Tuesday, January 6, 2009


Progress Energy, a position bought late this afternoon, was one previously sold last year at around 45 for a profit. 

After the market close, I saw that the price fell about 4% to 38.46 after PGN announced a 11.5 million share offering.  Yahoo! Finance
This should hardly be a surprise given its recent shelf filing with the SEC, and the already well-accepted fact that such issuances would be done as part of the funding for new construction.  Nonetheless, a price fall can be expected at least for a time due to such an expected event. The Morningstar report mentioned the need for stock and debt offerings on the first page of its report. 

PGN also announced recently that it expected 2008 earnings at the low end of guidance. 

I was already familiar with this company, and my first involvement as a shareholder probably goes back about a decade as a shareholder of Carolina Power & Light whose service area includes parts of North and South Carolina.   I was also a frequent visitor to Raleigh, where CP & L had its headquarters,  during the late 1970s on business and started to follow that company some back then.  In 2000, CP & L merged with Florida Progress to become one of the largest electric utilities in the country, serving in states that have a positive regulatory climate for regulated utilities.  The rate of return allowed on its investment in the Carolinas is one of the highest allowed anywhere in the country.  As you would expect, demand for electricity has slowed due to the economic downturn and doubtful accounts has increased as some families struggle to pay their bills.  But the Carolinas and Florida will resume their favorable demographic growth patterns, so much so that Florida has approved as necessary to meet demand a 17 billion dollar nuclear plant to be built by PGN in Levy County Florida, still subject to regulatory reviews.   I remember that several nuclear plants had already been constructed in the 1970s, including the Brunswick and Harris stations built and owned by CP & L, but new construction was halted after the ones started in the 1970s were finished, as many will remember the incidents at Three Mile Island and ChernobylShearon Harris good till 2046 - Business - News & ObserverThree Mile Island Nuclear Generating Station - Wikipedia, the free encyclopedia.Chernobyl disaster - Wikipedia, the free encyclopedia  Brunswick Nuclear Generating Station - Wikipedia, the free encyclopediaBack when they were being built in the U.S., you could depend that the construction would go way over budget and actual start up would be years behind schedule.  The old Florida Progress had the Crystal River station. Nuclear Plants - Progress Energy

When making an investment in an electric utility, it is best to keep expectations of potential gains low.  An investor has to go into those investments expecting that most of the gain will be the dividend which is currently yielding around 6.2% at my cost.  Hopefully, with a little luck, I may at some point see a gradual price move back to 46 and then I would consider selling the position again.  If this happened within a year, after receiving 4 dividend payments, I would have close to a 20% annualized yield, and that is just about as good as it gets with an electric utility.  The five year chart reveals a small and tight pattern of between 40 to 45 from April 2004 to  the end of September 2006, followed by a high volume break out and a good move for a utility from about 45 to 52 in May 2007.  PGN spent most of 2008 in its 40 to 45 range.  Since it is a stock, it had a bad October 2008 and fell to a new range of 35 to 40.  It is now near the top of that range. While I am certainly not a technician, I would suspect that the 1st quarter of 2009 will tell whether the stock can find its comfort zone again in the 40 to 45 range.  It does have some room to move in the current low interest rate environment with its dividend yield of 6.2% still taxed at 15%. Possibly, with some investors tiring of 3 month treasuries yielding practically nothing, they may start to come back to the utilities.    So I am cautiously optimistic of receiving a 45 price sometime in 2009.   It will be a little like watching grass grow and many would tire of that activity quickly.  I am a more patient sort, though many say I have no patience at all. 

I read the recent reports from S & P, Morningstar and Value Line before re-entering my position on PGN.  The S & P report is available at most brokerages and PGN receives 4 stars from that company with a 12 month price target of 45.  I would expect sellers  to start to emerge with a little gusto before reaching that price judging by the historical chart.  So I might be pushing my luck to hold out for 45 but would be pleased to see it in a year.  

Besides receiving some comfort with the dividend, I know that there is a there there with a utility. I can see the nice generating stations online now, the large high voltage transmission lines, the substations and extensive distribution lines and facilities.  I always wondered whether there was any there there for a Lehman Brothers.  As it turned out, there was nothing there when the music stopped.   Is there any there there? Negative Article in WSJ on Mall REITs

There are many downsides to owning an electric utility.  One would be unfavorable rate decisions by the state regulatory commissions that sometimes seem to happen particularly in economic downturns.  They were down today pretty much across the board as money was rotating out of defensive names.  A return of inflation and higher interest rates would be a negative for them.  There is always a possibility of an accident at a power plant.  You can read more in its SEC filings such as its very long, information packed 10-q.  q32008_10q.htm

Book value may be close to 34 in 2009 with earnings estimated at around $3.10.PGN: Analyst Estimates for PROGRESS ENERGY INC - Yahoo! Finance The dividend pay out compared to earnings is not favorable, being high, currently at a $2.46 per share annual rate.  It goes ex dividend soon.    

I will certainly consider adding to the position tomorrow if the after hours decline holds in trading tomorrow, or becomes even larger which would just be that more appealing to me.  I did not take a full position this afternoon but only enough to replace the BDNPrc.   A full position would be 100 shares.  I now own DUK, POM, ED, PGN, GXP AND PNW in the electric utility sector with CON ED being the largest dollar position and dividends are reinvested only in Duke and Con Ed.   The first position in Duke was taken with about a 400 share buy in the early 1980s.     

I thought that I would go back to a picture of me when I had some nice hair.  It is unfortunate that modern science did not come up with Rogaine and Propecia in the 1970s. 

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