Tag Archives: long-ideas

Why I Believe Terraform Power Is Still A Good Buy

Summary Despite the stock price decline, fundamentals remain on track. Dividend yield has improved to 6% plus. Strong stable cash flows, geographic diversification and a good mix of generation resources. Solar Energy will continue to grow in high double digits and TERP should benefit as the largest renewable energy yieldco. Yieldcos have been criticized by a lot of industry analysts recently. Given the downturn that the energy stocks are facing currently, yieldcos have failed to deliver the promised results. Having said that, I believe that yieldcos are a safe bet because of their low risk profile and ability to generate stable and predictable cash flows. Even when the entire energy market is going through a severe downturn, they should continue paying their dividends since their cash flows are quite stable. Everything was going well for Terraform Power (NASDAQ: TERP ), the spin off from SunEdison (NYSE: SUNE ), until July this year, when prices started to fall. Though the stock is down 40% since YTD, it has been frequently increasing its dividend and CAFD guidance. The stock has a current dividend yield of more than 6% with a market capitalization of $2.6 billion. Demand for solar energy will continue to increase such that more solar projects will require financing. TERP has a good portfolio of assets increasing dividend payouts in a regular manner. Despite the recent sharp price decline, TERP has maintained its dividend guidance for 2015. While the next year may not be great in terms of growth, TERP should be a good long term holding. Here’s why I think it’s a good buy 1) Renewable Energy Market Is Growing – There is no doubt about the fact that renewable energy is set to boom in the future. It is estimated that renewable energy could account for almost 80% of the world’s energy supply within four decades. As per the recent INDC filings, large countries will have to shift their focus toward solar, wind and other renewable forms of energy for their power needs. New solar projects will get launched in a regular manner and this will help the yieldco business model to flourish. 2) Largest Renewable Energy Yieldco – Terraform Power is well diversified with not only solar assets but also other renewable energy assets, such as wind energy projects. TERP occupies an advantageous position in the industry with a history of good performance. The company is going to slow down and consolidate, as its sponsor SunEdison is curtailing its expansion. 3) Good Liquidity Position to Support Acquisitions – Terraform Power had liquidity of ~$1.3 billion as if Q2 2015 to support further dropdowns and future targets. We currently have $1.3 billion of liquidity which is more than sufficient to support our growth needed for each of 2016 targets. We expect to use this liquidity to fund the Invenergy and Vivint Solar acquisitions, which will provide us with the capital that we need to meet our $1.75 DPS – Carlos Domenech CEO of Terraform. Source: SA Transcripts Source: TERP IR 4) Fundamental Performance Remains Quite Good – As can be seen from the table below, TERP’s performance has improved during the second quarter. The project pipeline also grew by 1 GW to reach 8.1 GW at the quarter end. 146 MW of dropdowns are expected to generate ~$21 million of unlevered CAFD annually over the next 10 years. Q1 ’15 Q2′ 15 Revenue (million $) 75 132 Adj EBITDA (million $) 52 108 CAFD (million $) 39 65 Dropdowns (in MW) 167 146 DPS ($) 0.335 5) High Yield – Terraform Power has been increasing its dividend payments as can be seen below. A yieldco primarily distributes its earnings as dividends to its investors and TERP has already achieved its full-year dividend per share target in the first quarter itself. The projected yield stands at 7.32% and the current yield is 6.32%. Date Amount 08/28/2015 0.335 05/28/2015 0.325 02/26/2015 0.27 11/24/2014 0.2257 Details of Recent dividends from Morningstar Downside Risks a) TERP’s performance is tied to SunEdison’s future performance – Though I was supportive of SunEdison’s acquisition strategy to become the leader in the renewable energy space, I agree that it has become a bit too aggressive. This has been a cause of concern for SUNE investors who have begun doubting the means to fund these acquisitions. One of the biggest risks for a yieldco is the fact that it’s heavily influenced by the actions of its sponsors. SunEdison is a strong renewable energy player today, but it needs to slow down to consolidate its acquisitions. SUNE’s stock price has taken a terrible battering after investors became alarmed over the increase in debt to finance its acquisitions. SUNE has corrected its course by canceling some of its acquisitions in India and Latin America. SunEdison’s stock price has started to stabilize after the management changed its strategy. However, TERP’s future is tied to SUNE’s performance. If it does not improve, then TERP will face a hard time in growing its assets. “We tried to do transactions the market couldn’t absorb. It started over a year ago but we got the brunt of it over the last two months.” – CEO Ahmad Chatila said in an interview. Source: Bloomberg b) Increased competition will result in higher acquisition costs – Even though the market has become slightly tough for yieldcos, there are still new ones in the pipeline. Canadian Solar (NASDAQ: CSIQ ) still plans to list its yieldco by the end of this year or early next year. There are other yieldcos such as 8point3 Energy Partners (NASDAQ: CAFD ) and NRG Yield. New yieldcos will increase competition, raising the acquisition cost for solar projects. Stock Performance and Valuation TERP stock currently trades at $18.3, which is 32% above its 52-week low price. The stock has lost 34% since the last one year and CAFD also is down 30%. The market capitalization stands at $2.6 billion, with a projected yield of 7.32% while CAFD’s stands at 4.37% . The current dividend yield of CADF is very low – a little more than 1%, while TERP’s stands at more than 6.3%. Conclusion Though the stock has been battered due to the general energy market slowdown and the skepticism around SunEdison, the yieldco has been performing quite well. Terraform Power has a lot of potential in the renewable energy space with a solid 27% diversification in wind energy. It has already achieved its full-year dividend per share target in the first quarter itself. SunEdison is a strong player in the energy market and Terraform Power will leverage from its leading position. Though there has been some unrest in the investor community I’m sure it will die soon, since solar energy is the future. Not only does yieldcos offer less volatility but are also more stable in dividend payouts. I support this yieldco platform and see the recent pullback as a good time to build a position.

AGL Energy Is Hitting The Sweet Spot Right Now

Summary AGL Energy’s net income and free cash flow look uninspiring, but one needs to dig deeper to find the true story. The net income was negatively impacted by an impairment charge whilst almost half of the capex consists of growth capex. Using the sustaining capex and taking AGL’s cost reduction plans into consideration, the company is trading at a 2018 FCF yield of 8-9% and that’s quite appealing. Introduction Very few people might know AGL Energy ( OTCPK:AGLNY ) ( OTCPK:AGLNF ), but this $7.5B market cap company is one of the largest electricity and gas providers in Australia. It trades in energy, but also creates its own power through its renewable and non-renewable power plants. Surprisingly, there’s a decent volume in shares of AGL Energy on the company’s OTC listing, but I would obviously strongly recommend you to trade in the company’s shares through the facilities of the Australian Stock Exchange. As you can imagine, the ASX offers much more liquidity as the average daily dollar volume in AGL Energy is $25M. The ticker symbol is AGL . 2015 was a tad better than expected… I was really looking forward to see the final results of AGL Energy’s financial-year 2015 (which ended in June of this year). We already knew that year wouldn’t be a good year when discussing the net profit, as the company had to record an A$600M ($420M) impairment on some of its (upstream gas) assets. This impairment charge was due to delays in starting up the gas production as well as a lower expected gas price. This obviously meant the book value of those assets might have been overly optimistic, so an impairment charge was the right decision. (click to enlarge) Source: Annual report And indeed, even though the revenue increased by 2% to A$10.7B ($7.5B), the EBITDA fell by a stunning 40% to A$946M. As there’s of course still the usual depreciation expenses and interest expenses, the net profit fell by almost 62% to just A$218M ($145M). Ouch! (click to enlarge) Source: Annual report Even the cash flow statements were a bit uninspiring. The operating cash flow was A$1.04B, and after deducting capital expenditures to the tune of A$744M, the net free cash flow was approximately A$300M ($210M). All this sounds pretty boring and uninspiring, but I prefer to look to the future instead of at the past. But the 2016-2018 period will contain some very nice surprises From this year on, there will be numerous improvements. First of all, the net income will sharply increase again as I’m not expecting to see much more impairment charges. That’s very nice to keep the mainstream investors happy, but my readers already know I care more about cash flow statements than about net income, so I dug a bit deeper, and I’m extremely pleased with what I discovered. Of the A$744M in capital expenditures in FY 2015, only A$395M ($275M) of that amount was classified as “sustaining capex” . As it’s essential for cash flow statements to find out what the normalized free cash flow is, one should only use the sustaining capital expenditures and exclude the growth capex. So if I’d to deduct the A$395M from the A$1,044M in FY 2015, the adjusted free cash flow increases to almost A$650M ($455M). But there’s more. AGL Energy remains on track to complete the objectives it has outlined to reduce costs by FY 2017. AGL’s plan consists of cutting operating costs in, for instance, IT and supply contracts whilst on top of that, the sustaining capital expenditures will decrease from A$395M in 2015 to A$315M in FY 2017. This would increase the adjusted free cash flow by approximately A$200M per year to A$850M ($600M). And keep in mind this doesn’t take the organic growth into consideration, as I’m expecting the company should be able to increase its revenue and operating revenue (whilst reducing the operating costs and sustaining capex). Source: Company presentation And this really puts AGL in an enviable position. The net debt/EBITDA ratio as of at the end of its financial-year 2015 was acceptable at 2.4, but this should start to drop extremely fast as the EBITDA will increase whilst the net debt will be reduced. In fact, even after paying a handsome 4% dividend yield. According to my calculations, in FY 2018, AGL Energy should have a net adjusted free cash flow after paying dividends of approximately A$400M, and this will probably be used to reduce the net debt (which will have a snowball effect as it will reduce the company’s interest expenses, increasing the net operating cash flow). It will also be interesting to see how AGL intends to spend the US$850M in cash flow it expects to generate through asset sales. Investment thesis So yes, AGL Energy’s 4% dividend yield is safe and will very likely be increased in the future. Don’t let the low net income fool you, the cash flow statements are explaining this story much better and the adjusted free cash flow is definitely sufficient to cover AGL’s dividend expenses. I’m also really looking forward to see if the company can indeed reduce its operating costs and sustaining capex, because if it would effectively be able to do so, AGL is trading at an expected free cash flow yield of 8-9% by FY 2018. I’m keeping an eye on AGL Energy and might pull the trigger during a weak moment on the market. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Can You Bet On Duke?

Summary There are multiple concerns with the company right now regarding lawsuits and blackouts, but this company is taking all the right steps towards clean energy to foster long-term growth. Focusing in on the stock’s current level after August/September volatility is key to deciding whether or not an entry point is plausible right now. It’s consistent dividend, but inconsistent cash flow is worrisome, yet I believe the company will pull through.. Duke Energy (NYSE: DUK ) is one of the most stable companies in my portfolio, but is starting to really look like a growth story based upon the ventures its undertaking. The stock rose quite confidently through August before getting hammered by speculation on the Fed in September. I view the mid-September bottom as the lowest level for the rest of the year, unless more Fed speculation develops. I’d argue that Duke is going to trend higher based upon internal factors now, as their shift towards clean energy is creating significant long-term growth opportunities. Performance It’s been a while since I last wrote on Duke, and probably fair enough considering it’s a utility company and its catalysts typically aren’t notable enough to reiterate on a short time frame. Duke, however, is special. This company is constantly in the news, whether it’s about the coal basin fines or its movement to get low-cost energy to east coast residents in a variety of ways, creating a lot of activity in the stock. You can view the YTD trend below: (click to enlarge) Source: StockCharts Growth Catalysts I use this company primarily as a safe investment because I believe utility companies, in theory, are very stable and predictable investments. While the YTD price trend won’t necessarily agree with me, Duke is starting to present itself as a great growth opportunity and to really clarify the forward-looking catalysts, I’m examining the following: Duke has applied for a permit to build a solar facility in Osceloa County in Orlando, FL by spring 2016. This solar facility is expected to bring 500 MW to the county by 2024, which makes it a very large-scale project. Duke is applying for a permit next month to build a natural gas plant in Asheville. It’s approval could come by the end of this year and would serve as a significant catalyst for the stock. They’re closing their already standing electric steam plant in Asheville (378 MW) and replacing it with this new plant, whose capacity is 650 MW. Since 2008, the company has spent $4 billion on wind and solar projects, which helps replace the energy needs of its customers as more coal-fired power plants are retired; while this is the more long-term direction of the company, but is a solid basis for those considering a long position Hurricane Joaquin could negatively impact the stock depending on the number of blackouts that occur and are attributable to Duke Expenditures to close the coal ash basins in an environmentally responsible manner will continue to occur, with the most recent payout being $7 million. They’re due to pay another $10-15 million by 2029 for this location. Fourteen total basins are required to be closed. The $90 million Indiana power plant payment has already been priced into the stock, in my opinion. Marginally lower utility rates for South Carolinians thanks to lower natural gas and lower coal prices. The finishing of several natural gas pipelines from the Marcellus is going to bring low-cost energy to east coast residents, allowing Duke to take advantage. These pipelines have been stalled from completion in the past, but are on track to finish by mid-late November. Keeping an eye on treasury yields is a good idea as these generally move in an inverse trend to utility stocks like Duke. As a further consideration, Duke has been one of the biggest movers on interest rate speculation in recent months and if interest rates do get hiked, Duke will see a noticeable pullback. I do not believe the Fed will hike rates in October, but there will still be added volatility as we near Yellen’s next speech. What’s notable about these growth catalysts is that Duke is moving away from harmful, nonrenewable energy sources towards cleaner fuels like natural gas and solar, which helps to not only make this company more of an ethical investment, but also helps it to reduce operating costs in the long-term and service a wider range of individuals. When you think about that value proposition, it’s hard to not justify an initial entry into the stock right now. From a financial standpoint, I think this company is heading into Q3 earnings with a lot of confidence. It has its highest TTM ROE in two years at 6.91%, and revenue, net income, and EBITDA are all up from a low Q1, which can springboard some easy growth rates for the next earnings report. Additionally, Duke is in constant conversation with federal and state governments about lowering the tax burden that they currently face. If this can retract even a percentage point, Duke is going to be in that much better position. Dividend Consideration The stock is currently yielding 4.67% and it’s worth noting that this is the 88th year in a row that Duke has paid a dividend, that’s nothing short of pure consistency. The dividend that was paid out on Sept. 16 was up 3.8% from the previous payout. Furthermore, the TTM payout ratio is 94.6% – that’s exceptional. The 5Y growth rate seems low at just 2.24%, but the payout is high enough to appease my concerns. Now, there are concerns about whether or not this company can continue to pay its high dividend given its current level of cash flows. OCF has been steady the last two quarters at $1.44 billion, and it’s worth noting that Q3 2014 showed the highest quarterly OCF in two years at $2.55 billion, which is going to create high expectations come the ER. FCF is unfortunately all over the place, due to their debt reduction/issuance activity, and is currently negative at -$212 million for Q2. TTM FCF is $797 million. Essentially, the company shells out anywhere from $551-$565 million in dividend payments every quarter and has not failed to pay these dividends in a very long time. Thinking that Duke may cut its dividend or not payout is not a current concern, despite less than ideal cash flows. Conclusion We’re a while out from the Q3 earnings report in the first week of November, we have a lot to consider about this company’s financial health and valuation. Current P/E is 18.29 which is above the industry average of 15.04, but I’d argue that this is very marginal, all things considered. Duke, to me, is a company that you place a long position into and let it sit and provide you a modest annual return and a good stream of consistent and growing dividends.