Over the weekend, I was flying back from several days in the Florida sunshine with my three daughters, their various appendages, and 8 grandkids ranging in age from 11 years to 10 months. To pass the time, I put on headphones and listened to oldies but goodies music on my iPhone. Up came a 1970 favorite from the Steve Miller Band, “Going to the Country”, featuring Miller on guitar and Charlie McCoy on harmonica. Listening to the lyrics again made me think of Texas utility firm Vistra Energy (OTCQX:VSTE).
Most pointed were the lines:
Gonna leave the city put my troubles behind,
People in the city goin’ out of their minds,
Goin’ to the country just to feel like gold,
People in the country really let themselves go.
Goin’ to the country and leavin’ right away,
No time to talk I got to make a getaway,
Gonna leave the city it’s a crime and a shame,
People in the city are goin’ insane.
Vistra Energy is the phoenix rising from the disaster of the recently bankrupt LBO of utility Energy Future Holdings, formerly known as TXU. I wrote an article a few weeks back on VSTE linked here.
With its emergence from bankruptcy, VSTE has substantially less debt and is considered by many to have a “clean” balance sheet for a sector known for usually debt-heavy firms. There have been rumors flying that Vistra is considering leveraging up and buying merchant power company Dynegy (NYSE:DYN). I think management should heed the words of Steve Miller and look to expand in areas dominated by rural communities, and not those in the merchant power business relying on large population centers for growth.
Moody’s recently offered a report that cautioned merchant coal-fueled power producers in the Northeast and eastern Midwest could face challenges in refinancing their upcoming debt maturities. With new debt offered by gas powered generation facilities, investor’s appetite for coal backed debt could be soft. In addition, power prices in PJM’s 3-yr rolling auction process jurisdictions are still weak and are a continuation of several years of low prices. With low natural gas pricing and newer gas generating facilities coming online, the near-term future for power prices does not look encouraging for non-gas power producers. Coal represents a heavy 33% of DYN’s current generating capacity.
While rural communities outside the control of PJM, NEISO and NYISO may offer better potential, the ongoing consolidation of the electric utility sector could be reaching a crescendo. Just last week, regulators in Kansas rejected the $12-billion proposed merger of Westar (NYSE:WR) by Great Plains Energy (NYSE:GXP) due to their opinion the equity premium being paid for WR would create unacceptably high financial risk. Recently, NextEra (NYSE:NEE) was turned down by Texas regulators in its $18-billion bid for Oncor, another part of bankrupt TXU. While it is becoming more commonplace for regulators to initially reject utility mergers in hopes of squeezing concession from the acquirer, their demands could be pushing the envelope of economic acceptability.
So, if coal-fired merchant power producers and rural-focused electric utilities are unattractive, where should VSTE look for expansion? My humble suggestion would be for management to look towards rural natural gas firms, also known as Local Distribution Companies, LDC, in underserved areas. For example, Maine has a program whereby natural gas utility rates can be set based on competitive fuels, such as electricity, heating oil and propane, as a means to create a profit incentive for gas utilities to expand service. The National Association of Regulatory Utility Commissioners has formed a task force to investigate steps needed to increase natural gas distribution.
Many rural communities, which comprise residential, industrial and commercial customers, lack access to low-cost natural gas because of infrastructure issues-local distribution lines and gas utility services are unavailable. These communities must rely on bottled propane, heating oil and other more expensive fuels. The Natural Gas Access and Expansion Task Force will analyze the potential demand for the service extension and expansion of natural gas infrastructure and identify alternative or unconventional approaches to reaching these unserved and underserved areas.
Another place to start finding local gas distribution firms is the 2015 list of top gas utilities by sales volume offered by the American Gas Association. Many of these companies service rural customers.
It would seem these opportunities could offer better profit potential than to fight the current losing battle of low power prices in population centers from Chicago to Washington DC to Boston.
Author’s Note 1: For your listening enjoyment, here is a link to the awesome “Going to the Country” by the Steve Miller Band, one of many ear-candy offerings on my iPhone. Don’t forget to turn up the volume, especially during the harmonica and guitar segments – you will be glad you did.
Author’s Note 2: Please review disclosure in Author’s profile.
Disclosure: I am/we are long VSTE.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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