EAS: Energy East Should Cut its Dividend
Small Cap Watch List (Track at Marketocracy) and Mid Cap Watch List (Track at Marketocracy) member Energy East (EAS) plans to issue more shares:
Energy East Corporation [NYSE: EAS] today announced it will seek to issue up to 10 million common shares generating gross proceeds of approximately $240 million. These common shares are to be offered by a group of underwriters led by Morgan Stanley under Energy East’s effective shelf registration statement filed with the Securities and Exchange Commission.Proceeds from the offering will be used for the redemption of debt and for general corporate purposes, including regulated construction expenditures. The company plans to invest over $3 billion through 2011. Major planned investments include:
* $500 million for advanced metering infrastructure in New York and Maine. This investment will provide customers with pricing information throughout the day, promote conservation and improve operational efficiencies
* $500 million in transmission investments, predominately in Maine, which will improve electric grid reliability and promote renewable generation
* $500 million for the repowering the Russell Station power plant using clean coal technologies.The company estimates that these efficiency investments could result in CO2 reductions of close to 1 million tons annually, the equivalent of taking 175,000 cars off the road.
We’d prefer taking 175,000 shares off the public market, but let’s leave that aside for a moment. The company is talking about spending $3 billion “through 2011,” which gives them a five year window to do it. That translates into approximately $600 million per year in capital expenditures, compared with $305 million, $334 million and $412 million over the last three years. It is also clear that those three years suffered from under-investment, as annual depreciation was higher than capital expenditures by a cumulative $130 million. The under-investment, furthermore, may have affected sales, which grew more than 10% in 2005 but actually declined in 2006. So adding all this together, we concur that the company needs to invest more in its business.
The problem is, it can’t afford to make such large investments. Cash flow generated from operating activities was greater than $500 million in only one of the last three years, and then only barely. On top of that the company is paying out $150 million or more each year to fund its dividend payments, which are looking increasingly fragile. The only way the company can pay for the incremental $100-$200 million it will need in each of the next five years to fund its spending plans is to eliminate the dividend or raise capital by either issuing new debt or issuing shares.
Over the last three years the company chose the former, adding a total of $450 million to the company’s total debt load. Now it appears it will be balancing that with new shares. The problem is, without a reduction or elimination of the dividend, this will mean tying up even more capital in the dividend payments.
Energy East looks to us like a company that needs to tighten its belt to the last possible notch and cut its dividend while funding the capital expansion that is underway. Until they can consistently generate more cash flow than is needed to operate the business and pay for capital improvements, the dividend looks like a luxury.
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