Tag Archives: long-ideas

Future Growth Opportunities For Duke Energy After Piedmont Acquisition

Duke Energy expands its reach from the electric utility industry into the natural gas business. Increases Duke Energy’s stake in very profitable Atlantic Coast Pipeline while tripling gas customers. Expect to see increased EPS for Duke Energy. By Matt De Jesus I have a strong buy recommendation for Duke Energy (NYSE: DUK ) after its acquisition of Piedmont Natural Gas. Duke Energy acquired Piedmont for $4.9 billion, and will also assume around $1.8 billion of its debt, representing an enterprise value of close to $6.7 billion for Piedmont. Duke Energy paid a 40% control premium on the acquisition, paying out Piedmont shareholders $60 in cash for each share outstanding. Reasons they paid this high premium are related to the possible synergies related to the deal. This acquisition is a good deal for Duke Energy, as they try to grow in the utilities industry and possibly expand nation wide. Duke Energy is the largest electric power holding company is the country, and is headquartered in Charlotte, N.C. Before acquiring Piedmont, Duke Energy was known for producing electricity, and not a big name in the gas industry. However, with the electricity industry showing signs of stagnant growth, Duke Energy wanted a piece of Piedmont Natural Gas for a couple of reasons. First, the natural gas industry is growing, whereas the electricity industry is not. Utilities are going through a period right now where natural growth is slow, so companies, like Duke Energy, must grow through acquisitions. The natural gas market, according to Wall Street analysts, is bullish right now, so everyone is trying to get into the gas business, adding significance to Piedmont’s acquisition. They will receive all of Piedmont’s existing customers, thus tripling its number of natural gas customers from 500,000 to 1.5 million. Also, with Duke’s established brand and stake across the southeast, I expect these numbers to grow further. The second reason Duke Energy acquired Piedmont was because of the Atlantic Coast Pipeline. Now owning Piedmont, Duke Energy increases its stake in the $5 billion Atlantic Coast Pipeline to 50%. More importantly, because of the state regulations on Piedmont’s fuel delivery incorporated with the pipeline, the acquisition provides Duke Energy with a steady and predictable profit, which is very important in the utility industry. Much of a utility companies growth is based on a rate base, which is the value of property on which a public utility is permitted to earn a specified rate of return. So, utility companies make money off returns on investments in property for the company. This is why the regulated returns on the Atlantic Coast Pipeline are so important, as they are consistent and profitable. Third, the move is in line with the company’s possible plans to grow throughout the U.S. and not just stay in the Carolina, southeast area. By establishing itself in the gas industry, Duke is scaling itself for the long-term next step in its growth, which may be to take the company nationwide. This move would not be any time in the near future, as Duke must first establish itself in the gas industry. Some may question Duke Energy’s paying such a high control premium to buy out Piedmont, but in the long run, this is a great deal for the company. The deal enhances Duke’s forecast EPS rate of 4% to 6%. To give some perspective, Piedmont’s rate base and EBITDA have been rising annually at about 9%. Duke’s stock price is currently at $67.32, and has been down recently because of the debt involved with the deal and slowed growth in the electric utility industry. The 52-week low on the stock is $67.07, with the high being $89.97. This deal, in the end, will be good for Duke, and it’s investors because it will enhance EPS. The stake in the Atlantic Coast Pipeline is very integral to this, and will provide regulated profit for the company even when the market for electricity is down. Also, the market for natural gas is bullish, and with a big company like Duke Energy providing natural gas, investors will reap the benefits of the profits Duke will make from Piedmont. We’ll see Duke Energy grow in these next months/year, but it will take some time before we see the major benefits from this deal.

CenterPoint Energy: Investors Have Nothing To Fear

Summary The stock continued to decline after Q3. Equity investment write-down doesn’t reflect the investment’s true value. Results from core operations improved from last year. The market continues to be bearish about CenterPoint Energy (NYSE: CNP ). Given the company’s performance in 2015, it would seem that investors are doubting the stability of the utility company. After falling 20% from $23.43 at the beginning of the year to $18.68 before Q3 earnings, shares have since dropped another 8% to $17.10. Do the fundamentals support this rapid decline? Revenue continued to fall. Following Q2’s 19% drop, Q3 revenue decreased by 10% ($1.8 billion to $1.6 billion) as well, primarily as the result of lowering natural gas prices. However, this was offset by the drop in natural gas expense, which decreased from $702 million to $527 million. Due to various cost reductions, the company was able to decrease its operating expense from $493 million to $479 million. This impact may seem small, but this allowed the company to increase its operating income by 14% when compared to Q3 2014. This rise in operating profit is the first time the company achieved growth in 2015. Q1 and Q2 operating profit decreased by 13% quarter on quarter, and Q3 operating profit was flat. Isn’t this evidence that the company is improving? What are investors worried about? Possible Concern One thing that could trouble investors is the loss from equity investment ($794 million), which is the biggest reason that the company delivered a $900 million loss before taxes. The equity investment consisted solely of Enable Midstream (NYSE: ENBL ), a stock that I’ve talked about before. You can read my previous articles ( here and here ) to learn more about the company. Enable Midstream Partners is a midstream company that is suffering from industry headwinds. However, the company continues to deliver good cash flows due to its fee-based contracts. Furthermore, it is well capitalized with a good interest rate coverage ratio. Enable’s transported volume continued to grow in Q3, offsetting declining prices that negatively impacted product sales. Going forward, I believe Enable will come out on top even if natural gas prices don’t improve. What does all of this mean? I believe that the write-off of equity investment is not representative of Enable Midstream Partners’ true value. Core Operation Remains Stable Enough about Enable, what about CenterPoint’s existing operation? In my last article , I talked about the company’s stability. The Electric segment is not directly affected by commodity movements since it is not involved in power generation activities. The Natural Gas Distribution segment does have some exposure to commodity movements due to a time lag between purchases and deliveries, but the company actively uses derivatives to hedge any uncertainty. So overall, I would expect profit to be stable over the long term. CenterPoint’s stability is once again evident in Q3. Every single segment improved quarter on quarter. Operating income for the Electric segment rose 5%, Natural Gas Distribution’s operating income recovered from last year’s volatility, improving from a loss of -$8 million to a gain of $11 million, and Energy Services’ operating income increased by 17%. Takeaway I believe there’s nothing in the third quarter that was particularly alarming. The company continued to deliver stable profits amid a volatile commodity environment. Unfortunately, investors have been focusing on the wrong things. In particular, the Enable Midstream fear is overblown. Results from core operations should continue to improve, and that is what will really support the company as a whole.

Westar Energy: A Progressive Utility With A 3.5% Yield

Summary Westar Energy harnesses wind in Kansas for cheap power. Westar Energy retiring three old coal and gas plants. Westar implemented a $78 million rate increase in October. Westar Energy (NYSE: WR ) is a progressive utility company that is aggressively moving to clean power. Westar Energy plans to nearly double its clean power while reducing fossil fuel energy by 7%. In my previous article about Westar Energy, I told investors to buy this stock around $37 per share as the company adds cheap wind power while reducing coal. Kansas has some of the strongest winds in the country. Westar is prepared for tougher environmental regulations from the Clean Power Plan. The Clean Power Plan establishes state-by-state targets for carbon emissions reductions, and it offers a flexible framework under which states may meet those targets. The final version of the rule would reduce national electricity sector emissions by an estimated 32% below 2005 levels by 2030. Westar Energy has sufficient capacity right now to meet demand. But on a conference call with investors, Mark Ruelle, president and chief executive officer, said the investment in wind is primarily because it’s so inexpensive with the tax credits. The move also is a bit of a hedge on what form the Clean Power Plan takes in Kansas. Ruelle said wind energy is a bargain right now. (click to enlarge) Ruelle said Westar Energy has sent out requests for proposals to add another 500 megawatts of power. Right now 9% of Westar’s generation is from renewable resources, but that number will grow to 17% of generation in 2016. Nearly all of this energy will be from wind. Westar Energy’s energy generation mix includes 700 megawatts from wind energy, with commitments to add another 600 megawatts under development for a total of 1,300 megawatts. In addition, Westar is now considering adding another 500 megawatts on top of the 1,300. “We’re continuing to evaluate, but right now it looks like it makes more sense for our customers if we own all of our sizable portion of the incremental renewables,” Ruelle said. “Today our renewables portfolio is heavily imbalanced for PPA (Purchase Power Agreement) vs. ownership and if we don’t re-balance it a bit that might set us and our customers up for problems down the road when the PPAs expire, plus customer economics favor ownership,” Ruelle said. Westar Energy recently announced plans to close three small units at Lawrence, Tecumseh and Hutchinson by the end of the year. These are the first major unit that Westar has closed in the past few decades. The Lawrence and Tecumseh units burn coal, and the Hutchinson one uses natural gas. “It’s been good for our customers to hold on to these small old units as long as we reasonably could, but for a number of reasons, now is the right time to let them go,” Ruelle said. “They have lasted decades longer than anyone ever imagined, some of them are older than me, but given the clean power plan, their age, size and our need to manage expenses, it just doesn’t make sense to pour more money into them. They reflect two small 50s and early 60s vintage COLI units and a 60s vintage gas steamer. Together they are just 350 megawatts and less than 1% of plant investment.” Third quarter Westar Energy’s third quarter was sluggish. Cool-to-mild temperatures in August hurt demand for electricity. Westar Energy posted 3Q15 earnings of $138.2 million or $0.97 per share, compared with $146.9 million or $1.13 per share in 3Q14. Earnings for the nine-month period ended Sept. 30, 2015, were $253.4 million or $1.84 per share, compared with $270.3 million or $2.08 per share for the same period in 2014. The company has narrowed its 2015 earnings guidance range to $2.18-$2.25 per share from $2.18-$2.33. The company issued preliminary 2016 earnings guidance of $2.38-$2.53 per share. The company has strong financial strength. The company’s debt is investment grade. Total long-term debt was $2.941 billion at the end of 3Q15, compared to $3.224 billion at the end of 2014. The stock trades around 18.8 times earnings, which is a slight premium to its peers. Westar will see earnings improve in the fourth quarter and in 2016 due to implementation of a $78 million rate increase, approved by the Kansas Corporation Commission. Risks Utilities are sensitive to interest rates. When the Federal Reserve begins raising interest rates, these stocks are likely to take a hit. Utilities had a nice run up in 2014, but haven’t performed well in 2015. The Utilities Select Sector SPDR Fund (NYSEARCA: XLU ) is down -9.47% YTD. Westar stock has held up fairly well in 2015, down only -1.14% YTD. Ruelle said one large chemical producer had reduced consumption of electricity due in part to the low prices for oil. I believe we are near a bottom in oil but the price recovery will be slow and arduous. Weather is always a factor with utilities. Westar benefits from extremely hot temperatures in the summer and really cold temperatures in the winter. 2015 was mild to moderate most of the year in Kansas. Conclusion If Westar falls into the high $30s again, investors may want to consider buying the stock. Westar is a well-run utility with strong financials and steady income. The stock offers a yield of 3.5% with potential for modest appreciation. I bought WR at $37.03 on Aug. 27, 2015. The stock recently traded at $41.32 per share, a gain of 11.58% plus the gain from the $0.36 dividend for a total gain of 12.55%. I’m holding o nto the stock. Long-term investors will get the dividend and likely modest appreciation with a 12-month target price of $44.