Tag Archives: dividend-ideas

Terraform Power’s Recent Moves Support Dividend Growth Of At Least 15% In 2016

Summary Terraform Power closed the first part of their planned transaction with Invenergy, 832MW of net wind power plants, increasing their current portfolio from 1.9GW to 2.8GW. I found it interesting that the company ended up changing the financing package for this transaction, which is expected to deliver unlevered CAFD of $139mil in 2016. Terraform also recently updated their purchase agreement with SunEdison for the producing assets of SunEdison’s deal to buy Vivint Solar. The updated deal projects that Terraform will pay $799mil to purchase 470MW of producing assets. These assets should produce annual CAFD of around $73-75mil. Both transactions support an increased dividend in 2016. The actual amount will depend on the timing of the transactions, but I expect 2016 exit rate of at least $1.60/share. Terraform Power (NASDAQ: TERP ) has had a pretty busy last couple of weeks. The company completed a large part of their planned transaction with Invenergy on Wednesday, buying 832MW of wind assets. This comes on the heels of the announcement last week of a renegotiation of the terms of SunEdison’s (NYSE: SUNE ) purchase of Vivint Solar (NYSE: VSLR ). The updates have removed many of the concerns investors have had with TERP, and the stock has responded in kind, as it has almost doubled from its late November lows. As I explain below, these transaction also support a continued dividend increase in 2016. TERP data by YCharts TERP came out with solid 3rd Quarter results in early November, but management’s unwillingness to confirm their previously estimated 2016 dividend increase to $1.75, and liquidity concerns at sponsor SUNE, led to the stock plunging over the next two weeks $6.73. At that point, the current yield was 20%. The market finally came to its senses when David Tepper announced a large stake and sent an open letter to management. Invenergy Transaction: Sources/Uses of Fund Changed One of the interesting takeaways from TERP’s announcement of the Invenergy transaction is the fact that they changed the way they ended up financing it. Back in July when the deal was made, the plan (see page 17) was to place half the MW into TERP immediately, and hold the other half in a SUNE warehouse. From August thru the 3Q earnings call in November, the plan (see page 18) was to only drop down 265MW and place the rest in a structured warehouse. Now it seems that management has decided to place all of the projects directly into TERP immediately. Sources of Cash   Uses of Cash   Non-Recourse Project Debt assumed or incurred with respect to transaction $801m 832MW of Wind Assets located in US and Canada $1,962m Pro-rata portion of $500mil new non-recourse term loan $417m     Cash on Hand (incld proceeds from TERP $300mil senior note offering in July 2015) $744m       $1,962m   $1,962m The press release notes that, “once all projects are operational, the first year adjusted EBITDA (before minority ownership) is expected to be $147 million, and unlevered CAFD (before all project and HoldCo debt payments) is expected to be $139 million.” Unfortunately, this doesn’t clarify how much we should expect the project and HoldCo debt payments to be, so it’s tough to predict how much of the unlevered CAFD will actually be available for dividend payments. My best estimate is to use the initially projected cash on cash yield of 8.4%, which equates to about $62mil (8.4% x $744mil cash on hand). We’ll have to wait for TERPs 4Q results for more details. The new $500mil term loan charges LIBOR + 5.5%, with a 1% LIBOR floor, meaning that TERP is currently paying 6.5%. It matures in 2019 and can be prepaid anytime, so it’s very likely that TERP will refinance this as soon as they can organize something with better terms. Vivint Transaction Terms Improve Last week TERP and SUNE announced that they had improved the terms of the Vivint transaction. TERP was able to reduce their initial purchase commitment from $922mil down to $799mil, by only paying for completed installations, and paying a reduced fee of $1.70/MW. The final total will depend on the actual number of producing MW transferred when the Vivint deal closes sometime during Q1 2016. In their Q2 earnings presentation, management noted that they expected the 523MW to generate average unlevered CAFD of $81 annually, so I project that the 470MW delivered at close will generate $70-75mil annualized unlevered CAFD. Considering the fact that TERP used substantially all of their cash on hand at the end of Q3 to fund the Invenergy transaction, it’s likely that they will be drawing on their revolver for much of the $799mil. The revolver’s rates are currently under 3%, so the annual interest would be about $24mil. Thus, I expect final CAFD to be about $50mil. 2016 Updated CAFD Projection Based on their 3Q presentation, TERP expected to generate CAFD of about $208mil before taking into account the Invenergy and Vivint transactions. If we assume that the Vivint transaction closes by the end of Q1, we should see annualized CAFD at the following levels next year: Quarter End Q1 Q2 Q3 Q4 Annualized CAFD $270m $320m $320m $320m CAFD distributed (85%) $230m $272m $272m $272m Per Share Quarterly Distribution $.35 $.40 $.40 $.40 The quarterly distribution estimates include the effect of SUNEs IDRs. I don’t expect TERP to actually increase the dividend to $.40 for Q2, even though it seems that operations would allow this. Rather, it’s likely that they will prefer to show steady quarterly increases up to $.40/share in Q4. This confirms my view that these transactions will cause TERP to increase their dividend by at least 15% over the next year.

Strong Fundamentals The Name Of The Game For Southern Company

Summary SO’s fundamentals strongly backed by its hefty capital investment plan. The company is utilizing available growth opportunities in the U.S. utility sector to keep earnings growing. SO is actively expanding its renewable energy generation portfolio. The stock is a good investment prospect for long-term income-seeking investors. Utility companies have a defensive business model because of consistent demand and regulated business exposure, which make revenues and cash flows highly certain. In the recent past, utility companies are incurring capital expenditures, which have been weighing on their earnings and cash flows. Utility companies are making capital expenditures to strengthen their power generation infrastructure to keep up with the gradually increasing electricity demand and keeping up with the changing environmental regulation. According to the EIA, electricity demand in the U.S. residential area will increase by 2.1% in the second half of 2015. The report also confirms 1.3% and 1.2% rises in commercial and industrial sales of U.S. utility companies in 2016. The bright outlook of the U.S. utility industry makes me bullish about Southern Company (NYSE: SO ), which is one of the largest utility companies in the U.S. The company serves both regulated and competitive markets across the U.S. SO is making its way in the U.S. utility industry by regularly investing heavily in expansion and the development of its renewable regulated asset base. Also, the stock maintains its attractiveness for income-hunting investors, as SO offers a yield of 4.8%. However, on the valuation front, anticipated production cost overruns at Kemper is making it trade at a discount to peers, which I think provides a good entry point for long-term investors. The company has been reporting healthy financial numbers, due to the strong backing of its large regulated asset base. The company registered an EPS of $1.17 in 3Q2015, an increase of $0.25 per share from EPS of the previous year’s same quarter. And for the nine months ending September 30th, the company’s EPS was $2.30, as compared to an EPS of $1.88 reported in the same period a year ago. The earnings growth momentum of SO is expected to remain strong in 4Q’15, which as per management’s estimates, will yield it a year-end EPS of $2.88 per share, at the high end of the previously given annual EPS guidance range of $2.76 to $2.88. I consider the company’s capital investment plan for the creation of a strong renewable energy generation base as a key driver of its future earnings growth. Recently, SO has announced that it will invest $2.3 billion this year, higher than its previous expectations of $1.4 billion. Although there are additional projects under consideration for 2016, its management still expects to spend around $1.3 billion during the year. Year to date in 2015, the company has announced around 12 new renewable energy-related projects, which will add 1,000MW capacity towards its existing renewable portfolio’s current capacity of 1,600MW. SO has been actively acquiring solar facilities to grow its portfolio of renewable energy generation. The company continued to develop itself as a solar success story by acquiring the 300MW Solar Gen2 and the 300MW Desert Stateline projects from First Solar (NASDAQ: FSLR ). The acquisition being in line with SO’s business strategy of expanding wholesale business in targeted markets through the acquisition and construction of new units, will bode well for SO’s earnings growth in the long run. Moreover, the company is right on track to become the second largest gas utility in the U.S. by merging with AGL Resources (NYSE: GAS ). The merger is waiting for regulatory approval, expected in the second half of 2016, after seeking a nod from AGL’s shareholders. Upside of this merger rests in strengthening SO’s status as the regional powerhouse in southern U.S. Moreover, given the size of GAS, I believe the probable GAS-SO merger will boost overall earnings growth of the company by approximately 4% to 5%. More importantly, SO’s future earnings growth will be driven by the settlement of its Vogtle nuclear power plant. By keeping the nuclear power plants schedule on time, in-service dates of two nuclear power plants are expected to be 2019 and 2020. Actually, customer rate impact for Vogtle unit 3 and unit 4 is expected to remain in the previously predicted range of 6% to 8% , which will affect the company’s future earnings and free cash flow growth positively. Speaking of its clean coal power plant ‘Kemper’, which has been repeatedly delayed in the past few quarters, has resulted in stock valuation contraction. The stock is trading at a forward P/E of 15.34x , in contrast to the utility industry’s forward P/E of 18.85x . The management expects that the project will be operational from the first half of 2016, but in early October, the Mississippi Public Utilities staff analyzed the Kemper project and said that there is hardly a 30% chance that the project will be completed by December 2016. Given the fact that the company’s management has estimated a $25 to $30 million incremental cost, if the project is delayed in the second half of 2016, I believe the Kemper project will remain an overhang on the stock price in the near term. However, once the project is completed, it will augur well for the stock valuation. Furthermore, SO has an attractive capital repayment plan, strongly backed by its cash flows. In the current low interest environment, its current dividend yield of 4.80% , with its strong free cash flow growth potentials, is well headed to ensuring a safe and sustainable future of income investors, and casts an impressive outlook of the stock. Summation The company has strong business fundamentals, which are strongly backed by its hefty capital investment plan. In its attempts to keep its earnings growing, SO is utilizing the available growth opportunities in the U.S. utility sector. And for this, the company is actively expanding its renewable energy generation portfolio, which being regulated, offers huge earnings growth potentials. Owing to the strong growth potentials of SO’s ongoing renewable energy generation projects, I expect to see uninterrupted growth on its earnings and cash flows in the long term, which I think will help its shareholders to be satisfied by consistently increasing dividends. Therefore, I think the stock is a good investment prospect for long-term income-seeking investors.

The 4 Horsemen Of Southern Utilities, Revisited

Combined, these four utilities service over 22.8 million customers in 11 states. These states represent some of the best for regulatory friendliness to utilities, an important fundamental for all utility investors. The Southeast’s economic growth has lagged the national average, but the recent growth curve appears to be favoring this region. In March 2013, I penned an article that suggested owning four utilities servicing the southern states. These were Southern Company (NYSE: SO ), Dominion Resources (NYSE: D ), Duke Energy (NYSE: DUK ), and SCANA Corp. (NYSE: SCG ). There is still good reason to implement this strategy. The first is the geographical territory covered by these. Combined, the geography stretches from Virginia to Mississippi and from Florida to Indiana and Ohio. A basic concept for utility investing is: It’s all about location, location, location. After SO gobbles up AGL Resources (NYSE: GAS ), these four will service a combined 22.8 million customers. Below is a list of states covered by each firm: Southern Co.: Mississippi, Alabama, Florida, Georgia, and soon to add Arkansas with the AGL merger Dominion Resources : Virginia, West Virginia, and Ohio Duke Energy : Florida, South Carolina, North Carolina, and Indiana SCANA Corp. : South Carolina, North Carolina, and Georgia These states represent areas of improving economic growth. Over the past four years, the Bureau of Economic Analysis has pegged the average annual growth in the Southeast at 1.3%, after getting a slow start in 2011 at a sub-par growth of 0.6%, or less than half the 2011 national average. In 2014, the percent change in GDP for the Southeast was 1.7%, still slightly worse than the national average of 2.2%. However, the percentage growth trend line is one of the best in the country. From a regional growth perspective, the Southeast has improved from last in 2011 to fourth out of eight in 2014. Continuing regional and national outperformance in key service states of Georgia, Florida, South Carolina, West Virginia, and Ohio will offer better organic opportunities for these utilities. Personal income annual growth has been approximately the same as the national level at a four-year average of 3.75%. Population growth has been strong at 12% above the national average at 0.9% a year. Below is a graph of GDP growth by state offered by the BEA. (click to enlarge) These four utilities cover states that are usually considered healthier for regulatory oversight. The credit side of S&P offers an assessment of the regulatory environment as their friendliness, or lack thereof, has an impact on the credit worthiness of regulated utilities. Pre-2014, S&P offered a four-category grouping (More Credit Supportive, Credit Supportive, Less Credit Supportive, Least Credit Supportive), but since changed to a three-category grouping (Strong, Strong/Adequate, Adequate), which is a bit less precise. However, it is still a meaningful comparison of the 10 states listed above. Southern Co.: Mississippi (Adequate, Credit Supportive), Alabama (Strong, More Supportive), Florida (Strong, More Supportive), Georgia (Strong/Adequate, More Supportive), and Arkansas (Strong/Adequate, Credit Supportive) Dominion Resources: Virginia (Strong/Adequate, Credit Supportive), West Virginia (Strong/Adequate, Less Supportive), and Ohio (Strong/Adequate, Credit Supportive) Duke Energy: Florida (Strong, More Supportive), South Carolina (Strong, More Supportive), North Carolina (Strong, Credit Supportive), and Indiana (Strong/Adequate, More Supportive) SCANA Corp.: South Carolina (Strong, More Supportive), North Carolina (Strong, Credit Supportive), and Georgia (Strong/Adequate, More Supportive). On average, Duke and SCANA have better regulatory profiles than Southern and Dominion. Below are S&P Credit post- and pre-2014 utility regulatory assessments by state: (click to enlarge) Source: S&P Credit (click to enlarge) Source: S&P Credit Below is a table comparing various stock fundamentals for each of the four horsemen: Source: Guiding Mast Investments, reuters.com, morningstar.com Since 2013, Dominion’s equity rating fell one notch while SCANA’s increased one notch. Southern Company’s credit rating fell by one notch and Duke’s increased by the same amount. From the table above, the PEG ratio indicates the better value seems to be Dominion and SCANA while Southern and Duke have the highest yields. Dominion and SCANA’s trailing 12-month return on invested capital, ROIC, is higher than their respective five-year averages, indicating improving capital management. Below are fastgraph.com presentation of each of these stock’s 20-year history and current valuations: (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) Below are total return performance charts of the four utilities, as offered by Morningstar.com, starting with a graph of total return of a $10,000 investment five years ago: Source: morningstar.com However, each utility has some issues. Southern Co. and SCANA share similar concerns with large nuclear power construction projects in progress. Dominion is spinning off natural gas assets into its drop-down MLP. Duke may have paid a high price for its latest acquisition as it continues to move towards a higher exposure to regulated returns. Both Duke and Southern Company are expanding their regulated businesses by buying more natural gas customers in existing service territories. Within the realm of underlying consolidation trend in the utility sector, three of the four should remain the acquiring companies while SCANA could be an acquired company, especially after its large construction exposure diminishes over the next few years. For example, with an enterprise value of $15 billion, SCANA could be absorbed by any of the other three. Overall, utility investors looking to expand their horizons should consider any or all of these four horsemen of the southern utilities. Author’s note: Please review disclosure in author’s profile.