Utilities have historically been some of the toughest dividend stocks around – but that's all changing. As these energy companies scramble for a safer niche to save their dividends, some companies are investing heavily in one of the best models in the business. Here's what you need to know.
Mission for transmission
There are two types of people in this world: those who pay to cross a bridge and those that build their own. Utilities are increasingly trying to be the latter, pulling a "Billy Goat Gruff" toll booth business model for transmission lines spreading across the United States.
There are three main reasons this is happening. First, energy generation ain't the stalwart subsidiary it used to be. The competitive energy market is increasingly volatile as demand slumps and prices head higher and lower with little warning.
Second, the grand scale introduction of natural gas is increasing our ability to transport energy throughout our nation. Pipelines are complementing power lines as gas gets around before local plants guzzle it up.
And finally, businesses just aren't built any more to invest in huge power projects – profits or not. With the future uncertain and short-term gains (unfortunately) taking precedent, the "toll booth" model of transmissions is much more salient to shareholders than a $25 billion nuclear plant that may or may not pay off .
Who's trying transmission?
Most utilities have some sort of transmission stake, but AEP (NYSE: AEP ) is the undisputed leader. Its system accounts for around 10% of the demand for 38 states and Eastern Canada, as well as 11% of Texas' major energy moving demands . The utility received approval for another $318 million addition to its 40,000 miles of lines in May , and economies of scale (as well as an exit from coal ) should keep this business segment growing.
AGL Resources (NYSE: GAS ) recently received two regulatory approvals to ramp up its natural gas transmission lines. Its New Jersey subsidiary got the go-ahead for a $115 million infrastructure investment yesterday, just two weeks after the utility's Georgia gas company was cleared for a $275 million project. CEO John Somerhalder noted that AGL's regulation-friendly locations play a key role in his company's ability to invest (and recoup costs) in transmission projects .
In the past month, two major announcements marked the entry of three of the newest Billy Goat Gruffs around. NextEra Energy (NYSE: NEE ) and Spectra Energy (NYSE: SE ) are spending a whopping $3 billion to bring Florida its third major pipeline. The project will boost supply to meet local demand, connect Floridians to Alabama and Georgia markets, and allow both companies to contract out capacity to anyone else interested in the action .
Not to be outdone, Ameren (NYSE: AEE ) announced last week that Illinois regulators have approved Ameren's own $1.1 billion electric transmission project. The 400-mile line will be the single-largest investment the utility has made in around 30 years, and should help to better connect (more reliably and efficiently) Illinois citizens to a diversity of power sources, including wind .
Transmission for the win?
As these companies show, transmission is increasingly important. But unlike energy investments, its model doesn't rely on big up-front investments or a "jump and pray" approach to picking the future's preferred energy source. Keep track of your dividend stock's Billy Goat Gruff transmission investments, and you'll be well on your way to sustainable earnings.
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