Since 1999, utility stocks have finished higher 7 years when interest rates have risen and never lower. In fact, three worst performances by far were during years of falling rates: 2008, 2002 and 2001.
That hasn’t prevented reflexive selling of utilities in the face of the 70% increase in benchmark 10-year Treasury yields. The silver lining is that investors now have another opportunity to buy best in class companies like WEC Energy (WEC).
WEC serves 4.5 million electricity and natural gas distribution customers in Wisconsin (70% revenue), Illinois (15%), Michigan and Minnesota. It owns 60% of the American Transmission Company (ATC), operating the upper Midwest U.S. power transmission grid. And this month, its contract renewable energy business bought 90% of a 190-megawatt Kansas wind project, which will supply Facebook when it enters service in Q4.
WEC expects regulated decarbonization efforts to drive 7% annual rate base growth through 2025 in business-friendly Wisconsin. CAPEX plans feature $1.8 billion in infrastructure upgrades and 1.8 gigawatts of new renewable energy capacity, including the state’s first solar (200 MW) and battery storage (100 MW) project scheduled for service in early 2023.
WEC plans to reduce overall CO2 emissions 70 % by 2030, with $1 billion in savings for customers. That’s an efficiency formula management has consistently executed, cutting operating and maintenance costs by 3% in 2020 while targeting an additional 2% to 3% cut reduction for 2021. And utilities will also get a boost from solid and consistent 1% yearly customer growth.
WEC’s ability to routinely hit exceptionally narrow earnings guidance continues to merit a premium valuation for shares. Last year’s $3.79 per share, for example, actually beat the high end of the company’s initial pre-pandemic guidance range.
Risks to 2021 projections of $3.99 to $4.03 per share include the lingering pandemic, potential inability to execute cost reductions and potential regulatory setbacks. Fortunately, none are likely this year. And the only real surprises so far have favorable, namely federal extension of wind and solar tax credits to speed utility decarbonization. Even the most conservative investors should be looking to buy WEC at current prices.
The natural gas price spikes during the great Texas freeze will force new scrutiny of supply chains from wellhead to burner tip. One energy company that won’t have to: Aggressive Holding National Fuel Gas (NFG), which operates everything from regulated distribution utilities to oil and gas wells.
The company’s earnings are affected by energy prices. But by combining conservative hedging practices (80% of remaining 2021 output) with stable cash flows from distribution utilities and pipelines (45% EBITDA), National Fuel has been able to grow dividends every year since the 1970s. That includes a solid 2.3 % boost in pandemic afflicted 2020.
Infrastructure upgrades and modest customer additions fuel reliable growth at the utilities, which serve roughly 750,000 customers in mostly small town and rural areas of New York and Pennsylvania. Rate mechanisms minimize sales volatility from year to year. And pipelines and storage revenue is largely locked in under regulation by the Federal Energy Regulatory Commission.
Earnings from utilities and pipelines alone are enough to sustain low single digit annual dividend growth going forward. But results from gas gathering (15% of EBITDA) and E&P (40%) have also been exceptionally steady over the years, thanks to consistently conservative financial and commodity price management.
National Fuel’s biggest move by far in recent years was the 2020 acquisition of 710 billion cubic feet of proven gas reserves and 142 miles of gas gathering pipelines from Royal Dutch Shell (RDS/A). That’s concentrated the company’s E&P operations in Appalachia, boosting geographic proximity for supplying regulated businesses. And it’s positioned for solid long-term output growth as well, with break-even production costs in key development areas of just $1.06 per million BTU.
The Shell acquisition did increase leverage, with debt to EBITDA reaching 3.5 times at the end of fiscal year 2020 (end Sept 30). But despite a somewhat aggressive $2.1 billion CAPEX plan through 2023, the company is well on track to a 3.2 times ratio by the end of FY2021.
Deleveraging and earnings growth will accelerate if gas prices avoid another relapse this year, which appears increasingly likely with associated gas volumes from shale reduced. Aggressive income investors should be buying National Fuel Gas is a buy up to $52.
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March 24, 2021 at 06:30PM
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WEC Energy & NATURAL FUEL GAS: Income Stocks To Own - Forbes
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