While the S&P 500 was relatively flat over the past year, U.S. utility stocks gained an average of 14.8%. It is the top-performing sector by almost 5 percentage points. There has also been a lot of news coming out about some mergers and about the top performers. These are the companies that are worthy of further research.
Duke Energy Corporation (DUK): DUK and Progressive Energy, Inc. (PGN) are in the midst of creating the largest electric utility in the United States. A recent ruling from the Federal Energy Regulatory Commission has postponed this $13.7 billion merger. The FERC ruled that there was not an acceptable plan to protect the wholesale market competition in the Carolinas after the merger. There is fear that the combined company's markets will create a monopoly.
The companies announced that they would extend the termination date by six months to July 8, 2011. This was the date that, contractually, either side could extend the termination date to. (This was defined in DUK's January 9, 2011 8K.) DUK and PGN will propose a new plan to protect competition within the next two to three weeks. Although this merger has been delayed, DUK can still be considered a buy. It is trading near its 52-week high after a 21.23% 52-week change, it has a payout ratio of 71%, and its 5 year average dividend yield is 5.6%.
Progressive Energy, Inc.: Recent news consistently puts PGN next to DUK, being that they are merging in less than six months. PGN pays out almost all of its retained earnings, with an 8% retention ratio, and has the same 5 year dividend yield of 5.6%. Upon the merger, PGN will continue as a wholly owned subsidiary of DUK. Each share of PGN will be cancelled and converted into the right to receive 2.6125 shares of DUK, as defined in PGN's 10Q. Most recently, PGN has been selling at about 2.5 times that of DUK. If this margin continues, PGN can be seen as the more attractive stock to own prior to the merger.
Exelon Corporation (EXC): EXC and Constellation Energy Group Inc. (CEG) have recently signed an agreement and plan of merger to combine the two companies in a stock-for-stock transaction. This merger will result in CEG shareholders receiving 0.930 shares of EXC for every share of CEG. The resulting company will retain the Exelon name and be headquartered in Chicago.
As of September 30, 2011, Exelon has incurred approximately $37 million of expenses associated with the transaction. The incentive for the two companies to go forth with the merger is the termination fee. If EXC backs out, it will be fined $800 million, and if CEG backs out, it will be fined $200 million. This transaction is expected to close early this year.
Furthermore, on September 30, 2011, EXC announced its completion of the acquisition of all of the interest in Antelope Valley Solar Ranch One. This is a 230-MW solar photovoltaic) project under development in northern Los Angeles County, California, from First Solar, Inc. (FSLR), which developed and will build, operate, and maintain the project.
This acquisition builds on EXC's commitment to clean energy. This is part of a business strategy called Exelon 2020, which aims to eliminate the equivalent of EXC's 2001 carbon footprint. Exelon expects to invest up to $713 million in equity in the project through 2013. More information about the merger and acquisition can be found in EXC's 10Q.
Consolidated Edison, Inc. (ED): ED has two regulated utility subsidiaries: Consolidated Edison Company of New York, Inc. (CECONY) and Orange and Rockland Utilities, Inc. (O&R). ED is a holding company which owns all of the outstanding common stock of CECONY and O&R.
ED, CECONY, and O&R all entered into a Credit Agreement dated October 27, 2011. No one company is responsible for the obligations under the credit agreement of any company other than itself. However, because ED owns all of the outstanding stock of the other companies in the agreement, it is subject to the most risk. The companies intend to use this credit for their commercial paper programs. Any money borrowed will be at a variable rate, subjecting each company to interest rate risk.
However, as long as there is not an event of default, this agreement will be beneficial. As shown in the 10Q, ED's 101% cash balance increase from FYE 2010 to FYE 2011 suggests a low chance of default. This, like many other energy utilities, is a good buy for those who are not risk tolerant and who expect a steady dividend. Consolidated Edison continues to stack up well against its peers.
Southern Company (SO): According to Bloomberg, SO owns the three power plants that are the largest emitters of greenhouse gases. SO is the only company with three plants among the Environmental Protection Agency's top 10 list. CFO Journal states SO's CFO is confident that it can make large infrastructure investments and continue paying its dividend, despite the fact that recessional declines in power usage have put pressures on power producers. It will need to make these investments in order to keep the EPA off its back.
Quarterly earnings have grown 12.10% year over year and its net income is growing 2 times greater than its revenue. It is operating more efficiently than it has been, with a profit margin of 11.82%. I like the stock because it yields a dividend of 4.23 and has an 18% gain over the last year. I believe that even though SO's forward price to earnings ratio is 16.55, the stock can be expected to trade closer to 25 times earnings due to new investor interest and improving fundamentals.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
