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Third Avenue Focused Credit Fund – Designed To Implode

Summary Third Avenue Focused Credit Fund has been placed in liquidation by its board of trustees. The cause was the illiquidity of its portfolio of deep value high yield securities. The board could not continue to run an open-end mutual fund with such a high concentration of illiquid securities. Will there be contagion for other high yield bond funds? Yes, if they have a high proportion of illiquid securities in their portfolios. On December 10, Third Avenue Focused Credit Fund (MUTF: TFCIX ) announced that it was going into liquidation rather than redeeming any additional securities. It is in all the newspapers. Liquidation is a highly unusual move for an open-end mutual fund to make, but it appears to have been the only rational course of action open to the fund’s board of trustees in the circumstances. The fund, started in 2009, had an unusual, possibly unique investment style. It invested in deep value high-yield bonds – the sort that would not blush when called “junk” – often with the lowest ratings. Third Avenue Management, the fund’s manager, and its chairman, Martin Whitman, are highly regarded value investors. It is not a fly-by-night operation. Indeed, when the Focused Credit Fund opened in 2009, I was an early investor – though I redeemed my shares after about a year because I thought the fund was taking greater risks than I had understood when I invested. The fund had over $2 billion of assets at the beginning of 2015, but due to portfolio losses and redemptions, it was down to $789 million at December 10. Illiquidity of the Portfolio Assets of a mutual fund have two pricing mandates: (1) a mandate under the Investment Company Act that, although detailed in overall methodology, is relatively general regarding specific securities, and (2) a process under Generally Accepted Accounting Principles, which, by dividing valuation into three methodologies, is somewhat more specific. By reason of its specificity, the GAAP definition tends to prevail in the valuation of individual securities. The last SEC-filed report on the valuation of the Focused Credit Fund’s portfolio securities, as of 7/31/15, shows that of the fund’s $1,953 million of assets, $171 million was priced in accordance with level 1 methodology, $1,399 million in accordance with level 2 methodology, and $382 million under level 3 standards. By the standards of most mutual funds, only level 1 assets are deemed to be liquid – that is, capable of being sold at a price near their valuation in a reasonable period of time. The Third Avenue Focused Credit Fund had over half its assets in level 2 and almost 20% in level 3, which sometimes is called “mark to myth.” These figures stand out starkly against the SEC’s general rule that open-end funds are to limit their holdings of illiquid securities to 15% of assets or less. Strategic Illiquidity Looking at Focused Credit Fund’s holdings, it appears that the deep value methodology that the fund adopted almost necessarily led to endemic illiquidity because securities of that type trade infrequently. Looked at in that light, the fund was almost bound to implode if the lowest-rated part of the high yield market declined significantly. And that is just what happened in 2015: The lowest rated high-yield securities performed far worse than the rest of the market. In that circumstance, a high level of redemptions was predictable, and an inability to sell the portfolio’s securities at reasonable prices in reasonable amounts of time also was predictable. Under and Over Valuations – Risks either Way In a way, I am surprised that the Board of Trustees waited so long to put the fund into liquidation because the responsibility for valuing level 2 and level 3 assets falls on the board itself, including its independent members. Although the board usually defers to management and often has a subcommittee that deals with valuations, the board as a whole is responsible. Thus, for a long period of time, the board has been blessing portfolio valuations that are hard to defend, even if they were done in the best of faith. Moreover, those who cashed out and those who held on had conflicting interests. Those who cashed out benefited from higher valuations; those who held on benefited from lower valuations. The board therefore has been or will be sued every which way. Liquidation is the only way to avoid further litigation risk for valuations. It appears from reading press reports that the officers of Third Avenue Management are concerned that they may have overvalued some portfolio securities. That surprised me because looked at from the point of view of a lawyer representing the independent trustees, a role I played often over a 30-year period, and the valuations should be conservative – on the low side. But it appears that the Third Avenue people are concerned about over-valuations. However, I now see that an investment manager has incentives to place valuations of the high side because that will keep the NAV up, which will tend to fewer redemptions and higher management fees. If the valuations were high, then stockholders that did not redeem may have been injured because stockholders that redeemed got more than they should have. In all likelihood, the remaining stockholders have a good class action. The board finally decided it had to liquidate the fund because no matter what valuation methodology it used, it would be subject second-guessing in court. Definition of Liquid Security Over the last year, I have written about the need for a better definition of liquid security. The definition, I have argued, is too loose; therefore, it is likely to lead to some funds holding far greater proportions of illiquid securities than the SEC thought safe – or than I thought safe. The industry has fought a redefinition because it has made money from the old definition. The liabilities that are likely to flow from this event may soften that opposition, and the events will strengthen the forces of reform. Here is what I said on this subject at NexChange.com about six months ago: The genius of the form is that forward pricing at net asset value prevents investors from gaming the system. Whether the market is going up or down, NAV is NAV. (Yes, there are issues with trading in different time zones, but those issues have been minor in most cases.) But the genius of NAV depends on two things: One, that it be a reliable source of true value; and two, that the underlying securities be, for the most part, liquid in substantially all markets. Many open-end bond funds have significant percentages of assets that are liquid under the SEC’s definition of “liquid” but that in a crisis would not be liquid-that is, they could not be sold except at a price far lower than their intrinsic value. If, due to redemptions, some funds were forced to sell such assets, the NAV of all similar funds would fall more precipitously than the intrinsic value of their underlying assets would warrant. This illiquidity problem could be solved by the SEC changing its definition of “liquid asset” to make it more stringent. Open-end bond funds then would have to avoid smaller issues that would likely be thinly traded and have practically no market in a crisis. But that will not happen because the fund industry is making too much money on their bond fund products. Besides, the problem is not likely to have a systemic impact because the illiquid issues are not due immediately and the losses that investors suffer will not, for the most part, be leveraged.” The liquidation of Third Avenue Focused Fund is evidence that my fears were well founded. In the same series of articles at NexChange, I discussed the difference between interest rate risk-based valuation issues and credit quality-based valuation issues. Here is what I said. It is applicable to the Focused Credit Fund style and experience. There is a big difference between wondering whether the interest rate on a particular bond is appropriate in the current market and wondering whether the bond will be repaid. The interest rate question an investor can quantify. At any given rate (the current risk free rate is known), the value, based solely on the interest rate, tenor and repayment options, is known. The spread between the implied market rate on the bond and the market rate on a similar duration Treasury reflects the market’s judgment as to credit risk. Traders will be quick to spot any anomalies and will take advantage of them, in effect stabilizing the interest rate side of the market. But when the issuer’s ability to repay comes into doubt, no one knows what the right price is, and the market may have no floor. That is what owners of sub-prime backed RMBS and their derivatives discovered on 2008. When credit quality is unknown, there may be no market price because there may be no market.” Contagion Will there be contagion for funds that look like Third Avenue Focused Credit Fund? Yes, if they really do look like it. But I expect there are not many of those. The unusual deep value nature of the fund’s strategy met up with that class of assets falling out of favor over the last year and seeing their value drop sharply. The bigger question is whether more ordinary high-yield open-end funds will suffer from contagion. First reactions, including that of the Wall Street Journal, appear to suggest there will be contagion throughout that class of funds. How far it will go remains to be seen. The tide has gone out. Now we will see who is swimming naked – that is, who really has a higher level of illiquid securities than they claim to have. That could be quite a few. According to research using the Schwab search engine, there are 82 high yield bond funds with over $500 million in assets, 28 with over $1 billion, and 3 with over $10 billion. That looks like maybe $48 billion of assets. That is a large number, but it does not seem like enough to be a systemic threat. (Yes, that’s what they said about the subprime mortgage market in 2007.) Two of the biggest are BlackRock High Yield Fund (MUTF: BHYAX ), and JPMorgan’s High Yield fund (MUTF: OHYFX ).

Spark Energy’s (SPKE) CEO Nathan Kroeker on Q3 2015 Results – Earnings Call Transcript

Spark Energy (NASDAQ: SPKE ) Q3 2015 Earnings Conference Call November 12, 2015 11:00 AM ET Executives Andy Davis – Head of Investor Relations Nathan Kroeker – President and Chief Executive Officer Georganne Hodges – Chief Financial Officer Analysts Michael Gyure – Janney Montgomery Scott LLC Operator Good morning, ladies and gentlemen. Welcome to the Spark Energy, Inc. Third Quarter 2015 Earnings Conference Call. My name is Shannon, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, there will be a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes and this call will be posted on Spark Energy, Inc’s website. I would now like to turn the conference over to Mr. Andy Davis, Head of Investor Relations for Spark Energy, Inc. Please go ahead. Andy Davis Good morning, and welcome to Spark Energy, Inc’s third quarter 2015 earnings call. This morning’s call is being broadcast live over the phone and via webcast, which can be located under Events and Presentations in the Investor Relations section of our website at www.sparkenergy.com. With us today from management is our President and CEO, Nathan Kroeker; and our CFO, Georganne Hodges. Please note that today’s discussion may contain forward-looking statements, which are based on assumptions that we believe to be reasonable as of this date. Management may make forward-looking statements concerning future expectations, projections of our operations, economic performance and financial condition. These statements are subject to risks and uncertainties that could cause actual results to differ materially from these statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we give no assurance that such expectations will be realized. We urge everyone to review the Safe Harbor statement provided in yesterday’s earnings release, as well as the risk factors contained in our SEC filings. We undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise except as required by law. During this morning’s call, we will refer to both GAAP and non-GAAP financial measures of the company’s operating and financial results. For information regarding our non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures, please refer to yesterday’s earnings release. With that, I’ll turn the call over to Nathan Kroeker, our President and Chief Executive Officer. Nathan Kroeker Thank you, Andy. I’d like to welcome our shareholders and analysts to Spark’s third quarter 2015 conference call. I will make a few opening remarks about our operating results and then our Chief Financial Officer, Georganne Hodges, will provide some detail on the financial results. We will then conclude with questions from our analysts. Georganne will give you the financial details of our third quarter results shortly, but I will tell you that we are very pleased with our results. We saw enhanced margins in both our Retail Natural Gas and Retail Electricity segments during the quarter, as wholesale prices continue to decline. We also saw increased volumes in our Retail Electricity segment, primarily as a result of our CenStar Energy and Oasis Energy acquisitions. I will talk a little more about those acquisitions, which we closed in July in a moment. With the help of our two acquisitions, we saw our customer count increased 17% in the third quarter, ending the quarter with 357,000 customers or 401,000 RCEs. Our two acquisitions added 53,000 customers, or 105,000 RCEs. The performance of both our CenStar and Oasis acquisitions have exceeded our initial profitability expectations on a combined basis. We have already taken advantage of the access we now have to 20 new markets in additional brands in several ways. We’ve expanded our existing broker relationships, adding commercial customers in new markets and in our new brands. We’re seeing success with our alternative brand wingback strategies, and we’re leveraging our channel management expertise and vendor relationships thus far to launch campaigns in several of the CenStar and Oasis markets. From an integration perspective, everything is on track. Our accounting, treasury, risk management, load forecasting, and supply functions are fully integrated at this time. While it’s still early, we are very encouraged by what we are seeing from these two transactions. We continue to see improvements in customer attrition in the third quarter, as we focused on sales, quality, and call center improvements, achieving a 23% decrease in customer attrition quarter-over-quarter. During the third quarter, we renegotiated our mass-market vendor commission structure to more accurately correlate commission payments with lifetime customer value and improve overall sales quality. What we expect to see higher lifetime value customers as a result of this change, this realignment has resulted in a slowing of organic customer additions, at least, in the short-term. We expect this trend to continue into the fourth quarter. On September 14, we paid a quarterly cash dividend for the second quarter of $0.3625 per share. More recently on October 22, we announced that our third quarter dividend of $0.3625 per share will be paid on December 14. We expect to pay this quarterly dividend on a go-forward basis, and we expect 2015 adjusted EBITDA to exceed our planned 2015 dividends and all required distributions and tax payments. And I want to reiterate that we do not anticipate any changes to the dividend policy. Thanks for your attention. And with that, I will now turn the call over to Georganne Hodges, our Chief Financial Officer for her financial review Georganne? Georganne Hodges Thanks, Nathan. Strong unit margins particularly in our electricity business, contributions from our acquisitions and lower organic customer acquisition spending resulted in adjusted EBITDA of $5.6 million for the third quarter. This represents a $10 million increase over our loss of $4.4 million for the third quarter of 2014. Retail gross margin was $26.7 million compared to $14.6 million in 2014. This $12 million increase is primarily attributable to expanded electricity unit margins and increased electricity volume. The continued low commodity prices led to favorable supply costs. These favorable supply costs coupled with our ability to optimize margins were key drivers to our elevated unit margins in the quarter. Additionally, our adjusted EBITDA and retail gross margins benefited from expanded spot margins from our acquisitions. G&A expenses for the quarter were $15.5 million, compared to $10.6 million in 2014. This increase is primarily due to increased billing and other variable cost associated with our customer portfolio, as well as increased cost associated with our acquisitions. Bad debt expense for the quarter remained flat at $1.9 million. Customer acquisition spending for the quarter was $5.8 million compared to $8.7 million spent in the third quarter of 2014. This decrease was primarily due to our decreased organic sales in the quarter, as well as recent changes to our residential vendor commission payment structure, which Nathan spoke about. Approximately 113,000 new customers came up less than a [ph] quarter, which includes 53,000 from our acquisitions. Our net income for the third quarter was $5.9 million compared to 400,000 in 2014. Our basic and diluted earnings per share for the quarter were $0.42 and $0.31 respectively, I’ll point out that our diluted earnings per share was impacted by the convertible subordinated debt with an affiliate of our founder. As of today, the balance of our working capital line is $26 million and the balance of our acquisition line is $21.2 million. As you look at our balance sheet, you will notice a few new line items this quarter, which are results of the acquisitions of CenStar Energy and Oasis Energy. Acquired customer intangibles with current and non-current, trademark, and goodwill are the result of business combination accounting. Please refer to the acquisitions footnote in our 10-Q for an extended commentary on the valuation of these assets. That concludes my prepared remarks. I’ll now turn the call over to Nathan. Nathan Kroeker Thanks, Georganne. In summary, I would just like to say that we are very pleased with the strong and adjusted EBITDA and retail gross margin we realized in the third quarter, which historically is a down quarter for us due to the seasonality of our business. As we move through the fourth quarter, we continue to see strong margins underpinned by lower commodity prices. We will now open the line up for questions from our analysts. Operator? Question-and-Answer Session Operator Thank you. [Operator Instructions] Our first question is from Mike Gyure with Janney. Your may begin. Michael Gyure Hi, thanks for taking my question. How should we think about your customer acquisition costs spending for, let’s say, the remainder of the fourth quarter? And then maybe directionally, as you move into 2016, whether that would be above or below, what’s your plan on spending for 2015? Nathan Kroeker I think what you’ll see in the fourth quarter, first of all, Mike, it’s good to hear your voice. This is Nathan. I think, what you’ll see in the fourth quarter is the slowdown that we experienced in the third quarter will continue through the fourth quarter. Some of the changes that I alluded to earlier in terms of improving sales quality have a natural effect of slowing sales down a little bit. But what you’re going to see is, you’re going to see us add better quality, higher volume customers that that are going to be more valuable to us in the long-term. My expectation is that those sales will pick up again in the first-half of 2016. It takes about three to six months for a change like this to kind of work its way through the system. In terms of our overall organic customer spend next year it’s probably slightly below what we spent in 2015. But I think we’re going to see as great as much value with the spend, as we did in 2015. And, obviously, all of that is predicated on what type of M&A opportunities are out there. If we decide that we find some excellent M&A opportunities, book purchases, or tuck-ins, we may divert some of those dollars to M&A throughout the year, as we optimize the growth strategy. Michael Gyure Great. And maybe a follow-up on that, as far as the customer acquisition spending, would you envision that being in pretty much the same geographies and locations that you’re in today as opposed to, I would say, new markets? Nathan Kroeker We’ve got 20 new markets between CenStar and Oasis, and we’re certainly incorporating that into the growth strategy. But, I think, we’re in about 66 markets today. We do not have to add new markets in order to realize organic growth. I think the vast majority of what we’re going to do next year will be within those 66 markets, yes. Michael Gyure Great. Thanks. Operator Thank you. [Operator Instructions] We have no further questions at this time. I’d like to turn the call back over to Nathan Kroeker for closing remarks. Nathan Kroeker All right. I’d just like to thank everybody again for participating in today’s call, and we look forward to seeing some of you in the near future. Have a great day. Operator Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. Have a wonderful day. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. 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The Prospect Of A Warm Winter Hurts DTE Energy’s Short-Term Outlook

Summary Michigan electric and natural gas utility DTE Energy reported Q3 earnings that beat on EPS despite missing on revenue due to hot temperatures and low fuel prices. The company’s long-term outlook, which was already strong, continued to improve as national policy and low natural gas prices increased the value of its NEXUS pipeline project. Its short-term outlook has diminished, however, as the presence of a strong El Nino will likely result in a warm winter and a cool, early summer in its service area. The company’s shares are no longer so undervalued as to merit investment given this short-term outlook, although investors should consider selling near-the-money calls due to its weak short-term outlook. Michigan electric and natural gas utility DTE Energy (NYSE: DTE ) reported Q3 earnings last week that beat solidly on EPS despite missing on revenue. In a bullish article on the company written back in June, I noted that its operating outlook was not nearly as negative as investor sentiment was at the time, concluding that: Its shares certainly appear to be more attractive based on forward valuations than they were at the beginning of the year, a result that can be largely attributed to the prevalence of bearish sentiment toward dividend stocks in anticipation of one or more interest rate hikes by the Federal Reserve later in the year. With a 3.7% yield, an improved operating environment, and plans to increase regulated capacity while expanding its non-regulated operations, DTE Energy is an attractive long investment candidate. In the subsequent four months, the share price increased by 12%, although it has settled a bit over the last two trading days. While I continue to like the company’s long-term operating environment, the development of a strong El Nino that is now expected to last well into Q2 2016 can be expected to impact its short-term earnings. This article re-evaluates DTE Energy as a potential long investment in light of these changing conditions. Q3 Earnings Report DTE Energy reported Q3 revenue of $2.6 billion (see table), virtually unchanged from the previous year, and missing the consensus analyst estimate by $80 million. The miss came despite the presence of a hot quarter in the company’s service area, with 48% more cooling degree days occurring compared to the previous year, albeit only 4% more than the long-term average. This gain was partially offset by the presence of self-imposed reduced rates resulting from the lower energy prices during the quarter on a YoY basis. Its electric sales volume to industrial customers also declined by 2% YoY, resulting in a total volume reduction of 1% over the same period. The service area’s warm weather persisted into the end of the quarter as well, resulting in a 53% YoY reduction to heating degree days, albeit from a much smaller base compared to cooling degree days. DTE Energy Financials (non-adjusted) Q3 2015 Q2 2015 Q1 2015 Q4 2014 Q3 2014 Revenue ($MM) 2,598.0 2,268.0 2,984.0 3,078.0 2,595.0 Gross income ($MM) 1,545.0 1,326.0 1,586.0 1,749.0 1,476.0 Net income ($MM) 265.0 109.0 273.0 299.0 156.0 Diluted EPS ($) 1.47 0.61 1.53 1.69 0.88 EBITDA ($MM) 678.0 466.0 715.0 832.0 578.0 Source: Morningstar (2015) The aforementioned presence of much lower energy prices during the quarter was reflected in reduced operating expense, which declined by 1% YoY. Operating income came in at $440 million, or an increase of 84% compared to the previous year, due to the presence of flat revenues and lower costs. Net income came in at $264 million, up 70% compared to the previous year, resulting in a diluted EPS result of $1.47 compared to $0.88 YoY. The EPS result included a beneficial $0.07 mark-to-market impact that, if ignored, resulted in an adjusted diluted EPS result of $1.40 that beat the analyst consensus by $0.15. EBITDA came in at $678 million, up from $578 million in the previous year. The company’s quarterly dividend was 6% higher YoY, reflecting its strong performance over the TTM period. DTE Energy’s Q3 earnings strength was reflected across almost all of its segments. DTE Electric reported a diluted EPS of $1.19, up from $0.76 YoY. The Gas Storage and Pipelines segment came in second at $0.15, up from $0.11 YoY, on strong demand for its pipeline and gathering services resulting from the presence of very low natural gas prices compared to the previous year. DTE Gas reported an EPS of -$0.06 that represented a gain over the previous year of $0.03 despite the presence of fewer heating degree days in the most recent quarter. Only the Power and Industrial Projects segment reported lower earnings, which declined from $0.21 to $0.17 YoY – a move that the company attributed to lower steel earnings. Finally, DTE Energy announced that it had increased its 33% stake in its NEXUS natural gas pipeline joint venture with Spectra Energy (NYSE: SE ) to 50%. Progress on the pipeline has continued over the last four months, and while the company’s increased stake caused its expected cost contribution to rise to $1 billion, the pipeline is expected to be in service by Q4 2017. Contracting was recently completed for the pipe itself, and the FERC filing is expected to be done in the current quarter. Outlook DTE Energy’s management felt confident after the Q3 earnings release to reaffirm its FY 2015 guidance range of $4.65-4.91 and increase the midpoint of the guidance to $4.78. While this result would represent a sequential decline from the company’s bumper FY 2014 earnings, it would still be one of its strongest on record. Furthermore, the company also released its first FY 2016 guidance with an EPS range of $4.80-5.05 – a move that it based on continued economic growth and falling unemployment in its service area. Existing investors will be pleased to know that management is also targeting dividend growth equal to EPS growth, suggesting a 3% increase in FY 2016 based on the midpoint of the guidance. While DTE Energy’s long-term outlook is very optimistic, I believe the company will struggle to achieve the midpoint of its FY 2016 EPS range. The reason for this is the development of one of the strongest El Ninos in the last half of a century over the last several months. These weather events are commonly associated with warmer-than-normal winter weather in the northern half of the U.S., including Michigan , and cooler-than-normal weather in the southern half. Historical records show that El Nino events are associated with substantially above-average temperatures in Michigan between October and May, in which case DTE Energy’s service area can expect to experience fewer heating degree days than normal in Q4 2015 and Q1 and Q2 2016. Furthermore, late Q2 will probably be both colder and wetter than normal, raising the prospects of a reduced number of cooling degree days during early summer. DTE Energy’s guidance already assumes that Q4 2015’s earnings will be lower on a YoY basis just due to the presence of abnormally cold weather in Q4 2014. That said, El Nino threatens to derail the company’s FY 2016 guidance by causing its H1 2016 earnings to come in below expectations. DTE Energy’s operating outlook improves after FY 2016, however, due to a combination of recent regulatory and market developments. Its Gas Storage and Pipelines segment is becoming an important contributor to earnings, and this is likely to continue so long as natural gas prices remain low relative to historical prices. The company’s JV NEXUS pipeline was already expected to provide a large boost to the segment’s contribution. Low natural gas prices will increase its expectations, however, by driving demand for natural gas as power plant fuel at the expense of coal. The recently announced acquisition of Piedmont Natural Gas (NYSE: PNY ) by Duke Energy (NYSE: DUK ) exemplified the larger trend by U.S. utilities to convert coal-fired plants to cheaper natural gas. Looking beyond just the current natural gas pricing environment, however, NEXUS is poised to benefit from two recent developments. The first is continued economic growth in Michigan, including Detroit. While the state and the city both suffered mightily in the aftermath of the 2008 financial crisis, with the latter being hit especially hard by the abandonment of high-margin SUVs and other fuel-inefficient vehicles by cost-conscious drivers, the persistent presence of low petroleum prices over the last three quarters has caused the U.S. automobile industry to stage a strong comeback. Michigan’s economy has rebounded as well, with the Chicago Fed recently proclaiming it the fastest-growing economy in the Midwest. Falling unemployment and continued economic growth will cause natural gas demand in DTE Energy’s service area to also increase, with NEXUS ultimately making further such increases possible. The U.S. Environmental Protection Agency’s recently released Clean Power Plan will increase demand for natural gas pipelines in Michigan and the upper Midwest. The Clean Power Plan requires each state to reduce its carbon intensity (units of greenhouse gas emissions per unit of electricity generated) over the next decade. Michigan must achieve a 24% reduction to its carbon intensity by 2024 and a 39% reduction by 2030. Importantly, its final carbon intensity target is very close to the carbon intensity of a gas-fired power plant, meaning that the state’s utilities can contribute by switching from coal to natural gas. This is already being done across the U.S. due to return of cheap natural gas, and the Clean Power Plan is expected to simply deliver a legal impetus to a market trend that already exists. This will serve to further increase demand for the type of service that the NEXUS pipeline will provide upon its completion. Valuation The consensus analyst estimates for DTE Energy’s diluted EPS results in FY 2015 have risen slightly over the last 90 days, while those for FY 2016 have remained stable. The FY 2015 consensus estimate has increased from $4.74 to $4.79, in line with management’s midpoint guidance, while the FY 2016 estimate has stayed flat at $4.96, slightly above the midpoint guidance. Based on a price of $82 at the time of writing, the shares are trading at a trailing P/E ratio of 16.1x on a non-adjusted basis and forward P/E ratios of 17.1x and 16.5x, respectively. All three of these ratios are higher than in June, but still low relative to their respective 3-year ranges. That said, I do expect that the company will struggle to achieve the FY 2016 consensus estimate if El Nino has a similar impact on Michigan’s winter temperatures to those that it has had in the past, in which case the shares are not clearly undervalued at this time. Conclusion DTE Energy reported solid Q3 earnings earlier this week as hot temperatures in the second half of the summer and low energy prices contributed to a large YoY earnings gain. Management was upbeat in the company’s Q3 earnings report and subsequent earnings call, outlining the rebounding nature of its service area’s economy, continued opportunities for additional future capex, and progress on its NEXUS pipeline JV. I further believe that the persistence of low energy prices and low natural gas prices in particular as well as the release of the Clean Power Plan will provide additional support for the new pipeline when it comes on-line. That is still two years away, however, and DTE Energy must first face the prospect of two consecutive warmer-than-normal winter quarters followed by a cooler-than-normal summer quarter as a strong El Nino makes its presence felt. Given the increase to the company’s share price that has occurred over the last four months and the prospect of multiple bearish quarters, I do not recommend buying DTE shares at this time. Existing shareholders who bought back in June and don’t want to incur the tax implications of a short-term sale, however, should consider selling near-the-money call options at this point to take advantage of the fact that the company’s near-term outlook is not as positive as its longer-term outlook. DTE Energy remains an attractive investment opportunity due to economic recovery in its service and its own strategic moves to benefit from rising natural gas demand, but it is not one that provides a sufficient margin of safety for me to recommend it as a “buy” at this time.