Tag Archives: sectors

NiSource – Red Flags All Around

Summary NiSource’s coal operations have gotten it in trouble before; it won’t be the last. Floundering gross margins have handicapped profitability. Net debt/EBITDA over 4x indicates significant leverage. Nearly $500M in annual interest expense. NiSource (NYSE: NI ) is a provider of natural gas and electricity to customers across seven states. The company touts its long-term return potential, citing strong local market growth, geographic diversity, and sizeable upgrade potential on its existing infrastructure, on which it would be entitled to a fair return on its investment. NiSource recently completed a spin-off of its Columbia Pipeline (NYSE: CPGX ) business, which means the new NiSource generates nearly 100% of its revenues from regulated utility operations. This fact, plus management’s guidance of 4-6% annual dividend growth from here on out, has drawn in income investors that have been searching for low-risk, stable income options in a highly volatile market. Is NiSource deserving of this praise, or are there potential bumps in the road for the company in the years ahead? Columbia Pipeline Spin-Off NiSource completed the spin-off of Columbia Pipeline Group in early July. Pitched to shareholders as unlocking value by separating two distinct businesses into independently run, pure-play public companies. Shareholders bought the idea hook, line, and sinker. Columbia Pipeline owns an extensive route of pipelines connecting the Northeast Marcellus/Utica shale plays to important local locations along with hundreds of billions of cubic feet of natural gas storage. Customers are primarily contracted, fee-based giants in the energy/utility business such as Exxon Mobil (NYSE: XOM ) and Dominion Resources (NYSE: D ). The prospect of management-guided 20%+ annual EBITDA growth on a seemingly ever expanding domestic energy market drew in investors chasing big capital gains and solid dividends. Unfortunately for shareholders of this new entity, the market has sold off highly leveraged midstream energy MLPs like Columbia Pipeline (along with peers like Kinder Morgan (NYSE: KMI )) on fears related to the sustainability and growth potential of American energy production. Smaller companies like Columbia Pipeline have been more adversely affected by the sell-off; shares are down 40% in a few short months compared to a flat performance from the S&P 500. This lesson in volatility has likely been a tough pill to swallow for dividend investors who have likely grown used to relatively mild movements in price. While I think midstream MLPs have been oversold and selling here would be a mistake, investors should likely consider paring down exposure to Columbia Pipeline as the share price recovers. Pro-Forma Operating Results Unfortunately for shareholders, NiSource has done a mediocre job regarding transparency of breaking out Columbia Pipeline’s contribution to NiSource’s earnings results on its presentations. This is necessary for investors to properly evaluate how the utility business has been performing over the past few years. After digging around in the SEC filings, I’ve broken out NiSource’s utility operations above given its pro-forma Columbia Pipeline filings given here . Total revenue has grown marvelously, but gross margins have contracted. NiSource has never been known for efficient operations and that trend has continued into recent years. This has always been a concern for investors. Another concern with the company is its electric operations, which generated approximately 30% of total utility revenues in 2014. The vast majority of available power generation (2,540MW of 3,281MW, or roughly 77% of power generation) is fired by coal. Energy mix has been unchanged for years, and given my pessimistic outlook on coal, my opinion here should be obvious. With such a high percentage of ageing coal power plants, it is likely only a matter of time before these plants reach the same fate as the company’s Dean Mitchell Generating Station, which was shut down in a settlement with the Obama Administration. This agreement also led to the company being forced into $600M in infrastructure upgrades on these old coal plants. The company had avoided provisions that required these upgrades for years. Even pro forma to exclude the buildup in the Columbian Pipeline infrastructure over the past few years, NiSource has been a serial burner of cash and a big issuer of debt – the combined company has issued billions in debt over the past few years to cover cash flow shortfalls. After the spin-off, NiSource is being left with a $5.5B long-term debt load. With EBITDA falling in the $1.3B range for 2015, net debt/EBITDA will be a hair over 4x. This is manageable for a utility, but investors should be cautious, especially given likely capital expenditure requirements for NiSource to maintain and update its prior-mentioned aging coal power plants. Conclusion Management here has the opportunity for a fresh start towards operating a functional utility. Improving gross margins, investing in its business smartly, and paying down its debt. Unfortunately, the company is more like a three-legged chair at the moment – the very foundation of the company is wobbly. Coal-fired generation puts a target on the company’s back. Nearly $500M in annual interest expense cuts operating profit off at the knees. With the company trading at nearly 18x 2016 earnings estimates, shares aren’t cheap compared to peers. Fair value is closer to 15x 2016 earnings of $1.03/share, or $15.45/share. In my opinion, investors would be wise to avoid NI’s shares currently.

EVX: Cash In Trash

Proper waste management has been largely ignored by newly emerged economies. Legislation in advanced economies has necessitated the creation of a waste management industry. The Market Vectors ETF contains top-tier companies as well as very specialized waste management companies. Over the past twenty years or so, many nations discovered that socialist economic management, although noble in concept, was impractical in reality. Nations such as China, India, Russia, Eastern Europe and many South American nations pursued and adopted “free market principles” with great success. Literally millions upon millions have risen out of poverty and have attained a better standard of living. However, as so often happens in emerging markets, environmental sustainability took a back seat to economic development. The rapid industrial expansion may well have created a global “climate change”. It certainly has created dangerous levels of smog and air pollution in many of the world’s most famous cities. Several of the world’s great rivers have become polluted and nearly devoid of life. One critical problem that has hardly been addressed is the various kinds of solid waste; everything from industrial waste down to the trash generated, by each of us, every day. Van Eck Global offers investors a way to benefit from a niche market through its Market Vectors ETF Environmental Services ETF (NYSEARCA: EVX ) . The fund tracks the performance of the NYSE Arca Environmental Services Index (AXENV) : a modified equal dollar-weighted index intended to give investors exposure to the environmental services sector. A word of caution: This is a very thinly traded specialized fund so it may not be a suitable holding for all investors. However, it does contain well-known, well-established, dividend-paying companies. Hence, the questions are whether it’s worth holding the fund, or simply selecting individual companies. Since there are only 23 companies in the fund as of the first week of August 2015, it would be best to break the holdings down into their respective sectors and identify both strong and weak points. First, the fund is comprised almost entirely of US-based companies, 96.4%, and also a few Canadian holdings, 3.6%. This is an important point. Both governments have long established legislation on environmental issues, including the proper, safe and sustainable disposal of industrial and residential waste, for one example, the Ocean Dumping Ban Act of 1988 . Further, legislation is far from complete. Individual US states have their own requirements. The point being that there is a demand for the management of waste necessitated by laws and regulations. Further, laws, regulations, certifications, permits, specialized equipments and procedures are required to collect, transport and dispose of medical waste. A quick examination of the top ten holdings demonstrates the general waste management industry as well as the lesser-known specialized waste management companies. In fact, potential investors might even find the services offered as unique, interesting, and without a doubt critically necessary. Company and Symbol Percentage of Fund’s Holdings Recent TTM P/E Recent EPS Recent Dividend Yield Industry Specialization What They Do Waste Management (NYSE: WM ) 11.09% 23.36 $2.17 3.03% Industrial Provides waste management through local subsidiaries. Collects, transports, recycles: paper, glass, plastics, metal, electronics. Owns landfill and landfill gas-to-energy facilities. Republic Services (NYSE: RSG ) 10.99% 25.23 1.69 2.82% Industrial Similar to Waste Management, collecting, transporting and recycling non-hazardous residential, municipal and industrial solid waste. Waste Connections (NYSE: WCN ) 10.61% 26.89 1.85 1.05% Industrial and Minerals Diversified. Managing, collecting, transferring, disposing and recycling of municipal and residential wastes. Recycles paper, glass, metals and compostable waste, as well as non-hazardous natural resource exploration wastes. Stericycle (NASDAQ: SRCL ) 10.70% 40.91 3.49 0.00% Healthcare Services Provides consulting and regulated compliant solutions for healthcare and commercial businesses. Subsidiaries in the Americas, Europe, and the Pacific. Collections include “sharps”, pharma, blood, dental, used safety products and veterinary waste. Steris Corp. (NYSE: STE ) 3.88% 29.92 2.25 1.49% Healthcare Services Medical sterilization equipment and services. Disinfection systems, surgical tables, OR storage, scrub sinks; OR and GI procedure accessories; patient tracking; cleansing products. Some brand names: Amsco, Hamo, Cmax, Reliance and Harmony Tetra (NASDAQ: TTEK ) 3.77% 17.57 1.50 1.22% Materials and Energy Engineering and consulting services; water management and infrastructure, oil sands, geotechnical and Arctic engineering services. Operates in Canada as well as the US. Cantel Medical Corp. (NYSE: CMN ) 3.74% 49.40 1.09 0.19% Healthcare Services/Consumer Products Infection Prevention; GI equipment reprocessing, sterilants, detergents; disposable healthcare products; dialysis disinfection; biological packaging; and water purification. US, Canada and Puerto Rico. Progressive Waste Solutions (NYSE: BIN ) 3.69% 26.77 1.02 1.92% Industrial Municipal and residential waste management; landscape collection and recycling, recycling centers and landfill operations; portable toilets; waste audits and education/event services. Serves US, and Canada. ABM Industries (NYSE: ABM ) 3.68% 22.72 1.45 1.94% Industrial Provides integrated facilities solutions for commercial, government, institutions, hotel, airports, data centers, high-tech manufacturing. Commercial cleaning, maintenance and repair, HVAC maintenance, janitorial, security, parking management. US and Canada. US Ecology, Inc. (NASDAQ: ECOL ) 3.56% 35.22 1.38 1.48% Industrial/ Mineral Collection, transportation, treatment, disposal, recycling of hazardous, non-hazardous, and radioactive wastes. Chemical cleaning, decontamination, spill and emergency response. Operates in US and Canada. (Data from Van Eck and Reuters) Overall, 5 of all 21 holdings have a negative trailing twelve-month (TTM) EPS. The fund’s average EPS is positive at 0.96. The average TTM P/E is 25.5195 and the average dividend yield is 1.23%. The fund has a total of $15.6 million in total net assets. Its gross expense ratio is somewhat high at 0.92%, however, according to Van Eck, expenses for the fund are capped at 0.55% through January of 2016. As noted above, the fund is very thinly traded averaging 250 shares per day, over the past 30 days. The fund is currently trading at a slight premium to NAV of 0.03%. The share price was $62.51 as of the close on August 7, $0.03 over the NAV. The following table is a summary of the fund’s basic metrics: 1 Month 3 Months YTD 1 Year 3 Year 5 Year Since Inception 10/10/06 EVX -0.54 -1.1 -4.51 -2.32 9.82 8.67 6.45 EVX Shares -0.65 -1.55 -6.04 -4.37 9.67 8.57 6.41 AXENV Index -0.5 -1.01 -4.45 -2.16 10.29 9.20 6.99 (Data from Van Eck) Lastly, the fund pays a yearly dividend, as summarized in the table: (Data from Van Eck) A word or two needs to be said about a few of the holdings. For example, Newpark Resources (NYSE: NR ) , 2.01% of the holdings, is actually an oil and gas driller and only loosely connected to the management of resource waste management, per se. The company emphasizes its corporate responsibility to the environment as a provider of sustainable and ecologically-friendly drilling services in the industry. Needless to say, the company has been affected recently by overproduction in the oil and gas industry. Tenneco (NYSE: TEN ) , 3.00%, manufactures catalytic converters and diesel oxidation catalysts for combustion engines, thus indirectly managing carbon emission waste. Schnitzer Steel (NASDAQ: SCHN ) , 1.80%, specializes in large-scale metals shredding, blending and recycling to customer specifications, thus reducing landfill waste. Layne Christensen (NASDAQ: LAYN ), 1.86%, specializes in water management, drilling and construction. Darling Ingredients (NYSE: DAR ) , 3.03%, manufactures sustainable natural ingredients for edible and inedible bio-nutrients. These examples demonstrate that not every holding is a “pure-play”, which goes “out into the field”. They and others in the fund recycle or repurpose what would otherwise be an unusable waste product. However, all of the companies do relate to the central theme of hazardous and non-hazardous waste management: transportation, recycling, repurposing, filtration, disposal and also environmental consulting services. Since the sector has so few participants, it’s reasonable to consider the potential of competition and then pricing power. It’s reasonable, but not likely as EPA regulations require licensing, certification, inspection and needless to say accountability if something should go wrong. Thus, it would be difficult, expensive and time consuming for new entrants to establish themselves in this sector. On the other hand, an outright purchase of an established specialized waste management company would be far simpler. Recent headline-making events such as oil drilling accidents, freight train derailments causing chemical spills and fires requiring the evacuations of entire towns, coal wastewater ponds leaking into the water table, difficult or untreatable hospital infections, salmonella bacterial contamination in food production, contaminated HVAC cooling towers causing the often fatal Legionnaires’ disease, all indicate the growing need to fill a large niche for private sector investment. The Van Eck Market Vectors ETF is one of the few funds which specialize in environmental service. The companies in this fund are mostly profitable to the point of paying dividends. Once more, the lack of a market for the ETF shares will make this difficult to trade. But the fund will give a long-term investor with a little extra risk capital and patience, an opportunity to hold a diversified position in a growing industry, increasingly mandated by law and public demand. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) 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. Additional disclosure: CFDs, spread betting and FX can result in losses exceeding your initial deposit. They are not suitable for everyone, so please ensure you understand the risks. Seek independent financial advice if necessary. Nothing in this article should be considered a personal recommendation. It does not account for your personal circumstances or appetite for risk.

TerraForm Power: Go Long On Renewable Energy

Summary TerraForm’s assets are new and efficient. Dividend guided by management to increase over 50% by 2017; yield on cost of 8% at currrent prices. Yieldco structure gives the company a highly visibile pipeline, external wind power acquisitions change the game. Shares are heavily undervalued at current prices. I’m long and you should be too. TerraForm Power, Inc. (NASDAQ: TERP ) is one of a few relatively new yieldcos trading in the market today. The company was set up to operate SunEdison (NYSE: SUNE ) assets in solar energy, but has since expanded to offer wind energy production as well. The current portfolio totaled 1,883 MW at the end of Q2 2015, but there has been 788MW worth of acquisitions already announced in 2015 and the company has call rights on 3,716MW of production that is under construction by SunEdison. Currently, the majority of assets are held in the United States (71%) and the United Kingdom (20%). From a management perspective, the relationship between TerraForm and SunEdison means that investors stand to benefit from SunEdison’s expertise as a large player in renewable energy design and downstream operations. The majority of TerraForm Power management worked at SunEdison so there is deep industry knowledge in the management suite in regards to predicting capital expenditures and industry ties to other third parties in the industry. Yieldcos have increased in popularity over the past few years, especially within the renewable energy space. Investors new to the concept can view a yieldco in a similar light to the more familiar master limited partnership (MLP) structure. Yieldcos do not pay corporate taxes and only completed, revenue-generating assets are held within the structure, attracting investors seeking low risk and stable cash flow. In return, parent companies get access to lower costs-of-capital while still retaining the majority voting interest on their assets. (click to enlarge) Shares have taken a dive in July and now trade below the initial IPO price in 2014. Is this warranted or does the company present a substantial opportunity at current prices? What steps has management taken over the past year and how does the asset pipeline look? Wind Diversification TerraForm has significantly diversified its power generation into wind assets in 2015. Starting with the FirstWind acquisition that closed in 2015 (500 MW), the company acquired an additional 1,451MW of wind energy from Atlantic Power and Invenergy in June/July 2015. By the end of 2015, all these transactions will have closed and TerraForm will be one of the largest wind power providers in the United States from basically having no wind assets just a year ago. In fact, starting in 2016 TerraForm will derive more power generation from wind than solar. This was a big deal for the company and these transactions catapulted TerraForm forward in the renewable energy markets. I like these acquisitions as they diversify the revenue base and will enhance scale in what currently is a highly fragmented renewable energy market. For a company that many viewed a year ago as just a depository for SunEdison solar assets, this has been a major change and management has a vision for the future. High Leverage Does Present Risks Due to the capital-intensive nature of the business and the corporate structure, traditional metrics like net debt/EBITDA and others are high. Current net debt/run-rate EBITDA stands at 5.1x, which should be something investors weigh before opening a position. Recent cash raises in the equity/debt markets have been all but used up to fund the recent transformative acquisitions mentioned. Current liquidity stands at just $646M (only $50M cash-on-hand plus the open revolver balance). Going forward in the short term, TerraForm’s large transactions are over in my opinion and the company will switch gears to focus on integration and cultivating existing production. Dividend Growth and Eventual Share Price The 2015 dividend is set to be $1.35/share, an annual rate of 4.46% at current prices. However, management has guided for the dividend to increase to $1.75/share in 2016 and $2.05/share in 2017. (click to enlarge) * TerraForm Investor Presentation At current prices of $25.33/share as of this writing, a dividend of $2.05/share in 2017 would give you a yield on cost of over 8% on your original investment. This is extremely solid and I think the market must either not understand the company or believe it cannot meet its dividend growth goals, which have been reiterated quite often in calls. Analysts have been quite direct on management’s view of share value and whether issuing further equity in the pipeline, to which Management has responded adamantly that they view the shares as undervalued at current prices and do not wish to raise capital this way. I think it is unlikely that current shareholders get diluted at current prices. Conclusion Shares are undervalued at current prices and the market sell-off from $40/share to current lows has been overdone. I picked up some shares at current prices today (to go along with my other two utility plays, Calpine Corporation (NYSE: CPN ) and AES Corporation (NYSE: AES )). In general, I think investors in utilities should seek out companies with young power plants with significant holdings in the next generation of power generation (natural gas, wind, solar) at cheap prices. TerraForm fits the bill. Disclosure: I am/we are long TERP. (More…) 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.