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Warm Weather In Q1 Didn’t Diminish Portland General Electric’s Long-Term Outlook

Summary Utility Portland General Electric’s Q1 earnings were dampened by unseasonably warm weather in Q1, which caused its sales volume to decline and earnings to miss the consensus estimate. The company would have had a solid quarter but for the mild winter, however, and it benefited from low fuel costs and a growing customer base. Weather aside, the company has continued to invest heavily in new non-coal capacity that will allow it to take full advantage of expected strong employment growth in its service area. While its shares appear to be undervalued at present, I would prefer to wait for them to fall to $31, a move that could occur with rising interest rates. Western electric utility Portland General Electric (NYSE: POR ) saw its share price approach a 52-week low earlier this month in the wake of a disappointing Q1 earnings report and subsequent downgrade by J.P. Morgan . While weather-related issues did negatively impact the company’s earnings earlier in the year, its trailing EBITDA is just short of a 15-year high (see figure). Furthermore, a disappointing short-term operating outlook co-exists with a more optimistic long-term outlook. This article evaluates Portland General Electric as a long-term investment in light of its recent performance and operating outlook. POR data by YCharts Portland General Electric at a glance Portland General Electric generates and distributes electricity from a number of fossil and renewable sources in the state of Oregon. The company’s most recent public iteration (its history as a firm dates to the late 19th century) came after it was divested from Enron in 2006 following the latter’s bankruptcy. Portland General Electric distributes electricity to 44% of Oregon’s inhabitants, with a total of 841,000 customers throughout the state, including much of the city of Portland (it divides service to the eponymous city with Berkshire Hathaway subsidiary Pacific Power ). The majority of Portland General Electric’s existing generating capacity , or 2,139 MW, comes from thermal power, split between roughly 65% natural gas and 35% coal. The company also utilizes substantial renewable sources, however, including 717 MW of wind power and 501 MW of hydroelectric power. A further 100 MW is purchased from third parties and resold by the firm. Oregon has recently begun to push companies in the state toward the replacement of fossil fuels with renewable resources, as evidenced by its March 2015 adoption of a low-carbon fuel standard. While the new standard is limited to transportation fuels, its implementation has led to proposals for the state to further adopt a carbon tax on fossil fuels, including fossil-based electricity. Recognizing the new trend, Portland General Electric will have phased out 61% of its coal-based capacity (i.e., its Boardman coal-fired facility) by 2020. As part of this effort the company is exploring the replacement of this capacity with biomass in a move that would create one of the largest biomass power facilities in the country. In the meantime it is building a new 440 MW natural gas-fired facility next to the existing Boardman coal-fired facility, thereby ensuring that its overall capacity will not be adversely affected by the closure of the coal-fired facility even in the event that biomass is not determined to be a feasible alternative feedstock. Portland General Electric is also moving forward with regulatory assessments of a new planned 6 MW hydroelectric dam in the state. As with other regulated electric utilities, Portland General Electric’s trailing earnings have been relative stable (see table). The most recent five quarters have been a strong rebound from 2013, however, when the company’s net income and EBITDA fell sharply. Overall it has been a consistent performer, however, reporting quarterly net losses on just two occasions in the nine years since it separated from Enron. As a regulated utility the company is dependent on state regulators to set rates at a level that will allow it to cover its cost of capital, and past earnings volatility has often been a result of regulators setting rates at levels below those requested by the company (the most recent example being the 2015 rates). Despite this most recent disappointment, however, Portland General Electric still manages to boast trailing net margin, return on equity, and return on assets figures that exceed the industry average. Portland General Electric Financials (non-adjusted) Q1 2015 Q4 2014 Q3 2014 Q2 2014 Q1 2014 Revenue ($MM) 473.0 500.0 484.0 423.0 493.0 Gross income ($MM) 250.0 239.0 222.0 214.0 255.0 Net income ($MM) 50.0 43.0 39.0 35.0 58.0 Diluted EPS ($) 0.62 0.52 0.47 0.43 0.73 EBITDA ($MM) 160.0 160.0 153.0 141.0 173.0 Source: Morningstar (2015) Portland General Electric also maintains relatively little cash on its balance sheet, with this amount falling to only $27 million at the end of Q1 (see table), relying instead upon steady operating cash flow and cheap credit to cover its substantial capital expenditures. At the end of Q1 the company listed $483 million in cash including short-term credit and letter of credit capacity maturing in November 2019. Furthermore, while it had an additional $2.1 billion in long-term debt at the end of the quarter, this was available at low rates (3.5% on 15-year debt, for example). While the company’s current ratio of 0.72 and substantial long-term debt load would be a cause for concern in other industries, Portland General Electric has no difficulty in acquiring additional financing as needed. Furthermore, its recent record of negative free cash flow has been the result of its large investments in additional capacity to meet demand growth in its service area, and these should pay substantial dividends (both figuratively and literally) as it comes online in 2017 and 2018. Portland General Electric Balance Sheet (restated) Q1 2015 Q4 2014 Q3 2014 Q2 2014 Q1 2014 Total cash ($MM) 27.0 127.0 97.0 97.0 64.0 Total assets ($MM) 7,091.0 7,042.0 6,657.0 6,399.0 6,169.0 Current liabilities ($MM) 809.0 873.0 482.0 457.0 451.0 Total liabilities ($MM) 5,152.0 5,131.0 4,768.0 4,528.0 4,313.0 Source: Morningstar (2015). Q1 earnings report Portland General Electric reported disappointing earnings in late April for Q1, missing on both lines. Revenue came in at $473 million, down 4.1% YoY from $493 million and missing the consensus estimate by $17.3 million. The company attributed the poor result to a substantial decline to sales volumes resulting from an unseasonably warm winter in its service area. Heating degree days in Q1 were down 21.7% from the previous year and 20% from the 15-year average, reducing demand as its customers were not forced to turn their heaters on as frequently as usual. The Q1 sales volume fell by 3.5% YoY, reducing revenue by $16 million. The company reported net income of $50 million, down from $58 million the previous year. Diluted EPS was $0.62 compared to $0.73 YoY, missing the consensus estimate by $0.10. EBITDA fell to $160 million from $173 million YoY. The company stated that diluted EPS would have been higher by $0.20 had the number of heating degree days for the quarter matched the 15-year average, while the expiration of the Production Tax Credit for wind power and abnormally low wind supply in the quarter reduced EPS by another $0.08. Partially offsetting these reductions was the sharp fall in the prices of natural gas and coal that occurred in the second half of 2014, which reduced the company’s operating costs by $23 million. Generation, transmission, and distribution costs rose 15% YoY but this was due to new capacity coming online. Finally, the company increased its number of retail customers by 0.7% YoY. But for the weather, then, Q1 would have been a solid quarter for the company. Indeed, the company’s management was confident enough in its overall performance to increase the quarterly dividend by 7% from $0.28 to $0.30 a week after the earnings report’s release, bringing its forward yield to a respectable 3.5%. Outlook Portland General Electric reported during its Q1 earnings call that its expansion plans are moving ahead as intended. The aforementioned new 440 MW Boardman natural gas-fired facility is on schedule to be mechanically completed by Q2 2016 and is on track to meet its estimated budget of $450 million. Its gas turbine and generator were installed in Q1 and its steam generator is expected to be constructed this quarter, bringing its overall construction to 50% completion. The company intends to finance its future capital expenditures, which could exceed $2.5 billion through 2018, via its operating cash flow ($494 million TTM), $400 million in new debt, and $270 million from equity forward sales that are due to be completed by the end of Q2. Finally, the company has requested a net 3.7% customer price increase for FY 2016 and expects state regulators to issue a decision by the end of 2015. Investors should note that the regulators have a history of awarding Portland General Electric lower-than-requested rate increases, however. Management stated in its Q1 earnings call that it is reducing its FY 2015 diluted EPS guidance from $2.20-$2.35 to $2.05-$2.20 in response to the weather-induced Q1 earnings miss. Beyond 2015, however, there are reasons to expect the company’s earnings to rebound. First, its Q1 earnings would have been stronger but for the quarter’s unseasonably warm weather. A return to the long-run average next year, let alone a colder-than-average winter such as the Northeast U.S. experienced at the same time, would provide its earnings with a boost. Similarly, the warm weather contributed to a record-low snowpack in Oregon that reduced the electricity yielded from Portland General Electric’s sizeable hydroelectric capacity, forcing it to increase its reliance on purchased power rather than its own generators. While there is no guarantee that next winter will provide a more favorable operating environment for the company, the 15-year average suggests that it will. Portland General Electric also benefits from operating in a state that has seen its labor rolls grow faster than the U.S. average since 2013 in a trend that is forecast to become particularly pronounced after 2017 (see figure). The company’s heavy investment in new capacity will, if the forecasts turn out to be correct, allow it to take full advantage of this trend by adding new customers and responding to increases in existing demand as economic growth strengthens still further. While its limited geographic exposure has been a burden at times in the past, Oregon’s expected above-average economic growth will similarly provide the company with an advantage over utilities in other parts of the country in coming years. Indeed, it could even make Portland General Electric a possible takeover target, although such an event is too speculative at present to have a large influence on an investment decision. Oregon Total Nonfarm Employment data by YCharts Finally, Portland General Electric can also be expected to benefit from last year’s sharp decline in the price of natural gas. While the fall hasn’t been as pronounced in Oregon as in the central and south-central U.S., the state is still experiencing citygate prices that are 21% lower today than at the same time a year ago (see figure). Continued low natural gas prices will provide the company with a couple of advantages. First, it places it in a position to take advantage of low prices and potentially invest in the acquisition of large natural gas reserves that can be utilized if and when prices increase in the future. Management stated during the Q1 earnings call that it is actively exploring such an investment, and I would expect to see the company move forward with it in the event that natural gas prices fall much further. Second, cheap natural gas increases the feasibility and reduces the opportunity costs of its move away from coal-fired facilities. Natural gas has less than half of the carbon intensity of coal when used to produce electricity and a switch from the latter to the former will both boost the company’s public image and mitigate the adverse impact of a possible carbon tax in the state. Oregon Natural Gas Citygate Price data by YCharts Valuation Not surprisingly, analyst estimates for FY 2015 have been revised lower over the last 60 days in response to management’s own lowered guidance. The diluted EPS consensus estimate for FY 2015 has fallen from $2.29 to $2.16, although the FY 2016 estimate has remained steady over the same period at $2.39. Based on the share price at the time of writing of $34.29, the company has a trailing P/E ratio of 16.8x. The consensus estimates result in forward ratios for FY 2015 and FY 2016 of 15.9x and 14.3x, respectively. While the trailing ratio is high compared to its 3-year history (see figure), the forward ratios are relatively low. POR PE Ratio (NYSE: TTM ) data by YCharts Conclusion Portland General Electric reported disappointing earnings for Q1 due to unseasonably warm conditions and investors have pushed the company’s shares near their 52-week low in response. While there are no guarantees that future weather conditions will be more favorable, even a return to the long-run average conditions would provide the company’s future earnings with a substantial boost. Beyond the current fiscal year, the company is continuing to invest heavily in new generating capacity, both as part of a move away from coal as well as in response to expectations of increased demand over the next several years as Oregon’s employment growth is forecast to substantially exceed that of the U.S. While Portland General Electric does not benefit from as friendly of a relationship with state regulators as many of its competitors do, I ultimately believe that this is outweighed by its geographic location and generating capacity investments. The only thing that prevents me from initiating a long investment at this time is the prospect of rising interest rates later in the year and movement of large investors away from utilities and other dividend stocks. I believe that the company’s share price could follow those of other dividend stocks lower in anticipation of a rate rise later in the year. Following such a decline, however, I would readily purchase Portland General Electric’s shares for $31, or approximately 13x its expected FY 2016 earnings. 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.

TBT Is The Best Inverse Bond ETF On The Market

Summary TBT has the most volatility. TBT provides additional exposure through 2X leverage. TBT has more net assets than its competitors. Introduction In an economic environment where Interest rates are bound to rise in the coming months, a well performing inverse ETF is a good tool for any investor to have prepared. The best inverse bond ETF on the market is the ProShares UltraShort 20+ Year Treasury ETF ( TBT). TBT has over 2.70 Billion in net assets, and it seeks a return that is -2 times the return of the Barclays U.S. 20+ Year Treasury Bond Index for a single day. Inverse exposure is used to hedge against declines, seek profit from declines, and underweighting exposure to a market segment. I believe that TBT is the best inverse bond ETF on the market. Why TBT is the Best When interest rates rise, bond and bond index holders suffer. Inverse bond ETFs are valuable for investors with portfolios that are bond heavy or for investors trying to capitalize on rising interest rates. TBT has a 0.92% expense ratio and a 9.40% increase year to date. The industry average expense ratio hovers around 0.9%, and is comparable to TBT’s main competitors: the ProShares Short 20+ Year Treasury ETF (NYSEARCA: TBF ), the Direxion Daily 20+ Year Treasury Bear 3x Shares ETF (NYSEARCA: TMV ), and the ProShares UltraPro Short 20+ Year Treasury ETF (NYSEARCA: TTT ). What differentiates TBT is its 2x leveraged volatility, and its total assets. TMV has performed the best with returns of 12.80% YTD. TMV’s performance can be attributed to its 3X leverage which exposes it to the market more, but can also produce unwanted and potentially harmful volatility. TBF is 1x short and is less volatile, but TBF has only returned 5.84% YTD. Returns To show how TBT, TBF, and TMV move relative to each other, Included a comparison chart of returns year to date. Each index moves in a correlated manner, but the returns are different based on how leveraged each ETF is. Analysis Like its competitors, TBT shows a strong inverse (-.99) correlation to the 20 year index. Additionally, I compared TBT (in orange) and its competitors to the 10 year treasury. I did this to show how it correlates to, and can be utilized to hedge, 10-Year Treasury Bonds. The 10- and 20-Year Treasury move almost identically. As you can see, all four ETFs have a nearly perfect correlation to 10-Year yields. TBT and TBF, however, appear to be the most correlated. Yields and bond prices are inversely correlated, which allows one to hedge against rising interest rates. Each Inverse ETF accomplishes its goal of providing the investor with inverse exposure. Graph of 10-Year Treasury Yields This graph shows the relative performance of each aforementioned ETF relative to 10-Year Treasury Yields. I included this chart to show how each ETF produces different returns, yet each is correlated to the relative movement of the 10-Year. Analysis Continued TBT is the most heavily traded Inverse Bond ETF. TBT has an average volume of 3,364,979 while the second most traded is TBF with an average volume of only 785,380. Specialty 7-10/10 year inverse ETFs like the i Path U.S. Treasury 10-Year Bear ETN (NASDAQ: DTYS ) and the ProShares Short 7-10 Year Treasury ETF (NYSEARCA: TBX ) have average volumes of 53,418 and 11,371 respectively. A highly traded ETF like TBT avoids liquidity risk better than all of its competitors. Additionally, for investors wanting to move high volumes of equity in a short time period of time (without strongly affecting the price) TBT is your best bet. TBT is leveraged 2X to produce 2 times exposure to daily volatility. Some investors may not want to expose themselves to 2X leverage because it exposes them to additional risk than a direct 1X inverse ETF like TBF. For this reason, TBT is a better option for investors who are able to stomach risk well. I believe TBTs 2X exposure is hugely beneficial to long term performance. 3X exposure can be too volatile and unpredictable to trade effectively. 1X exposure does not provide adequate daily returns or hedging opportunity for those attempting to capitalize on market conditions. Finally, TBT has over 3 billion in total assets which allows TBT to track its underlying index more thoroughly than its competitors. TBT’s closest competitor, TBF, has only 1.1 Billion in total assets, while the average assets of its competitors fall closer to 100 million. Conclusion TBT is the best inverse bond ETF on the market. TBT provides high levels of exposure to yields while reducing additional risk that plagues its competitors. TBT has a fair expense ratio, and high correlation to its underlying index. For investors looking for ways to hedge against rising interest rates, TBT is clearly the superior ETF. 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.

Is GREK Today’s Least Competitive Wealth-Builder ETF Investment?

Summary Days ago our article identified an ETF ranked at the best end of the scale posed in the title above, drawing Seeking Alpha reader attention. The ongoing EU vs. Greece drama now reaching a moment of (possible) truth has as one (or more) possible outcome(s) capable of defining an immediate tragedy. Hence the question being raised. And if this is not the worst possible choice of a long ETF position, is (are) there more threatening one(s)? Market-makers have to appraise them all, to do their jobs. We use their hedging actions to tell us what they think. It’s beyond our ken. Way beyond. Value analysis requires comparisons. Without appraisal of the bad, how do we know good? Yin and Yang are both essential. How does GREK look to market-makers? The Global X FTSE Greece 20 ETF (NYSEARCA: GREK ) presents market-makers with a challenging task of appraisal. In our recent article we posed the question this way: From a population of some 350 actively-traded, substantial, and growing ETFs is this a currently attractive addition to a portfolio whose principal objective is wealth accumulation by active investing? We daily evaluate future near-term price gain prospects for quality, market-seasoned ETFs, based on the expectations of market-makers [MMs], drawing on their insights from client order-flows. Following that article’s format where possible, let’s look at their appraisal of GREK. Yahoo describes it this way: The fund currently holds assets of $310 million and has had a YTD price return of -9.1%. Its average daily trading volume of 899,906 produces a complete asset turnover calculation in 29 days at its current price of $11.77. (The Bank of Piraeus may wish it had as long on withdrawals.) Behavioral analysis of market-maker hedging actions while providing market liquidity for volume block trades in the ETF by interested major investment funds has produced the recent past (6 month) daily history of implied price range forecasts pictured in Figure 1. Figure 1 (used with permission) The vertical lines of Figure 1 are a visual history of forward-looking expectations of coming prices for the subject ETF. They are NOT a backward-in-time look at actual daily price ranges, but the heavy dot in each range is the ending market quote of the day the forecast was made. What is important in the picture is the balance of upside prospects in comparison to downside concerns. That ratio is expressed in the Range Index [RI], whose number tells what percentage of the whole range lies below the then current price. Today’s Range Index is used to evaluate how well prior forecasts of similar RIs for this ETF have previously worked out. The size of that historic sample is given near the right-hand end of the data line below the picture. The current RI’s size in relation to all available RIs of the past 5 years is indicated in the small blue thumbnail distribution at the bottom of Figure 1. The first items in the data line are current information: The current high and low of the forecast range, and the percent change from the market quote to the top of the range, as a sell target. The Range Index is of the current forecast. Other items of data are all derived from the history of prior forecasts. They stem from applying a T ime- E fficient R isk M anagement D iscipline to hypothetical holdings initiated by the MM forecasts. That discipline requires a next-day closing price cost position be held no longer than 63 market days (3 months) unless first encountered by a market close equal to or above the sell target. The net payoffs are the cumulative average simple percent gains of all such forecast positions, including losses. Days held are average market rather than calendar days held in the sample positions. Drawdown exposure indicates the typical worst-case price experience during those holding periods. Win odds tells what percentage proportion of the sample recovered from the drawdowns to produce a gain. The cred(ibility) ratio compares the sell target prospect with the historic net payoff experiences. Figure 2 provides a longer-time perspective by drawing a once-a week look from the Figure 1 source forecasts, back over (almost) two years. Figure 2 (used with permission) What does this ETF hold, causing such price expectations? Figure 3 is a table of securities held by the subject ETF, indicating its concentration in the top ten largest holdings, and their percentage of the ETF’s total value. Figure 3 (click to enlarge) Well, maybe that’s what is causing such price expectations, but it seems more likely that international politics has more to do with it. So let’s depart from GRKZF, the Greek Organization of Football Prognostics SA, and turn to the Wall Street organization of stock price prognostics, or market-makers [MMs]. Sport is where you find it. Just how bad is the GREK outlook? We use the MMs forecasts for stock and ETF prices, implied by their self-protective hedging actions, plus the accumulated actuarial history of market price events following such prior forecasts as are seen today, to rank each subject. Figure 4 is a table of how the worst-ranking ten ETFs appear. Please remember, our ranking interest is in wealth-building, not wealth destruction. What works well in one direction may not work in the opposite. Shorting is not recommended. Figure 4 (click to enlarge) When we compare the wealth-building prospects for GREK (ranked 270th out of 340) it doesn’t come close to the terrors inherent in these last ten. Remember, the MMs role is to build a balance between buyers and sellers in every trade, so they have to find acceptable expectations at each end of an actionable array of prices. The actions produce the trade, the expectations are what produce the actions. Check the row of data beneath the top illustration of Figure 1. Its forecast upper end is 23.7% above the then-current price of $10.58. That compares to the ten-ETF average of Figure 4 of +29.4% in column (5). What of the risk exposure? When GREK in the past has been seen by MMs to have an outlook like today’s (a Range Index of 33, meaning twice as much upside as downside) its typical worst-case price drawdown experienced was but -16.3%. The worst-ten ETFs of Figure 4 managed -19.7% — a fifth of their capital gone, not just less than a sixth. And on top of that GREK had 42 out of 100 chances of seeing its price recover back into profit territory, while those other ETFs had but one chance in four of that happening (column 8 blue average). And they started, on average, from prior forecasts with Range Indexes of 26, with three times as much upside as down. See? GREK could be worse. ‘Course it could (needs to) be better. The average equity today offers a 29 Range Index with +12.5% upside. There is real credibility to that population forecast, since prior similar forecast hypothetical positions produced gains of +3.9% (net of 35/100 losses, not 58/100). GREK actually had prior net losses of -6.5% and negative credibility ratio (like the other worst ten ETFs) comparing upside forecasts to actual TERMD payoffs. Conclusion But those are historical comparisons. The past may not be prologue. Buyers must hope so. Besides, there is less than two years of GREK pricing for us to work with. Maybe Greece has just had a bad recent two years. We keep a ten-foot long pole at hand for just such occasions. Hope we don’t have to use it, not sure we would. 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.