Attractive Yields at Bargain Prices

08/14/2008 12:00 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

In his Utility Forecaster newsletter, Roger Conrad offers a selection of income recommendations.
Ill-conceived diversification has crippled dozens of utilities in past decades. That's why it's so encouraging when management sees the light before disaster strikes, as new Income Portfolio Aggressive Holding Great Plains Energy (NYSE: GXP) did this year in dumping its Strategic Energy marketing unit.

The Kansas City-based company has also completed the buyout of Aquila, boosting regulated operations in Missouri at a low price and creating numerous opportunities for cost cutting. The average interest rate on Aquila's $1 billion debt, for example, is 9.9 percent, versus just 6 percent for pre-deal Great Plains.

Great Plains' yield of 6.6 percent is a clear sign the company faces challenges. One is a sizeable capital budget, including paying off the remaining cost of the Iatan II plant, cleaning up emissions from coal plants (75 percent of output), growing its customer base, and holding a 50 percent stake in the Wolf Creek nuclear plant (21 percent output). Another is winning a decent return on investment from traditionally stingy regulators in Missouri and Kansas, who did award a greater share of merger savings to ratepayers.

Important, all three major credit raters have affirmed the company's BBB (stable) grade. There are no longer nonutility businesses to distract management from its sole task of running a strong utility. Finally, the bar is being set very low here, with the stock trading for barely book value. Nearly 20 percent off its 52-week high, Great Plains Energy is a buy up to 27.

Macquarie Global Infrastructure Total Return (NYSE: MGU) and Tortoise Energy Infrastructure (NYSE: TYG) were pounded last month as the infrastructure stocks and limited partnership (LP) units in their portfolios were dumped by skittish investors. Macquarie also took a hit from worries that it could be affected by troubles at its parent bank, despite the fact that assets are wholly segregated, as is the case with all funds.

Both funds are off more than 25 percent from where I recommended them in the October 2007 issue. Now they're as cheap as they've ever been. Tortoise continues to increase its distribution every quarter. For exposure to a wide range of LPs, buy Macquarie Global Infrastructure Total Return up to 25 and Tortoise Energy Infrastructure up to 28.

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