Tag Archives: utilities

Is SLV Heading Towards A New Low?

A busy week ahead for SLV. The upcoming ECB rate decision could result in a weaker Euro. And as the Euro/USD falls, SLV is likely to follow. The next NFP report could also bring down the price of SLV. This week is expected to be turbulent not only for silver and the iShares Silver Trust ETF (NYSEARCA: SLV ) but also for other commodities and major currencies, considering the upcoming non-farm payroll report, Yellen’s testimony and the ECB rate decision. The first two events could influence people’s perspectives regarding the upcoming FOMC meeting, while the last event could have a strong impact on the Euro. And given the expected changes of both central banks’ monetary policies, the price of SLV is likely to resume its descent. The highly expected European Central Bank policy meeting will be on Thursday. Currently, some analysts think the ECB may announce a two tier deposit rate for commercial banks parking their cash at the ECB – a similar system to the one they have in Switzerland. Others think ECB President Draghi will just consider lowering again the deposit rate and increasing the already running quantitative easing program. In either way, this could mean a weaker Euro, which may put additional downward pressure on SLV. The following day, the non-farm payroll report will be published. Last time, the NFP’s headline figure was high at 271,000 jobs – well above market estimates. And wage growth rate rose to 2.5%, which was the highest rate since 2009. With such progress, the FOMC is likely to move forward with raising its cash rate, assuming the next NFP report doesn’t disappoint. After all, the FOMC promised in the last meeting that if economic data show promising results, the committee will move forward with a rate hike in December. The market is still not fully convinced the FOMC will hit liftoff in a few weeks from now – the implied probabilities for a December hike are at 78%. Perhaps if the next NFP report shows a growth rate in jobs of over 200,000 – the market currently estimates a growth of 201,000 – and a wage growth of at least 2.4%, the market will be more inclined to believe higher interest rates are up ahead. And then the market could start focusing on the pace of subsequent rate hikes. So far this month, long-term treasury yields also rose: 10-year yields increased by 0.06 percentage points while 1-year yields added 0.16 pp. For SLV, a higher cash rate also means higher long-term interest rates, which are likely to bring down silver prices. But it’s worth noticing that it’s still not a done deal about the December rate hike. If the NFP report shows a very modest gain in jobs and lower growth rate in wages, this could reduce the odds of a December hike by the Fed. And that also means a short term bounce for SLV. Chair Yellen will testify this week in front the Joint Economic Committee of the U.S. Senate and before Economic Club of Washington regarding the economic outlook of the U.S. This will be her last public address before the December meeting. Perhaps she will refer to progress of labor market and inflation. After all, according to the personal and income outlay update , consumption grows at a slower pace than income. And the core PCE inflation is only at 1.3% (back in October) – well below the Fed’s 2% target . It seems that the rise in wages didn’t result in more spending, which, in turn, didn’t raise core inflation. Without higher inflation, the Fed will still reconsider up to the last minute whether raising rates in December is a prudent move. The silver market has seen better days. If the NFP report shows another modest gain in jobs and the ECB moves forward in reducing its rates or augmenting its QE program, the U.S. dollar is likely to appreciate. And given the current expectations of what’s up ahead, the price of SLV is more likely to keep declining in the short term. For more please see: Choosing Between Gold and Silver

The Vanguard Utilities ETF Is On My Holiday Shopping List

Summary The expense ratio and dividend yield are both great. The dividend yield could be further enhanced by changing the weighting structure to emphasize utility companies with stronger yields. The Federal Reserve meeting on December 16th may include a rate increase that could create some nice sale opportunities on utilities. As we prepare for the holidays, I’m getting my shopping list ready. One of the additions to my list is the Vanguard Utilities ETF (NYSEARCA: VPU ). I’ll take investors through my reasoning for putting this on the list as a potential acquisition for the middle of December or later. Expense Ratio The ETF is posting .12% for an expense ratio. What else is there to say? That is a solid expense ratio and makes this fund one of the cheapest options for exposure here. Largest Holdings The diversification within the ETF is pretty weak. For a very long term holder it might make sense to replicate the ETF by just buying the underlying securities and taking higher trading costs to eliminate the expense ratio. However, an expense ratio of only .12% would be difficult to beat without a fairly long time horizon or a large volume of commission free trades in the account. (click to enlarge) The major holdings here are the same ones I would expect to see. Duke Energy Corporation (NYSE: DUK ) is a fairly huge utility company and frequently at the top of the list for utility ETFs. All around this appears to be a reasonable portfolio for an investor that wants to get more utility companies into their portfolio without having to buy the companies individually. Top Dividend Yields The following chart demonstrates the top 10 utilities for dividend yield that have increased their dividend for at least the last 5 consecutive years: Symbol Company Name Yield Years CNP CenterPoint Energy 5.34% 10 SO Southern Company 4.81% 15 DUK Duke Energy Corp. 4.62% 11 PPL PPL Corp. 4.39% 14 STR Questar Corp. 4.07% 36 ALE Allete Inc. 4.02% 5 DGAS Delta Natural Gas 4.01% 11 ED Consolidated Edison 3.95% 41 AEP American Electric Power Co. 3.95% 6 NWN Northwest Natural Gas 3.91% 60 There is quite a bit of cross over between the list as DUK, PPL, AEP are on the top 10 holdings and the 10 utilities for high yields. Because VPU is using a market capitalization weighting scheme, their top holdings are dominated by the largest capitalization utility companies. Using a market capitalization weighting scheme is great for keeping expenses low and maintaining a passive style, but the strategy does nothing to boost the dividend yield of the portfolio. If the price of shares in a utility is increasing but their dividend is not, that utility will see their ranking within the portfolio increase. While I’d prefer to see a focus on utility companies that offer a strong combination of high yields and expected growth in their dividends over the next several years, I’m still consider VPU as a potential holding due to the very low expense ratio and desire to maintain diversification in my portfolio. Looking For Utilities With the Federal Reserve poised to raise rates in December, it seems like a great time to be fishing for good prices on utility companies with an eye to keep buying as long as rates are going up and prices are going down. Utilities tend to have a significant correlation with bonds and an increase in rates will generally send share prices lower. To put that a different way, an increase in bond yields will drive an increase in utility yields. If the price of the utility is falling simply because bond yields are moving higher and the utility yield needs to move in a similar fashion, that is a fine buying reason for me. VPU or Individual Utilities If my portfolio was large enough to plan on buying 10 individual utilities with material allocations to each, I’d be treating individual utilities as being a superior plan to simply buying into VPU. However, going into December I am also looking to beef up my position in equity REITs with the Schwab U.S. REIT ETF (NYSEARCA: SCHH ), and my international positions with the Schwab International Small-Cap Equity ETF (NYSEARCA: SCHC ) or the Schwab International Equity ETF (NYSEARCA: SCHF ). Since I won’t have a great deal of cash left over, I would be more likely to look at taking VPU rather than buying up the individual securities. Conclusion Utility companies can act as a form of income investment because of their strong dividend yields. Unlike buying into a bond portfolio investors can expect that the level of dividends will be increasing over time which makes up for the portfolio having more risk than a simple bond portfolio. I’ve added VPU to my list of ETFs to keep an eye going through December and into early 2016 as a possible candidate. I won’t make those moves in the next few days, but I’ll be looking to see if shares fall hard after the Federal Reserve meeting on December 16th.

U.S. Geothermal – Still No Short-Term Catalysts On The Horizon

Summary US Geothermal continues providing decent financial results. This year the company demonstrates some progress in taking two geothermal projects, WGP Geysers and El Ceibillo, closer to their production phase. However, in my opinion, setting COD (“Commercial Operation Date”) at 2Q 2018 (El Ceibillo) and 3Q 2017 (WGP Geysers) is going to be a challenge for the company. I believe that currently US Geothermal’s shares are overvalued against its peers. On November 23, 2015 US Geothermal Inc (NYSEMKT: HTM ) published its 3Q 2015 results. Below I am commenting on these results. I am also covering the last developments at the two most advanced geothermal projects. Year to date financial results The table below summarizes year to date financial results: Source: Simple Digressions and the company’s reports As the table shows, the results reported by the company in the first nine months of 2015 were comparable to those reported last year. However, a 17.5% increase in book value is worth commenting. To remind my readers, I consider book value as one of the best performance measures of any company. Simply put, if a company is able to increase its book value in the long-term, it means that it has built its value. Let me show how HTM was building its value: Source: Simple Digressions and the company’s reports Note: to calculate HTM book value I have excluded two issues, which distort it in the long-term: Accumulated other comprehensive income (AOCI) – it is part of the equity section of the balance sheet, representing accumulated unrealized gains and unrealized losses, such as cash hedges or currency translation adjustments. Every year or quarter this item fluctuates, very often quite much. What is more, AOCI depends on exchange rates, interest rates and other issues, which the company does not control. Therefore I have eliminated AOCI from my calculations of book value. Non-controlling interest – because non-controlling interest represents the stakes other entities hold in the company’s consolidated assets I have excluded this issue from my calculations. Because non-controlling interest is excluded from my calculations, the final figure demonstrates book value attributable to the company’s shareholders. As the chart shows, HTM increased its book value attributable to its shareholders from $0.66 per share at the end of 2012 to $0.80 per share at the end of September 2015 (an increase of 21.2%). In my opinion, it is a big plus – US Geothermal, increasing its book value in the long-term, behaves like a classic utility company. Operating results The table below presents basic operating results: Source: Simple Digressions and the company’s reports As the table shows, year to date US Geothermal reported slightly lower electricity generation and slightly higher operating expenses than in the same period in 2014. After taking a closer look at each operating facility I came to the conclusion that the main factor, standing behind higher operating expenses, was the Raft River’s performance. Raft River, located in Idaho, is the smallest HTM’s power plant, in terms of generation capacity (9.4 MW). Since the beginning this facility has been lagging behind other two plants. However, this year this underperformance is particularly striking: (click to enlarge) Source: Simple Digressions and the company’s reports As the chart shows, this year each megawatt hour, generated by Raft River, delivered only $4.94 in operating income (I call it “Netback”). Other plants, San Emidio and Neal Hot Springs, delivered $61.19 and $75.66, respectively. In its 3Q 2015 report the company explained that there were two reasons standing behind this underperformance: 371 lost hours during two unplanned outages (according to my calculations, these outages were responsible for the lost revenue of $196 thousand) Higher operating costs due to turbine repairs and wage increases – year to date these additional costs were $361.5 thousand (turbine) and $142.3 thousand (wages). I think that technical problems, experienced at geothermal facilities, happen sometimes. However, granting wage increases to the crew when the facility is in trouble is not, in my opinion, the best practice. Projects under development US Geothermal has four projects classified as “Projects under development”: El Ceibillo Phase I, San Emidio Phase II, WGP Geysers and Crescent Valley Phase I. Of these four projects, in 2015 the company was developing mainly two of them: WGP Geysers and El Ceibillo. Below I am commenting on these developments. WGP Geysers In April 2014 the company acquired the so-called “Geysers project”. To remind my readers, this project is located in the Californian broader Geysers geothermal field, the largest producing geothermal field in the world. In June 2015 the company completed a flow test program of the three production wells. These tests confirmed that wells were operational but to achieve a planned long-term capacity of 28.8 MW, two or three additional production wells should be reopened (the company does not need to drill new wells). In other words – before any geothermal company takes a decision on eventual production, flow tests have to be performed to establish resource viability. US Geothermal completed such tests and announced that two or three additional production wells were needed. In my opinion, it is an important message. It seems that the company is approaching a production decision on WGP Geysers – if such is the case it could be a game changer. However I have some doubts. The company estimates that production at Geysers should start in the third quarter of 2017. In my opinion, it will be a challenge to meet this timeline because HTM must, for example, open two or three production wells, connect its property to the grid, sign a power purchase agreement, find financing for its project etc. All these issues need time so the two-year time frame, in my opinion, seems to be very optimistic. El Ceibillo, Guatemala US Geothermal used to postpone a commercial operation date (COD) of El Ceibillo many times. Fortunately, since the fourth quarter of 2014 the company has been confident that this facility should start its operations in the second quarter of 2018. On October 13, 2015 HTM was granted the concession agreement for the El Ceibillo development. To remind my readers, the previous concession expired this year so now the company is once again formally allowed to continue development. Currently the company is in the middle of it. In 2014 it completed a nine hole temperature gradient drilling program (an initial part of any development). This year HTM is performing flow tests – one well (EC-2A) confirmed that there is a commercial resource at El Ceibillo but at least two additional wells are needed to extend the resource area (drilling at the first well, EC-3, started on October 29 ). Summarizing, the company is at its intermediate stage of development at El Ceibillo. In my opinion, setting 2Q 2018 as a COD is going to be, similarly to WGP Geysers, a challenge. Equipment purchase On November 9 the company announced it acquired equipment for the construction of three binary geothermal power plants. This equipment was acquired at a significant discount to its cost. According to the company: “We paid $1.5 million, which is approximately 5% of the equipment’s original cost, a saving of roughly $28 million. This equipment gives us the ability to expand our megawatt output at our existing portfolio of advanced stage development projects at significantly lower cost, and in much shorter construction timeframes” The equipment is supposed to be applied to the Crescent Valley and San Emidio Phase II projects. The initial market reaction was very positive – on November 9, the company’s shares closed 8.9% higher than on the previous day. Well, in my opinion, the equipment acquisition is surely a positive thing in the long-term – the company should save a lot of money and time at the construction of Crescent Valley and San Emidio II. The management did a very good job, indeed. However, in the short-term this message means nothing – the company has just bought some equipment, which will be stored as inventory, waiting a few years to be applied. Additionally, this equipment will be accounted for as inventory and disclosed at cost ($1.5 million). However, the most paradoxical thing is the fact that when both projects start their operations, the company will be allowed to recognize depreciation charges attributable to only $1.5 million. Putting it differently, an excellent managerial success, due to accounting and fiscal rules, will be converted into lower depreciation charges and higher taxes in the future. Valuation To demonstrate US Geothermal’s market valuation I have calculated the Enterprise Value / EBITDA multiples for a few geothermal energy stocks. The chart below, depicting these ratios, was taken from my article on another geothermal company, Polaris Infrastructure. As the chart shows, currently the company’s shares are trading at a multiple of 12.3, which means that they relatively overvalued against its peers: Summary US Geothermal continues to provide descent financial results. However, due to large non-controlling interest component, HTM shares are relatively overvalued against its peers. In this article I have covered two projects, which are approaching production phase – WGP Geysers and El Ceibillo. Year to date some progress towards putting these projects closer to production has been evident. However, in my opinion, to meet time frames set by the company is going to be a challenge. Therefore I am sustaining my previous thesis on US Geothermal – there are still no short-term catalysts to lift the company’s shares. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.