Kinder’s debt has grown to more than $40 billion, prompting the pipeline operator to slash dividends to avoid a credit downgrade to junk status.
Southern Buys Half of Kinder System in Latest Gas Expansion
by David Marino
Southern Company bought a 50 percent stake in Kinder Morgan Inc.’s Southern Natural Gas pipeline system in the latest expansion into natural gas transportation by a utility as power demand ebbs.
Kinder Morgan will continue to operate the 7,600-mile (12,000 kilometer) system that connects natural gas supply basins in Texas, Louisiana, Mississippi, Alabama and the Gulf of Mexico to markets in the southeastern U.S., the companies said in a statement.
Inclusive of existing Southern Natural Gas debt, the transaction equates to a total enterprise value of approximately $4.15 billion, which implies a value of $1.47 billion for Southern Company’s 50 percent share of the equity interest.
“Our new ownership stake in SNG will position Southern Company for future growth opportunities and enhanced access to natural gas, which are expected to benefit customers and investors alike,” Southern Company Chairman, President and Chief Executive Officer Thomas A. Fanning said in the statement.
With demand for electricity declining and natural gas taking market share from coal, Atlanta-based Southern was among the first utility owners to seek growth by buying a gas transporter. Duke Energy Corp. and Dominion Resources Inc. followed suit. Southern last month received regulatory clearance for its $8 billion takeover of natural-gas distributor AGL Resources Inc.
“The notion of being long gas infrastructure between now and 2050 is a real winner,” Fanning said June 29 in an interview on Bloomberg Television. An interstate pipeline would provide “terrific synergy” with a generation fleet that’s switching to gas from coal,” he said.
Kinder plans to use all of the proceeds to reduce pay down debt, Steve Kean, Kinder Morgan president and CEO, said in the statement.
Specifically, if the non-utility assets are divested or spun off, then a proportionate share of the debt must follow the divested or spun off non-utility asset. Finally, if utility assets financed by unsecured debt are divested or spun off to another entity, then a proportionate share of the debt must also be divested or spun off.
MDU Resources is authorized to issue 5,093,427 shares of Common Stock under the Executive LTIP Plan. Based upon the information provided in the application, issuance of Common Stock in connection with the Executive LTIP Plan will not impair MDU Resources' ability to perform service as a public utility.
This authorization is based upon the terms and conditions described above and for the purposes specified in the application subject to the following conditions:
(1) This authorization is effective July 16, 2016 through July 16, 2018;
(2) The requested waiver for Common Stock from the Commission's competitive bidding and negotiated placement requirements at 18 C.F.R. Section 34.2 is granted;
(3) MDU Resources must file a Report of Securities Issued, under 18 C.F.R. Sections 34.9, and 131.43, no later than 30 days after the sale or placement of equity securities;
(4) This authorization is without prejudice to the authority of the Commission or any other regulatory body with respect to rates, service, accounts, valuation, estimates or determination of cost or any other matter whatsoever now pending or which may come before this Commission; and
(5) Nothing in this letter order shall be construed to imply any guarantee or obligation on the part of the United States with respect to any security to which this letter order relates.
From Targeted News Service
FERC Issues Letter to MDU Resources Group
The U.S. Department of Energy's Federal Energy Regulatory Commission issued the following letter:
MDU Resources Group, Inc.
Docket No. ES16-35-000
ORDER AUTHORIZING ISSUANCES OF SECURITIES
On May 12, 2016, MDU Resources Group, Inc. (MDU Resources) filed an application pursuant to section 204 of the Federal Power Act (FPA)(1) requesting authorization to issue an additional 5,093,427 shares of MDU Resources common stock (Common Stock). MDU Resources states that the shares of Common Stock it seeks authorization to issue are in connection with its Long-Term Performance-Based Incentive Plan (Executive LTIP Plan). MDU Resources is regulated as an electric and/or gas utility in Minnesota, Montana, North Dakota, South Dakota, and Wyoming.
MDU Resources states that the Executive LTIP Plan permits the grant of restricted stock, performance units, performance shares, and other awards. Shares of Common Stock issued may be (i) authorized but unissued shares, (ii) MDU Resources treasury shares, or (iii) shares purchased on the open market.
MDU Resources requests a waiver from the Commission's competitive bidding and negotiated placement requirements at 18 C.F.R. Section 34.2.
This filing was noticed on May 13, 2016, with comments, protests or interventions due on or before June 2, 2016. None were filed.
On February 21, 2003, the Commission issued an order announcing four restrictions on all future public utility issuances of secured and unsecured debt.(2) First, public utilities seeking authorization to issue debt backed by a utility asset must use the proceeds of the debt for utility purposes. Second, if any utility assets that secure debt issuances are divested or spun off, the debt must follow the asset and also be divested or spun off. Third, if any of the proceeds from unsecured debt are used for non-utility purposes, the debt must follow the non-utility assets.
From Yakima Herald-Republic
Cascade Natural Gas receives approval for first rate increase since 2007
YAKIMA, Wash. — Customers of Cascade Natural Gas will see an increase in their gas bills come September.
The state Utilities and Transportation Commission approved a 1.7 percent rate increase Thursday that will produce $4 million in new revenue annually for the Kennewick-based utility. That is below the $10.5 million (4.17 percent) rate increase the utility originally requested in December 2015.
When the increase goes into effect Sept. 1, the average residential gas customer will pay $1.39 more, for an average monthly bill of $55.86.
This is first rate increase for Cascade Natural Gas, which has nearly 200,000 residential and business customers in 68 communities throughout the state, since 2007.
From Plus Media Solutions
US Official News
South Dakota: Highway 37 Concrete Overlay Project Begins July 11
Pierre: The State of South Dakota has issued the afollowing news release:
The South Dakota Department of Transportation says work is beginning on the Highway 37 Concrete Overlay project just north of Huron and motorists can expect changes in traffic flow starting Monday, July 11.
As part of the work on Monday, 24-hour flagging and pilot car will begin on the four-mile section of the project. Traffic will be reduced to one lane for about four weeks.
On Thursday, July 14, concrete paving will begin at the south end of the project.
Motorists are asked to slow down through the work zone and be prepared for suddenly slowing, merging and stopped traffic as well as watch for construction workers and equipment adjacent to the roadway.
The prime contractor on this $3.2 million project is Knife River Midwest of Sioux City, Iowa.
Work is expected to be completed on Aug. 26, 2016.
From States News Service
I-15 REPAIR AND REPLACEMENT STARTS MONDAY NORTH OF MALAD SUMMIT REST AREA IN BANNOCK COUNTY
The following information was released by the Idaho Transportation Department:
Work to repair and replace a section of Interstate 15 north of the Malad Summit Rest Area, from the Downey Interchange to the Virginia Interchange, is expected to begin Monday (July 11). The work is expected to finish by mid-September.
Crews will replace damaged concrete slabs, repair dowel bar joints in the pavement, seal joints, repair spalling (cracking) and grind the concrete surface for a smoother, safer ride between milepost 30 and 36.7. Crews will begin by constructing interstate crossovers to remove fast-moving traffic from the vicinity of highway workers and improve safety and mobility for both.
Motorists can expect a one-lane, two-way operation, a 70-mph speed limit, with reduction to loads 14 feet wide or less. Crews will work weekdays from 6 a.m. to 6 p.m.
Knife River Construction, Boise, is the prime contractor on this $3.86 million project.
Dalrymple ordered agencies to cut their budgets by 4.05 percent, which will save the state about $245 million through the two-year spending cycle. The governor also took more than $497 million from the state's Budget Stabilization Fund, leaving only about $75 million in the surplus stash of cash that has been built up over the past decade largely from past oil bounty.
Dalrymple in May also ordered most agencies to cut their budget by 10 percent for the next two-year budget cycle.
House Majority Leader Al Carlson, R-Fargo, said it's imperative that the revenue forecast be as accurate as possible to craft budgets. He said the last forecast done in January wasn't "even remotely close. We were off by a mile and a half."
Carlson, and others on the panel, said the state should err on the side of forecasting weaker tax revenue, instead of making cuts when it doesn't materialize.
"Don't be unrealistically but also don't be unrealistically high," Carlson said. "We can always go upward but it's pretty darn hard to go down."
Associated Press State & Local
Group advises North Dakota budget use lower oil projections
BYLINE: By JAMES MacPHERSON, Associated Press
BISMARCK, N.D. (AP) - An advisory group of North Dakota lawmakers, state officials and business leaders on Friday recommended much lower projections for oil prices and production when crafting state spending plans.
State Budget Director Pam Sharp called the projections recommended by the Legislature's Advisory Council on Revenue Forecasting "not significantly above worst-case scenario."
A dramatic drop in North Dakota tax collections due to depressed oil and farm commodity prices has North Dakota scrambling to make up for millions of dollars in potential shortfalls to the state treasury.
The recommendations by the 17-member group will be used to craft a new forecast expected next week by the economic consultancy Moody's Analytics.
Sharp has said if the new revenue forecast shows a continuation of lower-than-expected tax collections, Republican Gov. Jack Dalrymple may have to call a special session to deal with the shortfall.
Oil prices, a key contributor to the state's wealth, have nosedived and dropped more than expected since the Legislature adjourned last year. The Legislature planned its more than $14 billion two-year budget on analysts' projections that assumed North Dakota oil production would hold at about 1.1 million barrels daily and would sell for $45 to $65 per barrel. Oil has lingered at or far below the low end of the threshold.
North Dakota's daily oil production is pegged slightly more than 1 million barrels a day at present. North Dakota sweet crude was fetching about $40 a barrel on Friday.
The advisory panel set new prices for oil to base the forecast on $42 to $58 through June 2019, and at 900,000 barrels a day until then.
Sharp said tax collections are already down $101 million since the governor ordered cuts on Feb. 1 to make up for more than $1.1 billion in shortfalls.
election will determine everything, Mrs. Clinton wins, Fed keeps low interest rate policy for the out years, props up her administration and kicks paying off all the debt Obama ran up.... Treasury can't pay interest off if interest on debt is priced at "real" market rate of interest... Treasury/U.S. Government needs to suppress interest rates
if Trump wins all bets are off, rates move up, could have protectionist trade wars, currency wars, etc.... lot of unknown....not sure I know where to put money with these events...
no investment is 100% safe, the best i can offer you is Vanguard Wellesley Income Inv (VWINX). it is a mutual fund (low cost) 60% bond 40% dividend paying equity. i look at it as playing both sides of the fence.
my favorite ETF is Vanguard Whitehall Funds - Vanguard High Dividend Yield ETF (VYM) , it has had a huge run-up from the move into equities w/yield, so it has downside risk in rapidly rising interest rate environment...
i have not made any purchases since August 2014.
i've sold off, been bought out of stock positions in the last two years. just accumulated cash. I intend to buy all in 100% invested hopefully before November election and I will see how everything plays out...
will spread purchases in large cap U.S. companies that sell globally....
I waited Obama out, if Mrs. Clinton wins no-economic growth policies will continue, the large companies will buy back stock, cut costs, and takeover competitors to attain growth and hope this moves the companies stock price higher.
tomorrow will be interesting with jobs report, also the period after November election and January inaguration will show how markets view the winners economic plans/policies...
as always time will tell.....
But that could be reversed, analysts said, and Treasurys could come under selling pressure, leading bond prices to tumble and yields to rebound, if there are any potential signs of U.S. inflation, including wage inflation in upcoming jobs reports. Economist polled by MarketWatch expect the non-farm payrolls report due on Friday to show 170,000 jobs created in June and a 0.2% uptick in average hourly earnings.
Year-over-year wage inflation, which had been subdued throughout this recovery, has been trending higher over the past year.
A selloff in Treasurys due to rising wage inflation would spill over to defensive equities, such as utilities, said Kent Engelke, chief economic strategist at Capitol Securities Management.
The trailing 12-month PE ratio for utilities, currently at 19.85, is higher than that of the typically more-volatile technology sector, at 19.16, according to a note from Bespoke Investment Group.
“The last two times when utilities rallied in the face of falling interest rates—for example in 2011-12 and late 2014, a sudden rebound in rates resulted in the collapse of utilities,” Jaffee said.
The biggest gains in utilities this year came in the run up to and immediately after the Brexit referendum — when the U.K. voted to leave the European Union.
The S&P 500 Utilities sector rallied more than 8% in June with half of those gains coming in the last week, post Brexit, when global financial markets suffered a rout and government bond yields touched record lows.
Still, the sector has been climbing steadily since the start of the year and is, along with telecom, the best-performing sector on the S&P 500 index on a year-to-date basis.
The most popular utilities ETF, the iShares Select Utilities which has about $9 billion assets under management, saw a $1.7 billion inflow since the start of the year.
And as chart-watchers will note, the run higher in utilities also broke through key technical levels.
“The PHLX Utilities Index broke out in June and saw immediate follow-through,” said Katie Stockton, chief technical strategist at BTIG.
A so-called breakout refers to prices breaking above a level of resistance and heading higher. A follow-through refers to a security continuing to add gains in strong volumes, suggesting a new uptrend is underway.
“I give the benefit of the doubt to utilities... Even though they look overextended and overbought, the steep climb is not yet parabolic,” Stockton added.
Moves in defensive stocks are correlated to the recent rally in government bonds, fueled by a global flight to the perceived safety of government debt. As demand drives up bond prices, yields fall.
Wall Street’s most boring stocks are in bubble territory
By Ellie Ismailidou Markets reporter & Anora Mahmudova Reporter
Buying the stocks that Wall Street calls boring has paid off over the past six months—but now this “defensive” strategy is starting to look pretty risky.
Utilities, a sector traditionally viewed as a safety play in times of market turmoil, have risen 21.2% in the first half of 2016—the sector’s best first-half performance in over 25 years.
But if you ask some analysts, the run-up in prices leaves the sector extremely overextended and valuations dangerously high; some analysts believe the sector is in bubble territory.
Are some investors already catching on? Thursday’s decline marked the utilities sector’s sharpest daily drop, at 1.8%, in seven weeks.
Over the past six months, investors in search of yield and safety in a global environment of historically low yields, elusive growth and geopolitical uncertainties piled into anything that resembled defensive plays — Treasurys and gold prices soared as did share prices of utilities, telecoms, real estate investment trusts, consumer staples and master limited partnerships.
The most commonly cited valuation metric, the 12-month forward price-to-earnings ratio of the S&P 500 utilities sector is currently at 19, above its 10-year average of 14 and well above the PE of the broader index, as shown in the chart below.
“It’s a simple macro trade, when rates are falling and there is global uncertainty investors buy defensive and domestic sectors like utilities,” explained Diane Jaffee, senior portfolio manager at TCW.
Even as utility-stock prices have risen over 20%, expected earnings growth for the sector in 2016 is only 4.4%, according to FactSet.
But when investors rush in and earnings don’t grow, valuations get dangerously frothy, analysts said.
The longer-term risk is demand destruction caused by alternative energy and, potentially, batteries. In Texas, the wind blows at night when power demand is low. Texas has so much wind power that utility TXU Energy gives away electricity during those hours. Analysts at Bernstein Research argue that in a few years, batteries will be cheap and powerful enough that homeowners can store the nighttime power and use it during the day to cut their energy bills to zero. The same could be true for some homes with rooftop solar.
It won't happen tomorrow, but if thousands or millions of people go off the grid, utilities will suffer. Too much supply and weak demand in a high-cost, heavily indebted industry is never good.
But before that happens, investors who bought the stocks just for their dividends will have fled.
If rates eventually rise, the sector will be burdened with higher costs to borrow and lower valuations on their shares even as regulators catch up to the good times the companies have been enjoying.
The great utilities rally of 2016 will be a tale of excess in a low-yield world.
But when utility bills are low overall, regulators are more likely to be generous when they negotiate rate increases, according to Morningstar utilities analyst Travis Miller.
Finally, there is the benefit of having more-valuable shares, which makes it cheaper to raise capital. "Your cost of equity has gone down and your cost of debt has gone down," Mr. Miller said.
People who are buying utilities instead of bonds appear to forget that stocks can go down. Last summer, the sector fell 11% in two weeks. Investors got so nervous, they pulled $4.2 billion from utilities mutual funds last year, according to Morningstar.
Investors also don't appear to understand the difference between fully regulated utilities that are relatively safe and unregulated businesses that are vulnerable to the whims of the marketplace. Typically, the best-run regulated utilities trade at 10% premiums to the industry, but now the least-risky and most-risky are valued almost the same. Southern Co., the big southeastern U.S. utility, is well run, highly profitable and has friendly regulators, yet it trades at a price/earnings ratio of 21, just below the industry average.
Utilities fans also haven't noticed the fields of windmills in places such as western Texas and solar panels sitting on suburban rooftops. The U.S. will rely on fossil fuels and nuclear power to generate electricity for decades to come, but the rise of alternative energy is already being felt by utilities. Alternative energy accounts for about 13% of electricity generation in the U.S., according to the U.S. Energy Information Administration, with wind power jumping by one-third in the past 12 months.
The issue is the U.S. doesn't need much more electricity than is already being produced. For utilities, it means they are shutting down plants, mostly nuclear and coal. While consumers will pay some of the cost, companies also will take a hit.
Desperate for Yield? Utility Stocks Are More Dangerous Than They Look; The biggest driver of good times at utilities is low interest rates--and that is a problem
by Brown, Ken. Wall Street Journal (Online)
Before the U.K. voted to leave the European Union, investors bought electric utilities. When markets collapsed right after the vote, investors bought utilities. And when markets rebounded a few days later, investors bought utilities.
Companies that produce electricity have never been so popular. Buyers love the sector for its 3.3% dividend yield and for its terrific recent performance. The sector is up 21.9% this year, making it the second-best sector in the market, trailing only telecom, which yields 4.2%, according to FactSet.
Besides the yields, the utility industry is enjoying strong fundamentals that have boosted profits. When executives at electric utilities dream of the perfect world, it probably looks something like today. Sadly, dreams never last forever.
The biggest driver of the good times at utilities is low interest rates. The most obvious impact has been yield-chasing investors driving up share prices and pushing valuations for the world's stodgiest industry to the highest level in at least 20 years, according to FactSet. Utilities don't look so expensive when compared with Treasury yields. The spread between dividend yields on utilities and 10-year Treasurys is nearly 2 percentage points, among the highest ever.
Low rates also have boosted utilities' profits. That is because regulators allow utilities to make a specific return on their investments. Utilities borrow a lot, so rates matter. But regulators have lagged behind the reality. So rates are being set as if utilities were borrowing at higher rates than they really are. The difference is profit.
The second benefit for the industry has been lower energy prices. Energy accounts for roughly two-thirds of consumers' electric bills, and utilities just pass along those costs.
A week ago, the world looked like it was going to collapse in on itself. Today, the index was within 22 points of its record high. That didn’t happen because investors suddenly decided Brexit wasn’t so bad. Rather, it’s because once again, a subtle but unmistakable message has been sent out from the world’s central banks.
Why’d Stocks Rally? It’s Obvious, Isn’t It?
By Paul Vigna
Yes, something unusual happened in the bond market this morning, a brief spike lower that took the U.S. 10-year Treasury yield to a post-Constitutional Convention low. At the same time, the 30-year also hit a new low. If that wasn’t enough, the 50-year U.K. bond traded to a level even with the U.S. 10-year.
You might think there’s a message in there somewhere, and you might be right.
We’ve long since gotten used to low bond yields, but Friday morning saw those historically low yields fall even lower. Quick, name a bond that yields 1.38%. Well, this morning, that was both the U.S. 10-year Treasury note, and the 50-year U.K. bond. Meanwhile, the yield on the U.S. 30-year fell to 2.19%. Who is fixing a 1.38% yield for five decades? What is going on?
We can talk about the technical side of it, but the macro side of it is quite easy to grasp, according to Longford Associates Joan McCullough. Here’s a small piece from her morning note in which she explains it:
“It is so obvious, it is insulting to have to state it in this space:
“The central banks are gonna’ flood the globe with liquidity and every form of unlimited accommodation. With a view towards guaranteeing the stability of the financial system. Around the world. Until nobody will be able to tell the difference between the rest of the world and Japan, I suppose.
Yup. Central banks. Of course, that’s not surprising. The Federal Reserve has already backed off its tightening plan. The ECB’s Mario Draghi called for world-wide coordination of central bank policies. The European Commission has authorized the Italians to “support” their tottering banks, and the Bank of England’s Mark Carney said the bank would likely cut rates.
This has, naturally, been good for risk assets. The S&P 500 is up again on Friday, trading as high 2109.