Tag Archives: utilities

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.

Exelon – Making Good Strategic Decisions

Summary Exelon’s commitment to growing its regulated asset base with investments means it will experience strong future growth. The company remains committed to acquiring POM, which will strengthen and expand regulated operations. Analysts are expecting a healthy earnings growth rate of 5.06% for EXC. I reiterate my bullish stance on Exelon Corporation (NYSE: EXC ); the company’s healthy financial performance in the first half of 2015 indicates that its fundamentals are really strong. Moving ahead, as EXC continues to invest in projects related to its infrastructure growth and development, I expect to see the company’s financial numbers growing at a rapid pace in the years ahead. EXC’s acquisition of Pepco Holdings (NYSE: POM ), if approved, will strengthen the company’s future growth potentials giving more upside to its future earnings and revenue base. And given the fact that the long-withstanding nuclear plant closure plan is about to get legislative approval soon, I believe that EXC will witness a positive impact on its stock price as it will raise investor confidence in the company’s future growth prospects. EXC’s Long-Term Growth Drivers Remain Intact Given the fact that demand for electricity has been increasing at a modest pace, utility companies have been investing heavily in their infrastructure development and growth-related projects to meet growing demand and strengthen their power generation fleet. Like all other companies, EXC is also making hefty growth investments for its natural gas and renewable energy generation-related projects that contain strong potential for rate base growth. Under this investment plan, around 215MW of clean energy generation assets were added to the company’s portfolio in 2014. Moreover, in the first half of 2015, EXC’s 40MW of Fourmile Wind energy project started operations in Maryland, whereas the construction of its second Maryland-based wind project, the 30MW “Fair Energy Wind Project”, is underway. Given the fact that its attempts for growth of clean and renewable energy generation infrastructure have started making positive contributions to the company’s financial numbers in the overall first half of 2015 and, particularly in 2Q15, EXC’s growth efforts have accelerated in this area. Currently, the company is actively working to complete its 230MW of solar photovoltaic project in Antelope valley, Solar Ranch. With around 3.8 million solar panels, the solar photovoltaic project, once completed, will be the largest photovoltaic projects in the world. In addition, EXC is working hard to build a new CCGT unit in Granbury, which is expected to add 1,000MW to the existing 704MW at the natural gas power plant. With their high operational flexibility, which is 100MW/Minute ramp rate and efficiency, these units will not only transmit energy faster but also have the flexibility to generate electricity during peak demand hours. The company’s management has reaffirmed their confidence in CCGT units, and given the strong efficiency of these assets, I believe EXC could generate healthy returns in Texas. Along with its infrastructural growth and development-related projects, the company’s increased inclination towards acquiring other business casts an impressive picture of its future growth prospects. In this regard, EXC has long been eyeing the potentials of POM. Recently, DC regulators have denied the company’s bid for POM, but given the strong growth potentials attached to the deal, EXC’s management said in a recent press release that they will appeal against the regulator’s decision. The company’s management believes the POM acquisition will increase the contribution of its regulated utility earnings to 60%-65%, in total, up from its current 50% contribution, which will ultimately secure its future earnings and sales growth potential, and will also provide stability to its cash flows. Owing to the company’s hefty growth investments made year-to-date and also due to its plan of making more investments in the years ahead, I expect strong sales and earnings for EXC in future. During the 2Q15 earnings conference call, while affirming the company’s long-term investment plan, EXC’s CEO said : …we’re investing $16 billion in our existing utilities over the next five years, which provides respectable growth rates, and roughly another $7 billion with the addition of PHI.” Furthermore, the company’s decision to either shut down or retain the nuclear plants in Illinois is expected this month. Given the fact that retention of nuclear plants will become costly for EXC, due to order costs related to nuclear cores, which depend on the length of continuing operations, and also due to increased legislative requirement under the Obama administration, I believe the company should close its loss-making Illinois-based nuclear reactors in order to better its competitive position and secure its long-term earnings growth potential. Also, EXC will be able to focus on its stable, regulated operations, which ensure a secure and stable cash flow base for the company. EXC has been sharing its success with shareholders in the form of dividends, and dividends offered by the company are safe. Also, its cash flows will improve in future due to the company’s above-mentioned efforts for getting a larger, regulated asset base. The stock offers a dividend yield of 4.20% . Given the company’s commitment to making healthy dividend payments and also due to its secure cash flow base, I expect to see consistent dividend growth in future. Also, analysts expect an increase in cash flows and book value per share for EXC in 2016 and 2017, as shown below. (click to enlarge) Source: 4-traders.com Risks The company remains exposed to the risk of fluctuation in commodity prices, which could adversely affect its margins. Furthermore, rate base risks, volatility in interest rate environment, lower capex outlook and unforeseen weather changes are few risks that might hamper EXC’s future stock price performance. Conclusion The company’s commitment to growing its regulated asset base with investments, including investment directed towards several clean and renewable energy generation projects, makes me believe that EXC will experience strong future growth. Moreover, the company remains committed to acquiring POM, which will strengthen and expand its regulated operations, and provide stability to its sales and earnings in the years ahead. Also, analysts are expecting a decent sales growth rate of 3.16% for EXC, which is well above the industry median of 1.62%. Moreover, analysts have projected a healthy next five-years earnings growth rate of 5.06% for EXC. Due to the aforementioned factors, I am bullish on 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.

The Guggenheim S&P 500 Equal Weight Utilities ETF: Utilitarianism

An alternatives to a traditional government bond holding. Utilities offer steady, consistent returns and are largely immune to the business cycle. This equal weight utilities fund is biased towards low dividend risk, yet has a respectable return. The world of investing has changed much over the past five years due to the financial crises of 2008 and its subsequent recession. The realization that investing may never be the same is a growing one, particular when it comes to income. As it stands now, even if central banks are able to normalize policy, it still may be years before government bond yields normalize, and that’s under the assumption that all advanced economies will continue to grow uniformly. Recent economic reversals in newly emerged economies, particularly the “BRICS” along with the collapse in commodity prices and the astonishing overproduction of crude petroleum have all weighed on high quality assets yields. High quality government securities have been pressed to their limits. Furthermore, cross market technology, institutional trading, pension fund demands and ‘carry asset’ strategies have created much higher volatility in the once mundane government bond market. The point of the matter is that the individual investor may be saving for retirement in a completely new world. The strategy of holding long term government bonds as a portfolio cornerstone has become an ‘old world’ concept. Utilities assets may be one replacement solution for government bond holdings. There are several to choose from, and one of the top yielding in the class is the Guggenheim S&P 500 Equal Weight Utilities ETF (NYSEARCA: RYU ) . According to Guggenheim, the fund “… Seeks to replicate as closely as possible, before fees and expenses, the performance of the S&P 500 Equal Weight Index Telecommunication Services & Utilities. ..” A word about the ‘equal weight’ S&P Index: according to S&P, the equal weight S&P 500 index is an alternative version of its renowned S&P 500 market cap weighted index. In the equal weight index each S&P 500 member constitutes 20 basis points of the S&P 500 index with a quarterly rebalancing in order to prevent excessive turnover. The S&P 500 equal weight Telecommunications and Utility Index is merely a subset of the equal weight S&P 500 index. Since the fund is based on ‘equal weightings’, it seems superfluous to analyze the top ten holdings. Instead, since the objective here is dividend risk assessment it would be more useful to analyze the potential risk to regular distributions. This may be achieved by comparing a company’s payout ratio to the dividend. Since a payout ratio is defined to be the proportion of earnings paid out as dividends, the lower the payout ratio the less likely the dividend will be reduced and conversely, the higher the payout ratio, the more likely a dividend may be reduced. The fund has 34 holdings and an average dividend yield of 4.0571%. The average payout ratio is 73.62%. (This is less than the S&P 500 market cap weighted payout ratio of almost 85). Five of the holdings have payout ratios of over 100%; 21 of the 34 holdings are below the average payout ratio; 11 are above; 2 have non applicable payout ratios; 14 of the holdings are above the fund’s average yield, and 20 are below the fund’s average yield. Hence, the fund is biased towards the ability of the holding to continue to pay or increase dividends. The chart below summarizes the payout ratio (in blue) and the yield (in red). (click to enlarge) (Data from Reuters and Guggenheim) The 10 lowest payout ratios average out to 44.39% with an average yield of 3.563%. There are no Telecom Service companies in the fund with a payout ratio low enough to place it in the ten lowest of the fund. (Data from Reuters and Guggenheim) The 10 holdings with the lowest payout ratio are summarized in the table below. Company Type Price/Earnings (TTM) Price/Cash Flow Price/Book Divided Yield Payout Ratio AES Corp (NYSE: AES ) Independent Power and Renewable 9.70 3.24 2.14 3.31% 23.43% Edison International (NYSE: EIX ) Electric Utility 12.60 5.52 1.72 2.80% 33.70% PPL Corp (NYSE: PPL ) Electric Utility 10.84 6.49 2.11 4.81% 38.81% Dominion Resources (NYSE: D ) Multi-Utility 24.29 12.25 3.40 3.65% 41.43% Scana Corp (NYSE: SCG ) Multi-Utility 10.29 6.69 1.44 4.04% 43.98% Nextera Energy (NYSE: NEE ) Electric Utility 15.56 8.11 2.16 3.02% 45.61% Sempra Energy (NYSE: SRE ) Multi-Utility 17.77 9.24 2.07 2.88% 48.80% Public Service Enterprise (NYSE: PEG ) Multi-Utility 11.13 6.56 1.61 3.85% 52.13% Eversource Energy (NYSE: ES ) Electric Utility 16.76 9.80 1.50 3.46% 55.99% Exelon Corp (NYSE: EXC ) Electric Utility 11.59 4.20 1.15 3.95% 56.51% (Data from Reuters and Guggenheim) There are, as one might expect, different types of Utility Companies. Diversified Telecommunications includes entertainment, mobile, internet and voice services; Electric Utilities are, as the name implies, electricity providers although some, Duke Energy for instance, provide natural gas as well; Independent Power and Renewables generate power through renewable resources like wind and solar and also install residential and business solar systems; Multi-Utilities provide natural gas, electricity, storage facilities and pipeline delivery. (Data from Reuters and Guggenheim) For a few detailed examples: AES is global, providing services to Chile, Columbia, Argentina, Brazil, Central America, the Caribbean, Europe and Asia. AES generates renewable power from solar, wind, hydro, bio mass and landfill gas. Scana Corporation, classified by the Guggenheim fund as ‘Multi-Utility’ provides natural gas as well as fiber-optic and telecomm services. Dominion Resources distributes natural gas, electricity, natural gas storage, LNG transportation and risk management services. It also has an equity stake in a joint venture with Caiman Energy called Blue Racer , a Marcellus Shale natural gas processing company; neither are publically owned companies. NiSource Inc (NYSE: NI ) is a holding company providing services through 13 subsidiaries for gas, electric and pipeline as well as a financing service. Many of these companies also hedge or trade derivative contracts. The point being that for utility funds with only a few holdings, it’s worth examining the descriptions or company profiles of the holdings to fully understand the depth of the individual holdings. (click to enlarge) Lastly, the fund has a reasonably long history, incepted in November of 2006. Its expense ratio is reasonable at 0.40%. Its total net assets are over $112,487,000 distributed over 34 holdings with a cash reserve. The average daily volume is 186,066 shares per day and there are 1.6 million outstanding shares. It currently trades at a slight discount, $-0.08 per share to NAV. The fund has paid a total of $17.80 in quarterly dividends since inception. Hence, the fund provides a reasonable yield in today’s low yield environment, low volatility with a beta of 0.87 and reasonable liquidity. Should the global economy contract because of a readjustment in the Chinese economy, and the U.S. economy remains reasonably strong with depressed commodity prices, a utility fund such as the Guggenheim S&P 500 Equal Weight Utilities ETF would do well generating good returns with relative safety for some time to come. 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. Additional disclosure: Additional disclosure: CFDs, spreadbetting and FX can result in losses exceeding your initial deposit. They are not suitable for everyone, so please ensure you understand the risks. Seek independent financial advice if necessary. Nothing in this article should be considered a personal recommendation. It does not account for your personal circumstances or appetite for risk.