most comfortable with is utilities. Not only are power, gas, water and communications in a recovery mode--cutting debt, operating costs and business risk--it’s the only sector where companies are virtually guaranteed cash flow no matter what the economic environment.

Even during the Great Depression, demand for power, gas, water and telecom services kept cash moving into utility coffers. The best were kept whole and continued to pay dividends to investors. But even the worst survived. No other industry can make that claim.

This time around, these services are more essential than ever. In fact, it’s almost impossible to envision any scenario--short of a real apocalypse, like the tsunami that hit the Indian Ocean Basin last week--in which people won’t be using electricity, a telephone or running water. We’ve just become too dependent.

As a result, I look for credit risk to continue to decline in the utility sector. That will be a powerful offset to any rise in interest rates, and it ensures any investment you make will survive a crash in the market or even the economy. In fact, once the initial selling due to rate hikes is done, investors would almost surely flock back to their safety and dividends.

The bottom line, however, is income investors are going to take some hits if interest rates should rise from here. And they may take a knock if investors become exuberant in the early months of the year (as they often do) and rotate out to more growth-oriented stocks in order to grab a quick buck.

I intend to watch the dollar closely in coming days, and its impact on rates. In the meantime, my best advice is to adhere closely to the buy targets I’ve laid out in Utility Forecaster, Canadian Edge and in the Income Portfolio of Personal Finance, so you won’t overpay now. But a well-constructed portfolio of income securities will weather any storm we see on Wall Street, and investors who buy cautiously now and wait on opportunity will do even better.

Note that the January issue of Utility Forecaster will be posted on my website www.utilityforecaster.com, by Thursday evening, December 30. This month, I look at five good places to bet for the coming year. Note that last year’s forecasts were five for five--improving sector conditions, more industry mergers, rising energy prices, regulatory victories for big telecoms and a drop in the US dollar. That’s a big reason we were able to turn in a strong performance for the year.

Like Wall Street traders, most utility regulators and corporate executives like to take the final week of the year off. That typically makes for a slow news cycle. Nonetheless, some utility bosses were hard at work this week, moving their companies forward. Here’s the weekly roundup of the mostly encouraging developments.

UF STOCKS

CHEVRONTEXACO (NYSE: CVX) reported only minimal damage to its energy infrastructure in Asia, an encouraging sign given the still-rising toll of death and devastation from the region’s historic tsunami. The company also reported the settlement of a dispute in Nigeria, which had forced it to shut in 20,000 barrels per day of oil production for the past few weeks. That should help the company get more of its output to market in coming weeks and take advantage of what’s still an extremely favorable pricing environment. The company has promised to increase infrastructure investment in the region. Big oil stocks have sagged a bit in the past month, as oil prices have backed off from 2004 highs in the $55 per barrel range. BUT SITTING ON A PILE OF CASH AND FIRMLY IN CONTROL OF A VITAL RESOURCE, CHEVRONTEXACO IS STILL A GREAT BUY FOR LONG-TERM INVESTORS UP TO 55.

DOMINION RESOURCES (NYSE: D) may wind up taking at least some heat for what was apparently a reporting error for natural gas storage capacity. But the Federal Energy Regulatory Commission appears more interested in ensuring the integrity of pricing than in punishing a company for a reporting error. For its part, the ute has instituted more intensive reporting procedures, which should limit its legal risk. It also continues to pursue the purchase of the Kewaunee nuclear power plant in Wisconsin, where it and the plant’s co-owners have petitioned regulators to reconsider their rejection of the deal. IN THE MEANTIME, DOMINION CONTINUES TO ENJOY SOLID MARGINS FROM SALES OF POWER AND GAS AND REMAINS A GREAT, LOWER RISK ALL AROUND ENERGY BUY UP TO 70.

NSTAR’S (NYSE: NST) plans to build a major underground power line in its Massachusetts service territory has been approved by regulators. The company will construct the line to improve the reliability of its transmission system and the costs--plus a rate of return for investors--will be passed along to ratepayers. This is the kind of deal that will keep earnings rising at this pure distributor and transporter of energy, and in an extremely reliable way. NSTAR REMAINS A BUY WHENEVER IT TRADES UNDER $50 A SHARE FOR CONSERVATIVE, LONG-TERM INVESTORS.

SIERRA PACIFIC RESOURCES CONVERTIBLE PREFERRED (NYSE: SRC) continues to trade in the neighborhood of its conversion value to approximately 3.6 shares of SIERRA PACIFIC RESOURCES (NYSE: SRP) common stock, plus the remaining $4.50 per share in dividends to be paid before the mandatory November 2005 conversion. With the conversion date closing in, that should continue to be the case for the convertible’s remaining life. Sierra’s fate over the next year--which will determine the convertible’s ultimate value--is going to depend on whether the company can continue its financial recovery. Last week, management received some confirmation of the US District Court’s decision that vacated an order by bankruptcy court judge Arthur Gonzalez to pay Enron creditors $335 million. The upshot seems to be that Sierra may wind up paying creditors something for the busted power purchase contract, even though it was negotiated under fraudulent terms. The amount, however, is likely to be much less than the original order. As a result, it shouldn’t have too much of an impact on the recovery, or the prices of the common or preferred stocks. THE SIERRA PACIFIC RESOURCES CONVERTIBLE PREFERRED REMAINS A BUY UP TO 42, BUT FOR SPECULATORS ONLY.

TECO ENERGY 6.125 NOTES OF 5/1/2007 got a lift this week. The company announced the final disposal of its Frontera power plant for $128.5 million in cash plus $5.2 million in shed liabilities. TECO will record a $28 million after tax loss on the deal, which brings it closer to its goal of retrenching to a regulated Florida electric and gas utility, with some attached operations in coal and shipping. Proceeds were used to pay off debt. Retrenching is the key to bringing these bonds back to investment grade. In the meantime, it means diminishing credit risk which—along with a near-term maturity and premium to par price—limits interest rate risk to those who buy for the yield of nearly 5 percent. BUY THE TECO ENERGY 6.125 NOTES OF 5/1/2007 UP TO 104 ($1,040).

PF STOCKS

CHEVRONTEXACO (NYSE: CVX) reported only minimal damage to its energy infrastructure in Asia, an encouraging sign given the still-rising toll of death and devastation from the region’s historic tsunami. The company also reported the settlement of a dispute in Nigeria, which had forced it to shut in 20,000 barrels per day of oil production for the past few weeks. That should help the company get more of its output to market in coming weeks and take advantage of what’s still an extremely favorable pricing environment. The company has promised to increase infrastructure investment in the region. Big oil stocks have sagged a bit in the past month, as oil prices have backed off from 2004 highs in the $55 per barrel range. BUT SITTING ON A PILE OF CASH AND FIRMLY IN CONTROL OF A VITAL RESOURCE, CHEVRONTEXACO IS STILL A GREAT BUY FOR LONG-TERM INVESTORS UP TO 55.

DOMINION RESOURCES (NYSE: D) may wind up taking at least some heat for what was apparently a reporting error for natural gas storage capacity. But the Federal Energy Regulatory Commission appears more interested in ensuring the integrity of pricing than in punishing a company for a reporting error. For its part, the ute has instituted more intensive reporting procedures, which should limit its legal risk. It also continues to pursue the purchase of the Kewaunee nuclear power plant in Wisconsin, where it and the plant’s co-owners have petitioned regulators to reconsider their rejection of the deal. IN THE MEANTIME, DOMINION CONTINUES TO ENJOY SOLID MARGINS FROM SALES OF POWER AND GAS AND REMAINS A GREAT, LOWER RISK ALL AROUND ENERGY BUY UP TO 70.

NORTHROP GRUMMAN CONVERTIBLE PREFERRED C (NYSE: NOCC) has continued to tick up in recent months. The key has been the defense giant’s prowess winning new contracts from a very generous Pentagon, which is flush with a record high budget. This week, the company scored on $166 million in advance procurement funding from the US Navy for basic “long-lead” items such as main engines, diesel generators, steel plates and cable. Last week, it secured a $248 million contract from the US Air Force for replacement motors for intercontinental ballistic missiles. These are the kind of bread and butter contracts that keep the cash flowing in for Northrop, even as it continues to develop extremely sophisticated systems. The preferred is now fairly high priced, relative to its conversion value of around $109 a share. AS A RESULT, NORTHROP GRUMMAN CONVERTIBLE PREFERRED C IS A HOLD UNTIL EITHER THE PRICE COMES OFF TO UNDER $130, OR THE CONVERSION VALUE RISES TO THE $115 TO $120 PER PREFERRED RANGE.