Tag Archives: alternative

Recent Buy – Brookfield Infrastructure Partners L.P.

Summary I initiated a position in Brookfield Infrastructure Partners LP, a utilities and infrastructure company. The diverse sectors of operations and geography, coupled with regulated and contractual cash flow, makes it a very stable and attractive investment. A starting yield of 5.2% and a 5-year dividend growth rate of 12.6% make it very attractive for income-focused investors. The market jitters continue as the world turns its eyes to the US Fed – will they or wont they raise the interest rates? There are a plethora of dangerous financial situations facing the world which could possibly send the stock and bond markets into a turmoil. I continue to purchase looking for good opportunities trying to tune out the noise as a majority of these occurrences are out of control. Whenever I make a purchase, I like to share my buys to document and illustrate how I am building my income stream over the course of months/years. My main goal is simply to keep investing at regular intervals and build my passive income over the course of time. In staying true to tradition, here’s another purchase in my portfolio, this time adding a new company to my portfolio. I initiated a position in Brookfield Infrastructure Partners LP (NYSE: BIP ) (note: it also trades as BIP.UN.TO on TSX, and since I am a Canadian resident, I bought the TSX-listed shares) with 35 shares @ C$53.20. The stock yields 5.18%, adding US$74.20 (~C$96.50) to my forward annual passive income. Brookfield Infrastructure Partners, even though headquartered and based in Canada & trades on the TSX exchange, maintains its financials (and declares dividends) in USD. Company Overview Brookfield Infrastructure Partners L.P. owns and operates utility, transport, and energy businesses. The company’s Utilities segment operates a port facility that exports metallurgical and thermal coal mined in the central Bowen Basin region of Queensland, Australia; approximately 10,800 kilometers of transmission lines in North and South America; and approximately 2.4 million electricity and natural gas connections in the United Kingdom and Colombia. Its Transport segment provides transportation, storage, and handling services for freight, bulk commodities, and passengers through a network of 5,100 kilometers of track in Southwestern Western Australia; approximately 4,800 kilometers of rail in South America; approximately 3,200 kilometers of motorways in Brazil and Chile; and 30 port terminals in North America, the United Kingdom, and Europe. The company’s Energy segment offers energy transportation, distribution, and storage services through 14,800 kilometers of transmission pipelines; and 370 billion cubic feet of natural gas storage in the United States and Canada, as well as serves approximately 40,000 gas distribution customers in the United Kingdom. Brookfield Infrastructure Partners Limited serves as a general partner of Brookfield Infrastructure Partners L.P. The company was founded in 2007 and is based in Toronto, Canada. Corporate Structure The Brookfield companies have a complicated corporate structure, with each entity intricately weaved with other entities to form a set of public and private companies. The companies include Brookfield Asset Management, Brookfield Property Partners, Brookfield Renewable Energy Partners, and Brookfield Infrastructure Partners. The simple view of where Brookfield Infrastructure Partners fits in under the Brookfield Asset Management umbrella is summarized below. (click to enlarge) Recent Buy Decision I sold my Utilities ETF in June 2015 and have been looking into buying individual companies that can give me dividend growth and better equity ownership. In July 2015, I initiated a small position in Algonquin Power & Utilities Corp (AQN.TO) , and earlier this month I initiated a position in Canadian Utilities (CU.TO) . This adds a third company in the utilities sector. While the classification is under the Utilities sector, Brookfield Infrastructure is, as the name suggests, truly a complete infrastructure company. BIP holds interests in Utilities (39% of revenue), Transport (43% of revenue), Energy (10% of revenue) and Communication Infrastructure (8% of revenue). BIP has a great geographical diversification with operations in North America (8% of revenue), South America (27% of revenue), Europe (34% of revenue), and Australia (31% of revenue). The utilities segment operates: Coal terminals (handles 20% of global seaborne metallurgical coal exports from Australia) 10,800 Kms of electricity transmission lines in North & South America; Regulated distribution of electricity & natural gas connections. The transport segment operates: Railroads: ~5,100 km of track, sole freight rail network in Southwestern Western Australia ~4,800 km rail network in South America Toll Roads ~3,300 km of motorways in Brazil and Chile Combination of urban and interurban roads that benefit from traffic growth and inflation Ports 30 terminals in North America, UK and across Europe One of the UK’s largest port services providers The energy segment operates: Energy Transmission, Distribution and Storage 14,800 km of natural gas transmission pipelines, located primarily in the U.S. Over 40,000 gas distribution customers in the UK 370 billion cubic feet of natural gas storage in the U.S. and Canada District Energy Delivers heating and cooling to customers from centralized systems including heating plants capable of delivering ~2.8 million pounds per hour of steam heating capacity and 251,000 tons of cooling capacity and distributed water and sewage services The communication infrastructure operates: Telecommunications Infrastructure ~7,000 multi-purpose towers and active rooftop sites 5,000 km of fibre backbone located in France Generate stable, inflation-linked cash flows underpinned by long-term contracts with large, prominent customers The diverse sectors of operations and geography, coupled with regulated and contractual cash flow makes it a very stable and attractive investment. A wide economic moat Funds from operations (FFO) have risen at 23% CAGR and distribution has risen 12% CAGR since 2009. BIP is a Dividend Challenger having raised dividends for 7 consecutive years. The current yield is 5.18% and has 1-, 3-, and 5-year dividend growth rates of 11.6%, 13.3%, and 12.6%. BIP has a BBB+ (stable) S&P credit rating and the debt/equity 1.86, and the company holds enough cash to service the debt. Debt repayment schedule has a well laddered maturity profile. BIP just announced earlier this week that it will acquire Australian port operator Asciano for US$6.6B – which will expand the company’s footprint in Australia and help better compete in the space giving BIP better recognition and visibility. The management has made it clear that this is only the beginning this transaction is a ‘stepping stone’ for more expansions in the future. While some share dilution is occurring as part of the deal, AFFO from the deal is expected to increase 7% immediately. Brookfield Infrastructure Partners LP Diversification (click to enlarge) (click to enlarge) Risks As with any investment, there are risks involved. Being in the utilities sector, the risks in the regulated industry is slightly lower. But the non-regulated industry, where most of the growth comes from – can see possible new regulations that could put future growth prospects in doubt. Rise in interest rates can cause the stock prices to tumble in the utilities sector. With international operations, currency fluctuations can cause an unknown movement in revenue, especially since the financials are reported in US$, the international earnings can seem depressed. Further Reading Disclosure: I am long AQN.TO, BIP.UN.TO, and CU.TO. My full list of holdings is available here . Disclosure: I am/we are long BIP, AQUNF, CDUAF. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Long-Term Potential Not Enough To Change Hold Rating On Southern Company, For Now

Summary Company’s strategy of making hefty growth investments in renewable energy generation projects means it is well placed in capital intensive U.S. utility industry. Analysts anticipating a healthy sales growth rate of 2.10%for SO, above the industry median. Strong growth prospects of the company will grow its cash flow base. I reiterate my hold rating on Southern Company (NYSE: SO ) due to the prevailing construction-related challenges at two important power projects of SO. As a matter of fact, the Kemper and Vogtle project delays have restricted its near-term growth potentials, but in the long run, these projects along with SO’s ongoing renewable energy generation related projects will support its top and bottom-line growths. Given the healthy long-term growth potentials of SO, I believe its cash flows will remain reasonably strong in the years ahead, which will help it improve stock price performance by making increasingly healthy dividend payments to shareholders; SO offers a dividend yield of 4.7%. Near Term Concerns But Healthy Long-Term Waits for SO Over the past few years, the U.S. utility industry has gone through a transformational phase due to aggressive spending by utility companies in several infrastructural growth related projects. I believe the industry transformation is not over yet, because companies like SO, American Electric Power (NYSE: AEP ), Exelon (NYSE: EXC ) and Dominion (NYSE: D ) are still making hefty investments to develop and enhance power generation units. The following map shows the capacity and location of new power projects planned for 2015. (click to enlarge) Source: Minnpost.com SO has also been making capital expenditures to strengthen its power generation assets. In fact, SO has made all-time high growth investments in two major energy generation projects named Kemper and Vogtle, but both projects have been facing construction delays, which have increased construction costs for the company. As far as the 582MW Kemper project is concerned, the project was started with the intent to boost the company’s future growth potentials, but the constant delays and cost overruns at the Kemper construction site are weighing on SO’s profits. The company took the additional charge of $14 million (after-tax) during 2Q’15 due to an increase in the construction cost of the Kemper gasification-combined cycle project. In its efforts to cover these cost overruns, SO had previously signed a case for an interim rate hike of 18% for Kemper’s gasification plants in the state; the rate increase request is recently approved by regulators, which will allow the company to partially offset the increase in construction cost. Although SO’s management expects Kemper to be operational in the first half of 2016, if the project continues to be affected by project delays and cost overruns, I believe the recent rate hike will fail to cover the cost overruns in the longer run, thereby disrupting the company’s profitable margins. Moreover, SO’s plan to build two Vogtle nuclear power plants in Georgia is facing similar delays. Although the management has predicted a three-year delay in the Vogtle project, as per the government’s review, the project will be delayed longer than three-years, costing the company around $8.2 billion . Although issues related to Kemper and Vogtle are both key concerns for the company’s profits, with the commencement of their operations, both projects will act as vital sources of generating strong revenues, earnings and cash flows in the years ahead. Moreover, SO is working hard to grow its renewable energy generation portfolio to hedge against fossil fuel risk and to supply low-cost power to customers. In fact, there are many ongoing and upcoming solar energy generation projects by the company, which contain a strong upside for its future earnings and cash flows. As part of its plan to establish a strong renewable energy generation asset base, SO had acquired the Blackwell Solar facility. Although the acquired facility is currently under construction phase, with the completion of construction, the acquired facility will help the company serve around 11,000 homes. In addition, SO’s plan to construct a new 46MW solar energy generation facility at Marine Corps Logistic Base-Albany has been approved by regulators, which is expected to commence operations by the end of 2016. With this approval, the company’s subsidiary Georgia Power has attained 166MW of solar generation capacity on Georgian military bases. Given the fact that all of the abovementioned power generation projects of SO will improve its production capacity and optimize its power generation portfolio, I expect to witness strong revenues, stable cash flows and healthy earnings growth in the longer run. Analysts are also expecting that SO’s earnings will grow at a decent pace in the years ahead, as shown in the chart below. (click to enlarge) Source: Nasdaq.com Furthermore, SO’s management is also working to convert existing coal-based power generation plants to gas plants. The company has announced in a press release that its 120MW Gadsden plant in Alabama will be switched from a combination of natural gas and coal to entirely natural gas. Given the fact that SO has incurred around $3 billion over the last decade to meet regulatory standards regarding limitation of carbon dioxide emission from coal base plants, I believe the conversion of Gadsden plant on natural gas is a good step by the company, as this allows it to comply with regulations and will portend well for its profit margins in the long term. Investors Remain Rewarded at SO The company has been making healthy cash returns to its shareholders through dividends. Year-to-date in 2015, SO has returned around $34 million in the form of dividends to its shareholders. These healthy dividend payments have earned it an attractive dividend yield of 4.70% . Given the strong growth potentials of the company’s growth investments, I believe SO will have strong cash flows to carry on its policy of making hefty dividend payments in the years ahead. Analysts have also projected growth in the company’s book value per share and cash flow per share, as shown in the chart below. (click to enlarge) Source: 4-traders.com Risks Continuous increases in construction costs at Kemper and Vogtle plants will remain an overhang for the company’s profits in future. In addition, any laxness exhibited by the management during the operational stage of ongoing renewable energy generation projects will result in SO’s failure to report financial numbers as per the management’s plans. Furthermore, harsh weather conditions, unforeseen negative economic changes, strict government regulations and taxes to limit carbon dioxide emissions from nuclear units are key risks that might hamper the company’s future stock price performance. Conclusion Despite the current cost overruns and project delays at SO, the company’s strategy of making hefty growth investments in renewable energy generation projects makes me believe that it is well placed in the capital intensive U.S. utility industry. Analysts also view the company’s long-term growth prospects positively, as indicated by their anticipated healthy sales growth rate of 2.10% , which is well above the industry median of 1.80%. Moreover, the strong growth prospects of the company will grow its cash flow base, meaning more upside for its future dividends. Also, analysts have projected a decent next five-years growth rate of 3.55% for SO. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Exelon’s Time Is Coming

Summary Exelon is becoming attractive for traditional utility investors. Exelon is embracing regulation and withdrawing from nuclear power. Three new events are expected. Any single event could change the company. Two events take place within weeks. Management does not control the last event. Equity investments should be coordinated with announcements. Exelon (NYSE: EXC ) could become one of the nation’s most valuable utilities. It’s not there yet. Before jumping in, wait for some important announcements. After the market digests the news, consider adding Exelon to your portfolio. Exelon’s management is in the process of making significant changes to their company’s profile. If successful, Exelon’s revenues will become less volatile, their earnings more manageable and their debt more attractive. Exelon will be able to attract lower cost of capital to help them expand and grow. Today, Exelon is one of the nation’s largest utilities. With an enterprise value near $50 billion, only four investor-owned utilities are larger. Known by the investment community as a nuclear power producer that also owns a few local distribution utilities, their objective is to be known as a regulated utility that also owns some merchant power assets. To transform the company, Exelon wants to own more regulated assets and less nuclear. To accelerate those changes, Exelon will orchestrate three major events. Any single event could trigger a change in the company’s profile and valuation. In the end, management expects smoother revenues, cash flows and earnings. Event 1: Pepco Holdings Exelon currently owns three regulated utilities. The first is Commonwealth Edison Company (ComEd), which serves metropolitan Chicago. The second is PECO Energy Company (OTC: PECO ), which serves metropolitan Philadelphia. The third is Baltimore Gas & Electric (BGE), which serves metropolitan Chicago. Exelon is attempting to acquire their fourth. It is Pepco Holdings (NYSE: POM ), which in turn owns three regulated utilities. Pepco’s three utilities surround Exelon’s BGE and touches PECO. Pepco’s territory includes the District of Columbia, Maryland, Delaware and New Jersey. Before any merger can be completed, Exelon requires approval from those same states, the District of Columbia and other regulators. Exelon’s approvals are almost complete. They have won approval from all federal and state regulators except one. It is waiting for the District of Columbia. Within the District, several constituent groups support the merger while several vocal groups strongly oppose. The DC Commission must make a decision that could upset some groups. For Pepco’s shareholders, DC’s announcement will provide either relief or disappointment. While it is widely expected that DC will approve the merger, there is a small probability they will not. Should DC reject the deal, Exelon’s shareholders would face a bumpy road and Pepco Holding’s stock would likely tumble. DC’s decision is expected within days or weeks. A politically practical time for an announcement would be around September 4 (Labor Day weekend). Any merger would be completed a few days later. DC’s decision could alter Exelon’s other plans. Specifically, Exelon intends to alter their portfolio of nuclear power assets. Exelon plans a major announcement about those assets soon after the DC Commission releases their decision about Pepco (assuming that decision is forthcoming). Event 2: Exelon’s Nuclear Power Plants While Exelon was never a pure play on nuclear, its revenues and earnings were dominated by their massive financial position in the nation’s largest fleet of commercial nuclear power plants. According to reports published by Washington-based Nuclear Energy Institute, Exelon owns 20,791 megawatts, or slightly more than 21 percent of the nation’s nuclear capacity. It is the operator for 17,509 megawatts of nuclear capacity, including 1,126 megawatts owned by Public Service Enterprise Group (NYSE: PEG ) and 455 megawatts owned by MidAmerican Energy, a unit of Berkshire Hathaway (NYSE: BRK.A ). Exelon is considering the early retirement of up to seven nuclear power stations in three states. The combined capacity of the seven is approximately 6,380 megawatts (electric). If all seven were retired, Exelon would shrink their $52 billion worth of property, plant and equipment assets by about $10 billion to 15 billion and their operating assets by almost 45 percent. Two nuclear units are already gone. Exelon previously announced plans to retire their Oyster Creek facility in 2019, ten years early. Located in New Jersey, Oyster Creek is one of the nation’s oldest nuclear plants. At 615 megawatts, it is also one of the smallest. Another old and small unit operates in Upstate New York. Exelon’s R. E. Ginna Nuclear Power Plant is losing money. Because Ginna is an essential resource for grid reliability, Exelon sought and won temporary approval for a boost in revenues. In “CASE 14-E-0270 – Petition Requesting Initiation of a Proceeding to Examine a Proposal for Continued Operation of the R.E. Ginna Nuclear Power Plant, LLC” (August 13, 2015), New York’s Public Service Commission issued an order that approves temporary rates to fairly compensate the local utility, Rochester Gas and Electric, who in turn would pay Exelon. That order keeps Exelon’s 581-megawatt facility running until September 2018, with a possible extension to March 2020. By then, the Commission expects Rochester Gas and Electric will complete transmission and distribution system upgrades, access other sources of reliable power and disconnect from Ginna. On or about 2019, Ginna will likely join Oyster Creek and retire. The other five nuclear plants are seeking a similar deal. All five are located within the State of Illinois and the Midcontinent Independent System Operator’s territory (with limited access to PJM Interconnection). All five struggle for adequate revenues. Unless there is relief from the power markets or policymakers, Exelon needs to cut their costs. The best way to cut costs is to retire uneconomic assets and move on. For months, Exelon has been working with federal and state officials. They have been seeking a level playing field with other power producers. They want to be paid for their plants’ derivative products. Currently, the state takes those products without compensation. The issue is clean energy. According to DOE-funded NC Clean Energy Technology Center, the State of Illinois has 71 policies and incentives, which help the state’s power producers deliver clean energy. Not one of those programs include the state’s 11 nuclear power plants, which are carbon free, produce no air pollution and produce no water pollution. Unlike wind and solar – which offer important benefits to the state – nuclear power also offers the grid incredible levels of reliability. Nuclear power plants operate 24 hours a day, 7 days a week, rain or shine, day or night, cold or hot. Not only do nuclear plants produce clean energy with incredibly levels of reliability, nuclear plants also provide another valuable attribute. When nuclear power plants operate – which is about 90 percent of the time – inefficient and more costly plants need not operate and they are pushed out of the market. Inefficient plants usually pollute more than efficient plants. Consequently, nuclear power plants displace air-polluting power plants watt for watt. Most policymakers understand nuclear power plants produce clean energy. Not as many understand the consequences of removing existing nuclear power plants. It turns out; the consequences are severe. If existing nuclear units are removed from the grid, air-polluting power plants must replace lost capacity. If Illinois wants clean air and clean water, they will need to keep as much existing nuclear power as possible. The fate of Exelon’s five nuclear facilities will be announced in September. While the number of plants to be axed is unknown, a guess would be three out of the five. However, the decision could be dependent on the Pepco decision. For Exelon shareholders, early retirement means the company will ultimately write down nuclear assets. Depending on the plants involved, the write down could be $5 billion to $15 billion. As such, management’s announcement could affect the company’s valuation – at least for the short term. Event 3: Government Wakes Up The decks will be cleared after a favorable Pepco decision and after Exelon’s nuclear announcements. The market should absorb all the news and adjust the company’s forward earnings. For equity investors, this could be the time to jump in. It turns out; there is a little surprise. After the nuclear retirements have been announced, there is a likelihood the company could reverse course. If they do reverse course, the stock could slowly recover and grow. While Exelon expects to announce their nuclear strategy in September, they will not retire any unit for at least 18 months. As Exelon’s President, Chief Executive Officer disclosed in the last quarter’s conference call : “We have requirements around notification to PJM of our intent to retire units. It’s an 18-month notification. We also have commitments around when we have to notify of our availability for the 2018-2019 auction in participation on that. And very importantly, we have to order and design cores [for] the 2019-2020 auction. We’ve been in consultation with the Board and we’ll continue to consult with the Board, and where management’s made their decision we’ll pass that to the Board for the final approval in that timeframe, and continue with the outreach to our stakeholders.” Another executive repeated the CEO’s strategy. William Stoermer, Exelon’s senior communications manager explained : “Exelon will delay a decision “as long as we can see that the legislation is continuing to move forward,” Mr. Stoermer said. He warned, however, that if the legislation doesn’t advance and Exelon doesn’t “get through the auction process,” company officials will “have to make very difficult decisions,” including the potential of closing the plant in 2017.” So, there you have it. The big announcement to close is not really a firm announcement to close. Exelon plans to keep all five units running for a year or more. They may not retire them for decades. As such, it appears September’s nuclear announcement is aimed mostly at policymakers. This suggests that investors have some upside potential. If government policymakers hold to their position and allow perfectly good nuclear assets to retire, their decision is already baked into the price of Exelon’s stock. If, however, policymakers yield, the company’s revenues and earning improve and Exelon’s stock should respond. Of course, there are always risks. The future is not certain and Exelon’s management has a history of surprising shareholders. However, this time management appears to be signaling their intentions. While their signals are not aimed at shareholders, they are public and they appear to be consistent with keeping assets. Nevertheless, the third event not controlled by Exelon’s management. It is in the domain of government policymakers, who are saddled with several large challenges. For them, allowing solid nuclear plants to retire early resolves nothing and only adds to their woes. Let’s look at a few of their challenges. If Exelon closes one or more nuclear plants, the state’s consumers will incur higher electricity costs and more air pollution. This is because Exelon’s five nuclear plants are deregulated and they earn most of their revenues from the power markets. Within the power markets, when a lower cost producer is removed from the bidding, higher cost participants fill the void at higher costs. Higher costs means higher prices for consumers. It also means more pollution, because higher-cost producers are usually less efficient and less efficient plants pollute more. In addition, a loss of large nuclear plants means the state loses a large tax base and reduced economic activity. At the local level, retiring large nuclear facilities means permanent loss of thousands of high-paying jobs. It means a permanent loss a huge tax base that pays for local schools, fire, safety and infrastructure. It also means a loss to local businesses and real estate. Losses at the local level could be severe. Those losses will put pressure on political leaders, who in turn will likley seek relief at the state level. The worst case is if the state does nothing. It will hurt localcommunities. It will also hurt the state. However, it is not a terrible outcome for Exelon’s shareholders. Should three or five nuclear plants retire and decommission, the company’s revenues will decline. Ongoing expenses will decline at a faster rate. However, the company’s long-term cash flows and earnings should improve. Exelon operates 11 nuclear power plants within the state. Should Illinois decide to include nuclear in their clean energy portfolio, it would not only improve financial results for Exelon’s five underperforming units, it could boost results for all 11 nuclear units. To prepare, investors should consider two strategies. First, wait before buying additional shares of Exelon. Wait until after DC and Exelon announce their first and second events. After the news has been digested by the markets, watch the charts and consider strategic buys of the stock. Second, consider Exelon’s other equity unit (NYSE: EXCU). Technically, they are convertible notes (Fitch BBB-). They currently pay a 6.5 percent dividend. On some screens, they appear as an equity (without much description). During the last six months, EXCU’s market values have been roughly correlated to EXC. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.