We reiterate our Neutral recommendation on Progress Energy Inc. (:PGN) as its first quarter results lagged the Zacks Consensus Estimate as well as the year-ago quarter earnings. This was primarily due to impact of unfavorable weather leading to lower demand in the Carolinas, and high operational and maintenance expenses related to additional planned nuclear refuel outage at Progress Energy Carolinas.
As we know, utility businesses depend on weather, and Progress Energy is no exception. Periods of fickle weather not only diminish demand for energy, but can also impact the finances of the utility companies.
Progress Energy is well positioned with its strong regulated asset portfolio, increased generation capacity, market expansion initiatives, cost-cutting initiatives and tendency to secure energy for the future. The company has undertaken aggressive energy efficiency programs, with an investment of $110 million for the next three years. It focuses on infrastructure and technological development, which mainly includes implementation of renewable energy technologies and improvement in production levels.
On top of it, Progress Energy’s merger with Duke Energy Corporation (DUK) is expected to be a strategic move, as the combined entity is poised to become the nation’s largest utility provider with a regulated customer base of 7.1 million in six states. This merger will be accretive to the combined entity’s dividend and earnings. The company is making progress and is on track to close its proposed merger with Duke Energy by July 2012.
On the flip side, utility companies have no control over wholesale prices of natural gas, oil or coal. Volatility in commodity prices may adversely affect several aspects of Progress Energy’s operations as it purchases a major portion of its electricity requirements from the open market. Like coal and natural gas prices, the price of wholesale electricity can and does fluctuate. This will impact the company’s top and bottom lines in the future.
Progress Energy’s utility operations are subject to federal and state legislative requirements, and extensive environmental regulations, pertaining to air quality, water quality, greenhouse gas emissions, carbon dioxide emissions and waste management. Frequent changes in the regulatory environment could impact the company’s financial performance. Furthermore, the company expects the cost of compliance with existing and new environmental laws to be significant.
We expect the stock to remain range-bound until additional progress is seen from regulatory approvals for the proposed merger with Duke Energy. Volatile commodity prices and adverse weather conditions are also expected to affect the stock’s performance in the near term. All these factors make us retain our Neutral stance on the stock.
Progress Energy Inc. currently retains a Zacks #3 Rank (short-term Hold rating).
Based in Raleigh, North Carolina, Progress Energy Inc. is engaged in regulated electricity operations in southeastern U.S. The company also has certain non-regulated businesses.
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