Dividend Inc. submits:
As we have indicated in our February 26th posting,
As a sector, the water utilities are the most undervalued in our Dividend Achiever Watch List.
Archive for the ‘Utilities’ Category
Water Utilities Look Reasonably Priced
On March - 8 - 2010
Will Surging Smart Grid Investment Result in Surging Electric Prices?
On March - 8 - 2010
John Petersen submits:
The electric power system in the U.S. is dirty, antiquated, stupid, unstable, and a security nightmare. After years of discussion and debate, consensus now holds that the generation, transmission and distribution infrastructure will need hundreds of billions in new investment to reduce emissions, improve reliability, minimize waste and inefficiency, improve security, and facilitate the integration of wind, solar and other emerging alternative energy technologies.
Commonly cited capital spending estimates range from $200 billion globally by 2015 to $2 trillion overall. In his November 2008 report, "The Sixth Industrial Revolution: The Coming of Cleantech," Merrill Lynch strategist Steven Millunovich observed that cleantech markets will dwarf IT to the tune of two orders of magnitude. While there’s plenty of room to debate how the future will unfold, there’s little question that we’re watching the emergence of an investment mega-trend that will endure for decades.
PG&E May Give Consumers Data on Daily Power Consumption
On March - 8 - 2010
Greentech Media submits:
By Michael Kanellos
It’s the morning after, and Pacific Gas & Electric (PCG) might be in a position to tell you what happened soon.
Valmont’s Rise Is Overdone
On March - 8 - 2010
William Kabourek submits:
February 17, 2010, seems light years away. On that day Valmont Industries (VMI) reported earnings and offered 2010 guidance. The good news was that net income grew 5% on expense control success. The bad news was that revenue declined 19% due to weakness in the utility and construction segments. Management estimated a 25% decline in net income for 2010, and VMI stock subsequently fell several dollars to around $69.
Today, Valmont announced the acquisition of Delta PLC (DTAXF.PK), a similiar company in the galvanization business and manufacturer of utility poles and highway products. Delta is strong in Asia and Australia. The price is $430 million, including $350 million of Delta debt. The debt component elicited a warning from S&P that the company could be downgraded should deal terms or market conditions change negatively. VMI sees the transaction as accretive to earnings in 2011. The stock was up $8.12, or 11%, to $81.63.
VMI is up $13 in 14 days. The company’s recent guidance for 2010 has dropped concensus earnings to $4.26, resulting in a forward P/E of 19. A 19 multiple is fairly stout for a company with declining sales, a 25 % decrease in net income, and the likelihood of higher interest rates, thus lower P/Es.
Valmont is a solid company. It has generally earned a good ROE and hasn’t over leveraged itself. It builds quality products and is a leader in each of its businesses. International business provides access to the faster growth of emerging markets. VMI is a company that is hard to bet against, but I think I will.
At 19 times 2010 earnings, there isn’t a lot of logical share price growth ahead. Poor earnings comparisons and potential merger integration issues, as well as the specter of a S&P downgrade, could cause pressure on the shares.
I haven’t pulled the trigger yet, but I’m seriously thinking about selling shares short.
Disclosure: No positions
Algonquin Power: Adequate Yield and Growth Potential
On March - 8 - 2010
George Fisher submits:
Algonquin Power and Utilities (AQUNF.PK) is a small-cap Canadian electric generation company focused on renewable, clean power and water utilities. The company manages a billion dollars in utility assets in the US and Canada. AQN in the process of transforming itself from a Canadian income unit trust to a growth oriented cross-border utility. As with some Canadian unit trusts, the transformation is creating an opportunity for investors to capture acceptable yields along with capital gains potential.
Last decade, Canadian tax laws created favorable tax treatment for companies altering their corporate structure to a pass-thru entity that bypasses corporate taxes, similar to master limited partnerships in the US. The advantages were so pronounced that a large number of companies were making the change and tax revenues were being negatively impacted. To offset the decline in tax revenues, the gov’t changed the pass-thru requirements and will begin taxing unit trusts as standalone corporations. Many unit trusts are converting back to corporations as the tax advantages evaporate. AQN is one such company.
To recoup some of the tax advantages lost in the conversion, Algonquin has purchased/merged with a struggling fuel cell manufacturer that offers a loss carry-forward benefit. It is estimated that AQN will have reduced tax liabilities until 2014. By that time, the concept of carbon tax credits and investment incentives could be enacted, encouraging renewable electric generation.
The corporate conversion has created some shareholder pain beyond just tax issues. As a unit trust, AQN was structured to generate a high tax-advantaged yield for investors. With this option going away, AQN has changed its business strategy from an income focus to a growth focus. The first task in the 3rd quarter of 2008 was to slash its annual dividend from C$0.91 to C$0.24, paid quarterly as of Jan 2010. As might be expected, this change was accompanied by a collapse of the share price from C$9 to a 2009 low of C$2. Share prices have since recovered to C$4.
Algonquin owns 67 electric generation facilities in Canada and the US, comprising of 44 hydro-electric, 12 thermo-electric, and 1 wind farm. In addition, AQN operates 18 water utilities in Illinois, Arizona, and Texas. About 50% of revenues are derived from renewable facilities, 25% from water utilities, 18% from thermo-generation (mainly natural gas) and 7% from bio fuel plants.
AQN manages about 460 MW of installed capacity, about two thirds of which are from renewable sources, mainly generated at smaller plants. AQN continues to add to its portfolio of alternative energy assets. For example, it recently purchased 3 hydro-electric and 5 diesel/oil thermo-electric (standby reserve use only) plants in Maine and New Brunswick, expanding overall generating capacity by 8%.
Canada has been a proponent of hydro-electric long before it became fashionable. It is estimated that 55 to 60% of current Canadian electric generation is from hydro, making a substantial inventory for AQN to choose from for further acquisitions. AQN will continue to grow its portfolio of renewable electric generation assets over time, expanding both its earnings base and its dividend potential.
Revenues in 2009 were C$187 million. Stock market capitalization is C$382 million, and long-term debt is C$241 million. There are 91 million shares outstanding, and an additional 35 million shares will be issued from convertible debentures in 2014 to 2017. Net earnings per share for 2009 were C$0.38, with cash flow from operations of C$0.63, making the current C$0.24 dividend payout ratio of 63% comfortable for a utility. EPS is estimated at between C$0.30 and C$0.35 for 2010 and between$ 0.35 and C$ 0.40 in 2011.
2009 was a down year for Algonquin in revenues and EBITDA, with revenues falling 12% and EBITDA falling 11.7%. The reason for the decline is lower demand for power and lower electricity prices. Both should strengthen as economic growth improves.
There are several positive aspects of Algonquin that utility investors should focus on:
- Management has, so far, demonstrated their ability to develop and execute a new growth strategy. While the conversion from a unit trust was difficult for high-yield investors, the opportunities for EPS and eventual dividend growth in renewable power generation are quite good.
- Algonquin is developing a strong relationship with Canadian Maritimes electric utility Emera (EMRAF.PK). AQN and EMA are acquiring the assets and will jointly operate an electric generation and transmission system in Lake Tahoe, California. Closing is expected late 2010, and will add 47,000 customers. In connection with the Lake Tahoe acquisition, EMA has agreed to purchase 8% of AQN stock. AQN’s newly acquired hydro assets will utilize EMA energy marketing services when current contracts expire this year and next. EMA will also assist in marketing excess generation from AQN’s Windsor Locks facility. The strategic alliance being built between EMA and AQN should be beneficial to both companies over time.
- Energy consumption, and pricing, has declined along with general economic activity. As the economy picks up stream in the US and Canada, energy prices will improve. While AQN’s attractive steady cash flow is based on long-term supply contacts, there are several contracts that are up for renewal this year and next. A strengthening electricity market would assist cash flow going forward.
- Anticipated operating cash flow after dividend payment could allow for investment in new capacity of upwards of C$35 million annually. This could fund one 25MW wind farm a year, or about 4 to 5% capacity growth, without adding much additional dilution or leverage.
- The strength of AQN’s electric generation is the renewable and sustainable energy aspects of 45 of its facilities. AQN is well positioned to benefit from carbon credits / offsets if a cap and trade type system is developed, and could be eligible for renewable energy investment tax credits if they become available, increasing after-tax returns for future investment and income. It is possible AQN’s portfolio of assets could become more valuable due to tax incentives / carbon offsets for renewable electric generation.
- Since the dividend cut in late 2008, more than 100% of the outstanding shares have traded hands, with the safe assumption that unit trust investors seeking high yields have exited. The profile of the current investor is in tune with management’s new focus of growth. The current yield of 5.6% should be sufficient to reward income-seeking utility investors as assets and earnings grow over time. While not forecast to increase, the trend should allow for dividend enhancements in the future.
- The conversion from unit trust to a corporation is not exclusive to Algonquin. The stock price trading history of some previous unit trust conversions implies that once management proves their ability to execute a new business plan, share prices tend to recoup. It takes time and patience though. TransCanada (TRP) is one such example, albeit a different industry.
- There are several pending water utility rate cases for 2010. It is anticipated that usually favorable decisions should generate upwards of 8 to 9% revenue growth split between 2010 and 2011, and could add about C$0.15 to cash flow over the next 18 months.
Investors looking for small-cap electric utilities should consider Algonquin. There should be a reasonable opportunity for share prices to recoup to the C$6.00 range, 15 x 2011 C$0.40 EPS estimates, for a 40% potential capital gain. The current yield, while not overly substantial, should be sufficient to reward shareholders looking for the combination of income and growth. While C$6 would be richly valued at 15 times earnings and a 4.0% implied yield, AQN is uniquely positioned in the renewable power generation business. If any surprises are announced, they should be to the upside.
Disclosure: Author long AQUNF.PK
Utilities: An Opportunity Too Great to Ignore
On March - 8 - 2010
Alan Brochstein, CFA submits:
Utilities are a corner of the market that I normally avoid, but I believe that the opportunities are too great to ignore. I am no expert in the area, but I have been spending some time learning about some of the big-picture drivers as well as the details about a few of the names. I shared my interest initially in December as I focused on higher-yielding Utilities and have reposted it to my blog. I subsequently made two purchases in February, which I disclose below, but this is really a sector call.
Utilities are generally regulated, though many participate in unregulated activities and some are totally unregulated. The sector is typically low-beta and higher dividend yield than stocks in general. Capital structures tend to be significantly more leveraged than other industries. While one of my goals when I invest is to find good management (or at least be fully aware when management is inferior), it’s hard to find stand-outs in the sector. Even when one does identify strong management, other factors dominate the earnings outcomes, like regulatory or even weather. So, for someone who typically likes to invest in companies with strong balance sheets and superior management, I can’t be blamed for not spending a lot of time on Utilities.
Entergy at a Crossroads
On March - 8 - 2010
Zacks.com submits:
The final decision of Entergy Corporation’s (ETR) proposed spin-off of its non-utility Nuclear power business has been deferred until Mar 25, 2010. The New York Public Service Commission (NYPSC) played spoilsport, who is apprehensive of the financial health of the resultant company (Enexus Energy Corporation).
Earlier, NYPSC expressed its apprehension that the long-term unsecured bonds worth $3.5 billion that Entergy plans to issue for the spin-off will drag down the bond rating of the new company, affecting its financial capacity.
AEP, FPL: U.S. Utilities Agree on Nukes, CCS and CO2
On March - 8 - 2010
Greentech Media submits:
The CEOs and Chairmen of two of the largest utilities in the United States were brought together on stage Friday morning in Southern California at the Wall Street Journal ECO:nomics event. Although there are large differences in where and how they source their respective fuels and feedstocks, when it comes to the subject of nuclear power, clean coal, carbon capture, carbon and government sloth — they tended to be in violent agreement.
American Electric Power (AEP) gets about 80% of their electricity from coal while FPL gets only 4% of their energy from coal. FPL Group (FPL) is the biggest U.S. producer of wind power, operates in 27 states and generates about $16 billion in annual revenue.
Water Utilities on the Move
On March - 8 - 2010
Dividend Inc. submits:
Water utilities were on the move yesterday as Los Angeles-based Dividend Achiever Southwest Water Company (SWWC) announced that it was being bought by Water Asset Management, LLC in a deal valued at $427 million. The stock of Southwest Water Company (SWWC) jumped 46% during market hours on the news. Almost all other water utility companies moved higher, as seen in the table below.
(Click to enlarge)
It should be noted that of the ten companies listed above, San Jose Water (SJW), American States Water (AWR), California Water Service (CWT), AquaAmerica (WTR), American Water Works (AWK) and Consolidated Water (CWCO) are Dividend Achievers. In the last month, San Jose Water (SJW), California Water (CWT), AquaAmerica (WTR) and American States Water (AWR) have been on our Dividend Achiever Watch List at the same time. The New Low Observer had issued Investment Observations on AquaAmerica (WTR) on October 31, 2009, and the other on California Water Service (CWT) on January 3rd.
As a general observation of our Dividend Achiever Watch List and our Nasdaq 100 Watch List, when companies from an industry start to cluster on the list we know that whatever cyclical forces are at play require us to look closely at that industry and those companies. Although we have sold our initial investment in AquaAmerica (WTR), we subsequently acquired a "substantial" position in California Water Service (CWT).
Anyone interested in the qualitative elements of water utilities should be mindful of our boiler plate warning on investments in the industry:
Although water is critical to life, investors need to understand that companies in this industry aren’t a "sure thing." The biggest reason for this is that when, and if, water becomes scarce, municipalities will step in to take over (nationalize) what should otherwise be sold at the most profitable price (thereby curbing wasteful consumption.) There is literally an upside cap on profitability to companies like these due to the critical importance of the resource being sold.
Disclosure: Author long CWT
FERC Commissioner Moeller: Natural Gas, Smart Grid Going ‘Big Time’, Cap and Trade Likely to Stall
On March - 8 - 2010
Greentech Media submits:
By Michael Kanellos
Berkeley, Calif.-We’ve got to come to grips with our bipolar attitude toward energy infrastructure, according to Philip Moeller.