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Combined, these four utilities service over 22.8 million customers in 11 states. These states represent some of the best for regulatory friendliness to utilities, an important fundamental for all utility investors. The Southeast’s economic growth has lagged the national average, but the recent growth curve appears to be favoring this region. In March 2013, I penned an article that suggested owning four utilities servicing the southern states. These were Southern Company (NYSE: SO ), Dominion Resources (NYSE: D ), Duke Energy (NYSE: DUK ), and SCANA Corp. (NYSE: SCG ). There is still good reason to implement this strategy. The first is the geographical territory covered by these. Combined, the geography stretches from Virginia to Mississippi and from Florida to Indiana and Ohio. A basic concept for utility investing is: It’s all about location, location, location. After SO gobbles up AGL Resources (NYSE: GAS ), these four will service a combined 22.8 million customers. Below is a list of states covered by each firm: Southern Co.: Mississippi, Alabama, Florida, Georgia, and soon to add Arkansas with the AGL merger Dominion Resources : Virginia, West Virginia, and Ohio Duke Energy : Florida, South Carolina, North Carolina, and Indiana SCANA Corp. : South Carolina, North Carolina, and Georgia These states represent areas of improving economic growth. Over the past four years, the Bureau of Economic Analysis has pegged the average annual growth in the Southeast at 1.3%, after getting a slow start in 2011 at a sub-par growth of 0.6%, or less than half the 2011 national average. In 2014, the percent change in GDP for the Southeast was 1.7%, still slightly worse than the national average of 2.2%. However, the percentage growth trend line is one of the best in the country. From a regional growth perspective, the Southeast has improved from last in 2011 to fourth out of eight in 2014. Continuing regional and national outperformance in key service states of Georgia, Florida, South Carolina, West Virginia, and Ohio will offer better organic opportunities for these utilities. Personal income annual growth has been approximately the same as the national level at a four-year average of 3.75%. Population growth has been strong at 12% above the national average at 0.9% a year. Below is a graph of GDP growth by state offered by the BEA. (click to enlarge) These four utilities cover states that are usually considered healthier for regulatory oversight. The credit side of S&P offers an assessment of the regulatory environment as their friendliness, or lack thereof, has an impact on the credit worthiness of regulated utilities. Pre-2014, S&P offered a four-category grouping (More Credit Supportive, Credit Supportive, Less Credit Supportive, Least Credit Supportive), but since changed to a three-category grouping (Strong, Strong/Adequate, Adequate), which is a bit less precise. However, it is still a meaningful comparison of the 10 states listed above. Southern Co.: Mississippi (Adequate, Credit Supportive), Alabama (Strong, More Supportive), Florida (Strong, More Supportive), Georgia (Strong/Adequate, More Supportive), and Arkansas (Strong/Adequate, Credit Supportive) Dominion Resources: Virginia (Strong/Adequate, Credit Supportive), West Virginia (Strong/Adequate, Less Supportive), and Ohio (Strong/Adequate, Credit Supportive) Duke Energy: Florida (Strong, More Supportive), South Carolina (Strong, More Supportive), North Carolina (Strong, Credit Supportive), and Indiana (Strong/Adequate, More Supportive) SCANA Corp.: South Carolina (Strong, More Supportive), North Carolina (Strong, Credit Supportive), and Georgia (Strong/Adequate, More Supportive). On average, Duke and SCANA have better regulatory profiles than Southern and Dominion. Below are S&P Credit post- and pre-2014 utility regulatory assessments by state: (click to enlarge) Source: S&P Credit (click to enlarge) Source: S&P Credit Below is a table comparing various stock fundamentals for each of the four horsemen: Source: Guiding Mast Investments, reuters.com, morningstar.com Since 2013, Dominion’s equity rating fell one notch while SCANA’s increased one notch. Southern Company’s credit rating fell by one notch and Duke’s increased by the same amount. From the table above, the PEG ratio indicates the better value seems to be Dominion and SCANA while Southern and Duke have the highest yields. Dominion and SCANA’s trailing 12-month return on invested capital, ROIC, is higher than their respective five-year averages, indicating improving capital management. Below are fastgraph.com presentation of each of these stock’s 20-year history and current valuations: (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) Below are total return performance charts of the four utilities, as offered by Morningstar.com, starting with a graph of total return of a $10,000 investment five years ago: Source: morningstar.com However, each utility has some issues. Southern Co. and SCANA share similar concerns with large nuclear power construction projects in progress. Dominion is spinning off natural gas assets into its drop-down MLP. Duke may have paid a high price for its latest acquisition as it continues to move towards a higher exposure to regulated returns. Both Duke and Southern Company are expanding their regulated businesses by buying more natural gas customers in existing service territories. Within the realm of underlying consolidation trend in the utility sector, three of the four should remain the acquiring companies while SCANA could be an acquired company, especially after its large construction exposure diminishes over the next few years. For example, with an enterprise value of $15 billion, SCANA could be absorbed by any of the other three. Overall, utility investors looking to expand their horizons should consider any or all of these four horsemen of the southern utilities. Author’s note: Please review disclosure in author’s profile. Scalper1 News
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