For Immediate Release

Chicago, IL – October 10, 2014 – Today, Zacks Equity Research discusses the Utilities, including Duke Energy Inc. (DUK-Free Report), Exelon Corp. (EXC-Free Report), Pepco Holdings Inc. (POM-Free Report), Wisconsin Energy Corp. (WEC-Free Report) and Integrys Energy Group, Inc. (TEG-Free Report).

Industry: Utilities

Link: http://www.zacks.com/commentary/34771/

The biggest positive as well as the fundamental strength of the utilities is that there is hardly any viable substitute for their services. The global invasion of electrical gadgets and therefore the endless need for electricity and utility services is an added advantage.

Over the coming decade, we foresee higher usage of hybrid vehicles which in a way would increase the consumption of electricity and lower the pollution level. A number of big automobile companies are the front-runners in the creation of hybrid vehicles. The usage of these vehicles on a larger scale could create additional demand in the utility sector.

Regular Dividend

The utility operators generate more or less stable earnings unless there are severe factors disrupting their operations. These operators likewise reward their shareholders through the payment of stable and growing dividends. This was evident during the economic crisis of 2008–2009 when these operators paid dividends without fail even as companies in a number of industries cut their payouts.

Focused R&D

In their pursuit to improve the standard of services, utility operators have relentlessly pursued research and development work. Keeping the rise in demand and efficient use of power in mind, the operators have brought new smart meters, transmission and distribution lines, and gas pipelines into operation.

Utility operators are also benefiting from ongoing research work in the solar photovoltaic (PV.V) sector. Solar energy is a growing alternate energy source and the new solar cells with higher conversion rates allow operators to generate more power with fewer solar panels. This enables the operators to lower the cost of generating power from alternate sources as these are generally more expensive than fossil fuel sources.

Mergers and Acquisitions

Apart from spreading business organically, the players in the utility space make strategic mergers and acquisitions, which lead to cost synergies and better utilization of resources.

We believe that in a mature energy market like the United States, mergers and acquisitions represent a sure way to enhance market share. This activity expands market reach through the usage of transmission and distribution lines, diversifies the generation portfolio of the companies and also lowers operating costs through the usage of common back office space to control the expanded operation.

In one of the mega-mergers in this space, in 2012, Duke Energy Inc. (DUK-Free Report) acquired Progress Energy for nearly $26 billion to form one of the largest electric utilities in the U.S.

The nuclear fueled energy supplier Exelon Corp. (EXC-Free Report), to further expand its footprint in the U.S., has decided to acquire Pepco Holdings Inc. (POM-Free Report) for a total consideration of nearly $7 billion.

A premier diversified utility Wisconsin Energy Corp. (WEC-Free Report) has inked a definitive agreement to acquire Integrys Energy Group, Inc. (TEG-Free Report). Wisconsin Energy will invest a total of $9.1 billion, consisting of cash, stock and assumed debt.

Utility Services Have No Alternative

A big positive for the utility operators is that there is hardly any viable substitute for the services these provide. We can have different fuel types like coal, oil, natural gas, nuclear power and renewable sources to produce electricity, but do not have any alternative to electricity. Similarly, clean water does not have any substitute. This is perhaps the most vital driving factor for the industry.

To Sum Up

Despite ever stringent regulatory constraints, utilities offer investors a safe investment option. The inherent capital intensity of the business creates barriers to entry for new players.

In fact, it wouldn't be wrong to call utilities government-sanctioned monopolies where the public sector guarantees them a minimum return on investment over a long period of time. The non-cyclical and low-risk nature of these stocks make them perfect diversification instruments in any well-diversified portfolio.

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