Tag Archives: horizon-investments

American Electric Power’s Evolution Into A Fully Regulated Utility Company Assured

Company is strategically making all correct decisions and augmenting its power assets portfolio. ROE will improve in future, driven by rate increases and costs savings. AEP’s attempt to increase regulated operations will provide cash flow stability and will support dividend growth. American Electric Power (NYSE: AEP ) remains a compelling investment prospect for investors. The company has been making correct strategic decisions to strengthen its business operations and improve its risk profile. The company has been working to improve its earned ROE, increasing its regulated business operations, and scaling down its un-regulated operations, which I think will augur well for its stock valuation. Recently, AEP filed a settlement agreement with the Public Utilities Commission Ohio (PUCO), regarding its proposed Power Purchase Agreement (NYSEARCA: PPA ) plan for its 3GW of merchant power generating assets; I think this is a positive development, as it would provide more stability to its revenues, earnings and cash flows. Moreover, the company might plan to sell its remaining 5GW of merchant assets, not included in the PPA plan, which will allow it to use sale proceeds to make more investments in regulated transmission business. In addition, the stock valuation stays attractive, as it is trading at discount to its peers. Growth Catalyst AEP has been aggressively working to strengthen its business by increasing its regulated business exposure. In this regard, the company filed an agreement with PUCO, and PUCO is expected to provide a ruling on the settlement agreement in early 1Q2016. The agreement calls for 8-year PPAs at a 10.4% ROE for its 3GW of merchant power generation. In addition, the agreement includes converting coal plants to gas, building 900MW of renewable energy portfolio and up to $100 million in customers’ credit over the 8-year period. The agreement will provide stability to the company’s merchant power assets, as in the past these assets performance was negatively affected by low and volatile power prices. The agreement filed by AEP is very similar to the recent settlement agreement for FirstEnergy (NYSE: FE ). Other than the recent agreement filling for its 3GW of merchant assets, I think the company will opt to sell its remaining 5GW of merchant assets, not covered under a settlement agreement, to become a full regulated utility company. The sale of the remaining 5GW of merchant assets will not only provide stability to the company’s revenues and earnings, but will also give AEP an opportunity to use the sale proceeds to the sale to reinvest in the business, and grow its regulated operations. If the company opts to sell its remaining 5GW of merchant assets, it could generate $1.8-$2.35 billion in sale proceeds, which it could re-invest into its regulated transmission business. Also, the company can use the sale proceeds to buyback shares, but I think, this is an attractive option, as redeploying sale proceeds to expand regulated operations as it will strengthen its business model. In the long run, the company could also consider to undertake acquisitions, which will provide offer incremental transmission business opportunities. In addition, if the company opts to sell its 5GW merchant assets and re-invest proceeds in transmission business, long-term earnings could grow in a range of 5%-7%, better than its management long-term earnings guidance of 4%-6%, which is based on its transmission planned capital investments of $5.7 billion over the next three years. AEP has a plan to make capital investments worth $13 billion over the next 3 years, out of which 96% will be directed at regulated operations, which will strengthen its regulated business, and increase its regulated rate base. The graphs below displays planned capital investments and regulated rate base growth for AEP. (click to enlarge) Investors Presentation Separately, the ROE of the company is likely to improve in the coming years because of rate increases. The company received $45 million and $99 million rate increases at its two subsidiaries, Kentucky Power and APC’s, respectively. In additions, the company’s earnings growth will be supported by its on track cost savings measures; it is expected to save $205 million in costs, as displayed below. Investors Presentation Summation AEP is strategically making all correct decisions and augmenting its power assets portfolio in a way that will strengthen its long-term performance. The company’s ROE will improve in the future, driven by rate increases and costs savings. Also, the company’s attempt to increase its regulated operations will provide cash flow stability and will support its dividend growth; AEP offers a yield of 4.1%. Furthermore, the stock valuation currently remains compelling, as it is trading at a forward P/E of 15x , versus the industry average forward P/E of 16x . I think the stock valuation will expand, and the valuation gap will close as AEP will evolve into a fully regulated utility company.

PPL Corporation – Ready To Go Strong Starting 2016

Summary Stock is compelling investment prospect for income-hunting investors. Strategic investments in utility infrastructure development and extension-related projects are in-line with long-term growth generating strategy. Strategy of sharing cash flow base strength with shareholders through dividend payments will continue to positively affect stock price. PPL Corporation (NYSE: PPL )’s strong business fundamentals and its important infrastructural growth-related investments cast an impressive outlook for the stock. I believe the company’s regular efforts to augment the growth capabilities of its regulated business’ infrastructure with regular infrastructural improvement and enhancement-related investments will bode well for its future EPS growth. These healthy growth prospects of PPL will ultimately better its future cash flow productivity level and this will in turn help the company maintain its practice of paying increasingly healthy dividends in the years ahead. Moreover, PPL’s current valuations are more attractive than its peers and the industry average. Nevertheless, un-foreseen adverse weather conditions, volatility in fuel prices and strict regulatory restrictions are key threats that will keep on hovering over the company’s future financial performance. Over the last few years, the U.S. utility industry has faced challenges such as a decline in energy demand by industries amid the recession. Furthermore, the regulatory uncertainties and restrictions imposed by the Environmental Protection Agency (EPA) caused industry disruptions. However, the EIA has projected that energy demand in the U.S. will increase by 2.1% in residential space in the second of 2015 and will grow by 0.7% in industrial space in 2015, which indicates that the overall utility industry’s outlook is attractive. To combat the industrial headwinds and to meet the expected rise in energy demand, the U.S. utility industry players have accelerated their growth investments in order to get a broader regulated infrastructure. Like all of the other utility industry players, PPL is also making hefty infrastructural investments; around $10 billion is projected to be spent by the company on infrastructure improvement by the end of 2017, which will help it apply for regular rate base hikes and will ultimately drive its future earnings and revenues. I continue to believe that this utility company’s attractive growth investments will help it enjoy EPS growth in future, which will support its cash flows and dividend growth. PPL, however, is confident of achieving a 6% compounded annual earnings growth rate through 2017. And for its U.K. operations, the company now expects EPS growth of 1% to 2%, in contrast to its previous expectation of flat earnings growth. I think that these strong earnings growth potentials will augur well for the stock valuation. To recover the capital investments made previously, the company has applied for a 5.1% rate case hike. Although the case is still waiting for regulatory approval, if approved, it will add around $124 million per year towards PPL’s revenues. The company has plans to use the proceeds of its rate cases in technological upgradation and improvement-related projects. In this regard, recently, PPL asked for the Pennsylvania Public Utility Commission’s approval to make an investment of $450 million in the technology upgradation process of meters in order to resolve their problems associated with old meters. This investment will not only improve the company’s image as a quality regulated utility but will also benefit its EPS growth, because the cost of investment will be recovered through a special rate rider; as per the management’s estimates, this investment will increase rate base by $330 million . Moreover, two of PPL’s subsidiaries, namely Louisiana Gas And Electric Company and Kentucky Utilities Company, have recently signed a $220 million agreement with Paringa Resources Limited for the purchase of coal from Buck Creek No.1 mine, with the completion of certain construction-related work, coal purchase under this agreement will begin in 2018. The coal purchase agreement will extend PPL’s energy generation resources, thereby improving its load capacity and will help it apply for rate case, which in turn will help it in reporting incremental EPS growth. Furthermore, the company has maintained an impressive record of sharing its cash flows with shareholders through healthy dividend payments. Owing to consistent dividend growth, currently, PPL offers an attractive yield of 4.44% . Moreover, the commitment to keep its dividends growing has been affirmed by the company’s chairman in the 3Q2015 earnings conference call; he said : “Regarding the dividend, we expect minimal dividend growth again for 2016 as we strive to get the payout ratio down into the mid-60% range, at which time we will target a 4% to 6% dividend growth rate, more in line with our earnings growth expectations. We currently expect to be in the targeted payout range by the end of 2016. So our current expectation is that we will grow the dividend more meaningfully starting in 2017, but our current expectation for 2017 is at the low end of the 4 to 6% relative to the dividend.” Due to the abovementioned strong strategic growth prospects, I think the chairman’s dividend growth expectation is realistic and achievable. Moreover, PPL’s strong balance sheet position, as reflected in the chart below, makes me believe in the company’s ability to continue sharing a decent portion of its future cash flows with shareholders in the years ahead. Source: 4-traders.com Final Words PPL is a compelling investment prospect for income-hunting investors. The company’s strategic investments in utility infrastructure development and extension-related projects and its strong balance sheet position are in-line with its long-term growth generating strategy. Moreover, PPL’s strategy of sharing its cash flow base strength with shareholders through dividend payments will continue to positively affect its stock price. Also, earnings for PPL are expected to grow at a growth rate of 4.86% , better than Southern Company (NYSE: SO )’s earnings growth expectations of 3.88% . Also, PPL has attractive stock valuations in comparison to SO and the industry average, as displayed below. Source: Yahoo Finance & NYU.edu

Exelon Presents Mixed Picture As Investors Are Advised To Wait

Company’s management seems committed to appealing against PSC judgment. Management continues to consider Pepco merger as key in achieving Exelon’s goal of re-balancing asset portfolio. Recent PSC decision to reject proposed merger has adversely affected Exelon’s plans to grow regulated operations. Exelon has to make important decision regarding capital deployment. Company’s risk profile has also increased. U.S. utility companies have been making aggressive efforts to increase their regulated business operations exposure, as forward power prices remain weak. Exelon Corp. (NYSE: EXC ) has also been working to expand its regulated operations, in an attempt to provide stability to its revenues and earnings. Consistent with its efforts to increase regulated operations, the company has been directing capital investments towards regulated operations. However, the company’s plans to increase regulated operations are adversely affected, as the Public Service Commission (PSC) of the District of Columbia rejected the proposed $6.8 billion Exelon-Pepco merger; Exelon does have a right to appeal against the judgment. However, Exelon’s future growth prospects will be seriously affected if the proposed merger is not completed. Therefore, I recommend investors to stay on the sideline until some clarity appears on the merger. Overhang Prevails Exelon’s financial performance in recent years has been volatile mainly because of weak and volatile forward power prices. However, the company has been undertaking prudent strategic decisions in recent years by focusing on increasing its regulated operations, which remains an important source for the future earnings growth. Exelon is known as the largest operator of nuclear power plants in the country; however, cheap coal and natural gas have rendered nuclear power uneconomical. The company has been making capital investments to strengthen and develop its regulated operations, where regulators guarantee investment returns. Moreover, in the recent past, the company was working on the proposed $6.8 billion Exelon-Pepco merger to provide stability and growth for its future earnings. Exelon’s management expects that the proposed merger will increase Exelon’s regulated utility earnings contribution to 65%-70% up from the current level of almost 55%. However, recently, the PSC rejected the planned merger, stating that it is not in the ‘public interest’; the decision has weighed on stock prices of both Exelon and Pepco, and I think Exelon’s stock price will stay under pressure in the near term. Exelon plans to appeal against the judgment, as it has a right to appeal against the decision in 30 days. The rehearing process is expected to take 6 months. However, the merger rejection has increased Exelon’s business risk. I think the merger now has 50% probability of being completed, and the main reason for pessimism is that the PSC has outrightly rejected the proposal rather than offering conditional approval. The company can push for the merger by settling with key stakeholders and presenting a case that the merger will bring notable benefits to customers. Moreover, in anticipation of finalizing the merger, the company has already raised almost $6 billion in long-term financing, including $1.9 billion raised through equity issuance and $4.2 billion through senior note issuance. If the company’s merger efforts are not successful, Exelon will face earnings dilution from the financing. Also, capital allocations have now become a key question for the company. I think if the merger does not materialize, the company can opt to allocate $3-$4 billion for share buybacks. Therefore, going forward, the company has to make important decisions regarding wealth maximization for its shareholders, therefore, I recommend investors to keep an eye on the management’s future decisions, which could have a notable impact on Exelon’s stock price. Separately, the company has to make another important decision, whether it will continue to operate its nuclear power plants or close them. Electricity generation by Exelon’s nuclear power plant has been uneconomical because of cheap natural gas and coal. The company spends nearly $1 billion per annum on its nuclear plants to keep them operational reliably and safely. In my opinion, if the proposed merger is not completed, the company should continue to look for other options to expand its regulated operations, as regulated operations will augur well for its earnings stability and risk profile. Summation The company’s management seems committed to appealing against the PSC judgment. The company’s management continues to consider the Pepco merger as key in achieving Exelon’s goal of re-balancing its asset portfolio away from volatile unregulated business, with weak growth outlook, towards a more stable and growing regulated operations. However, the recent PSC decision to reject the proposed merger has adversely affected the company’s plans to grow its regulated operations and will weigh on its future earnings growth and stability. If the merger deal does not close, the company has to make an important decision regarding capital deployment and its future growth will be negatively affected. Also, the company’s risk profile has increased. Therefore, I recommend investors to stay on the sidelines and wait for clarity on the matter. 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.