Tag Archives: income

The GreenHunter Resources Preferred Stock Roller Coaster

Summary Wild recent price swings in GRH-PC. Preferred dividend was deferred in July, but company expects to restore dividend before the end of the year. Analysis of the Q2 report, conference call and preferred stock covenants. Gary Evans is well known to energy investors as the founder of Magnum Hunter Resources (NYSE: MHR ). Gary Evans also founded and controls the much smaller GreenHunter Resources (NYSEMKT: GRH ). GRH is focused on waste water disposal. They primarily handle waste water produced from natural gas wells in the Appalachian region. In addition to sharing the same CEO, MHR is also GRH’s largest customer. MHR has had more than its share of drama lately. The stock has had huge moves due to volatile commodity prices, debt covenant changes and speculation on asset sales. The speculative GRH-PC preferred stock has become almost as volatile lately. No one will ever accuse Gary Evans of running a dull company. GRH-PC is a par $25 cumulative preferred issue with a 10% coupon. See prospectus for additional details. At a recent price of $9.85, GRH-PC is trading at under 40 cents on the dollar. Preferred stocks are often far less volatile than common stock issues, but this has not been the case for GRH-PC. Over the past month GRH-PC has plunged from over $19 to a low of $7.50. It then bounced back to $15.50 before drifting back down below $10. GRH-PC seemed to be on track back in early July when I wrote this article . The company had just successfully closed a new secured credit line to fully fund capital projects. They were operating at 100% of capacity and turning away potential customers. Margins were increasing and badly needed new disposal well capacity would enable them to quickly ramp up revenues and cash flow. What went wrong?” The licensing of 2 new disposal wells took longer than expected due to regulatory delays. The new disposal wells are now online and have increased waste water disposal capacity by approximately 50% (see Q2 conference call discussion). With additional disposal wells coming online over the next few months, GRH will have doubled its disposal capacity as compared to Q2 2015 levels. Revenues and cash flow are headed higher over the next few quarters. Unfortunately, regulatory delays caused EBIDTA to ramp up more slowly than expected. This caused a covenant violation on the company’s new secured credit line. The covenant violation prevented the monthly preferred stock dividend from being paid in July. This led to the crash in GRH-PC. So how long will the GRH-PC dividend remain deferred? As per the Q2 conference call comments by Gary Evans, the company hopes to end the deferral “sometime before the end of the year”. Note that since GRH-PC is a cumulative preferred issue, the company would be required to eventually make up any missed dividends. Here’s a key excerpt from the Seeking Alpha conference call transcript: Unidentified Analyst Okay, alright. And then I suspect that the lender for the $13 million is — you are not paying any cash out so I make sure you’re paying me, do you have to get back to that $1 million of EBITDA, before on a LTM basis, before they would let you do this seriously? Gary Evans – Chairman and CEO No, we have an amendment that’s been executed this morning that gives us flexibility and yours truly will probably be the one putting some more capital in to get back to paying the dividend. So, our goal is to get back to paying those dividends sometime before the end of the year. Unidentified Analyst Okay. And how quickly can you catch up on the accumulated part? Gary Evans – Chairman and CEO We can do it tomorrow, if we wanted to. Gary Evans owns a majority stake in GRH (see proxy statement ) and is committed to the company’s success. As per the conference call excerpt above “yours truly will probably be the one putting some more capital in to get back to paying the dividend”. GRH-PC is senior to the common stock owned by Gary Evans. It’s very comforting to see a CEO stepping up personally to help out when a company runs into trouble. Of course there is no guarantee that GRH will be able to able to successfully restore the preferred stock dividend this year. The favorable protective covenants of GRH-PC become more critical if the deferral lasts longer than expected. Some of these covenants are detailed on page 72 of the prospectus: Failure to Make Dividend Payments If we have committed a dividend default by failing to pay the accrued cash dividends on the outstanding Series C Preferred Stock in full for any monthly dividend period within a quarterly period for a total of four consecutive or non-consecutive quarterly periods, then until we have paid all accrued dividends on the shares of our Series C Preferred Stock for all dividend periods up to and including the dividend payment date on which the accumulated and unpaid dividends are paid in full: (NYSE: I ) the annual dividend rate on the Series C Preferred Stock will be increased to 12% per annum, which we refer to as the Penalty Rate, commencing on the first day after the dividend payment date on which such dividend default occurs; (ii) if we do not pay dividends in cash, dividends on the Series C Preferred Stock, including all accrued but unpaid dividends, will be paid either if our common stock is then listed or quoted on the New York Stock Exchange, the NYSE Amex or The NASDAQ Global, Global Select or Capital Market, or a comparable national exchange (each a “national exchange”), in the form of our fully-tradable registered common stock (based on the weighted average daily trading price for the ten business day period ending on the business day immediately preceding the payment) and cash in lieu of any fractional share As noted above, the GRH-PC coupon would be increased from 10% to the 12% penalty rate in the unlikely event that the deferral is not ended within 1 year. Preferred holders have another ace up their sleeve. After 1 year of deferral, dividends “will be paid” in common stock. Unlike a cash dividend payment, dividends paid in GRH shares would not violate credit line covenants since they are not a cash cost. Gary Evans may be working so diligently to get the preferred dividend restored ASAP in order to avoid having his equity stake diluted. MHR is GRH’s largest customer and their fortunes could help determine how fast the GRH-PC dividend is restored. As discussed on the conference call, MHR is now finalizing a joint venture agreement with a private equity partner. This could lead to a substantial increase in natural gas drilling. Additional drilling would increase demand for GRH’s waste water disposal services. There is also a downside to the MHR relationship. The Q2 report shows that the “related party accounts receivable” has doubled since December. Expected improvements in MHR’s liquidity from the JV or expected sale of midstream assets would also improve liquidity at GRH. Aggressive yield investors should consider the deferred dividend GRH-PC as a speculative play at 40 cents on the dollar. The heavy insider ownership of the GRH common stock, improving business fundamentals and strong protective covenants are very positive. This wild GRH-PC roller coaster ride may soon be headed higher. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks. Disclosure: I am/we are long GRH-PC. (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. Additional disclosure: The author is the publisher of the Panick Value Research Report. The Panick Report is focused on high yield preferred stocks, mrpanick@yahoo.com for the 2 week free trial.

Tax Free Income From Municipal Bond Closed End Funds

Summary Municipal bond CEFs offer attractive income free from federal taxes. In this article I explore the current muni-bond CEF space. Top funds for key metrics are discussed. Two funds that stand out on the basis of discount and NAV distribution yield are called out as particularly attractive at this time. Life changes and market changes: Both loom on my horizon. The first is unstoppable; the second is uncertain. And taken together they are exerting impacts on my portfolio. Regarding market changes: My view of macro events has led me to re-position my portfolio to a more defensive stance. One consequence is that I’m finding myself with more uninvested cash than I’m comfortable with, especially in my taxable income account where I have been trading out of high-risk, high-yield holdings. Life changes are also having an effect. These speak to my own case as an individual. But all my life I’ve been only a step or two ahead of a demographic tsunami, so I know many others will soon be dealing with similar issues. I’ll soon be putting another zero-birthday up on the scoreboard. This time a seven comes in front of the zero, a milestone that carries major tax consequences. First, my income will jump as I begin to draw social security retirement benefits, which I’ve put off as long as I could. This is a welcome addition and means I can comfortably give up some ground on income yield from my investments. But it also means more taxable income. In addition, in 2016 I will have to begin taking required minimum distributions – RMDs – from my tax-deferred accounts. This adds yet another increment to my taxable income. So, tax efficiency has become an important consideration. High yields are fine, but not if they come with a tax bill of staggering proportions. One outcome of these two pressures is that I continue to increase my allocation to tax-free municipal bonds in my income portfolio. There are other strategic moves underway, but for today’s topic I want to cover the muni bond space. I plan to follow up with a review of other tax-efficient income investments by early next week. As regular readers are aware, my strong preference for tax-free income is to invest in muni-bond closed-end funds. Tax-equivalent income from the CEFs is quite favorable compared to many other fixed-income sources. And it is much better than can be earned from holding individual municipal bonds or other municipal bond funds (EFTs or mutual funds). That attractive income comes, unsurprisingly, with risks. The high yields are partially generated by employing leverage, so it comes with the risk that leverage carries. In choosing funds I try to moderate some of that risk by looking for funds that are experiencing sharp downward moves in their premium/discount status. My assumption is that P/D status often tends to revert to mean values over time, so buying funds at an outsized discount (relative to the fund’s individual history) can help cushion some of the leverage risk. Of course there is often a very good reason for a sharp change in P/D status. In such cases, any confidence in mean reversion must be tempered by the full situation. In addition to leverage risk, muni bonds, like all fixed-income investments, are subject to interest rate risk. But the fact that many of these funds can sell at hefty discounts to their net asset values can help to moderate this risk to some extent. Interest rate fears tend to drive prices down, often well out of sync with interest-rate driven declines for NAVs. This creates deeper discounts. Keeping in mind all the usual caveats about the impossibilities in timing markets, an awareness of changes in P/D status as a reflection of investor psychology can often help moderate interest rate risk by opening opportunities to purchase a fund at a bargain rate. For example, ten months ago (Oct. 2014) I looked at muni bond CEFs here and noted that the space looked to be marked by extreme over-selling, likely a result of interest-rate anxieties. I considered those interest-rate fears overblown and came to a conclusion that bargains were common. I picked out five funds I particularly liked at the time. When I next wrote about muni bond CEFs 4 months later (Feb, 2015) those five funds had returned an average of 7.62% vs. 1.38% for the largest muni bond ETF, the iShares S&P National AMT-Free Muni Bond ETF (NYSEARCA: MUB ), much of it due to discount compression as interest-rate fears faded. But, by Feb 2015 the market had corrected the anomaly of a few months previous and bargains were scarce. It was, as I noted, not a good time to be a buyer in the muni-bond CEF market. I did select three funds at that time despite the paucity of attractive buys, but those three have lost 2.31% while MUB has only dropped -0.95%. This illustrates the importance of timely entry into this market when investor fears outweigh the actual risks. I’m not sure we are quite at that state now, but I expect it’s not far off. In any case, today’s muni bond fund market is, to my mind, much more buyer-friendly than it was in February. The muni-bond CEF space is large. There are at least 99 national muni CEFs and dozens more single-state funds. I’ll restrict my thoughts here to the 99 national funds covered by cefanalyzer . Those of us who live in high-tax states are likely to generate better after-tax returns with a state fund. For my own portfolio, I am invested in California state muni-bond CEFs. Tax-Equivalent Yield One of the things I like to do when discussing muni bonds is to present an overview of tax-equivalent distributions for marginal tax rates to make it easier for readers to determine what the yields mean to them. Most summaries of muni-bonds report tax-equivalent returns based on the highest marginal rates. Few of us qualify for those rates, so it’s important to consider one’s unique situation in deciding if a muni bond investment is appropriate. (click to enlarge) There are good taxable equivalent rate calculators on-line. My favorite is from Eaton-Vance ( found here ). It incorporates state income tax rates and the state-to-state variation in how muni bond income is handled. Distribution Yields Let’s start with a look at current distributions for the universe of national muni-bond CEFs. Distribution rates range from a low of 3.24% to a high of 7.38% (median = 6.18%). The full range for distribution rates looks like this: The top five funds for distribution at Market Price are: Distribution Price Distribution Price Discount Pioneer Municipal High Income Advantage Trust (NYSE: MAV ) 7.50% 5.00% Eaton Vance Municipal Income Trust (NYSE: EVN ) 7.00% 1.42% Dreyfus Municipal Income Inc (NYSEMKT: DMF ) 6.98% -5.01% Pimco Municipal Income Fund (NYSE: PMF ) 6.96% 8.95% Invesco Advantage Municipal Income Trust Ii (NYSEMKT: VKI ) 6.96% -9.38% And, the top five for distribution at Net Asset Value are: Distribution NAV Distribution NAV Discount Pioneer Municipal High Income Advantage Trust MAV 7.88% 5.00% Pimco Municipal Income Fund PMF 7.58% 8.95% Eaton Vance Municipal Income Trust EVN 7.10% 1.42% Pimco Municipal Income Fund Iii (NYSE: PMX ) 6.95% 2.51% Nuveen Municipal High Income Opportunity Fund (NYSEMKT: NMZ ) 6.73% -1.33% I’ve included Discount(/Premium) in the distribution tables because there is a strong message in the relationships. Note that funds with high distributions on NAV tend to sell at a premium. This is a widely seen phenomenon in closed end funds, where investors focus strongly on income and distribution rates. That focus tends to adjust premium/discount status in the direction of an equilibrium distribution on price. Thus funds with low to modest NAV distributions tend to get priced down; they will sell at deep to modest discounts. This does, of course, increase the distribution rate bringing them more in line with funds that have high NAV distributions. At the same time, the high NAV-distribution funds tend to get priced up into premium ranges thereby reducing their distribution rate from the NAV value. MAV, which holds top positions in both distribution metrics illustrates this. Its 7.88% NAV distribution drops to 7.5% after the 5.0% premium takes its bite. VKI, by contrast, lags well behind MAV on NAV distribution at 6.31% (which ranks a respectable 12th of the 99 funds). But its -9.38% discount drives the distribution on price to 6.96% pushing it into the top five for market yield. MAV is an interesting case to illustrate the downside of being too focused on high yield when selecting a fund. MAV had been selling at an outsize premium (approaching 25%) as recently as May of this year. But, as should have been clear to investors, that premium was generated by an unsustainably high distribution rate. In May the distribution was cut from $0.095 to $0.08/share, a drop of -15.7% and the premium fell from a high of 24.48% to near par (0.08%) late in July. As seen in the table above, the premium has picked up a bit in the past three weeks. NAV Yield, Discount/Premium, and The Move Toward Equilibrium Eli Mintz has documented the relationship between NAV yield and Discount/Premium status in an excellent article ( here ). He argues that the relationship between NAV distribution rate and Discount/Premium is a primary factor to be considered in evaluating municipal bond CEFs. Following his lead, I’ve plotted the current values with a linear trendline for these metrics for the 99 funds under consideration. (click to enlarge) Mr. Mintz advocates choosing among funds that fall well under the trend line, so I’ve narrowed the chart to show those funds posting discounts below -5.00%. (click to enlarge) Selection from the lower thresholds of this distribution produces several that look worth exploring on the basis of this metric. But, as we can see in the next table, some are paying out distributions that exceed their actual net investment income (NII Yield). NII calculations are done on a market price basis for the table. On this basis, CMU and MFM look particularly attractive. CMU has a discount below 10%. Its NAV distribution of 6.03% generates 6.73% for its current market rate. And with an excess NII yield of 71bps above distribution, the yield appears secure. MFM sports a discount just shy of -13% and a NAV distribution at 5.44% which generates 6.25% distribution yield. It, too, appears to be earning that distribution with net investment income 48 bps above its distribution yield. This is illustrated in the heat map distribution seen in the next table: Leverage and Duration I’ve included two indicators of risk here, average portfolio maturity and percent leverage. CMU’s leverage (35.56%) is about the middle of the pack for the muni bond CEF space, ranking 55 of the 99 funds. MFM carries less leverage. Its 30.04% leverage ranks 25th in the space. Maturity can provide some indication of interest rate risk. Duration adjusted for leverage would be preferred but this is not a metric that is available through the screeners I use. The average maturities of the CMU and MFM portfolios both stand at 18.6 years, ranking 66 of 99. For this set of funds, the Nuveen offerings (NMA, NMO, NQS, NXZ and NZF) might appear to be better positioned for interest rate risk on the basis of portfolio maturity. But, when portfolio duration is calculated this is not supported. Fund Duration (Unadjusted) Duration (Leverage Adjusted) CMU 6.56 10.20 MFM 7.00 10.00 NMA 7.10 10.85 NMO 7.72 12.10 NQS 7.76 12.32 NXZ 7.47 11.31 Summarizing Other Metrics I’ll close with a summary of the top five funds for some other metrics for readers who may be interested in exploring funds leading for these categories. Along with the ranking metric, I include discount, distribution rates, NII yield and NII excess. The top five funds for discount: Discount Dist Dist (Price) NII yield Excess Nuveen Quality Municipal Fund Inc (NYSE: NQI ) -13.62% 4.61% 5.34% 5.55% 0.21% Nuveen Dividend Advantage Municipal Fund 2 NXZ -13.07% 5.25% 6.04% 5.62% -0.42% Nuveen Municipal Market Opportunity Fund Inc NMO -13.02% 5.08% 5.84% 5.92% 0.08% MFS Municipal Income Trust MFM -12.91% 5.44% 6.25% 6.73% 0.48% Nuveen Dividend Advantage Municipal Income Fund (NYSEMKT: NVG ) -12.82% 4.77% 5.47% 5.66% 0.19% Top five for Total Return (Price) for one year: TR Price 1Y Discount Dist Dist (Price) NII yield Excess Western Asset Managed Municipals Fund Inc. MMU 11.92% -1.03% 5.52% 5.57% 5.55% -0.02% Western Asset Municipal Defined Opportunity Trust Inc. (NYSE: MTT ) 11.85% 6.49% 4.47% 4.19% 4.40% 0.21% Mfs Investment Grade Municipal Trust (NYSE: CXH ) 10.77% -7.45% 4.90% 5.29% 5.63% 0.33% Nuveen Municipal High Income Opportunity Fund NMZ 10.25% -1.33% 6.73% 6.82% 6.93% 0.11% Blackrock Muniassets Fund, Inc. (NYSE: MUA ) 10.21% -1.65% 5.38% 5.47% 5.35% -0.12% Top five ranked for Total Return for one year: TR NAV 1Y Discount Dist Dist (Price) NII yield Excess Delaware Investments National Municipal Income Fund (NYSEMKT: VFL ) 11.15% -11.32% 5.35% 6.03% 5.50% -0.53% Eaton Vance Municipal Income Trust EVN 9.10% 1.42% 7.10% 7.00% 6.89% -0.11% Western Asset Municipal Partners Fund Inc. (NYSE: MNP ) 8.13% -9.59% 5.24% 5.80% 5.53% -0.27% Western Asset Managed Municipals Fund Inc. (NYSE: MMU ) 7.77% -1.03% 5.52% 5.57% 5.55% -0.02% Pimco Municipal Income Fund Iii PMX 7.07% 2.51% 6.95% 6.78% 6.98% 0.20% Top five for one-year Z-Scores, a measure of the extent to which the current discount/premium varies from the average discount/premium for the past year. Readers unfamiliar with Z-Scores can read about the metric here . Z-Score 1Y Discount Dist Dist (Price) NII yield Excess MFS Municipal Income Trust MFM -2.00 -12.91% 5.44% 6.25% 6.73% 0.48% Nuveen Municipal Income Fund Inc (NYSE: NMI ) -1.80 -6.06% 4.38% 4.66% 4.77% 0.11% Nuveen Municipal Market Opportunity Fund Inc NMO -1.63 -13.02% 5.08% 5.84% 5.92% 0.08% Western Asset Intermediate Muni Fund Inc. (NYSEMKT: SBI ) -1.63 -7.12% 4.61% 4.96% 4.46% -0.50% Pioneer Municipal High Income Advantage Trust MAV -1.56 5.00% 7.88% 7.50% 7.43% -0.08% I’ll add the following chart which shows the distribution of 1-yr Z-Scores for all funds considered here. It provides a useful touchstone to compare with similar charts from previous articles to compare trends in the municipal bond CEF universe. I’ll close with the seven funds having the shortest average portfolio maturities. But keep in mind, as noted above, this is not a stand-in for leverage-adjusted duration, the preferred metric for evaluating interest-rate risk. Leverage-adjusted duration can usually be found on the sponsor’s web pages for a fund. I do not know of a screening tool that uses this metric. If any reader is aware of one, I would certainly appreciate your sharing that information. Maturity Discount Dist Dist (Price) NII yield Excess Blackrock Municipal 2018 Term Trust (NYSE: BPK ) 5.4 -0.65% 3.64% 3.66% 3.99% 0.33% Nuveen Select Maturities Municipal Fund (NYSE: NIM ) 5.7 -2.78% 3.16% 3.25% 3.35% 0.10% Deutsche Strategic Municipal Income Trust (NYSE: KSM ) 5.9 -0.23% 6.55% 6.57% 6.41% -0.16% Deutsche Municipal Income Trust (NYSE: KTF ) 6.2 -4.67% 6.28% 6.59% 6.44% -0.14% Alliance Bernstein National Municipal Income Fund (NYSE: AFB ) 6.3 -7.81% 5.48% 5.94% 6.20% 0.25% Eaton Vance Municipal Bond Fund Ii (NYSEMKT: EIV ) 6.3 -7.78% 5.41% 5.87% 5.86% 0.00% Putnam Municipal Opportunities Trust (NYSE: PMO ) 6.3 -10.08% 5.41% 6.02% 6.35% 0.33% Additional disclosure: I do not hold any of the funds discussed above. My municipal bond holdings are all in California state bond funds at this time. 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.

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.