Tag: Energy

Business Strategy and Outlook

AGL is one of Australia’s largest integrated energy companies. We believe it has a narrow economic moat, underpinned by its low-cost generation fleet, concentrated markets, and cost-advantages from vertical integration. Key attractions for shareholders include relatively defensive earnings, solid dividends, and relatively conservative gearing. Earnings are dominated by energy generation (wholesale markets), with energy retailing about half the size. Strategy is heavily influenced by government energy policy, such as the renewable energy target. 

AGL has proposed a structural separation into two businesses; a multi-product energy retailer focusing on carbon neutrality and an electricity generator that will own AGL’s large fleet of coal fired power stations among other assets. It is expected to be completed in mid-2022. 

AGL’s consumer market division services over 4 million electricity and gas customers in the eastern and southern Australian states, representing roughly a third of available customers. Retail electricity consumption has barely increased since 2008, reflecting the maturity of the Australian retail energy market and declining electricity consumption from the grid. Despite deregulation and increased competition, the market is still dominated by AGL Energy, Origin Energy, and Energy Australia, which collectively control three fourths of the retail market. 

AGL’s wholesale markets division generates, procures, and manages risk for the energy requirements of its retail business. The acquisition of Loy Yang A and Macquarie Generation means electricity production significantly outweighs consumption by its retail customers. Exposure to energy-price risks is mitigated by vertical integration, peaking generation plants and hedging. More than 85% of AGL’s electricity output is from coal-fired power stations. AGL Energy has the largest privately owned generation portfolio in the National Electricity Market, or NEM.

Financial Strength

AGL Energy is in reasonable financial health though banks are increasingly reluctant to lend to coal power stations. From 1.4 times in 2020, we forecast net debt/EBITDA rises to 2.1 times in fiscal 2022. Funds from operations interest cover was comfortable at 12.8 times in fiscal 2021, comfortably above the 2.5 times covenant limit. AGL Energy aims to maintain an investment-grade credit rating. To bolster the balance sheet amid falling earnings and one-off demerger costs, the dividend reinvestment plan will be underwritten until mid-2022. This should raise more than AUD 500 million in equity. Dividend pay-out ratio is 75% of EPS

Bulls Say’s

• As AGL Energy is a provider of an essential product, earnings should prove somewhat defensive. 
• Its balance sheet is in relatively good shape, positioning it well to cope with industry headwinds. 
• Longer term, its low-cost coal-fired electricity generation fleet is likely to benefit from rising wholesale electricity prices.

Key Investment Considerations:

• Fiscal 2022 will be tough but high wholesale gas and electricity prices bode well for earnings recovery from 2023. 
• The proposed separation of AGL’s retail and generation businesses will likely be somewhat value destructive due to potential duplication of resources and loss of scale benefits. 
• The Australian energy sector is heavily influenced by government energy policy, particularly over emissions and utility bill affordability.

Company Profile 

AGL Energy is one of Australia’s largest retailers of electricity and gas. It services 3.7 million retail electricity and gas accounts in the eastern and southern Australian states, or about one third of the market. Profit is dominated by energy generation, underpinned by its low-cost coal-fired generation fleet. Founded in 1837, it is the oldest company on the ASX. Generation capacity comprises a portfolio of peaking, intermediate, and base-load electricity generation plants, with a combined capacity of 10,500 megawatts.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Business Strategy and Outlook

Hess’ track record for efficiently allocating capital and generating value has been steadily improving for several
years. This had been a source of frustration for shareholders in the past. Before 2012, the firm was struggling
with persistent budget overruns and costly exploration failures, and the eventual collapse in its share price led
to a heated proxy fight with an activist investor (which it lost). Subsequently, the board was reshuffled, and
management began streamlining the company, selling midstream and downstream assets and rationalizing its
upstream portfolio. The current portfolio is more competitive, but the development cost requirements are
heavily front-loaded.
Currently, Hess is one of the largest producers in the Bakken Shale, with about 1,700 producing wells and about
530,000 net acres of leasehold. This includes a large portion in the highly productive area near the Mountrail-
McKenzie County line in North Dakota. Even with four rigs, it would take more than 10 years to develop this
position, and to conserve capital in the wake of the COVID-19 pandemic management is only running two rigs
(with a third to be added late 2021). Like peers, Hess has made huge strides with enhanced completions. It is
expected 180-day cumulative oil production to average 150 mbbls going forward (consistent with break-evens
of about $40/bbl. for West Texas Intermediate).
Hess also holds a 30% stake in the Exxon-operated Stabroek block in Guyana, which will be the firm’s core
growth engine going forward and is a game-changer for the company, due to its large scale and exceptional
economics. The block contains numerous confirmed discoveries already, including Liza, which came online in
late 2019. Economically, these projects appear around on par with the Bakken. But the up-front capital
demands are onerous–Hess’ share of the first development phase was over $1 billion. Six phases are currently
planned, culminating in gross volumes of about 1 mmb/d and management has suggested there is scope for as
many as 10 phases in the ultimate development. Total gross recoverable resources are a moving target, but the
latest estimate is over 9 billion barrels of oil equivalent.

Financial Strength

Hess’ Guyana assets are capital-intensive (it must pay 30% of the development costs, which run to $1 billion-$2
billion for each sanctioned phase of development; a total of six are currently planned and more than that are
likely eventually). And these commitments are heavily front-loaded. As a result, capital spending has
significantly exceeded cash flows in the last few years, leaving the firm with leverage ratios that are elevated
from the historical norm. At the end of the last reporting period, debt/capital was 57%, while net debt/EBITDA
was 1.8 times. The good news is that the firm’s liquidity backstop is very strong, as it prefunded a portion of its
Guyana commitment with noncore divestitures. The firm has a $2.4 billion cash war chest, and there is more
than $3 billion available on its credit facility as well. In addition, the term structure of the firm’s debt is fairly
well spread out, and there are no maturities before 2024 (other than a $1 billion term loan due 2023 and likely
to be paid in full with operating cash flows by the end of 2022).The firm does have a covenant requiring it to

Commodities – Energy
28 January 2022

Website: www.lavernefunds.com.au Email: info@laverne.com.au
1300 528 376 (1300LAVERNE) 1
keep debt/capital above 0.65, though it isn’t expected to get close to that level (and if it does a violation would
still be unlikely because in the associated debt agreement capital is defined to exclude impairments).
Bulls Say’s
 The Stabroek block (Guyana), in which Hess has a 30% stake, is a huge resource, with at least 9
billion barrels of oil equivalent recoverable.
 The first phase of the Liza development is profitable at $35/bbl (Brent), making it competitive with
the best shale. Management expects similar economics from subsequent projects in Guyana.
 Hess’ activity in Guyana provides geographic diversification and insulates it from domestic issues
(like antifracking regulations).

Company Profile
Hess is an independent oil and gas producer with key assets in the Bakken Shale, Guyana, the Gulf of Mexico,
and Southeast Asia. At the end of 2020, the company reported net proved reserves of 1.2 billion barrels of oil
equivalent. Net production averaged 323 thousand barrels of oil equivalent per day in 2020, at a ratio of 70%
oil and natural gas liquids and 30% natural gas.
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal
financial situation, objectives or needs of any particular person.

Business Strategy and Outlook

APA Corp. is an upstream oil and natural gas producer with assets in the U.S. and overseas. The vast majority of its domestic production is derived from the Permian Basin. This was a key growth engine for the company until 2020, when the coronavirus-related collapse in crude prices forced the company to dial back on drilling capital. After a hiatus, development operations have restarted, albeit at a slower pace–Permian volumes are likely to decline slightly during 2021. Drilling is currently focused on the same reservoirs that APA’s competitors are targeting (the Spraberry and Wolfcamp intervals in the Midland Basin and the Bone Spring and Wolfcamp formations in the Delaware). But in the past the firm also focused on its own discovery in the Permian region, the Alpine High play. Alpine High wells are characterized by very strong initial production rates but with a much higher gas and natural gas liquids content than it is probable elsewhere in the Permian. More recently, it has also been testing its East Texas Austin Chalk acreage. 

APA also holds a large acreage position in Egypt, where it has operated for nearly a quarter of a century. It is now harvesting cash flows there, and will probably keep volumes more or less flat in the next few years (drilling new wells to offset declines from older ones). But reported volumes could fluctuate as APA’s revenue and profits in Egypt are governed by production-sharing contracts (due to cost recovery provisions in these contracts, lower crude prices translate to higher volumes, creating a natural hedge, helping the company to cope with this very weak commodity environment). Meanwhile, it is awaited modest production declines from APA’s mature assets in the North Sea. 

Further, the company’s focus has now widened to include Suriname, following a string of exploration successes in Block 58 (which APA is appraising with its 50/50 partner, Total). The evidence to date suggests a very large petroleum system, which could be potentially transformative for the company. At this point, it is alleged that it is very likely that one or more of the discoveries will progress to the development stage, though none have been officially sanctioned yet.

Financial Strength

APA Corp has started to turn the corner after several years of above-average indebtedness. The firm has now strung together several quarters of substantial free cash flows, and while very high commodity prices have played a part, it is alleged the firm can maintain its current course at midcycle prices (reinvesting only a moderate portion of its operating cash while keeping production flat slightly growing). The deconsolidation of its Altus Midstream subsidiary won’t directly impact the firm’s financial health, though its leverage ratios will improve as reported debt will no longer include the Altus revolver, which has no recourse to APA. The Altus transaction will make it easier for APA to monetize that investment though, which potentially paves the way for further balance sheet strengthening. At the end of the last reporting period, consolidated debt was $7.4 billion. On an annualized basis net debt/EBITDA was 2.5 times, and debt/capital was over 100%. However, both metrics will improve after the deconsolidation. Anyway, there is little chance of a liquidity crisis anytime soon. The term structure of the firm’s debt is extremely spread out. Only about $500 million comes due before 2025, and only $3.2 billion matures in the five years after that. That means APA can forget about the principal on over half of its debt until at least 2030. Additionally, the firm has a liquidity reserve composed of $400 million cash and well over $3 billion in committed bank credit. The revolver does include a covenant ceiling of 60% for debt/capital, but capital is defined to exclude impairments since mid-2015. On that basis, APA is unlikely to come close.

 Bulls Say’s

• APA’s international operations in Egypt and the North Sea generate high rates of free cash flow under midcycle conditions, given exposure to Brent crude pricing, low operating costs, and minimal maintenance capital requirements. 
• APA has a long runway of drilling opportunities in the high-growth, low-cost Permian basin. 
• The recent discovery in Suriname could open the door to large-scale developments there, and the partnership with Total means APA’s capital commitment will be greatly reduced.

Company Profile 

Based in Houston, APA Corp. is an independent exploration and production company. It operates primarily in the U.S., Egypt, the North Sea, and Suriname. At year-end 2020, proved reserves totaled 874 million barrels of oil equivalent, with net reported production of 440 mboe/d (66% of which was oil and natural gas liquids, with the remainder comprising natural gas).

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Business Strategy and Outlook

Diamondback Energy was a modest-size oil and gas producer when it went public in 2012, but it has rapidly become one of the largest Permian-focused oil firms through a combination of organic growth and corporate acquisitions, most notably Energen in 2018 and QEP Resources in 2021. The firm consistently ranks among the lowest-cost independent producers in the entire industry, supporting a sustainable margin advantage. 

Keeping costs low is baked into the culture at Diamondback, and it is alleged, operations to remain lean and efficient, despite the recent expansions. From the outset, the company has enjoyed a competitive advantage that enables it to systematically undercut its upstream peers. This was initially based on the ideal location of its acreage in the core of the basin, and helped by the early adoption of innovations like high-intensity completions (resulting in more production for each dollar spent). More recently, the firm has started seeing significant economies of scale as well. 

Management has fiercely protected the balance sheet over the years and has been willing to tap equity markets when necessary, as it did several times during the 2015-16 downturn in global crude prices. But that’s ancient history now. Diamondback’s financial health is excellent, and the firm can maintain or grow its production while generating substantial free cash flows under a wide range of commodity scenarios. It is viewed little to no chance that the firm will choose to allocate more capital for new drilling than appropriate, which means production will probably stay flat or grow at low-single-digit rates for the foreseeable future. Excess cash will be used for debt reduction or returned to shareholders. To preserve flexibility for management, the firm has not committed to a specific reinvestment rate or vehicle for capital returns, like certain peers have, but it does intend to distribute at least half of its free cash somehow. 

Finally, it is emphasized that, the firm’s stake in its mineral rights subsidiary, Viper Energy Partners. This vehicle owns the mineral rights relating to some of Diamondback’s most attractive acreage, further juicing returns on drilling for the parent

Financial Strength

Diamondback has historically maintained excellent financial health, with one of the strongest balance sheets in the upstream coverage. The Energen acquisition pushed up its leverage ratios for a brief spell in 2019, COVID-19 kept them elevated in 2020, and the Guidon and QEP deals extended these period of above average leverage into 2021. But borrowing never reached an unsustainable level, even in these periods, and the firm’s leverage has already recovered. At the end of the last reporting period, debt to capital was 36% and annualized debt/EBITDA was 1.1 times. And as the firm is capable of generating substantial free cash under a wide range of commodity price scenarios, it could be held that, these ratios to continue improving. The firm has targeted debt reduction of at least $1.2 billion in 2021 using its free cash flows plus the over $800 million in asset sale proceeds from its sale of noncore assets. Consolidated liquidity stands at roughly $2 billion with no material debt maturities until 2023.

Bulls Say’s

• Diamondback is one of the lowest-cost oil producers operating in the United States. 
• Stacked pay in the Permian Basin multiplies the value of acreage, and further value can be unlocked as additional plays are proved up over time. 
• Diamondback has been an early adopter of enhanced completion techniques and is expected to remain at the leading edge.

Company Profile 

Diamondback Energy is an independent oil and gas producer in the United States. The company operates exclusively in the Permian Basin. At the end of 2020, the company reported net proven reserves of 1.3 billion barrels of oil equivalent. Net production averaged about 300,000 barrels per day in 2020, at a ratio of 60% oil, 20% natural gas liquids,  20% natural gas. 

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Business Strategy and Outlook

CMS Energy’s transformation during the past decade into a mostly regulated utility has set it up for a long runway of growth during the next decade. In addition, CMS’ work with Michigan regulators and politicians has turned the state into one of the most constructive areas for utility investment. These constructive relationships will be critical as CMS pursues an aggressive clean energy growth plan. 

With regulatory and political backing, CMS plans more than $13 billion of investment the next five years and potentially as much as $25 billion during the next 10 years. Its goal to reach net-zero carbon emissions by 2040 is a key part of its growth plan, supporting 6%-8% annual earnings growth for many years. 

Michigan’s 2008 energy legislation and additional reforms in the state’s 2016 Energy Law transformed the state’s utility regulation. As a result of those changes, CMS Energy has achieved a series of constructive regulatory decisions. 

CMS has secured regulatory approval for almost all its near-term capital investment as part of the state’s 10-year integrated resource plan framework. We expect regulators to support CMS’ updated 10-year plan filed in mid-2021. If CMS can keep rate increases modest by controlling operating costs, it is expected to continue to get regulatory support and could even add as much as $1 billion of investment on top of its current plan. 

CMS’ growth strategy focuses on investment in electric and gas distribution and renewable energy, which aligns with Michigan’s clean energy policies and is likely to earn regulatory support. CMS plans to retire the Palisades nuclear plant and all its coal fleet by 2025, keeping it on track to cut carbon emissions 60% by 2025 and reach net-zero carbon emissions by 2040. Proceeds from its EnerBank sale in 2021 will help finance growth investment. 

CMS carries an unusually large amount of parent debt, which has helped boost consolidated returns on equity, but investors should consider the refinancing risk if credit markets tighten.

Financial Strength

Although CMS has trimmed its balance sheet substantially, its consolidated 70% debt/capital ratio remains high primarily because of $4 billion of parent debt. Accordingly, the company’s EBITDA/interest coverage ratio is lower than peers, near 5 times. CMS has reduced its near-term financing risk with opportunistic refinancing. It is projected CMS to maintain its current level of parent debt and take advantage of lower interest rates as it refinances. This should enhance returns for shareholders. Management appears committed to maintaining the current balance sheet and improving its credit metrics through earnings growth. We expect CMS’ consolidated returns on equity to top 13% for the foreseeable future, among the best in the industry due to this extra leverage. CMS has taken advantage of favourable bond markets to extend its debt maturities, including issuing three series of 60-year notes in 2018 and 2019. CMS now has $1.1 billion of parent notes due in 2078-79 at a weighted-average interest rate near 5.8%. CMS also has been able to issue 40- and 50-year debt at the utility subsidiary. Regulators thus far have not imputed CMS’ parent debt to the utilities, but that’s a risk that ultimately could end up reducing CMS’ allowed returns, customer rates and earnings. We don’t expect the company to issue large amounts of equity after pricing a $250 million forward sale at an average $51 per share in 2019 and issuing $230 million of preferred stock in 2021 at a 4.2% yield. We expect the $930 million aftertax cash proceeds from the EnerBank sale will offset new equity needs through 2024. With constructive regulation, we expect CMS will be able to use its cash flow to fund most of its investment plan during the next five years.

Bulls Say’s

• Regulation in Michigan has improved since landmark reforms in 2008 and 2016. Support from policymakers and regulators is critical to realizing earnings and dividend growth. 
• CMS’ back-to-basics strategy has focused on investment in regulated businesses, leading to a healthier balance sheet and more reliable cash flow. 
• CMS’ board has more than doubled the dividend since 2011. We expect 7% annual dividend increases going forward even if the pay out ratio remains above management’s 60% target.

Company Profile 

CMS Energy is an energy holding company with three principal businesses. Its regulated utility, Consumers Energy, provides regulated natural gas service to 1.8 million customers and electric service to 1.8 million customers in Michigan. CMS Enterprises is engaged in wholesale power generation, including contracted renewable energy. CMS sold EnerBank in October 2021.

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Business Strategy and Outlook

After decades of deriving most of its income from natural gas distribution and midstream businesses, NiSource has transitioned to a more diversified earnings mix. About 60% of NiSource’s operating income comes from its six natural gas distribution utilities and 40% from its electric utility in Indiana following the 2015 separation from Columbia Pipeline Group. NiSource’s utilities have constructive regulatory frameworks that allow it to collect a cash return of and a cash return on the bulk of its capital investments within 18 months. 

In October 2020, NiSource sold its Columbia Gas of Massachusetts utility and received $1.1 billion of proceeds that it used to strengthen the balance sheet and prepare for its planned infrastructure investments. The sale came nearly two years after a natural gas explosion on NiSource’s Massachusetts system killed one person north of Boston. Insurance covered roughly half of the almost $2 billion of claims, penalties, and other expenses. Earnings are set to rebound quickly from their low in 2020 when COVID-19 pandemic costs, lower energy use, the Massachusetts utility sale, and a large equity issuance weighed on earnings. We expect modest customer growth combined with NiSource’s infrastructure growth investments to support 8% annual earnings growth and 6% annual dividend growth from 2021 to 2025.

Financial Strength

NiSource has issued a substantial amount of equity in the past few years in part to fund its large infrastructure growth projects and in part to cover liabilities arising from the Massachusetts gas explosion. This dilution and the sale of Columbia Gas of Massachusetts has kept earnings mostly flat since 2018.NiSource’s debt/capital topped 67% at year-end 2017, but huge equity infusions have brought that down to more sustainable levels in the mid-50% range. NiSource issued over $1 billion of common stock and $880 million of preferred stock in 2018 and 2019. The Massachusetts utility sale in 2020 raised $1.1 billion, and NiSource issued $862.5 million of convertible preferred equity units in early 2021. 

NiSource has grown its dividend nearly 40% since the 2015 Columbia Pipeline Group spin-off, but the growth has not been consistent. The company increased its dividend in mid-2016 by 6.5% and again by 6.1% in the first quarter of 2017, then by 11.4% in 2018. But the 2019 dividend increase was only 2.6% following the Boston gas explosion. NiSource is past the peak of its five-year capital spending plan and its equity needs shrink. 

Bulls Say’s 

• The dividend to grow near 5% annually during the next few years before accelerating to keep pace with earnings in 2024 and beyond. 
• NiSource should benefit from Indiana policymakers’ desire to cut the state’s carbon emissions by replacing coal generation with renewable energy, energy storage, and possibly hydrogen. 
• New legislation has improved the regulatory framework in Indiana for NiSource’s electric and natural gas distribution utilities.

Company Profile 

NiSource is one of the nation’s largest natural gas distribution companies with approximately 3.5 million customers in Indiana, Kentucky, Maryland, Ohio, Pennsylvania, and Virginia. NiSource’s electric utility transmits and distributes electricity in northern Indiana to about 500,000 customers. The regulated electric utility also owns more than 3,000 megawatts of generation capacity, most of which is now coal-fired but is being replaced by natural gas and renewables.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Business Strategy and Outlook

Xcel Energy’s regulated gas and electric utilities serve customers across eight states and own infrastructure that ranges from nuclear plants to wind farms, making the company a barometer for the entire utilities sector. That barometer is signalling a clean energy future ahead. Xcel took an early lead in renewable energy development, especially wind energy across its central U.S. service territories. The company now plans to invest $26 billion in 2022-26, much of it going to renewable energy projects and electric grid infrastructure to support clean energy.

Xcel could spend more than $1 billion per year on renewable energy and other clean energy initiatives as its focus shifts from wind to solar. Transmission to support renewable energy represents about one third of its investment plan. Politicians and regulators in Colorado, Minnesota, and New Mexico are pushing aggressive environmental targets, which could extend Xcel’s growth potential. Xcel aims to deliver 100% carbon-free electricity by 2050.

Xcel’s investment plan gives investors a transparent runway of 7% annual earnings and dividend growth potential. Xcel has more regulatory risk than its peers because of its large investment plan.

Financial Strength

Xcel Energy has a strong financial profile. Its key challenge is financing $26 billion of capital investment during the next five years with minimal equity dilution. Most of Xcel’s planned investments benefit from favourable rate regulation partially offsetting their financing risk. However, regulatory lag remains a key issue. Xcel’s strong balance sheet has helped it raise capital at attractive rates. 

Xcel’s consolidated debt/capital leverage ratio could creep toward 60% during its heavy spending in 2022-23, it is expected normal levels around 55%, which includes $1.7 billion of long-term parent debt.

Xcel has been issuing large amounts of new debt since 2019 at coupon rates around 100 basis points above U.S. Treasury yields. Xcel took care of its equity needs for at least the next three years with a forward sale that it executed in late 2020 to raise $720.9 million for 11.845 million shares ($61 per share). This followed a $459 million forward sale initiated in late 2018 at $49 per share. We think these were good moves with the stock trading far above our fair value estimate when the deals priced. After five years of $0.08 per share annualized dividend increases, the board raised the dividend by $0.10 in 2019 and in 2020 and by $0.11 to $1.83 for 2021.

Bulls Say’s

• Xcel has raised its dividend every year since 2003, including a 6% increase for 2021 to $1.83 per share. We expect similar dividend growth going forward. 

• Renewable energy portfolio standards in Minnesota and Colorado are a key source of support for wind and solar projects.

• The geography of Xcel’s service territories gives it among the best wind and solar resources in the U.S. and a foundation for growth

Company Profile 

Xcel Energy manages utilities serving 3.7 million electric customers and 2.1 million natural gas customers in eight states. Its utilities are Northern States Power, which serves customers in Minnesota, North Dakota, South Dakota, Wisconsin, and Michigan; Public Service Company of Colorado; and Southwestern Public Service Company, which serves customers in Texas and New Mexico. It is one of the largest renewable energy providers in the U.S. with one third of its electricity sales coming from renewable energy.

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Business Strategy and Outlook 

Vistra Energy’s emergence from the Energy Future Holdings bankruptcy in 2016 has been a success for the most part. Despite Vistra’s sensitivity to volatile commodity prices and legacy fossil fuel generation, it has produced solid returns. The only significant bump in the road has been winter storm Uri that hit Texas in February 2021, causing more than $2 billion of losses.

Vistra’s clean post bankruptcy balance sheet allowed it to acquire Dynegy in 2018 for $2.27 billion, more than tripling the size of its generation fleet and introducing Vistra to power markets outside Texas, notably the Midwest and Northeast. The rock-bottom price Vistra paid and cost synergies have made the deal value-accretive. Vistra produces substantial free cash flow before growth given minimal core investment needs. Management is expanding the retail energy business to hedge its wholesale generation market exposure and is investing in clean energy projects like utility-scale solar and batteries.

Financial Strength

After the setback from the Texas winter storm losses in February 2021, Vistra’s quest to earn investment-grade credit ratings and reach 2.5 net debt/EBITDA stalled. However, it remains in a solid financial position with plenty of liquidity. Management has shifted its focus toward returning capital to shareholders through stock buybacks and dividends rather than earning investment-grade credit ratings immediately. Vistra’s $1 billion preferred issuance in late 2021 with an 8% dividend floor all but ensures it will take several more years to earn investment-grade ratings. 

The board authorized a $2 billion share repurchase plan in late 2021, replacing a largely unused $1.5 billion plan from 2020. The combination of stock buybacks and $300 million annual allocation to the dividend means the dividend could top $1.00 per share by 2025, up from $0.50 when the board initiated the dividend in 2019 and surpassing management’s initial 6%-8% annual growth target. Vistra exited bankruptcy in 2016 with just $4.5 billion of medium-term debt. Consolidated debt grew to $11 billion after the 2018 Dynegy acquisition before Vistra began reducing its leverage.

Bulls Say’s

• Vistra’s debt reduction in 2019-20 gives it financial flexibility to repurchase stock, raise the dividend, and invest in growth projects in 2022 and beyond. 
• Vistra’s gas fleet benefits from historically low gas prices in most of the regions where it operates, allowing for higher operating margins. 
• The retail-wholesale integrated business model reduces risk and market transaction costs, allowing Vistra to be a low-cost provider, especially in its primary Texas market.

Company Profile 

Vistra Energy emerged from the Energy Future Holdings bankruptcy as a stand-alone entity in 2016. Vistra is one of the largest power producers and retail energy providers in the U.S. It owns and operates 38 gigawatts of nuclear, coal, and natural gas generation in its wholesale generation segment after acquiring Dynegy in 2018. Its retail electricity segment serves 5 million customers in 20 states. Vistra’s retail business serves almost one third of all Texas electricity consumers

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Business Strategy and Outlook

Alliant Energy investing nearly $7 billion in 2021-25 estimates company to achieve the midpoint of management’s 5% -7% target. Management estimates another $7 billion – $9 billion of capital investment opportunities in 2025-29.

Interstate Power and Light continues to build out renewable energy in the state. In addition to its 1,300 megawatts of wind generation in Iowa, for which the company earns a premium return on equity, the subsidiary now aims to install 400 MW of solar generation in the state. We continue to believe Iowa offers ample renewable energy investment opportunities–both wind and solar–to support the subsidiary’s Clean Energy Blueprint, which plans to eliminate all coal generation by 2040 and achieve net-zero carbon dioxide emissions by 2050.

At Wisconsin Power and Light, renewable energy is also a focus as the company begins replacing retiring coal generation. WPL plans nearly 1,100 MW of solar energy investments with battery storage. WPL has similar clean energy goals to Iowa, seeking to reduce carbon emissions by 50% by 2030, eliminate coal from its coal generation fleet by 2040, and achieve net-zero carbon emissions from its generation fleet by 2050. Across both subsidiaries, renewable energy investments account for over 20% of rate base.

Alliant benefits from operating in two of the most constructive regulatory jurisdictions. To maintain earned returns near allowed returns during this period of high investment, management has worked to reduced regulatory lag, received above-average allowed returns across its subsidiaries, and aims to continue to reduce operating costs for the near term.

Financial Strength

It is estimated a capital of $7 billion to be planned spending between 2021 and 2025, Alliant will be a frequent debt issuer. The company will issue equity to maintain its allowed capital ratios. The company has manageable long-term debt maturities, and it is anticipated that it will be able to refinance its debt as it comes due. It is expected that total debt/EBITDA to remain around 5.0 times. Even with its large capital expenditure program, Alliant maintains a strong balance sheet and an investment-grade credit rating. The total debt/capital is projected to remain below 55% through forecast. Interest coverage should remain around 5 times throughout. Alliant has ample liquidity with cash on hand and sufficient borrowing capacity available under its revolving credit facilities. Alliant’s dividend is well covered with its regulated utilities’ earnings and expect the dividend pay-out ratio to remain between 60% and 70%.

Bulls Say’s

• Alliant’s earnings growth prospects are robust, supported by renewable energy projects that have regulatory support. 
• Regulators in Iowa and Wisconsin are embracing renewable energy, providing additional growth opportunities with favourable ratemaking. 
• The company operates in constructive jurisdictions, supporting returns and capital projects.

Company Profile 

Alliant Energy is the parent of two regulated utilities, Interstate Power and Light and Wisconsin Power and Light, serving nearly 1 million electricity and natural gas customers and approximately 400,000 natural gas-only customers. Both subsidiaries engage in the generation and distribution of electricity and the distribution and transportation of natural gas. Alliant also owns a 16% interest in American Transmission Co. 

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.