Tag Archives: utilities

A Few Reasons To Remain Invested In American Electric Power

Summary American Electric’s fundamentals and valuation are favorable. American Electric is employing a number of strategies to improve its operational efficiency, and is also expected to invest aggressively in infrastructure projects. American Electric is expected to grow at a faster rate than the industry average. Electric utility company American Electric Power (NYSE: AEP ) has turned out to be a profitable investment so far this year. The company’s stock has done better than the S&P 500 index, gaining 28% so far. But, the god thing is that American Electric still remains a good investment due to its strong fundamental position and sound strategies that will help it improve further. Fundamentals are strong Trading at 16.33 times last year’s earnings, American Electric is cheaper than other players in the industry. Moreover, in the future, it is expected that the company will see better growth in its bottom line. In the previous five years, American Electric has clocked an annual earnings growth rate of 4.81%, and in the next five years, the growth rate is expected to improve to 5.2%. In comparison, the broader industry’s earnings are expected to improve at a rate of just 1.23%. Hence, American Electric is expected to grow at a faster rate than its peers. In addition, American Electric’s cash flow and dividend are appealing. The company carries a yield of 3.60% at a payout ratio of 55%. Now, since its bottom line growth is expected to be strong, it should be able to sustain the dividend. Moreover, American Electric has generated impressive cash flow numbers in the past twelve months. Its operating cash flow stands at $4.8 billion, while levered free cash flow is $287 million. As such, American Electric is in a fundamentally strong position considering the above argument. Strategies are sound Going forward, the company’s strategies should ensure that it continues to get better. American Electric Power is executing on its plan of expanding the transmission business model, and it is allocating an extra $100 million of incremental capital in 2014 for the model. Looking ahead, American Electric has approximately $2 billion of incremental transmission projects that will be executed in the coming four years. Also, to make operations more efficient, American Electric has deployed trucks at the Cardinal Plant for loading the entire welding materials at one place, and thus saving much of the time to transport and get inventory for parts. The time saved can be utilized in attending to tube leaks and alternate areas to get back the generation quickly. At the South Ben storage yard, it is simplifying and organizing storerooms and toolkits for improving the work times. The creation of new documents by the engineering group will also allow for accelerated response for projects to its customers for enhancing the customer experience. In addition, the Cook Nuclear plant is undergoing a first of its kind LEAN activity, and American Electric has already reduced the duration for targeted re-fueling, along with the costs related to it. Hence, the company is focused on reviewing several processes to eradicate redundant activities, along with the ones that fail to add value. Also, American Electric has evaluated a barge unloading system at the Amos Plant, which has resulted in an estimated investment of $6 million. It is estimated that this move will reduce coal costs by $10 million per year. Moreover, the company has decided to wash the flagging vests in the APCo Charleston area, thus saving $6,000 per year for a single employee, amounting to a total of $120 million of savings for 20,000 employees of the company. Risks to consider However, there are certain risks that investors will be taking on if they invest in American Electric. First, the company has a very weak financial position. Its cash position is weak at $299 million as compared to the total debt of $19.34 billion. In addition, a current ratio of 0.70 indicates weak short-term liquidity. A look at the graphic below indicates American Electric’s financial position as compared to industry peer Duke Energy (NYSE: DUK ). AEP Debt to Equity Ratio (Annual) data by YCharts Hence, American Electric has a pretty high debt-to-equity ratio as compared to Duke, while the current ratio is also lower than Duke. As such, American Electric will need to continue growing its earnings and cash flow at a good pace in order to improve its financial position. But, the good thing is that American Electric is well-positioned to improve its earnings, as analysts expect its bottom line at a rate of 5.2% for the next five years as compared to the industry average of 1.3%. Conclusion Hence, there are a number of reasons for investors to remain invested in American Electric. The company’s fundamentals are sound, it is focused on delivering more efficiency, and it has lined up investments to make the business better. As a result, though the stock has performed impressively this year, it is likely that it can deliver more gains going forward.

Clean Energy Fuels: Weighing The Pros Against The Cons

Summary Except for revenue, Clean Energy Fuels saw a decline in other key metrics in 2014. Clean Energy is burning through cash as it invests in infrastructure to tap the natural gas fueling market. Since natural gas-powered vehicles are expected to grow over 20 times in the next six years, it is important for Clean Energy to invest in infrastructure. Clean Energy, however, needs to make a quick turnaround in order to arrest a rapidly rising debt/equity ratio and a declining profit margin. It can be easily concluded that 2014 has been a year to forget for Clean Energy Fuels (NASDAQ: CLNE ), with the stock having depreciated almost 60%. This doesn’t come across as a surprise, because the company’s revenue growth hasn’t led to an improvement in its profitability. In addition, the company is burning through cash. The following chart will give us a bird’s eye view of Clean Energy Fuels’ problematic 2014. CLNE Revenue (NYSE: TTM ) data by YCharts But, the decline in Clean Energy’s net income, EBITDA, and cash from operations isn’t surprising at all as the company operates in an industry that’s making gains at a fast pace. According to Navigant Research , the global market for natural gas vehicles (NGVs) will reach 35 million units by the end of the decade, an impressive increase over 1.5 million units this year. Now, Clean Energy provides fueling infrastructure for these trucks. Considering the rapid pace at which the usage of NGVs is expected to grow in the future, Clean Energy needs to build up its infrastructure. This is the reason why the company’s financial performance has not been up to the mark this year, as it has aggressively invested in its infrastructure. But, the good thing is that it has positioned itself nicely for growth in the future. In fact, in 2015, its loss is expected to drop to $0.83 per share from the expected 2014 loss of $1.07 per share, translating into an improvement of 22.4%. Additionally, its revenue is slated to improve 15%. Moreover, for the next five years, Clean Energy’s bottom line is expected to continue improving at an annual rate of 25%. Factors Driving the Bullish Case The question is: Can Clean Energy actually achieve the expected growth rates? I think it can. The company recently closed two key strategic transactions with Mansfield and NG Advantage , and both these will allow it to tap key growth markets. NG Advantage has a robust compression infrastructure in place. As a result, it can provide cheaper natural gas for the facilities and vehicles of Clean Energy’s customers. Mansfield Energy, meanwhile, is a key behind-the-gate fuel provider in the U.S. It has partnerships with more than 900 petroleum hauling carriers countrywide. Through this venture, Clean Energy will operate closely with Mansfield’s haulers for transitioning their fleets to natural gas. Now, the addressable market opportunity that this joint venture has opened up is worth 3 billion gallons of diesel a year. In comparison, Clean Energy delivered 159 million gallons of natural gas in fiscal 2013. Hence, there is a big market that Clean Energy can tap as a result of the Mansfield deal. Apart from these partnerships, Clean Energy is also spending on the growth of its organic infrastructure. So far this year, Clean Energy has closed 49 station projects, and it has another 28 station projects under development. Driven by these infrastructure improvements, Clean Energy has been able to increase its customer count on the back of improved capacity. For instance, Clean Energy has signed a deal with Dillon Transport, and plans to open three truck-friendly public CNG stations to maintain Dillon’s expanding fleet of 200 natural gas trucks. Once fully deployed, these are expected to use 2.5 million gallons of fuel per year. The Bearish Case However, not everything is rosy about Clean Energy, as the following chart shows: CLNE Profit Margin ( TTM ) data by YCharts Clean Energy’s profit margin has been declining at a very fast pace, while its debt is rising at the same time. Presently, the company has total cash of $248 million, while its debt stands at $619 million. Also, as mentioned earlier in the article, it is burning through cash. The company’s operating cash flow is a negative $58 million in the past one year, while levered free cash flow is also negative at $121 million. Thus, if Clean Energy is unable to make a quick turnaround, its position might deteriorate further. This is a risk that investors need to be aware of. Conclusion As I mentioned in my bullish case, Clean Energy’s bottom line is expected to improve at an impressive pace. Given the prospects in the natural gas fueling market and Clean Energy’s own investments, there is a good probability that the company will be able to make a comeback in the future.

Entergy Corporation: A Derivative Play For The Gulf Coast Petchem Boom

Summary Entergy is building a new power plant and has plans to build new transmission infrastructure. Load demand, not price hikes, is driving earnings growth. Shares are up considerably but I believe they still have a ways to run. It’s difficult to like utilities these days. With interest rates so low, utilities typically yield under 4%. To make matters worse, most states now have ‘renewable energy mandates,’ which means that utility companies are effectively mandated to invest in new energy infrastructure even when load demand is static. This leaves utilities with little choice but to raise rates in the coming years merely to recoup the cost of investment. On August 15th I wrote an article on Entergy Corporation (NYSE: ETR ), a Louisiana-based utility which I thought was the best alternative to the renewable energy hurdle facing US utilities today. Unlike most other states, Louisiana has opted out of renewable energy mandates. Louisiana’s economy is also benefitting greatly from an unprecedented boom in the petrochemicals industry along the gulf coast. This building boom includes everything from chemical plants, NGL crackers, steel mills and LNG export facilities. Since August 15th, Entergy has soared along with the rest of the space. Entergy has leapt from $72 per share to $91, thanks largely to falling interest rates. Right now, most US utilities are trading somewhere above their average P/E multiples, Entergy included. Does that mean it’s time to sell the stock and call it a day? That is what this article will try to answer. Load growth (click to enlarge) Courtesy of Entergy Corp Investor Relations This graphic pretty well sums up what Entergy expects in the coming three years. Residential use is expected to rise modestly, but industrial use will increase by around 6.75% per year, which will drive overall retail load growth by around 3.5% year on year. Utilities love industrial load growth, because it often begets residential load growth, which in turn brings commercial and governmental load growth. The petrochemical boom along the Gulf Coast could bring a decade of good times for utilities such as Entergy, which has business all throughout Louisiana and also in the Texas Gulf Coast. Utility companies must always consider replacing old generation and transmission infrastructure, but it’s easiest to do so when load growth is increasing, because the costs to build more capacity can be spread out on a larger customer base. Entergy is constructing another plant in Louisiana, one which the company believes will support economic growth in the region with low energy prices for years to come. The new power plant, named Ninemile 6, is a gas turbine. Ninemile 6 is scheduled to be ready by the first of next year, and it is the earliest of a very robust construction plan from Amite Parish in southern Louisiana to the Texas Gulf Coast around Houston. Through 2021, Entergy will build transmission lines for the new Cameron LNG plant and a new steel plant. New transmission lines will go up along the Gulf Coast, and eventually the company will upgrade its southeast Louisiana terminal equipment too. Next year, Entergy will spend $665 million. All the while, load demand increases and a focus on the most economical generation sources will keep rates down. With a kilowatt per hour cost of just 7.7 cents, Louisiana has the fourth lowest electricity cost in the nation (behind Kentucky, West Virginia and Washington state). A list of industrial projects underway on the Gulf Coast. Projects range from steel mills to LNG export terminals, and include several world-class companies. Courtesy of Entergy Corporation Investor Relations Valuation As I mentioned earlier, shares of Entergy have jumped up with the rest of the sector. Shares were somewhat below fair value back in August, but they are now just slightly above. Let’s take a look at FAST Graphs for a bigger picture. Courtesy of FAST Graphs In August, shares were well below their fair value and average P/E ratio. Now, however, shares are 13.4% above average P/E and just about at the Graham-Dodd ‘Fair Value’ number. (FAST Graphs measures this by trailing twelve-month earnings.) While Entergy may not be a great deal right here, I would also say that it is way too early to sell shares. Entergy’s 3%-4% retail electricity demand growth makes the company a better choice than most other utility names. Entergy is a multi-year play and I believe this stock has way more room to run. At twenty times trailing earnings Entergy would trade at $120. Given the company’s solid growth prospects, I think twenty times earnings would be a place to consider hopping off. For now, however, I believe that Entergy should be allowed to run for awhile. Conclusion Entergy is in the right place at the right time, and it is one of the only utilities I would consider owning right now. (In fact, it is the only utility which I currently own shares in.) Unlike most other utilities, Entergy is largely unburdened with the need to supply more expensive renewable energy to its customers. The petrochemical boom is fueled by a supply of cheap input costs in natural gas and natural gas liquids. This gives US petrochemical companies an advantage over the rest of the world, and this input cost advantage does not look to be going away anytime soon. Entergy is a relatively low-risk ‘derivative play’ for the petrochemical boom, and I believe shares have a good bit more ways to run before an investor should even consider taking anything off the table.