Tag Archives: utility

Westar Energy: Why I’m Buying This Midwest Utility

Summary Westar Energy is a solid utility company with an 11-year history of increasing its dividend. Kansas economy grows despite tax problems initiated by its state governor. Westar stock sports a 3.89% yield. I’ve been watching Westar Energy (NYSE: WR ) since 1999. As a journalist, I covered the rise and fall of David Wittig, former Westar Energy CEO, who ran the utility like a hedge fund, making a big bets on various businesses unrelated to electricity generation. Westar Energy was for many years a natural gas and utility business. Because of Wittig’s mismanagement, the company was forced to sell natural gas assets to pay down debt. The debt reduction and subsequent CEOs’ focus on improving Westar’s utility business helped the company’s bonds become investment grade by the rating agencies. The company is way more attractive today as an investment than 16 years ago when I started covering it. I have met every CEO of this company since 1999. Toward the end of his reign Wittig was trying to dismantle the company by selling off assets, it was sad to watch. Investors who bought the stock at $9 per share during the crisis in the early 2000s have done quite well, but at the time, there was a very dark cloud over the company. I believe Wittig should have been running a hedge fund, not a regulated utility. Wittig resigned in November 2002 amid a scandal that involved a local banker in a real estate deal. Wittig’s cloud hung over the company until the two parties settled for $36 million payout to Wittig in 2011. Under CEO Jim Haines, Westar streamlined into a pure-play utility company. Bill Moore continued this mission while embracing wind power and cheap natural gas generation. Current President and CEO Mark Ruelle has picked up momentum by investing in wind generation and transmission projects while upgrading coal fired power plants to meet stringent emission standards. Westar spent over $1 billion in air quality investments in the past five years. The company is winding down expenses in air quality, from upwards of $200 million annually to less than $100 million this year and less than $30 million 2016. A June 2, 2015, presentation says Westar has seen “dramatic improvements in air quality.” Wind Renaissance Meanwhile, Westar Energy has really increased its use of renewable energy, especially wind. Renewable energy is currently 9% of generation mix — more than uranium at 8%. Renewable energy will grow to 16% in 2015. This is huge. And coal is declining. Westar uses cheap natural gas to generate electricity. Natural gas is easier to use than coal. Coal plants take some time to start up and shut down. Natural gas generators are quick to turn on and off. So natural gas assets are timely when the wind isn’t blowing, although the wind blows mightily in western Kansas most of the time. (click to enlarge) A year ago, Prairie Wind Transmission, LLC, a joint venture between Westar Energy and Electric Transmission America, celebrated completion of its 108-mile, 345-kilovolt high-capacity electrical transmission line in south-central Kansas. The double-circuit line will serve as an electric energy super highway between eastern and western Kansas, promoting growth of renewable energy in Kansas, providing greater access to lower-cost electricity and improved reliability in the region. Electric Transmission America is a joint venture between subsidiaries of American Electric Power (NYSE: AEP ) and Berkshire Hathaway Energy (NYSE: BRK.B ) to build and own electric transmission assets. “With our current wind resources and those we’ve already committed to next year, we’ll have enough renewable energy to power half our residential customers,” Ruelle said in a recent call with investors. Ruelle said Gov. Sam Brownback has favored renewables. “It’s just pragmatic Kansas politics,” Ruelle said . “He has been a big sponsor of renewables and supported renewables for what it means for rural Kansas. But as you also know there are folks that don’t like the concept of subsidize the energy period and Kansas has made a lot of progress in renewables and everybody has sort of been doing it…We have been doing it because that makes sense economically. And basically Kansas got to a place where we didn’t think a mandate was probably needed to step it up. We’re doing it not because of the mandate, we’re doing it because it’s relatively inexpensive and it’s a good way to navigate the environmental rates.” Westar Energy is the largest electric energy provider in Kansas, providing generation, transmission and distribution to approximately 687,000 customers in east and east-central Kansas. The company is headquartered in Topeka, and employs about 2,400 people in Kansas. Its energy centers in 11 Kansas communities generate more than 7,000 megawatts of electricity, Westar operates and coordinates 34,000 miles of transmission and distribution lines. The Economy The Kansas economy has grown slowly and steadily since the Great Recession of 2008-09, but lags the robust growth of Nebraska or Colorado. Kansas Gov. Sam Brownback is business friendly, but his tax policy has drained state reserves and forced cuts to education and welfare. The political situation here is backward to say the least. Growth occurs in places like Wichita because it is more entrepreneurial than Topeka, it’s not surprising that Pizza Hut started in Wichita. You will find more entrepreneurs in western Kansas than in the statehouse of Topeka. Kansas’ Gross State Product has grown from $121 billion in 2009 to $144 billion in 2013. In a recent conference call, Ruelle said, industrial sales were mixed to down. “The biggest negatives are from our largest chemical manufacturer and pipelines reflecting the impact of lower oil prices,” Ruelle said. “On the positive side, the refineries were operating at capacity and commercial aerospace remains strong. Other good news is that the large candy maker (Mars) who just came to our service territory a couple of years ago has already announced a big expansion and that will add a few more megawatt to our sales.” Rate case Westar Energy asked regulators for a $152 million rate increase but the Kansas Corporation Commission staff recommended $55 million based on a 9.25% Return on Equity (ROE). “If adopted that would be among the lowest authorized ROEs in the nation,” Ruelle said on the investor conference call. I believe the KCC’s proposed 9.25% ROE is lower than the historically 10% to 11% ROE built into previous rate cases. The KCC’s decision on the rate case is expected by Oct. 28 with implementation of new rates in November. I predict a negotiated settlement somewhere around $75 million. That would add $0.53 cents per share in revenue or about $0.06 cents per share in profit. EPS for the trailing 12 months was $2.25 per share, while the company is predicting 2015 earnings guidance at $2.18 to $2.33 per share. An additional $0.06 cents from the rate case would increase EPS by 2.6%. With large air quality projects finishing in 2015, the company’s need to raise capital has diminished. The company has a decent balance sheet, plenty of liquidity and no need for new equity. As a result, I expect the company to continue its trend of increasing its dividend. Growth and income investors will like this: The company has increased its dividend every year for 11 years. Payout ratio is reasonable at Westar Energy. Company pays out 60% to 75% of earnings in dividends. The current $0.36 cent per share quarterly dividend is a yield of 3.89%. I like the stock at $36.00. I believe the stock is fully valued at $40 per share. WR was trading at $39 per share in mid August before the recent stock market correction. Risks It is likely the Federal Reserve will start raising interest rates. This may or may not happen in 2015, but I do expect rates to go up by fall 2016. The cost of debt will go up for all utilities, including Westar Energy. However, I believe we will see relatively low interest rates for many years, perhaps the next decade. Economic growth is sluggish in Kansas. Gov. Sam Brownback eliminated income taxes for most small businesses, with the hope the owners would re-invest the tax savings into job creation. But business owners, farmers and ranchers did not need additional employees, so they never went on a hiring spree as Brownback had hoped. With a reduction in state revenue, local school boards will likely raise property taxes to fund the education gap. Weather has been mild all year, reducing the need for a boost in generation that is typical in summer months. Conclusion Westar Energy is a solid company with good management. A year ago I had purchased Westar stock at $36 per share and sold it at $40 per share. I recently bought shares at $37.07, and may add shares at lower prices. The stock market is going through substantial volatility. I can sleep at night owning this stock. People need electricity. Westar rates are among the most affordable in the country. I believe a rate increase will happen this fall and the company will be able to raise its dividend in 2016. Disclosure: I am/we are long BRK.B, WR. (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.

Dividend Growth Stock Overview: MGE Energy Inc.

Summary MGE Energy provides electric and natural gas service to 300,000 customers in Wisconsin. The company has paid dividends for over a century and increased them since 1977. Since 2010, MGE Energy has compounded dividends at about 3%. The stock currently yields 3.2%. About MGE Energy MGE Energy (NASDAQ: MGEE ) is a utility company providing electric and natural gas service to nearly 300,000 customers across parts of Wisconsin, including the capital of Madison. MGE Energy’s assets include 885 miles of overhead electric distribution lines and over 2,600 miles of gas distribution mains. The company conducts much of its operations through multiple subsidiaries, including MGE (Madison Gas and Electric), MGE Power Elm Road, and MGE Transco Investment LLC. The company has its headquarters in Madison and employs nearly 700 people. (Note: For purposes of this article, when referring to the publicly traded company, I will use the term MGE Energy. Where I use the term “MGE”, I’m referring to the subsidiary.) MGE Energy reports its results in five distinct business segments: Regulated Electric Utility Operations, Regulated Gas Utility Operations, Non-regulated Energy Operations, Transmission Investments, and “Other”. The Regulated Electric Utility Operations segment is responsible for generating, purchasing and distributing electricity through MGE Energy’s wholly owned subsidiary MGE. The segment serves over 140,000 customers, 86% of whom are residential customers; the remainder are commercial or industrial customers. The segment generated slightly more than half of MGE Energy’s total net income in 2014. The Regulated Gas Utility Operations segment purchases, transports and distributes natural gas to nearly 150,000 customers in 7 Wisconsin counties. Like the Electric Utility Operations segment, the ratio of residential to commercial/industrial customers is 8:1. The segment generated about 20% of MGE Energy’s 2014 net income. The Non-regulated Energy Operations segment controls two MGE Energy subsidiaries: MGE Power Elm Road, LLC and MGE Power West Campus, LLC. MGE Power Elm Road owns an 8.33% interest in two coal-fired generating units and MGE Power West Campus owns a controlling interest in a cogeneration facility on the campus of the University of Wisconsin. Both subsidiaries lease their shares of the assets to MGE for its electricity supply needs. 24% of MGE Energy’s 2014 net income was generated by this segment. The Transmission Investments segment controls MGE Energy’s investment in American Transmission Company LLC. MGE Transco Investment LLC (a subsidiary of MGE Energy) owns 3.6% of American Transmission. Earnings generated by this segment reflect MGE Energy’s share of American Transmission’s earnings. Finally, the “Other” segment includes subsidiaries that are responsible for investing in companies and property that support the regulated operations of the other segments, and that assist businesses expand within central Wisconsin. In 2014, MGE Energy earned $80.3 million on revenues of $619.9 million. These figures were up 7.2% and 4.9%, respectively. The bulk of the income growth came from a decrease in Electric Utility segment expenses. Net income from the Gas Utility segment was up 4.8% due to a colder winter as compared to 2013. Earnings per share were up 7.4% to $2.32, giving MGE Energy a payout ratio of 50.9% based on the annualized dividend of $1.18 per share. The long-term debt-to-equity ratio decreased in 2014 to 37.5% from 39.5% in 2013 due to a nearly 7% increase in shareholders’ equity. The company’s earnings are driven heavily by seasonal weather. With a return to more normal temperatures in 2015 (the winter of 2014 was unusually cold in MGE Energy’s operating area), the company’s earnings were down 34% in the 1st quarter and flat in the 2nd quarter. Combined earnings in the 1st half of 2015 were 92 cents a share, down 24% from $1.21 in the 1st half of 2014. The company has a share repurchase program to support the direct share and dividend reinvestment programs, but not to specifically reduce the number of outstanding shares. The company is a member of the Russell 2000 index and trades under the ticker symbol MGEE. MGE Energy’s Dividend and Stock Split History MGEE has compounded its dividend at about 3% since 2010. MGE Energy began increasing dividends in 1977. The company announces dividend increases in mid-August and the stock goes ex-dividend at the end of August. In August 2015, MGE Energy announced a 4.4% increase to an annualized rate of $1.18. I expect MGE Energy to announce its 40th year of dividend increases in August 2016. Like most utilities, MGE Energy increases its dividends very slowly, with annual increases in the low-to-mid single digit percentages. Over the last 5 years, the company has compounded its dividend at a rate of 3.1%. The dividend growth is slower over the long term, with 20-year and 25-year annual compound rates of roughly 1.6%. MGE Energy has split its stock 3 times in the last quarter century, each time 3-for-2. The stock split in January 1992, February 1996 and, most recently, in February 2014. A single share purchased prior to the first stock split would now be 3.375 shares. Over the 5 years ending on December 31, 2014, MGE Energy Inc.’s stock appreciated at an annualized rate of 17.72%, from a split-adjusted $19.90 to $44.99. This outperformed both the 13.0% compounded return of the S&P 500 index and the 14.0% compounded return of the Russell 2000 Small Cap index over the same period. MGE Energy’s Direct Purchase and Dividend Reinvestment Plans MGE Energy Inc. has both direct purchase and dividend reinvestment plans. You do not need to already be an investor in MGE Energy to participate in the plans. For new investors, the minimum initial investment is $250, or $25 if you sign up for 12 months of automatic investments. Follow on direct investments have a minimum of $25. The dividend reinvestment plan allows full or partial reinvestment of dividends. The plans’ fee structures are somewhat favorable for investors – the company picks up the transaction fee for purchases, but you’ll be assessed brokerage commissions on shares purchased on the open market. (There is no brokerage commission for shares purchased directly from the company.) When you go to sell your shares, you’ll pay a transaction fee of $15 plus the applicable brokerage commission. All fees will be deducted from the sales proceeds. Helpful Links MGE Energy’s Investor Relations Website Current quote and financial summary for MGE Energy (finviz.com) Information on the direct purchase and dividend reinvestment plans for MGE Energy 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. I have no business relationship with any company whose stock is mentioned in this article.

I Own Southern Company And AGL Resources – Now What Do I Do?

Summary The utility stocks Southern Company and AGL Resources are low growth, high yield investments. Southern Company is buying AGL Resources – I own both. What does the transaction mean to shareholders of both companies? This article reviews the transaction as it relates to shareholders going forward. Introduction Utility stocks are generally low-growth high-yield investments. As I will soon illustrate, both Southern Company (NYSE: SO ) and AGL Resources Inc. (NYSE: GAS ) neatly fall into that category. These low growth and above average dividend yield characteristics have led me to only invest in utility stocks when two important conditions are met. First and foremost, when considering utility stocks, I am even more of a stickler for fair valuation. My logic is simple; since long-term historic and future prospects for growth are low, I consider it imperative to only invest when utility stocks can be bought at fair value or below. There is typically not enough growth available to produce an attractive enough total return if you overpay even slightly. With most utilities, the dividends are consistent, but also grow at low rates in conjunction with the utility’s earnings growth. Second, I like to utilize utility stocks when current and dependable income is my primary investment objective. Although many utility stocks can be classified as dividend growth stocks, I tend to like them more for current income than total return. However, when purchased at or below sound valuation, investments in utility stocks can produce acceptable levels of long-term total return. On the other hand, when investing at sound valuations, utility stocks do tend to produce significantly more cumulative dividend income than the average company. As the following two announcements and reports indicate, Southern Company will become the second-largest utility company in the U.S. by customer base after buying AGL Resources. Importantly, Southern Company’s management expects the transaction to accelerate earnings growth in the first full year from its traditional 2% to 3% rate to a higher but still moderate 4% to 5% earnings growth rate. “Southern Co. to buy AGL Resources in $12B deal Aug 24 2015, 07:49 ET | By: Carl Surran , SA News Editor Southern Company (SO) agrees to acquire AGL Resources (GAS) for $66/share in cash, a 38% premium over Friday’s closing price, in a deal with an enterprise value of ~$12B including debt. SO says the deal will create the second-largest utility company in the U.S. by customer base, with 11 regulated electric and natural gas distribution companies providing service to ~9M customers with a projected regulated rate base of ~$50B. SO expects the deal to increase EPS in the first full year after the close and drive long-term EPS growth to 4%-5%” ” MARKET PULSE Southern Co. agrees to buy AGL Resources in $12 billion deal Published: Aug 24, 2015 7:41 a.m. ET By Ciara Linnane CORPORATE NEWS EDITOR Shares of AGL Resources Inc. GAS, +28.52% surged almost 9% in premarket trade Monday, after Southern Co. SO, -3.14% said it has agreed to buy AGL in a deal with an enterprise value of about $12 billion. Southern Co. said it expects the deal to boost earnings per share in the first full year after the close, and to drive long-term EPS growth to 4% to 5%. AGL will become a wholly owned unit of Southern Co., creating the second-biggest utility in the U.S. by customer base. AGL shareholders will receive $66 in cash for each share, a premium of 36.3% over the volume-weighted average stock price over the last 20 trading days through Aug. 21. We believe the addition of AGL Resources to our business will better position Southern Company to play offense in supporting America’s energy future through additional natural gas infrastructure,” Chief Executive Thomas Fanning said in a statement. The deal is expected to close in the second half of 2016. Southern Co. shares were up slightly in premarket trade, but are down 6.7% in the year so far, while the S&P 500 has lost 4.3%.” Here is a link to a report on Reuters that outlines the deal: The Southern Company Purchase of AGL Resources by the Numbers As a shareholder of both Southern Company and AGL Resources, I immediately wanted to know what I might expect from this transaction. In other words, does the deal make economic sense and will it benefit shareholders over the long run? Therefore, I looked at the deal through the lens of the F.A.S.T. Graphs fundamentals analyzer software tool and the FUN Graphs (fundamental underlying numbers) in order to evaluate the value to me as a Southern Company and AGL Resources shareholder. From The Perspective of an AGL Shareholder I was quite content with my position in AGL Resources as I considered the company fairly valued with a blended P/E ratio of 14.3 and I appreciated the 4.3% dividend yield. Additionally, since my cost basis was approximately 39, I was enjoying a reasonable level of capital appreciation coupled with its current above-average yield that had been growing at about 2½% to 3% per annum. The following earnings and price correlated graph illustrates my contentment. (click to enlarge) Of course, the approximate 30% premium over fair value significantly improves the total return I will receive when the transaction is complete. Therefore, from the perspective of an AGL Resources’ shareholder, I am quite pleased with the windfall. The following forecasting calculator on the day of the announcement and based on AGL Resources’ expected midterm future earnings growth illustrates the premium that Southern Company is paying. (click to enlarge) This is what the same graph looks like as of 8/24/2015, which shows the premium price that Southern Company is paying for AGL Resources. This would indicate that technically speaking AGL Resources has become overvalued as a result of the premium paid by Southern Company. (click to enlarge) On the other hand, when looked at from the perspective of expected future cash flows, the premium price that Southern Company is allegedly paying does not look so enticing. Cash flows are expected to increase significantly this fiscal year. Therefore, on the basis of price to cash flow, the apparent premium that Southern Company is paying based on earnings, looks like a bargain based on cash flows. (click to enlarge) When reviewing the cash flow per quarter growth (cflq) that AGL Resources has generated thus far in fiscal 2015, those fiscal year 2015 cash flow projections appear to be on track. So now, I am partially conflicted. I like the premium market valuation, but I’m not so sure that I’m truly receiving a premium price for my AGL shares based on potential cash flow growth. I have circled the last three quarters of cash flow highlighting the cash flow growth over the last three quarters. (click to enlarge) Furthermore, when I evaluate AGL’s historical annual dividends paid per share (dvpps) coverage based on cash flows per share (cflps) I am confident that my dividend was secure. Of course, I am even more confident considering the recent quarterly cash flow growth presented above. (click to enlarge) Furthermore, upon reviewing other valuation ratios, it appears that Southern Company instituted the transaction when AGL’s price to sales (ps) was at reasonable levels. However, the premium price they had to pay is common when a company is purchased outright. (click to enlarge) Additionally, AGL’s price-to-book value (PB) at the time the transaction was initiated was within historical norms as well (the red line). (click to enlarge) The bottom line is that as an AGL shareholder I have mixed views about the transaction. I like the premium market valuation, but I was also content to continue holding my AGL shares for the high yield they were providing. From The Perspective of a Southern Company Shareholder The following long-term earnings and price correlated graph on Southern Company supports my contentment as a shareholder. Although my cost basis in Southern Company was approximately at the same level that the company was trading at prior to the announcement, I was quite happy with my 4.7% dividend yield and believed that the company was fairly valued. Consequently, I was committed to continuing to own this high-quality utility company for many years to come. Moreover, even the approximate 5% price drop as a result of the transaction did not concern me very much because I felt the dividend was secure, above average, and had the potential for a modest amount of future growth. However, I was now faced with the issue of whether my Southern Company investment would continue to make sense after they purchased AGL. (click to enlarge) At this point, I decided that I would give credit to management’s assertion that the transaction would in fact accelerate Southern Company’s future earnings, and therefore, along with it – future dividend growth. Therefore, I reviewed the Forecasting Calculator based on consensus estimates from S&P Capital IQ prior to the AGL transaction. Here I discovered that consensus expected Southern Company’s earnings to grow at a very modest rate of 2.7%. Based on those consensus estimates and assuming that Southern Company would trade at a reasonable P/E ratio of 15 out to fiscal year-end 2018, I came up with a total annual rate of return expectation of 5.22%. Of course, that is nothing to write home about as it only represented capital appreciation of $.85. On the other hand, the $7.70 of projected dividend income was very attractive considering today’s low level of interest rates. Clearly, this is purely an income play and I had no delusions of anything different. (click to enlarge) This is what the expected returns look like after Southern Company’s price drop as a result of the announcement. The announcement brought Southern Company’s stock price into better alignment with fair value. (click to enlarge) For additional insight, I felt the forecasts prior to the transaction announcement were reasonably reliable considering the historical record of analysts forecasting Southern Company’s earnings. As the following analyst scorecard indicates, when making 1-year forward and 2-year forward estimates since calendar year 2000, the record of analysts following Southern Company has been consistently accurate at over 93%. (click to enlarge) Then I ran a similar calculation using the custom Forecasting Calculator based on management’s expectation of earnings growth accelerating to between 4% and 5% as a result of the transaction. I split the difference and ran a calculation based on Southern Company’s 5% drop in price and a forecast 4.5% growth rate. Based on those calculations, I was pleased that my Southern Company investment offered the potential for significantly more capital appreciation of approximately $11.11 versus the $.85 based on growth prior to the transaction. However, I was even more pleased to discover that my dividend income of $13.19 would be close to double what I expected prior to the transaction. Note: all these calculations are made and based on purchasing one share of the stock. The bottom line is that I have concluded that my Southern Company investment holds the potential to be much more attractive after the AGL transaction than it was prior to it. (click to enlarge) As a bonus , I have prepared a free analyze-out-loud video on my website MisterValuation which provides a more in-depth and detailed look at the Southern Company and AGL Resources transaction. Summary and Conclusions From the perspective of a Southern Company shareholder based solely on the numbers, I am enthusiastic and pleased with the AGL transaction. From the perspective of an AGL shareholder, I am disappointed that I will lose the company as a separate holding, but pleased that I will still benefit from its potential as a Southern Company shareholder. Of course, the premium over current market price is also a plus. However, I am now also faced with the challenge of what I will do with the proceeds received from the AGL shares. At this point, I am not yet certain whether I would reinvest the proceeds into Southern Company, or look for another opportunity. However, I have time to assess the situation. Disclosure: Long GAS, SO at the time of writing. Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation. Disclosure: I am/we are long GAS,SO. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.