Tag Archives: seeking

Diving Into The Deep End With Water Utilities

Only 11 investor-owned water utilities remain in the United States. Water utilities offer a steady income but increases in revenue often must be negotiated with regulatory bodies. CTWS and others have used acquisitions as a means to ensure growth amidst a regulated pricing environment. Descriptions ARTNA AWR CTWS CWCO CWT Yearly Forward Dividend 0.89 0.90 1.07 0.30 0.67 Yield 3.43% 2.16% 2.9% 2.57% 2.99% Payout Ratio 68.55% 52.46% 50.76% 63.31% 55.94% 5 year Div Annual Growth 3.3% 10.50% 2.33% 1.39% 2.02% Over the past five years AWR has seen impressive dividend growth, allowing it to beat the S&P 500. The rest have fallen short but in the process have offered nice yields that have continued to rise, albeit at a modest clip. SPY data by YCharts Artesian Resources (NASDAQ: ARTNA ) is the largest investor owned water utility on the Delmarva Peninsula and eighth largest in the US. It serves 301,000 people with 82,900 metered customers, producing 7.6 billion gallons per year. There is 1,201 miles of main, 5,827 fire hydrants and 69 treatment facilitates. The average residential water service cost for customers is $1.57 per day. Source: ARTNA Investor Relations Website Artesian invested $23.7 million in infrastructure improvements in 2014. American States Water Company (NYSE: AWR ) is a public utility holding company that owns 100% of its subsidiaries, Golden State Water Company and American States Utility Services, Inc. GSWC is a regulated water utility servicing 258,000 customers in California and electricity for 24,000, also in California. 75 cities are served with 38 water stations. ASUS offers contracted water and waste water services. Presently nine military bases water needs are being provided by ASUS with more active bids taking place and have the potential to be awarded in the next 5 years. Many of these contracts with military bases are 50 year contracts. 60% of AWR’s water supply comes from groundwater and 35% from Metropolitan Water Districts and its member agencies (mostly from the Colorado River). Source: AWR Investor Relations Website For the last two years AWR has instituted stock share repurchases each amounting of up to 3.2% of total outstanding shares. Connecticut Water Service Inc. (NASDAQ: CTWS ) is a regionally focused, regulated water utility. In addition to coverage in Connecticut, CTWS also owns the Main Water Company that covers small regions of Maine. There are 123,000 utility customers, 2,100 miles of pipe, 239 wells, 25 surface water supplies providing 176 million gallons per day. Source: CTWS Investor Relations Website CTWS’s strategy for growth is conservative acquisitions, such as two Maine water companies in 2012. Consolidated Water Co. Ltd. ( CWCO ) is a company focused on the business of seawater reverse osmosis desalination plans and water distributions in the Caribbean across 14 plants with a production capacity of 26.4 million gallons per day. Source: CWCO Investor Relations Website As of last quarter, CWCO plans on beginning the process of assisting in building another plant costing $600 million, this time in the continental United States. CWCO will take a minority position in the plant and will assist in operating it. This plant will be in Rosarito, Mexico and will serve Tijuana, Mexico’s 1.8 million people and San Diego, California’s 3.1 million. California Water Service Group ( CWT ) is the third largest investor-owned water utility in the US and provides water utility services for customers in California, Washington, New Mexico, and Hawaii. In these states CWT serves more than 2 million people through just shy of 500,000 customer connections, 95% of which are in California. Source: CWT Investor Relations Website In 2014 CWT invested $132 million in capital improvements and received authorization from regional governments to increase their rates, yielding $45 million in new revenue.

Alliant Energy: Management Strategy Looks Solid

Summary Alliant is investing in its future by building new, state-of-the-art power plants. New power-plant buildup has been costly, but debt is manageable and financed at low rates. With a history of stable earnings growth and dividend increases, shares look poised to outperform peers. Alliant Energy (NYSE: LNT ) is a regulated public utility with both electric and natural gas businesses. The company has a substantial presence in the Midwest, with the vast majority of Alliant operations taking place in Iowa and Wisconsin. A long-time outperformer, shares rebounded nicely off 2009 lows, trouncing the total returns of most other utilities. However, the last two years have seen shares just track along with the broader index. Can Alliant Energy return to its strong return profile? Shifting Energy Mix and Future CapEx Plans To comply with federal and state mandates, Alliant has made a big push over the past ten years to move from a coal-dominated power generation mix to one more focused on natural gas and wind. While coal still holds the largest piece of Alliant generation capacity, company management forecasts a major shift by 2024, where coal only constitutes roughly one-third of production. This change will primarily be driven by upcoming company investments in natural gas through its Marshalltown Generating Station (650MW combined cycle natural gas) and an expansion of its Riverside facility (another 650MW combined cycle natural gas facility). (click to enlarge) * Alliant Energy Investor Presentation Once these facilities are built, this will allow the company to shift its capital expenditure away from environmental upgrades and new power plant builds, instead allocating resources towards taking advantage of higher allowed returns through upgrading ATC electric transmission infrastructure (12.8% allowed return on equity). I’m a big fan of Alliant management’s capital expenditure plans and believe this is the way to go for enhancing shareholder returns, while ensuring compliance with possible future enhanced emissions regulations. This strategy is distinctly different from the plans we’ve seen from other Midwestern utilities like Great Plains Energy (NYSE: GXP ) and large nation-wide behemoths like Duke Energy (NYSE: DUK ). Operating Results Regulated electric revenues have stalled, primarily due to falling residential customer sales due to lower overall energy demand. Customer count has remained mostly flat. The big driver has actually been industrial demand, but these larger customers have the advantage of negotiating cheaper electricity from utilities directly, yielding lower margins. On the plus side, Alliant’s industrial customers are primarily in the food manufacturing and chemical businesses, businesses which are traditionally fairly resilient to economic downturns. Gas operations revenues are also down, but not due to falling sales. Like most gas utilities, Alliant has riders that pass along the cost of natural gas to customers, for better or worse. Falling natural gas prices means falling revenue but the company maintains its fixed profit per sale. While revenue has been flat, cash flow generation has been exceptionally strong for Alliant. The company has been spending this cash quicker than it comes in though, with heavy investments in new generation ($300M+ annual for Marshalltown/Riverside expected in 2015-2017) and electric transmission. (click to enlarge) * Alliant Energy Investor Presentation Alliant has made the decision to take advantage of its credit ratings and low interest rates and make these upgrades and investments now. Long-term debt has grown $1B from 2011 to the present, now standing at $3.7B. However, net debt/EBITDA is still 3.6x, in line with utility averages. There shouldn’t be much risk here, especially as operating income rises and capital expenditures fall over the next five-ten years. Conclusion Alliant is investing in its future, committed to shifting its power-generation mix and investing its operating cash flow in high-margin businesses. With a current dividend yield of 3.70% and a history of healthy annual dividend increases, shareholders seem set to be rewarded handsomely. 5-6% annual dividend increases over the next three-five years seem likely. With expected 2016 earnings per share of approximately $3.85, shares trade at just 15.6x 2016 earnings. There looks to be substantial value here with a fair margin of safety compared to most alternatives in the utility sector. Primary risk for shares are standard to most utilities: interest rate risk, risks related to allowed regulated returns or customer loss in the company’s service area, and a general revaluation within the utility sector that brings earnings multiples down across the board.

3 Of Seeking Alpha’s Best, Part III

Summary As a hedge fund manager, who do I think is worth following on SA? 3 (more) writers I take seriously and think you should too. This is the third in a continuing series. In Part I and Part II , I looked at six of Seeking Alpha ‘s best contributors. In this sequel, I offer three more worth following. I follow them closely and recommend that you do too; you will learn and profit from their expertise. Mike Winston Mike is a great idea-generator and friend. I interviewed him for my blog and listen carefully to his ideas. He is an expert on Yahoo! (NASDAQ: YHOO ). If you are interested in the Yahoo! stub, check out Yahoo’s Cashless Spin-Off Has Strong Business Purposes: Employee Options And Merger Currency and The Yahoo Tax Myth . Heath Winter Heath Winter is a former colleague and longtime friend. He is particularly expert in options strategies around merger arbitrage. You should read all of his ideas, but one that appears to remain a particularly attractive opportunity today is OmniVision Technologies A Top Opportunity In The Merger Arbitrage Universe . OmniVision (NASDAQ: OVTI ) has a $1.04 net arbitrage spread, which offers a 12% annual return if the deal closes by next February. Jeremy Raper Jeremy Raper is responsible for some terrific investment ideas on both the long and short side. One portfolio overlap of ours has been Avolon (NYSE: AVOL ), which he discussed in Avolon: Growing, Underfollowed Business At Steep Discount To Comps, 40%+ Upside , Avolon Update: Impressive Q1 Execution, Valuation Gap Vs. Peers Will Continue To Narrow , and in his Quick Update On Avolon . The $0.52 net arbitrage spread offers a 4% annual return, if the deal closes by next March. Another idea worth studying is Monster Worldwide (NYSE: MWW ), which he presented in Monster Worldwide: Frightening History, But The Only Thing Scary Now Is The Upside . This stock has generated significant interest on Sifting the World . You are also welcome to follow me and my investment ideas here . I do not claim to be one of Seeking Alpha ‘s best, but I stumble upon a misplaced bet from time to time. Here is a bit more about me in case you are interested. About the Author I began my career conducting public policy research and investigative work on behalf of hedge funds and proprietary trading desks impacted by government and political risks. My research for clients such as leading hedge funds and banks included regulatory and antitrust analysis, as well as litigation and legislation tracking. This work provided actionable intelligence and risk assessment. I founded Rangeley Capital in 2007 in order to exploit the seams between other hedge funds’ mandates. Such situations include broken deals, volatile corporate transactions, and securities that are hard to hedge. Rangeley enters positions with DC risks where spreads have blown out more than is justified by analyzable exposures. The goal is to buy at discounts to the value of probability-weighted outcomes. The intention is to always underpay. Today, Rangeley owns a portfolio of event driven value investments. Positions are taken in order to maximize the expected value of our portfolios. They are sized to account for liquidity and downside. Rangeley’s Special Opportunities strategy launches in January 2016 under the leadership of Andrew Walker . Andrew focuses on small capitalization, under analyzed opportunities that lack a natural investor base capable of correcting mispricing. You can read about Rangeley’s past and our future . If you are an accredited investor who wants to learn more, please contact my colleague Rob Sterner at resterner@rangeleycapital.com for details about Rangeley Capital and our upcoming fund launch. If you would like to consider becoming a member of Sifting the World , just send me your e-mail address and I would be happy to offer you additional information about joining.