Tag Archives: infrastructure

Fiscal Stimulus? Check Your Portfolio’s Inflation Beta

By Vadim Zlotnikov With negative interest rates unlikely to ignite global growth, the debate will soon shift to expansionary fiscal policy. Investors should consider how a potential inflation recovery could impact their portfolios. In the aftermath of the global financial crisis, central banks have boosted liquidity, which has helped markets return to normal and supported asset prices. But end demand hasn’t fully recovered yet, and nominal economic growth is still subdued. As a result, investors are losing confidence in monetary policy as a tool to stimulate growth. We see this as a key source of potential downside for risk assets. A closer look at three key transmission mechanisms sheds light on why quantitative easing (QE) has become less effective over time: QE encourages risk taking . By reducing the supply of financial assets, QE was expected to lower the risk premium investors demanded. But current estimates of the 10-year US Treasury term premium are now negative. That’s a 50-year low, and it suggests there’s limited potential for further declines. Meanwhile, equity valuations have risen above their historical averages and housing prices have regained their pre-crisis highs in most regions. Sure, valuations could expand further, but upside potential appears more limited, and further gains could trigger concerns about asset-price bubbles. Wealth effects haven’t led to more spending . Higher asset valuations have helped reduce household leverage, but households have been reluctant to spend more – despite growing wages and cheap energy. One likely reason: rising asset prices mostly benefit higher-net-worth households, which tend to save more. And even though households have reduced their leverage from post-crisis highs ( Display 1 ), it’s still higher compared to history. Corporations have reacted to tepid end demand by returning cash to shareholders, instead of exploiting higher stock prices and low rates to fund investment. Click to enlarge Currency depreciation is less likely to continue . As currencies have weakened in response to lower interest rates, they’ve been very effective at driving corporate profit margins and equity returns across regions. But if QE becomes less effective at pushing down long-term interest rates, it will also likely be less effective at driving currencies. Supportive Environment for Fiscal Stimulus The deleveraging cycle appears likely to last if consumer and business sentiment don’t improve. We think governments can break this cycle, even though they’re highly leveraged, too. Central bank asset purchase programs are in place, so governments could finance spending initiatives by expanding the money supply. And given low rates, the interest expense burden should be fairly small. In general, it’s hard to gauge how effective fiscal stimulus can be. Academic studies estimate that fiscal spending multipliers on GDP average less than one in a normal interest rate environment. In other words, for every fiscal dollar spent, GDP gets a boost of less than a dollar. But recent research suggests multipliers may be much higher today. When growth is strong and there’s no slack in the economy, public spending raises inflation and interest rates, crowding out private spending. But when output is below potential, like today, and there’s spare economic capacity, increased public spending can have a more direct impact on real economic growth, with a much larger fiscal multiplier ( Display 2 ). Click to enlarge Also, when monetary policy is constrained by zero interest rates, fiscal stimulus raises inflation expectations, causing real interest rates to decline. This decline raises overall demand substantially, which further heightens inflation expectations and depresses real interest rates. This process can help break the deflationary dynamics of zero interest rates. US growth has been strengthening and core inflation has been accelerating, but the settings in Europe and Japan point to the potential for fiscal stimulus to be more effective than normal. Underinvestment Has Created Fiscal Spending Targets Infrastructure spending could be a prime target for that fiscal stimulus, because many developed economies have arguably underinvested in this area. A McKinsey study estimates that in the US and some European countries, spending would need to increase by 0.5-1% to meet infrastructure needs. Fiscal spending directed towards the right infrastructure projects may have a positive structural impact on growth in addition to cyclical benefits. In Japan, given the country’s elevated infrastructure spending, measures to improve consumption (such as the postponement of the consumption tax), labor-force participation (such as elder care and child care), wages and capital spending (including corporate tax incentives) may be more appropriate. Up Next: Helicopter Money? We expect the risk-on, risk-off environment to last for a while – investors and policymakers still don’t have a coherent framework for stimulating economic growth. Monetary policy, including negative interest rates, has failed to bring sustainable growth. We expect to see more discussion of the potential for helicopter money (central banks printing money and funneling it to consumers to stoke demand), or simply tighter integration of monetary and fiscal policy. If this is done in scale, it would likely recharge inflation. But there are political hurdles in large-scale fiscal stimulus, so we expect these initiatives to be delayed until 2017-2018. And they’ll be implemented only if there’s more evidence that monetary policy is becoming less effective. Long-Term Investors: Check Your Portfolio’s Inflation Sensitivity Still, investors with long-term horizons (three to 10 years or longer) have some things to think about – if they’re willing and able to tolerate short-term volatility. We think it makes sense to consider increasing portfolio tilts toward assets that would benefit from an environment of reflation – in other words, inflation recovering to normal trend levels. This means potentially increasing their portfolios’ inflation sensitivity – also known as the inflation beta. Some ideas would be allocating to real assets, such as commodities, and emerging-market-related assets in equity, credit and currency. Value equities in Europe and Japan would be other ideas to consider. The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Vadim Zlotnikov, Chief Market Strategist; Co-Head – Multi-Asset Solutions; Chief Investment Officer – Systematic and Index Strategies

Infrastructure, Dividends And Path Dependence

A new paper from EDHEC Infrastructure Institute-Singapore argues that infrastructure firms represent a unique business model, one with lower revenue volatility, higher payouts, and substantially lower correlation with the business cycle than other firms. An “infrastructure firm” for purposes of this discussion is either a special purpose vehicle created in the context of a specific infrastructure project; a firm that conducts specific infrastructure-related activities, such as a port or an airport; or a regulated utility. Along the way to making its points, the paper also speaks, if only briefly, to an idea at the core of behavioral economics and finance: path dependence. But more of that in time. Investors and Regulators EDHEC infra prepared this paper in partnership with the Long-Term Infrastructure Investors Association, an organization of investors with a sum of $5 trillion in assets under management. In a press release that accompanied the paper, LTIIA chairman and CEO Thierry Déau said: “Not only can this research benefit investors in their profile decisions; it can also help build a deeper alignment between infrastructure investors and regulators.” The publication, “Revenue and dividend payouts in privately-held infrastructure investments,” by Frédéric Blanc-Brude, Majid Hasam, and Tim Whittaker, focuses on firms situated in the United Kingdom, because the UK offers “the largest, longest and most coherent set of infrastructure cash flow data available at this time.” Also, by confining the study to a single currency and regulatory environment, the authors avoid the need to control for those dimensions in their analysis. Six Conclusions Each infrastructure firm in the EDHEC infra database was, for purpose of this study, matched with a “nearest neighbor” non-infrastructure firm for control purposes. The matching was based on total asset size, leverage, and profitability. As a consequence of their statistical analyses, the authors came to six conclusions: Infrastructure firms have lower revenues and profits per dollar invested than the paired firm; They have significantly lower volatility of revenues and profits, in the aggregate and “at each point in investment and calendar time”; Infrastructure firms have a dynamic lifecycle, that is, the unit revenues and profits evolve by an order of magnitude over the investment cycle; Their revenues and profits are not tied, or at worst not closely tied, to the business cycle; The probability of positive equity payouts is high; finally; Equity payout ratios and considerably higher than in the relevant control groups. Trading one Cycle for Another The third and fourth of those points are closely related. One might roughly say that because infrastructure firms tie their fate to their own lifecycle, they gain some independence of the business cycle. Statistically speaking, four proxies of the business cycle highly correlated to one another [calendar year dummies, GDP, retail prices, and the Fama-French market factors] “have limited or no explanatory value with respect to the variance of revenues in infrastructure assets….” Thus, infrastructure can serve a portfolio manager as a powerful diversifier. It is in considering the equity payout process, referenced in the fifth and sixth of the bullet points above, that we come to the issue of path dependence. Path dependence is a concept developed within the subculture of behavioral economics. It refers to the sometimes nonrational and generally unanticipated ways in which later choices are affected by earlier choices. One classic example is the continued use of the QWERTY keyboard in all sorts of devices and virtual displays today, though its creation in the early days of the typewriter is shrouded in mystery. Joan Robinson anticipated the development of the idea of path dependency in the 1970s, when she wrote, “Once we admit that an economy exists in time, that history goes one way, from the irrevocable past into the unknown future, the concept of equilibrium … become untenable.” Robinson believed that path dependence was so important that it required a rethinking of the foundations of economics as a science. Blanc-Brude et al have no need to go that far. They do observe, though, that there is strong evidence of path dependency in this respect: “those [infrastructure] firms that begin to pay dividends early their life are more likely to be paying dividends later on.” This is odd, because infrastructure firms are “private firms with concentrated ownership.” The usual explanation for path dependence, that is for “stickiness,” in the level of dividend payouts, is premised upon publicly listed firms and/or distributed ownership. Stickiness is said to mitigate the agency costs inherent in the relationship between a small management group and a large ownership group. So: why do infrastructure firms, for whom the agency cost explanation doesn’t fit, nonetheless show this path dependency? The study gives no definitive answer to that question, beyond the suggestion that such a constant payout path in a standalone infrastructure product “could be interpreted” as a measure of the project’s success. It seems a fitting topic for further research.

Unitil’s (UTL) CEO Robert Schoenberger on Q1 2016 Results – Earnings Call Transcript

Unitil Corporation (NYSE: UTL ) Q1 2016 Earnings Conference Call April 21, 2016, 02:00 PM ET Executives David Chong – Director of Finance Robert Schoenberger – Chairman, President and Chief Executive Officer Mark Collin – Senior Vice President, Chief Financial Officer and Treasurer Thomas Meissner – Senior Vice President and Chief Operating Officer Laurence Brock – Chief Accounting Officer and Controller. Analysts Peter Wernau – Wernau Asset Management Insoo Kim – RBC Capital Markets Operator Good day, ladies and gentlemen, and welcome to the Unitil Q1 2016 earnings conference call. [Operator Instructions] I’d now like to introduce your host for today’s conference Mr. David Chong, Director of Finance. Sir, please go ahead. David Chong Good afternoon, and thank you for joining us to discuss Unitil Corporation’s first quarter 2016 financial results. With me today are Bob Schoenberger, Chairman, President and Chief Executive Officer; Mark Collin, Senior Vice President, Chief Financial Officer and Treasurer; Tom Meissner, Senior Vice President and Chief Operating Officer; and Larry Brock, Chief Accounting Officer and Controller. We will discuss financial and other information about our first quarter on this call. As we mentioned in the press release announcing the call, we have posted that information including a presentation to the Investors section of our website at www.unitil.com. We’ll refer to that information during this call. Before we start, please note that comments made on this conference call may contain statements that are commonly referred to as forward-looking statements, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements regarding company’s financial condition, results of operations, capital expenditures and other expenses, regulatory environment and strategy, market opportunities, and other plans and objectives. In some cases, forward-looking statements can be identified by terminologies such as may, will, should, estimate, expect or believe, the negative of such terms or other comparable terminology. These forward-looking statements are neither promises nor guarantees, but involve risks and uncertainties, and company’s actual results could differ materially. Those risks and uncertainties include those listed or referred to on Slide 1 of the presentation and those detailed in the company’s filings with the Securities and Exchange Commission, including the company’s Form 10-K for the year ended December 31, 2015. Forward-looking statements speak only as of the date they are made. The company undertakes no obligation to update any forward-looking statements. With that said, I’ll now turn the call over to Bob. Robert Schoenberger Thanks, David. I’ll begin by discussing the highlights of our past quarter. Beginning on Slide 5 of the presentation. Today we announced net income of $10.9 million or $0.78 per share for the first quarter of 2016, a decrease of $2.7 million or $0.20 per share over the first quarter of 2015. This decrease in earnings for the first three months of 2016 was driven by lower natural gas and electric sales and margins, reflecting significantly warmer winter weather compared to the same period last year. As Mark will discuss later, we estimate that weather impacted our earnings per share negatively by $0.25 in the first quarter. Turning to Slide 6. The graph shows that our financial results have increased over the past three years, while maintaining a strong rate of return on our utility investments. Our financial results go hand-in-hand with our strong operating performance. We have met or exceeded all service quality metrics for safety, reliability and customer service, and our customers have seen an almost 50% reduction in outages since 2010. The continuing investment of both our gas and electric utility distribution systems and the successful execution of our regulatory strategy, and our attention to customer service is providing a platform for sustained growth. Moving on to Slide 7. Our utility rate base continues to grow, as we had new customers and improved both the gas and electric distribution systems. Over the past four years, our combined gas and electric rate base has grown at an annual rate of 7%, driven by customer additions and our infrastructure replacement and improvement programs. On the gas side of our business, our rate base has doubled and our gas segment profit has nearly quadrupled since acquiring our New Hampshire and Maine gas business. Looking forward, we believe we have ample investment opportunities that would allow us to continue to grow around these levels for the foreseeable future. Slide 8, highlights the growth we have achieved on our natural gas business. Our gas customer growth has contributed significantly to our operating results, with customer additions in the range of 2% to 3% annually over the last three years. In addition to customer growth of weather normalized unit sales have grown in the range of 4% to 6% annually over the past few years. And weather normalized unit sales for commercial and industrial customers were up about 7.4% year-over-year. And while it’s still early in the year we are up, we are ahead of our schedule over the last year in terms of customer additions. Turning to Slide 9. We continued to look for opportunities to expand our gas distribution system. For example, a recently approved rate surcharge mechanism in Maine allows us to economically extend our gas mains to new targeted service areas. This rate surcharge mechanism is being piloted in Saco, Maine. It allows customers in targeted area of Saco, the ability to pay a rate surcharge instead of a large upfront payment or capital contribution to connect to our system. This pilot has a potential to add a thousand new customers to our system with roughly $1 million in annual distribution revenue. We believe that the successful implementation of programs like this will continue to allow us to reach new service areas beyond the current reach of our distribution system in a cost effective and efficient manner. In fact, we have had surrounding towns ask us to be able to participate in this program in the years ahead. Slide 10 provides an update of our current electric system investment initiatives. Construction is continuing on schedule for our two new substation projects in New Hampshire, with the first coming online in the second quarter of 2016. These electric distribution substations will provide the capacity needed for continued load growth on our New Hampshire systems, while addressing constraints of existing substations and improving reliability. Another electric initiative we are pursuing is grid modernization in both our Massachusetts and New Hampshire electric subsidiaries. At a high-level, this program is an effort to improve the reliability, resiliency and operational efficiency of the electric grid, while empowering customers to use the electricity more efficiently and facilitating the integration of distributed energy resources. So before I turn it over to Mark to go into more detail, I want to put the first quarter results in proper context. If you look at the factors that had contributed to the results we reported over the last five years, controlling O&M spending, our capital investment program, our regulatory agenda and our gas growth program, they all remain intact going forward. And we’re confident that those factors will help us achieve similar growth in the years ahead. So, Mark? Mark Collin Thanks, Bob. I will begin by discussing the weather impact on our gas and electric sales margin for the first quarter shown on Slide 11. This winter, including the key heating months of January and February of 2016, was one of the warmest on record throughout New England. In contrast, last winter was one of the coldest on record in New England. The combination of these two winters, extreme cold last year and extreme warm this year create a accumulative estimated impact to earnings per share of $0.25 year-over-year due to the lower gas and electric margins. Now turning to Slide 12. Natural gas margin was $35.9 million in the quarter, a decrease of $2.9 million or 7.5% compared to the first quarter of 2015. Gas sales margin was negatively impacted by lower therm unit sales due to the warmer weather, partially offset by the positive impacts of higher natural gas distribution rates and the growth in the number of customers. There were 23% less heating degree days in the first quarter of 2016 compared to 2015, which we estimate negatively impacted earnings per share by about $0.22, due to the lower gas margins. Excluding the effect of the weather on sales, weather normalized gas therm sales were up 2% in the first quarter of 2016 compared to the same period in ’15. This weather normalized growth was led by a quarter-over-quarter increase in estimated gas terms sales of 7.4% to large commercial and industrial customers. Slide 13 highlights our electric business sales and margin. Electric sales margin was $20.1 million in the first quarter of 2016, a decrease of $1.1 million or 5.2% compared to the same period in 2015. As on the gas side, electric sales margin decreases reflect the impact of weather, albeit electric sales are clearly less sensitive to weather than gas. We estimated that the weather impacted electric sales by about $0.03 in the first quarter of 2016 compared to the first quarter of 2015. Excluding the effect of weather on sales, weather normalized electric sales were led by 2.9% increase in sales to large commercial and industrial customers. Now, turning to Slide 14. We have outlined the major expense variances for the quarter. Operation maintenance expenses increased $0.5 million or 3% in the quarter compared to the same period of ’15. Depreciation and amortization increased $0.4 million or 3.5%, primarily reflecting higher depreciation on normal utility plant additions. Taxes, other than income taxes, increased $0.1 million or 2%, primarily reflecting higher local property tax expense. Net interest decreased $0.3 million, reflecting lower levels of long-term debt. Finally, income taxes were down $1.9 million, reflecting lower pre-tax earnings for the period. On Slide 15, we have provided an update of our financial results at the utility operating company level. The chart shows the trailing 12 months actual earned return on equity in each of our regulatory jurisdictions. Our total return on equity is lower in the last 12 month period ending March 31, 2016, reflecting the unseasonably warm weather in the first quarter that we have been talking about. Also, as we’ve discussed in the past and as shown on the table to right, we have long-term capital cost trackers in place to recover a significant portion of current and future capital spending. We have some other rate case activity underway, which I will summarize shortly. We expect these rate cases will help us to improve our realized rate of return as the year progresses. Slide 16 highlights our electric and gas rate case fillings in Massachusetts. Combined, both fillings reflect a revenue deficiency of approximately $6.8 million. We expect a decision in these two rate proceedings by May 1, 2016. In addition, we recently filed a notice of intent to file a base rate case for our New Hampshire electric subsidiary. We expect to file this rate case later next week, with a revenue deficiency of approximately $6 million. Now, this concludes our summary of our financial performance for the period. I’ll turn the call over to the operator who will coordinate questions. Thank you. Question-and-Answer Session Operator [Operator Instructions] Our first question comes from the line of Peter Wernau with Wernau Asset Management. Peter Wernau I had a quick question. We look at the business as sort of the underlying growth of volume versus the weather impacts. It’s nice that we had a nice and warm season, but if this doesn’t really impact our investment thesis, one thing I was hoping that you might provide some color on. I noticed you showed the compounded annual growth rate of the gas business and we’ve been modeling that. Is there a comparable metric for electric? Mark Collin In terms of the growth rate, as you said, if you get away from the volumetric kilowatt-hour sales the one thing that the weather doesn’t impact is our customer growth or our investment growth. And relative to our customer growth on the electric side of the business, we have been then continued to add customers on that side. It’s a little slower than gas. It doesn’t have the same high growth rate we’re seeing on gas primarily, because electric is just about served everywhere, so it grows along with households. We’re growing about 0.5% a year in terms of customers. On the investment side, we’ve also continued to have investment in rate base on electric. And that’s intended to grow between 3% and 4% per year in terms of our rate base. So in contrast, the gas business is growing more in the 8% to 10% range whereas the electric is down in the 3% to 4% range on rate base. But they’re both growing and they’re both continuing to contribute. And as I indicated earlier, our planned rate case for our largest electric division here in New Hampshire, we’ll be filling that next week. And we hope that that will get us on a path, so that we can earn our authorized rate of return on that division and make sure these investments are returning for us. Robert Schoenberger I mean just from an anecdotal point of view, the amount of actual and planned construction both in Maine and the seacoast area of New Hemisphere is really robust and growing. So hopefully that will contribute to the growth rate in the gas as well as the electric business. Operator Our next question comes from the line of Insoo Kim with RBC Capital Markets. Insoo Kim First of all, in terms of weather for 4Q ’15, which was, I guess last quarter, how much of the EPS was impacted by weather compared to normal? Robert Schoenberger In the fourth quarter? Insoo Kim In the previous quarter and the fourth quarter of last year? Robert Schoenberger I’ve got to make sure I understand the periods of comparing. This last quarter compared to the same quarter, a year ago? Insoo Kim No, just versus normal, I’m just trying to see –? Robert Schoenberger Versus normal, we’re down about $0.09. $0.09 in EPS due to versus what normal weather would have been. Insoo Kim But that’s for the first quarter, just this past quarter, right? Robert Schoenberger Yes. Insoo Kim What about further quarter before that on the fourth quarter? Robert Schoenberger Fourth quarter, I’d have to check that. I don’t have the fourth quarter normalized results in front of me, right now. Insoo Kim Because, I mean, obviously the first and the fourth quarter being the largest quarters and with the [ph] 20s year-over-year decline in the first quarter, I’m just trying to have a base level of earnings to compare for the fourth quarter that’s going to be coming up in a few quarters, so I guess I’ll check with that offline. Robert Schoenberger Okay. Insoo Kim In terms of the gas penetration rates, do you still see given where the oil prices are, the gas sales to grow at a lower end of that 46% range that you guys were talking about on weather normalize basis? Robert Schoenberger As I was telling you before, again, it’s early in the year, so it’s still early, but we’re about 25%, 30% ahead in terms of gross meter adds over the last year. So the oil price obviously has had some impact, but anecdotal evidence, for example, on in Saco, Maine, there is an industrial park there with 36 businesses, every one of them has indicated their interest into converting to natural gas. So to be conservative, I’d say on the low side, but we have hopes that it might be better than that. Insoo Kim And from a commission standpoint. Have there been conversations recently or in the past about whether decoupling mechanism that, and whether they’re interested in or you may be interested in implementing something like that in the future, to mitigate some of this follow-through the Maine earnings? Robert Schoenberger As you know, in our Massachusetts jurisdictions, our subsidiary in Massachusetts, we do have both decoupling on the electric and the gas side of the business. And that is complemented by, on the gas side we have a cost tracker for cast iron replacement. And we’ve requested a capital tracker for electric as well. In New Hampshire, there is a lot of activity now, particularly around energy efficiency program planning and such and the decoupling concept has come up as a potential rate making concept to help encourage or support increased energy efficiencies spanning and basically make the utility indifferent to lost sales from that. One partial decoupling mechanism that is getting a lot of discussion now as a lost base revenue calculation that essentially decouples the energy sales losses due to energy efficiency from the utilities revenue, that’s got a lot of attention. And then, in Maine, where we have the gas business up there, the biggest thing that we moved towards is more of a rate design. It allows us to recover a larger percentage of our delivery cost based on fixed charges or charges that are not subject to weather or are not as volatile to weather. In fact, even this quarter, it was dampened by fact that we’ve been able to move our rates towards higher fixed charges and so that the approach there has generally been to move towards higher fixed charges. We haven’t had much discussion around decoupling, but it wouldn’t surprise me if that comes back up. End of Q&A Operator Thank you. And that concludes today’s question-and-answer session. Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program and you may now disconnect. Everyone, have a great 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. THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS. If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com . Thank you!