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YieldCo Index ETF: The YieldCo Model Breaks – It’s A Bigger Lesson Than You Think

YieldCos were supposed to do for utilities what LPs did for energy companies. The potential appeared huge, with increasing investment in renewable power. Only the model just broke, and Global X YieldCo Index ETF is the evidence. The postmortem here is more instructive than you may think. Investors appear to always be on the lookout for the next big thing that will make them rich. Wall Street, meanwhile, is always ready to sell investors something that appears to meet that desire. Only time and time again, the opportunity doesn’t pan out. YieldCos are the current asset melting down. The Global X YieldCo Index ETF (NASDAQ: YLCO ) is proof of it. What’s the bigger picture lesson? What’s a YieldCo? A YieldCo is basically a company created or spun off by another company with utility assets that it would like to sell, but not necessarily lose control of. The YieldCo raises capital in the markets by issuing shares and debt, and then buys the assets of its erstwhile parent. The assets usually come with long-term contracts, so the revenues are reasonably certain to materialize, and the parent normally has operational control. The allure for investors is a stated goal to pay out large, growing distribution streams backed by more acquisitions. If this sounds roughly similar to the model that pipeline owners have used in the limited partnership space for years, it should. That’s basically the building block on which YieldCos have been created. It sounds like a win for everyone involved. Only, there’s one small catch. Access to capital markets. Talk about timing Wall Street’s financial alchemists have a habit of pushing things too far. And YieldCos now appear to be falling into that category. The best example I can provide is YLCO, an ETF that came public in late May of this year. Its shares have fallen by nearly a third since that point. YLCO stands as a warning to investors to not get caught up in the hot new thing. That can be hard to do, I know. Hot new things always seem to come with really compelling stories about how they are a “can’t lose” investment. Which is why you should always ask yourself why something you are looking at could blow up on you. In the case of YLCO, the answer to that is pretty clear: the fund would tank if the YieldCo space in which it invests doesn’t hold the promise that Wall Street believes it does. However, that’s not a deep enough answer, and it would be too easy to glass over the issue and stop there. After all, YLCO is buying a basket of YieldCos, which reduces risk through diversification. That’s why you need to go further and ask: What would kill a YieldCo’s potential? And could that happen across the YieldCo space? We know the answer now Looking at these questions in reverse order, we know that the chances of a broad YieldCo meltdown was pretty high. But what was the problem on the individual company level? The answer is access to capital. For a company that pays out most of its revenues to investors via distributions, growth has to come from acquisitions. But acquisitions can only happen if the company can sell more debt and equity at decent prices. If investors aren’t willing to provide that capital at desirable rates, the YieldCo loses its ability to grow. That will likely lead to a stagnant distribution and even fewer reasons for investors to buy its shares. The parent company, meanwhile, is stuck with a child that isn’t nearly as desirable to have around. And more or less everybody winds up a loser. For evidence of this take a look at the current troubles of NRG Energy (NYSE: NRG ) and NRG Yield (NYSE: NYLD ). NRG Yield makes up around 7.5% of YLCO, by the way. Commenting on NRG Yield, credit watcher Moody’s is taking a dim view of the future. Moody’s vice president Toby Shea noted, “The review for downgrade is prompted by NYLD’s lack of access to the equity markets due to the large, approximate 30 percent fall in its stock price in recent months. The ongoing inability to access the equity market creates uncertainty regarding the company’s financial strategy going forward.” Basically, the model is broken. Don’t stop there But what are the real takeaways? First, Wall Street’s hot new products are often better for Wall Street than main street and shareholders. I don’t want to be cynical, but this is as true today as it has always been in the past. And I find it hard to believe the future will be any different. It’s difficult, but try to keep this in mind whenever you see something new offered up as the next big thing. Second, YieldCos are probably not worth owning right now. And clearly, neither is YLCO. The risks far outweigh the rewards for all but the most aggressive investors. Third – and this is the one you really need to think about – what about other companies that have business models built on accessing the capital markets for growth? Limited partnerships are the most salient example, since they are facing their own demons right now. But they aren’t the only ones. For example, Student Transportation Inc. (NASDAQ: STB ) is rolling up the school bus space. But if it couldn’t access capital markets, its growth prospects would quickly fade. Then there are real estate investment trusts, or REITs. As a whole, I wouldn’t be too concerned about REITs. But not all REITs are created equal. I doubt that an industry leader like AvalonBay Communities (NYSE: AVB ) will be completely shut out of the capital markets. But what about apartment competitor NexPoint Residential Trust (NYSE: NXRT ), which is a relatively new entrant buying up second-tier assets with the intent of sprucing them up? It’s already leaning hard on the debt markets, if it can’t do that anymore, what does it do for growth capital? These two companies obviously sit at opposite ends of the spectrum, but there are variations all along the way. It’s worth taking a moment to ask the question for both new companies like NXRT, and also more established names – just in case. Stapled Shares One of the reasons why I brought up Student Transportation is because it came to market in a very different form. At the IPO, it was a stapled share, essentially pairing a share of stock with a piece of debt. The distribution was a combination of dividend and bond interest. It was a hot Wall Street idea not too long ago, meant to sate investors’ desire for income. Only, it didn’t work out as planned. And now most, if not all, of the handful of companies that came out as stapled shares have either gone away or converted their shares to plain old regular stock. The end result was usually a dividend cut for shareholders on top of capital losses. I watched stapled shares come and go. I owned a few. I got burned. It’s one of the reasons why I’ve been sitting on the sidelines with YieldCos. And why I’m watching single family home REITs with extreme interest, but I’m not buying any. Too new, too much of a fad, and the model could break down. It’s better to give Wall Street’s big ideas time to prove themselves. You certainly could miss out on gains, but you’ll also protect yourself from ideas that end up enriching Wall Street at your expense. YLCO is a symptom of a bigger issue, but it offers up an important lesson. Could YieldCos work out in the long run? Sure. Could YLCO turn out to be a great income opportunity in the ETF space? Yes. But for anyone who bought into the YieldCo story early, things aren’t working out quite as planned right now and there’s real potential that the idea is fatally flawed. It’s hard to resist the temptations of Wall Street, but when it comes to new things (corporate forms, IPOs, new products like esoteric ETFs) you are far better off stepping back and waiting. At the very least, take the time to consider what happens if the rosy projections offered up don’t pan out. In other words, always look for a reason why you shouldn’t buy something as you are reveling in the reasons why you want to.

Wheel Of Fortune?

The only thing we can control is ourselves. True happiness comes from inside. In the same way, investors can’t control the circumstances of the market or the global economy. Market prices are always fluctuating. But they can control the quality of the securities they hold. Circumstances may be volatile, but economic values don’t change all that much. Where are you on the wheel of fortune? When I was growing up, one of the most popular TV game-shows was “Wheel of Fortune.” Contestants would solve a word puzzle similar to “hangman” and spin a giant carnival wheel to win cash and prizes. The show has run for over 30 years. Its appeal is that it encourages viewers to play along – to try and guess the mystery phrase before the contestants. But before there was a TV show, there was another wheel of fortune, or rota fortunae . It’s a concept from ancient and medieval philosophy that characterizes fate, or chance. The goddess Fortuna would spin the wheel at random, changing the positions of those on the wheel. Some would suffer misfortune, others would gain windfalls. Fortune herself was blindfolded. The concept has come down to modern culture, although Fortuna is sometimes replaced by Lady Luck. Jerry Garcia co-wrote “The Wheel” and performed it with the Grateful Dead in the ’70s and ’80s. In the TV series Firefly, the main character notes “The Wheel never stops turning” several times. It’s important for investors to understand the role of fortune in their portfolios. The investment world is not an orderly and logical place. Much of investing is ruled by luck. Every once in a while, someone makes an outsized bet on an improbable outcome that ends up working out and ends up looking like a genius. But whether a decision is correct can’t be judged just from its outcome. A good decision is one that’s optimal at the time it’s made, when the future is unknown. A good decision weighs the probable outcomes and measures potential risk and reward. In the sixth century Rome, philosopher Boethius was awaiting trial – and eventual execution – on a trumped-up charge. While in prison, he reflected on how to be content in a world beset by evil. He concluded that current conditions are always in flux – rolling on the rim of the Wheel of Fortune. The only thing we can control is ourselves. True happiness comes from inside. In the same way, investors can’t control the circumstances of the market or the global economy. Market prices are always fluctuating. But they can control the quality of the securities they hold. Circumstances may be volatile, but economic values don’t change all that much. The Wheel of Fortune is always turning, lifting us up or taking us back down. Bad things can happen to good companies. We need to look inside what we own to see what our investments are really worth. Share this article with a colleague

NiSource’s (NI) CEO Joseph Hamrock on Q2 2015 Results – Earnings Call Transcript

Start Time: 09:00 End Time: 09:18 NiSource Inc. (NYSE: NI ) Q2 2015 Earnings Conference Call August 03, 2015, 09:00 AM ET Executives Joseph Hamrock – President and CEO Donald Brown – EVP, CFO and Treasurer Randy G. Hulen – VP of IR Analysts Paul Ridzon – KeyBanc Capital Markets Operator Good day, ladies and gentlemen, and welcome to the NiSource Q2 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference maybe recorded. I would like to introduce your host for today’s conference, Mr. Randy Hulen, Vice President of Investor Relations. Sir, please go ahead. Randy G. Hulen Thank you, Michelle, and good morning, everyone. I’d like to welcome you to our NiSource quarterly investor call. Joining me this morning is Joe Hamrock, CEO; and Donald Brown, CFO. As you know, the primary focus of today’s call is to review NiSource’s second quarter 2015 financial performance as well as provide an overall business update. Following our prepared comments, we will open the call to your questions. At times during the call, we will refer to supplemental slides available on our Web site. Just a reminder, on July 1, NiSource successfully completed the separation of Columbia Pipeline Group or CPG into an independent publicly traded company. As a result, NiSource no longer maintains any ownership interest in either CPG or Columbia Pipeline Partners. However, the financial information presented today does include CPG’s segment results, as it was part of NiSource through June 30. I would note future NiSource financial results will report CPG as discontinued operations. Therefore, our business segment discussion today will focus solely on NiSource utilities. As an independent company, CPG is hosting its quarterly call later this morning at 10 AM Eastern. And finally, before I turn the call over to Joe, I’d like to remind everyone that some of the statements made on this call will be forward-looking. And these statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in these statements. Information concerning such risks and uncertainties is included in the MD&A and Risk Factors sections of our periodic SEC filings. Having covered all those reminders, I’d like to now turn the call over to Joe. Joseph Hamrock Thanks, Randy. Good morning, everyone, and thank you for joining us for this first NiSource call since the separation of CPG. Today, we’ll briefly cover our second quarter results and earnings drivers before discussing execution highlights at our utilities. And we’ll close with an overview of our investment proposition and our future business plan as a premier pure-play utility company. And we’ll leave plenty of time for your questions. Before we get into the details though, let me just say how excited I am about the path ahead for NiSource. We’ve set a solid foundation for continued long-term growth and enhanced customer value, guided by an experienced management team with a proven record of execution. And it’s a privilege to represent our team today in sharing some of the highlights of our performance as well as our outlook for the future. As Randy noted, I’ll be referencing a few slides in the supplemental deck that was posted online this morning. First, a few key takeaways for the quarter. For the second quarter, results were solidly in line with our plan. The NiSource team delivered $0.18 per share non-GAAP in the recently completed quarter versus $0.25 per share in 2014. Across the board, we had continued solid execution of our infrastructure investments, customer programs and regulatory initiatives. As Randy mentioned, we finalized the tax-free separation of CPG on July 1. After the market closed on July 1, shareholders received one share of CPG common stock for each share of NiSource common stock. Our commitments through the separation were met, including disciplined cost effective execution, our ongoing focus on customer service and our commitment to investment grade credit. In fact, following the separation, our credit ratings at the three major agencies have either remained the same or improved. Standard & Poor’s upgraded our credit rating to BBB plus from BBB minus. Fitch Ratings revised its outlook to BBB minus with a positive outlook from BBB minus with a stable outlook. And Moody’s reaffirmed its rating of Baa2. These ratings set a strong foundation for us as a pure-play utility with significant long-term infrastructure investment opportunities. One of the key value drivers NiSource will continue to offer investors is a solid and growing dividend, which we expect to increase by 4% to 6% annually. We announced our first post separation quarterly dividend of $0.155 per share on July 2, which is consistent with the company’s intention announced in May to increase the initial combined NiSource and CPG dividend by nearly 8%. As we also announced in May, we expect to deliver non-GAAP earnings per share of $1 to $1.10 in 2016 with planned infrastructure enhancement investments of approximately $1.4 billion. Now, let me turn the call over to Donald to review our second quarter financial results highlighted on Page 4 of our supplemental slides. Donald Brown Good morning, everyone, and thanks for joining us. As Joe mentioned, we delivered non-GAAP net operating earnings of about $57 million or $0.18 per share, which compares to about $78 million or $0.25 per share in the second quarter of 2014. On an operating earnings basis, NiSource was down about $7 million. As a reminder, these results include CPG reportable segment financials. Two factors impacted our net operating earnings compared to 2014. One was additional interest expense related to Columbia Pipeline Group long-term debt issuance prior to the separation. The other was NiSource’s non-controlling interest in Columbia Pipeline Partners, which was formed in February 2015. Combined, these items add up to nearly $0.06 for the quarter. On a GAAP comparison, our loss from continuing operations was about $36 million for the second quarter versus income of about $79 million for the same period in 2014. This decrease was primarily as you would expect attributable to a loss on early extinguishment of long-term debt and separation costs. At the segment level, each of the three pre-separation business segments delivered financial results well in line with our expectations during the second quarter. Full details of our results are available in our earnings release issued and posted online this morning. Now, turning to Slide 5, I’d like to briefly touch on our debt and credit profile following the separation, which as you’ll see is consistent with our May 14 webcast. Following the recapitalization, our total debt level was reduced to $6.7 billion with the weighted average maturity of approximately 14 years and average coupon of approximately 5.86%. On the liquidity front, our $1.5 billion revolving credit facility went into place at separation. And as of July 1, we maintained net available liquidity of about $2 billion. Our financial foundation for our continued growth as a pure-play utility is solid, on track and consistent with our commitments. Now, I’ll turn the call back to Joe to discuss a few customer infrastructure investment and regulatory highlights across our utilities. Joseph Hamrock Thanks, Donald. Our teams remain on track to invest approximately $1.3 billion during 2015, which is part of our $30 billion of long-term regulated utility infrastructure investment opportunities. These investments further improve reliability and safety, enhanced customer service and reduced emissions, all while generating sustainable long-term growth. Let’s turn to a few highlights in our gas operations business segment on Slide 6. We’re continuing our disciplined execution on core infrastructure investment and modernization programs supported by complementary regulatory and customer initiatives. In fact, just last week, Columbia Gas of Massachusetts reached a settlement in principle with the Massachusetts Attorney General in its base rate case. The settlement agreement is expected to be finalized and filed for approval with the Massachusetts Department of Public Utilities later this month. The case, as you’ll recall, seeks to recover costs to support CMA’s multiyear modernization plan to maintain the safety and reliability of natural gas service for customers. Columbia Gas of Pennsylvania’s base rate case is progressing on schedule. The $46 million request supports continued investment in our well-established modernization programs that enhance safety and reliability. A decision in that case is expected by the end of this year. Turning to the pending base rate case at Columbia Gas of Virginia, on June 30, the hearing examiner recommended specific fixed customer charges for each rate class, addressing the final outstanding issue in the case. The commission had previously found that the stipulated annual revenue increase of $25.2 million is reasonable. A final order in the case is expected later this year. And back to Massachusetts, as an update to what we shared in our first quarter call, we received Department of Public Utilities approval of the 2015 Gas System Enhancement Plan on April 30. Cost recovery began on May 1 and is projected to increase annual revenues by approximately $2.6 million. And at NIPSCO gas, we continue executing on our seven-year natural gas system modernization program. Our 2015 projects, which include enhancement of existing infrastructure and extension of gas service to rural customers, are well underway and we expect to file our program and tracker update by September 1. Now, let’s turn to our electric operations on Slide 7. On May 26, NIPSCO, the Indiana Office of Utility Consumer Counselor and some of NIPSCO’s largest industrial customers reached a settlement agreement resolving all concerns raised by the parties in an Indiana Court of Appeals proceeding surrounding the company’s long-term Electric Infrastructure Modernization Plan. As part of the agreement, NIPSCO will file a base rate case, followed by a new seven-year plan. We expect to file the base rate case on or about October 1 of this year. The FGD unit under construction at NIPSCO’s Michigan City Generating facility is on schedule to be placed in service by the end of 2015. Following the completion of the Michigan City unit and with those we placed in service over the past two years, all of NIPSCO’s coal-burning facilities will be fully scrubbed. NIPSCO’s two major electric transmission projects are also progressing as planned. Right-of-way acquisition, permitting and substation construction are underway for both projects. You’ll recall these projects involve an investment of about $500 million for NIPSCO and are anticipated to be in service by the end of 2018. As you can see, our teams continue to execute on a well-established infrastructure, customer and regulatory plans. Before turning to your questions, I’d like to reaffirm the value proposition that we believe differentiates NiSource. Following the separation of CPG, we are well aligned with our aspiration to be a premier regulated utility company. Our plan represents a best-in-class risk adjusted total return proposition with $30 billion of long-term 100% regulated utility infrastructure investment opportunities, significant scale across seven states, transparent earnings drivers and constructive regulatory environments. We’re focused on leading in the areas that matter most in our industry, those are enhancing value to our customers and community, stewarding our assets to ensure safe, reliable, affordable and efficient service, engaging and investing in the communities we serve and ensuring through disciplined execution that we deliver on our financial and other stakeholder commitments. This transparent sustainable growth is expected to drive shareholder value. As we first announced in May, we expect to deliver non-GAAP earnings per share between $1 and $1.10 per share in 2016. We expect our capital program will grow to about $1.4 billion annually starting next year. And finally, we expect to grow our non-GAAP EPS and our dividend by 4% to 6% per year. Thank you all for participating today and for your ongoing interest in support of NiSource. We look forward to sharing continued updates on our progress. Now, Michelle, let’s open the call to questions. Question-and-Answer Session Operator Thank you. [Operator Instructions]. Our first question comes from the line of Paul Ridzon with KeyBanc. Your line is open. Please go ahead. Paul Ridzon Good morning. How are you? Joseph Hamrock Good morning, Paul. I’m doing fine. How are you? Paul Ridzon Good. When do you expect Massachusetts rates to take effect? Is that calendar tolerated at all? Joseph Hamrock The settlement details will be filed later this month and you could look for some potential changes in the timing of the rate implementation in that settlement, but I don’t want to get ahead of the actual settlement itself, the filing of the settlement. Paul Ridzon Understood. And can you just share a little bit what’s going on with electric road in Indiana, how much of that was weather? NIPSCO industrial was down. Is that all steel related? Joseph Hamrock Yes, we are certainly seeing the steel industry weather some very tough conditions relative to imports, and that – on the industrial side in that particular zone we’re encouraged to see some sign of support from Washington related to the import issues although the recovery looks like it will be prolonged. And on the other side of the coin, we see economic development opportunities emerging, which will provide a nice boost and hopefully a modest offset to the industrial decline in our territory over time. But altogether, the key point here is our outlook factors in those conditions and the effect of that downturn and we remain confident in our guidance for 2016. Paul Ridzon And then maybe I’m getting ahead of my skis here, but can you talk about the Indiana rate case and your strategy there with regards to rate base? Is it a – I guess filed under fair value or historic rate base? Joseph Hamrock We’re working out the details of that filing as we speak, Paul. The key element for us is to reposition the modernization efforts allowing for the deferral of the tedious investments we’ve made in ’14 and ’15 rolling those into that rate case and then filing a new tedious plan afterwards. And again, we’ll file that case around October 1. Paul Ridzon Okay. Thank you very much, guys. Joseph Hamrock Thanks, Paul. Operator Thank you. [Operator Instructions]. I’m showing no further questions at this time. I would like to turn the conference back to Mr. Joe Hamrock for any further remarks. Joseph Hamrock Thank you, Michelle, and thank you all for joining us this morning. As you can see, NiSource is very well positioned for execution as a premier pure-play utility. Our regulatory efforts continue to play out across the stakes and we’re very encouraged by the opportunities we see in the future. Until next time, I look forward to talking to you then. Operator Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program, and you may all 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.) 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