Tag Archives: alternative

Surf’s Up With Hawaiian Electric Industries

Summary Hawaii Electric Industries has 95% of Hawaiian electricity market. Hawaii population and building projects are trending up. Hawaiian Electric is poised to expand into this growing market while aligning with other macro trends. Hawaii has been known as one of the most coveted tourism destinations in the United States, but has recently started to become a hot area for residency and permanent living. As mainlanders flock to the beautiful beaches and island lifestyle offered by the most recently inducted U.S. State, opportunity for investors becomes more and more apparent in a variety of different ways. A company that is fully equipped and already capitalizing on Hawaii’s growth is Hawaiian Electric Industries (NYSE: HE ). A leading electricity provider for the Hawaiian Islands, Hawaiian Electric is a strong pick in an expanding economy, especially where residencies and buildings are being built and filled at a high rate. The Opportunity Hawaiian Electric Industries is the leading electricity provider, supplying almost 95%, roughly 450,000 customers, of the Hawaiian population with electricity through its various subsidiaries, including Hawaiian Electric Light Co., and Maui Electric Co. With obvious domination of the market, HE is poised to grow with the economic and population growth of Hawaii. As population trends towards higher numbers, more projects and residencies will continue to be built, and power will need to be supplied to these new homes. Hawaiian Electric can expect to get that call based off of their dominant market share and well known reliability. A steady flow of new customers in the foreseeable future as migration to Hawaii grows, coupled with a company that already has a strong grip on the market could lead to attractive profits and growth. (click to enlarge) As one can see from the chart, after soaring housing numbers pre-recession there was an obvious lull in authorized projects. Since, there has been growth, that, while not at pre-recession numbers, is trending up. This opens the door of opportunity for a company that provides electricity to almost all new housing projects in Hawaii. If this growth continues, look to see HE increase customers and ultimately profit from the construction of new housing. Expansion is looking to be a promising opportunity in the near future as a merger between HE and NextEra Energy, Inc. (NYSE: NEE ) is in the works, currently clearing obstacles in the process of joining forces. NextEra is a clean energy company stationed in Juno Beach, Florida, with almost $17 billion in latest reported annual revenues. As one of the top ten in Fortune’s 2015 list of “World’s Most Admired Companies,” NEE will offer a variety of services and assistance for HE to reach it’s goal of an entirely renewable energy portfolio by 2045, matching Hawaiian Electric Ind. with a leading trend in the utilities macroenvironment. The Company HE is a mid-cap stock with a strong financial base. Revenues have remained steady over the past 3 years, leading many to believe a stall of sorts has occurred, but as macro conditions improve and the company expands its portfolio these numbers could see growth. Forward thinking management strategies such as the renewable energy plan set forth by HE President Connie Lau will propel the company into the future of energy, aligning with not only consumer trends, but natural trends as well. Recognition of the fruits of these plans may not be seen for a number of years, but strong strategy and pursuit of that strategy is paramount in any business, but vital to the energy and utilities sectors in particular. Dividends have remained strong at $1.24 (4.37%) per common share, a respectable number for a mid-cap stock. One thing to consider when analyzing HE as a company is the strong growth in operating income this company has experienced over the past few years, from $284 million in 2012 to $329 million in their most recent 2014 annual report. This shows internal strength in its ability to generate larger profit margins while revenues remain steady, a competency necessary to success in an industry where squeezing higher profits from sales is so integral to growth and financial health. Share prices have seen a recent decline, from around $34 in January, down to about $28 in the recent days. Expect to see a rebound in these prices if the eminent merger with NextEra is completed, as this would lead to expansion and increased internal company strength in the market. Analysts predict company growth of 19% next quarter, along with 6% for the next year. Conclusion All investment decisions should warrant caution, and HE is no different. That said, a strong company with a large market share in a growing market are good finds. HE is exactly that, a strong, financially healthy, company that owns 95% of a market that expects steady growth in the coming years. Couple that with strong expansion strategy to meet changing macro trends towards cleaner, renewable energy and HE could be a strong investment.

Spark Up 12.5% Yields With Edenor Yankee Bonds, Maturing October 2022

Summary Edenor is the largest electricity distribution company in Argentina. It registered a more than 200% increase in its profit from continuing operations for the first six months (ended June 30) of 2015, compared to the same time period in 2014. Currently, Edenor stock is up 47% from the beginning of 2015. This week we focus on a monopolistic company providing an essential service within its captive market. Empresa Distribuidora y Comercializadora Norte S.A (NYSE: EDN ) is the largest electricity distribution company in Argentina, providing service to a large majority of Argentina’s largest city, Buenos Aires. After many years of government imposed tariff rates, recent legislation has not only provided additional revenues, but has laid the groundwork for a long-overdue increase in the rates Edenor can charge to its customers. These additional revenues have had an extremely positive effect on Edenor’s financials, with the company registering more than a 200% increase in its profit from continuing operations for the first six months (ended June 30) of 2015, compared to the same time period in 2014. With Argentina’s national elections next month, the international business community is anticipating the positive economic reforms that may come from a new ruling government, including long-overdue tariff increases for electricity distributors and generators. These slightly longer seven-year bonds, couponed at 9.75% and currently indicated a yield of about 12.5% when discounted to about 87.5, offer very high cash flow and represent an excellent opportunity for savvy investors to participate in the renaissance of the Argentine economy. Therefore, we are targeting them as a strong addition to our FX1 and FX2 income portfolios. Argentine Yankee Bonds Three years ago, we began finding great opportunities in many of Argentina’s nicely discounted dollar-denominated short-term bonds. While the high yields that were indicated turned away many of the typically more conservative fixed investors, the previously recommended Argentina bonds, as a group, have continued to remain on track toward producing remarkably high yields that are over 8% (and some upwards of 14%). As a group, the Yankee bonds from Argentina have significantly outperformed all other segments of our global high-yield portfolios. About the Issuer Empresa Distribuidora y Comercializadora Norte S.A. (Edenor) is the largest electricity distribution company in Argentina in terms of number of customers and electricity sold. Through a concession, Edenor distributes electricity exclusively to the northwestern zone of the greater Buenos Aires metropolitan area and the northern part of the city of Buenos Aires, which has a population of approximately 7 million people. Edenor’s ultimate parent company is Pampa Energia, the largest, fully integrated, electricity company in Argentina. Pampa is involved in all aspects of electricity, including generation, transmission and distribution. Edenor has a geographic monopoly in the area where it provides electricity service. In Argentina, each distributor supplies electricity to consumers and operates the related distribution network in a specified geographic area pursuant to a concession granted by the Argentine government. Only one concession is granted in each area. Increasing Tariff Rates After over a decade of frozen tariff rates, the Argentine government is finally conceding to the need for increased rates in the electricity sector. In March of this year, Argentina’s Secretary of Energy passed legislation that will pave the way for Edenor and other distributors in the country to raise tariff rates for the first time since 2007. Until those rates are officially increased later this year, the government will transfer funds to the company to cover the difference between current rates and actual distribution costs. The big picture of this legislation for Edenor in 2015 is an estimated US $455 million in additional revenues. In fact, Edenor had already received an additional $262.8 million as of June 30, 2015. This legislation (known as Resolution 32/15) has been well received by the financial markets, with Edenor stock rising to its highest point in March 2015 since the company’s stock began trading in 2007. Currently, Edenor stock is up 47% from the beginning of 2015. Edenor also has been anticipating the long-awaited rate increases and is in the process of drafting a new 10-year investment plan to update and upgrade its distribution network. Political Changes Argentina’s much anticipated elections will take place on October 25, 2015. Due to term limits, current Argentine President Kirchner will not seek reelection. Many Argentine citizens, as well as many in the financial world, are anticipating that the next ruling government will enact changes long overdue under President Kirchner’s watch. These changes include lifting trade barriers, amending price controls and reducing subsidies. The heavily subsidized electricity industry, which currently experiences outages during peak demand times, will likely be one of the first areas the new government will address. With the recently enacted legislation, industry experts predict the first order of business will be to raise tariff rates to a level more reflective of the actual costs for energy distribution. These higher rates will definitely favor Edenor, increasing the company’s cash flow, bolstering its operating margins and improving its credit rating. Financials Edenor’s financials have shown marked improvement with the addition of the revenue tied to the March 2015 legislation. For the six months ended June 30, 2015, the company had a profit of AR724.7 million from continuing operations compared to a AR722.8 million loss for the first six months of 2014. Q2 2015 also showed an impressive year-over-year increase in adjusted EBITDA. Edenor registered an adjusted EBITDA of AR310.0 million compared to a loss of AR$479.3 million for Q2 2014. As one might expect, Edenor has significant asset value in its property, plant and equipment. As of June 30, 2015, the company recorded $807.5 million (in US dollars) in asset value for its property, plant and equipment. This value well exceeds the company’s dollar-denominated debt of $191.2 million. Risks The default risk is Edenor’s ability to perform. After over a decade of artificially low tariff rates, it’s encouraging that the Argentine government is finally acknowledging the need to adjust rates to more accurately reflect the actual cost of electricity distribution. Edenor’s cash flow and operating margins have improved significantly since legislation was passed earlier this year to direct additional revenues to the company to more closely match actual operating expenses. Given Argentina’s history of government regulation in the private sector, there is certainly some geopolitical risks involved for bondholders of Edenor. With national elections only a month away, the international consensus is that whatever new government comes to power will need to contend with remedying the many areas of Argentina’s economy that have suffered under the current ruling party, including the aging electricity infrastructure. This will most certainly involve reducing subsidies (to shore up Argentina’s reserves) as well as raising electricity rates, which will translate to increased income for Edenor. Also, as electricity is an absolute essential need for any modern society, the government will do whatever is required to ensure Edenor’s viability. Edenor’s current dollar denominated debt totals $191.2 million (in US dollars). A decline in the Argentine peso would increase Edenor’s interest payments on this debt as their revenues are recognized in Argentine pesos. Even if a devaluation of the Argentine peso occurs after the upcoming election (as many are predicting), the expected increase in tariff rates for Edenor will help to balance peso volatility. These bonds have similar risks and yields to other Yankee bond issues reviewed on BondYields.com , such as the 8.875 Transener Yankee bonds , the 9.5% Autopistas Del Sol Yankee bonds and the 7.75% Hidroelectrica Piedra del Aguila Yankee bonds. Summary and Conclusion Edenor provides an essential service to the citizens of Argentina’s largest city, Buenos Aries. Although the company has had challenges in trying to match revenue with costs due to the long-standing tariff freeze, the tide has turned, as evidenced by the recent rally in Edenor stock, with the Argentine government moving toward allowing rate increases by the end of this year. Any such increase will have a positive effect for Edenor – increasing operating margins and allowing the company to update its aging systems. For bondholders, Argentina represents an excellent diversification opportunity into a country poised to make significant economic progress with the advent of a new ruling government. These 9.75% couponed bonds have a slightly longer duration than many of the bonds previously reviewed, but we like the monopolistic position of Edenor along with the essential service it provides to the city and country where it operates. Consequently, we believe the high 12.5% yields indicated with these bonds will make an excellent addition to our Fixed-Income1.com and Fixed-Income2.com global high yield fixed income portfolios. Issuer: Empresa Distribuidora y Comercializadora Norte S.A. (EDENOR) Coupon: 9.75% Maturity: 10/25/2022 Rating: B2/B CUSIP: P3710FAJ3 Pays: Semi-annually Price: 87.5 Yield to Maturity: ~12.5% Disclosure: Some Durig Capital clients may currently own Edenor’s 2022 bonds. Please note that all yield and price indications are shown from the time of our research. Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients. As a result of our institutional association, we frequently obtain better yield/price executions for our clients than is initially indicated in our reports. We welcome inquiries from other advisors that may also be interested in our work and the possibilities of achieving higher yields for retail clients.

Middlesex Water Is A Dividend Aristocrat

Middlesex Water Company has a remarkably safe, growing dividend, with a current yield of over 3%. Using a constant dividend growth model, investors will find that the current stock price is slightly below the fair value. Investors looking for a safe utility company with a steady dividend should take a look at Middlesex Water Company. Middlesex Water Company (NASDAQ: MSEX ) could be one of the safest dividend stocks in the market. This is a water utility company operating in central and southern New Jersey, as well as Delaware and northeastern Pennsylvania, which include some of the highest-income areas in the nation. As a water utility company and a company whose customers are overwhelmingly wealthy, Middlesex Water Company is able to provide a remarkably safe dividend, with the current 3%+ yield representing a payout ratio of under 70%. Furthermore, recent developments in New Jersey (where Middlesex Water Company operates most of its business) should allow the company to grow earnings and maintain its healthy dividend. Governor Chris Christie recently signed into law the Water Infrastructure Protection Act , which allows municipalities to sell their water systems to water companies. So while utility companies have typically been seen as safe investments, in New Jersey they can be considered safe and also have the potential for growth. These developments show that the Middlesex Water Company’s dividend should be safe, and that earnings growth opportunities in the future could potentially provide an additional incentive to invest. If the under 70% payout ratio is not impressive as it is, the company has made a cash dividend payment every year for 102 years, even in the midst of the financial crises. Furthermore, Middlesex Water Company has raised its dividend every year for 42 years. (click to enlarge) This is a perfect case of a dividend stock, and a stock that many investors will only purchase for the safety of its dividend. Thus, we can safely use the dividend growth model to find its value. Excluding that one quarter blip, Middlesex Water Company has raised its dividend every four quarters by .25 cents, for an annual increase in its dividend of 1 cent. While this nominal growth rate is constant, in order to use the dividend growth model, we must come up with a percentage rate. The percentage rate will be declining year after year, even as the dividend growth remains at a steady 1 cent increase. For next year, the dividend growth rate is represented by .01/.77 = 1.3%. In about 25 years, we know this rate will decline to just under 1%, so we can split the different and use a rate of 1.15%. This assumes the investor will be holding the stock for a period of 25 years. For our required return rate, we will use the Weighted Average Cost of Capital for Middlesex Water Company. This can be calculated by finding the weighted average cost of equity, which we will find using the Capital Asset Pricing Model (CAPM), and the cost of debt multiplied by 1 minus the tax rate). The weights will be 71% equity and 29% debt, using market cap of equity and the book value of debt. The Cost of Equity = Risk-Free Rate of Return + Beta of Asset * (Expected Return of the Market – Risk-Free Rate of Return). The risk-free rate we will use is the 10-year Treasury, currently yielding about 2.05%. The beta we will use is .62, as calculated by YCharts, which uses data from BATS Exchange. The expected return of the market – the risk-free rate, otherwise known as market premium – is left up to much more interpretation. I will use a rate of 5%, which is slightly less than the average S&P performance minus the current risk free 10-year Treasury rate. I am using a slightly less-than-average S&P average because evidence suggests the market will not do as well as it has done the past few years, as news is coming out that people are pulling money out of the market and into other investments. For example, the return on cash now exceeds returns on stocks and bonds for the first time in 25 years . This model will assume that investors putting money in the market will receive a historically lower return than average. Plugging all these values in, we get a cost of equity of 5.15%. The cost of debt can be easily calculated as interest expense divided by book value of debt. In this case, using year-end data from 2014, we get $5.067 million divided by $162.2915, which equals 3.45%. Middlesex Water Company’s average tax rate for the past two years has been 34.57%, so we will multiply 3.45%*(1-.3457) to get 2.26%. Now, to weight them, it will come out to (.71)*(.0515) + (.29)*(.0226) = 4.31% Using the next annual dividend payout of $0.78 as well as all these values, we can use the dividend growth model to estimate the stock is worth approximately $24.69. At a current price of $23.75, it appears MSEX is undervalued by approximately 4%. For investors looking for a safe, growing dividend, Middlesex Water Company is worth a look.