Tag Archives: utility

NorthWestern Corporation – A Year After The Near $1 Billion Transaction

Summary Cash flow generation outpaced dilution from the acquisition. The debt level is acceptable. The stock isn’t cheap, but you are paying a fair price in exchange for stability. NorthWestern Corporation (NYSE: NWE ) is a utility company that operates in Montana, South Dakota, and Nebraska. The company is both a generator and a distributor of electricity and a distributor of natural gas. In November 2014, the company completed a significant transaction, buying up hydroelectric generating facilities for $904 million. The idea is that this will decrease the company’s overall risk profile, since this transaction would decrease the company’s reliance on purchasing agreements. This is similar to how Questar Corporation sources natural gas from its own subsidiary instead of just being a typical distributor. Thus far, investors have been indifferent, as the stock hasn’t gone anywhere in a year. Is there anything wrong? To complete the transaction, the company issued 7.77 million shares at $51.50/share and $450 million of debt at 4.2%. The debt seems cheap, but the share issuance increased total share count by 20%, so there was significant dilution. However, this doesn’t seem to be a problem, as the company has significantly increased its cash flow generation. Year to date, the company generated $304 million of operating cash flow versus $205 million from last year. This represents an increase of 48%, well above the dilution. If we ignore the working capital changes, the improvement is more subdued (+15% from $207 million to $238 million), but is still impressive nevertheless. From an earnings perspective, the company seems to have gotten into a bit of trouble in Q3, as EPS dropped 33% from $0.77 to $0.51. As we’ve discussed earlier, the company was quite healthy from a cash flow perspective, so what caused this discrepancy? The answer lies in the income tax expense. In Q3 2014, the company benefited from the release of some unrecognized tax benefit. This was not repeated in 2015. For that reason I think the company’s performance is better judged by its earnings before tax, which mirrored the cash flow growth, rising from $12 million to $30 million. Looking at the balance sheet, I don’t see any reason for investors to worry either. Although there is $2 billion of debt, there is no major redemption until 2019, when $250 million would be due. Considering the company’s high cash flow, I believe that the company should not have any problem paying it off or rolling it over. From a coverage perspective, the company currently has an EBIT/interest expense ratio of 2.8x in 2015. For companies in other industries, I would be very cautious, but since the company is in the utility industry, investors do not have to worry about wild swings that could jeopardize the company’s current capitalization. From a valuation perspective, the company’s P/E ratio has steadily climbed to 18x given the multi-year long bull market. While the stock is no longer cheap on an absolute basis, I believe if you are looking safety, NorthWestern Corporation will still fit the bill. In other words, you are paying a fair price in exchange for the company’s stability. Keep in mind that the stability I’m referring to is the company’s ability to generate a profit, not revenue. Due to swings in the commodity market, revenue will not experience steady growth, but as a utility company, the company should continue to generate steady profits. (See below) Takeaway The company has continued to deliver good results in 2015. I believe that the relative muted response from the market can be attributed to the overall pessimism in 2015. As we head towards year-end, it has become apparent that a multi-year long bull market is finally coming to an end. As we step into a more uncertain future, I believe that defensive investors should be very confident about holding on to a company like NorthWestern Corporation.

Entergy Corp. Reports Solid Cash Flows From Operations

Summary This utility with a 5.14% dividend yield deserve a closer look. The decline in natural gas prices has led to a droop in wholesale electricity prices, harming Entergy’s profits. We use the company’s trailing 12 month P/E to get a better price comparison with industry peers. Regularly generating cash profits is an essential component of successful businesses. It only makes sense that’s how many investors wish to see their investments perform as well: as cash machines. Shark Tank investor “Mr. Wonderful” Kevin O’Leary agrees, emphatically stating, “cash is king.” And dividend payers like Entergy Corporation (NYSE: ETR ) churn that stuff out. The utility sector has recently crashed, with many companies trading at or near 52-week lows. Choosing the strongest companies from the lot is a fantastic opportunity to lock in great long-term deals on serious cash machines. Entergy Corp. trades at $66.69 per share, near its 52-week low of $61.27. Their dividend yield is a juicy 5.16% at this price level. During the third quarter, Jim Simons’ hedge fund increased their holdings in this company by 1.02 million shares – that means his research team concluded the company is trading at a discount to its intrinsic value. A clear indication that Entergy is worthy of further investigation. Entergy Corporation serves the growing suburban markets of Texas and operates in Arkansas, Mississippi, and Louisiana. They also distribute natural gas which is becoming more commonly looked upon as a commodity of growing importance in man’s fight against climate change, even as natural gas producers themselves are not presently thriving due to vast oversupply. The company is off of its 1-year high by 27.5% as the utility sector has generally gotten whacked by the market since February of this year. Financial Results & Removing A Big Non-Cash, One-time Impairment Charge Focusing on their operations, the company has announced the shut down of two loss-making power plants. The impairment write-offs and writedowns associated with the closure of the Pilgrim and FitzPatrick nuclear power plants took third quarter results to a net loss of $4.04 per share. I’d like to get closer to the Price-to-Earnings figure without this one-time charge baked in. After we removed the one-time charge we can easily compare the per share price ratios of Entergy Corp with its industry peers. First we’ll take a look at what third quarter 2015 results look like with and without the unusually high impairment charges, then we are going to bake-in Other Income, Interest Expense, and Income Taxes to arrive at an earnings figure that is comparable to industry peers. Note: The company’s 2012, 2013, and 2014 annual reports indicate asset impairment charges of ($ in millions) $255,524, $241,537, and $179,752, respectively. We will use the average of these three annual figures, divided by 4, to estimate the typical impairment charges per quarter. This will allow us to take a view of the profitability of the company aside from the plant write-offs associated with management’s work to improve operations. The average of the indicated impairments for 2012, 2013, and 2014 is $225,604. Divided by 4, that’s $56,401 of average quarterly impairments — the figure used in the image below. Time to review operating expenses with and without the recent quarter’s decommissioning related impairments: Taking another step closer to an industry-comparable earnings per share figure we’ll add in Other Incomes of $43,179 and subtract the quarter’s Interest Expense of $171,349. Our income before income taxes comes to $492,617. On Entergy’s very profitable 2014 they paid 38% tax on the aforementioned figure. Taking income taxes into account for the quarter we come to our net-of-decommissioning write-off 3rd quarter net earnings figure: $305,423. Finally, we will now find our remapped, industry peer comparable earnings per share and price-to-earnings figures for the 179,151,832 common stock shares outstanding: Retuned 3rd Quarter 2015 Earnings Per Share of $1.70 I selected Southern Company and FirstEnergy Corp. as they are among those enjoying profitability and similar dividend yields. Other peers in the energy utility sector include NRG Yield, Inc. (NYSE: NYLD ), Calpine Corp. (NYSE: CPN ), The AES Corporation (NYSE: AES ), and American Electric Power Co., Inc. (NYSE: AEP ). Entergy’s retuned Trailing P/E of 12.24 compares favorably to larger and slightly larger peers Southern Company (NYSE: SO ) and FirstEnergy Corp. (NYSE: FE ). Entergy enjoys a higher dividend yield and a competitive price-to-sales ratio with its market capitalization neighbor First Energy. Another favorable indicator is the firm’s Price-to-Sales ratio below the average of its peers. Cash Flow from Operating Activities Cash flows from operating activities, net of nuclear fuel purchases and resale, and net of financing costs, bring us to 3rd Quarter cash earnings of $329,628,000. This figure far exceeds their quarterly common stock dividend of $.85 per share, or approximately $154,038,000 inclusive of preferred dividends. It appears that the company can reliably generate enough cash to pay its dividends. Marketplace Interest in Entergy Corporation When a hedge fund with a small army of highly-qualified analysts and access to 3rd party consultants at costs of hundreds of thousands of dollars takes interest in a company by executing significant buy orders, I get interested too. Now, there’s no way to know the exact reasons for the following recent purchases I will outline below but you can be generally assured that these guy’s goal is to make money in a long position through the receipt of dividends and capital appreciation. As mentioned earlier in this article, Jim Simons’ hedge fund added 1.02 million shares of Entergy Corp during the second half of this year. That’s a 70% increase in the size of their position in the company, bringing Jim Simons’ funds’ total position to 2.47 million shares. Millennium Management increased their position by $54 million during the most recent quarter. They own 1,525,275 shares with a value of $99 million. Buying by Hedge Funds far exceeded selling during the second half of the year reported as of September 30th, which is a bullish indicator of smart money sentiment. Conclusion I like Entergy Corp.’s at its yield of 5% and greater. They serve a diverse geography from Texas, to Louisiana, Arkansas, and New York, among other locales. Their earnings figures are solid aside from the one-time decommissioning charge associated with the closure of money-losing nuclear power plants in Plymouth, MA and the FitzPatrick plant of New York State. The Plymouth plant closure is expected to be complete during the first half of 2019 and FitzPatrick’s closure during early 2017 at the latest. Most of the company’s production of electricity is by nuclear power plant. Their profitability has suffered with the collapse in the price of natural gas because it has brought down the wholesale price of electricity in their markets. In general, Entergy’s free cash flow should easily support its quarterly dividend for a long time coming. Utilities such as these folks are the classic example of long-term cash machines. Due to my belief that the marketplace has generally underappreciate Entergy’s ability to reliably pay its dividend, tempered by a reluctance to catch a falling knife where we don’t know whether or not natural gas prices will continue to drag on electricity prices, I rate Entergy Corporation a hold. If natural gas — hence wholesale electricity prices — start climbing again and all else stays the same, Entergy Corporation becomes a clear and even a screaming buy. Click +Follow next to my username to get the latest research beamed to your inbox in realtime Additional disclosure: This article represents the opinion of the author as of the date of this article. This article is based upon information reasonably available to the author and obtained from public sources that the author believes are reliable. However, the author does not guarantee the accuracy or completeness of this article. It is merely the author’s interpretation of the information contained in the article. The author may close his investment position at any point in time without providing notice. The author encourages all readers to do their own due diligence. This is not a recommendation to buy or sell a security

Riding The Petchem Boom With A Utility

Summary Entergy Corp. is a utility operating in the heart of America’s petrochemical boom. Entergy plans to steadily grow both earnings and dividends through 2018 at least. Shares are undervalued and I believe Entergy is a buy. The ‘shale boom’ just might be turning into the ‘shale bust’ as we speak, but the petrochemical boom is alive, well and durable. That’s because natural gas and natural gas liquids, inputs for the petrochemical industry, are now cheaper in America than anywhere else. This gives the U.S. a major advantage over other countries. The American petrochemical industry is really focused on the eastern Texas-Louisiana Gulf Coast. Not surprisingly, petrochemical plants and LNG export facilities are springing up all over the area. This boom is driven by demand, not supply, and so lower gas prices only help this growth trend. Investing in end-use chemical producers or LNG exporters is one way to participate in this trend, but utilities are also a low-risk way to be involved in this. Entergy Corporation (NYSE: ETR ) is the perfect company for this, in my opinion. Entergy generates power in New England from a handful of nuclear power plants, but the bulk of Entergy’s business is in generation and transmission of power in Mississippi, Arkansas, eastern Texas, and Louisiana. Louisiana is the largest piece of Entergy’s business, and, importantly, Entergy supplies much of the petrochemical industry along the Gulf Coast. Best of all, Entergy now yields over 5%, and has recently begun increasing its dividend as a result of the economic growth in its service areas. Solid growth and reliable income Some of Entergy’s industrial customers use as much power as a small city, and currently there are several plants being built along the Gulf Coast. This includes Cameron LNG in Louisiana, a Sasol cracker/chemical complex, two methanol plants under construction in Texas and Louisiana, and one steel mill under construction in Arkansas. (click to enlarge) Courtesy of Entergy Corp Investor Relations. The key ingredient to the industrial boom in this region is cheap, reliable energy. Louisiana and Arkansas have no renewable energy mandate. Texas does have one, but it’s not very big. Therefore, it’s no surprise that there’s three states have among the lowest electricity costs in the country. Low electricity prices entice these big industrial customers into this region and, as we will see, this in turn brings more residents and more efficient power distribution. It’s a virtuous cycle not often seen in the U.S. anymore. What does that mean for us? Well, it means 2% load growth for residentials and 4% growth for industrials, each year, through 2018 at least. (click to enlarge) Courtesy of Entergy Corp Investor Relations. Currently Entergy’s dividend is 57% of earnings, on a per-share basis. Over the last twelve months, Entergy has generated only $509 in free cash flow, but has paid $617 million in dividends. That, however, is because Entergy is building up its generation capacity with several power plants. Once the first new plant is up, St. Charles power station, Entergy will have much more financial flexibility. I fully expect Entergy to continue raising its dividend by low single digits through 2018, and perhaps even more in the following years. Valuation and conclusion (click to enlarge) Courtesy of Entergy Corp Investor Relations Is Entergy a good value right now? I believe it is. According to FAST Graphs, Entergy trades at 11.3 times earnings, which is quite a bit lower than the stock’s ten-year average valuation of 13.4 times earnings. That’s a 15.6% discount to its full-cycle average valuation, and there’s no reason Entergy shouldn’t achieve at least that average valuation. When you add a 5.1% dividend onto that, there’s a lot to like about this utility. Here’s what you’ll get with Entergy: A steady-growth utility in an economically strong area. As a utility, the barriers to entry in this industry are very high, which puts a lot of safety into this name. For these reasons, I believe Entergy is a buy right here.