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By Josh Peters, CFA and Jeremy Glaser | 10-27-2015 03:00 PM

2 Utilities Mergers: Should Dividend Investors Be Concerned?

Southern and Duke are both acquiring smaller utilities at steep premiums. DividendInvestor editor Josh Peters assesses the impact.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm joined today by Josh Peters--he's the editor of Morningstar DividendInvestor newsletter and also our director of equity-income strategy. There have been some recent big mergers in the utility space. We're going to talk about what impact that's going to have for dividend investors.

Josh, thanks for joining me.

Josh Peters: Good to be here Jeremy.

Glaser: Let's look at these two deals: Southern Company (SO) buying AGL Resources (GAS) and also, just recently announced, Duke Energy (DUK) buying Piedmont Natural Gas (PNY). Are there any similarities between these deals. Why are these companies trying to get bigger?

Peters: I think there are a lot of similarities. One is the financial backdrop, which is that you have the opportunity for companies to raise money--long-term financing at very low interest rates. I think for Southern and Duke, both coming into this period with strong balance sheets, it's like money jingling in their pocket. If interest rates go up later, you don't have the opportunity to do deals like these. They'd just be too expensive. So, that's part of it.

Another is that there is a broader theme right now that zeros in more on the electric side of the utilities industry than the natural gas side, which is that growth has slowed. Energy efficiency seems to be catching up with the rise in demand. So, you are not seeing as many opportunities to expand in electrical generation. Now, there are still a lot of opportunities out there, but that load growth is not there. It's more environmental retrofits, transmission investment, renewable energy, or natural gas replacing coal. Those are all good things. Those are all enough to power pretty good growth for the industry in general, but you don't have people using more and more electricity the way they had in the past.

I think this is, then, compared with the natural gas side, where after so many years now of such low gas prices, you've actually got growth. There's more growth going on on the natural-gas-delivery side of the business than the electric-generation-and-delivery side. So, there is a strategic rationale for this, and if you look at the states involved, Southern Company--headquartered in Atlanta--buying what was once known as Atlanta Gas Light. Duke Energy is buying Piedmont; it was pointed out by the company that Piedmont's natural gas system was originally owned by Duke, and it was spun off decades ago. Now, it's coming back into the fold. So, there is a lot in common between the two deals.

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