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.