This posting discusses two local favorites, Duke Energy, DUK, and Progress Energy, PGN. Unless you live under a rock you know these two regulated utility companies, pending approval, have agreed to merge. I expect the merger will be approved and occur later this year.
Presently I believe both these companies are soundly run and provide good dividend income for investors. When they do merge the company that emerges will be the largest utility in the USA and a payout of about 5.5%. A few years ago Duke got into trouble by doing business in energy trading outside it's expertise of running a regulated utility. Duke got smart and rid itself of those assets and got back to running it's utility. Progress, on the other hand never bought into the energy trading business, due to frankly what I believe is better management and continued to prosper. A few years ago they had a good merger with Florida Progress energy that I believe has helped both companies. Progress took several years to sell off not core assets from the Florida Progress merger and get down to it's knitting to being a regulated utility. Progress has run into some cash flow problems of late, due to some government mandates, and after many years of an increasing dividend has not raised the divy for a couple of years.
In case you are not aware of what I mean by "regulated utility", I mean one where the states the company operates in allows a monopoly service area in exchange for earning a pre-approved percentage return on assets. The usual return is generally in the area of 11% to 12%, which is about right for paying a dividend and paying the expenses with little or no growth. Utilities are a capital intensive business, due to the high costs of building power plants and energy delivery infrastructure, so it is essential they pay a nice dividend to attract the investor capital necessary to run their business. Growth comes from expansion of business by other companies who buy electricity in their service area and population growth.
Progress and Duke need this merger to consolidate some costs and allow the company to cover increasing expensive federal and state renewable energy mandates. However I would expect one or two new nuclear plants to commence once they get together to cover increasing power needs in their service areas, so called renewable energy just frankly can not cover.
I like the new company and believe it will be a good place to get income and some growth. I am some concerned about the regulatory atmosphere as mandates for renewal energy have hurt Progress and Duke the last few years and if added to could hurt profits by increasing expenses and thereby raising rates on consumers. One big positive however is the new company will be headed by Bill Johnson of Progress Energy, who in my opinion is frankly a much better leader than Jim Rogers of Duke.
I want to mention two other regulated utilities here. One SCG, South Carolina Power, a excellent run utility. They operate mainly in South Carolina and have possibly the best regulatory environment in the country. The share price has risen over the last year and pushed the divy percentage down due to investors starting to notice this quality operation. Still a nice 4.5% payout however. Another utility I have warmed up to of late is AEP, American Electric Power. AEP serves 10 states and has a huge customer base. Payout of around 5.1%, which I believe is secure. AEP recently raised their dividend as well.
I am currently either long or own options on AEP and DUK, I have in the past year owned options on PGN
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