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Black Hills’ (BKH) CEO David Emery on Q3 2015 Results – Earnings Call Transcript

Black Hills Corporation (NYSE: BKH ) Q3 2015 Earnings Conference Call November 04, 2015 11:00 AM ET Executives Jerome Nichols – Director, IR David Emery – Chairman, President and CEO Rich Kinzley – SVP and CFO Analysts Dan Eggers – Credit Suisse Insoo Kim – RBC Capital Markets Operator Good day, ladies and gentlemen and welcome to the Black Hills Corporation Third Quarter 2015 Earning Conference Call. My name is Malerie and I’ll be your coordinator for today. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Mr. Jerome Nichols, Director of Investor Relations of Black Hills Corporation. Please proceed, sir. Jerome Nichols Thank you, Malerie. Good morning, everyone. Welcome to Black Hills Corporation’s third quarter 2015 earnings conference call. Leading our quarterly earnings discussion today are David Emery, Chairman, President and Chief Executive Officer and Rich Kinzley, Senior Vice President and Chief Financial Officer. Before we begin today, I would like to note that Black Hills will be attending the EEI Financial Conference next week in Hollywood, Florida. You’ll find our presentation materials and webcast information on our Web site at www.blackhillscorp.com, under the Investor Relations heading. During our earnings discussion today, some of the comments we make may contain forward-looking statements as defined by the Securities and Exchange Commission and there are a number of uncertainties inherent in such comments. Although we believe that our expectations and beliefs are based on reasonable assumptions, actual results may differ materially. We direct you to our earnings release, Slide 2 of the investor presentation on our Web site and our most recent Form 10-K, Form 10-Q another document filed with the Securities and Exchange Commission for a list of some of the factors that could cause future results to differ materially from our expectations. I will now turn the call over to David Emery. David Emery Thank you, Jerome and good morning everyone. I will be starting on Slide 3 of the webcast deck and then we will be following a format similar to that of previous quarterly calls. I’ll give an overview of the quarter and some highlights. Rich Kinzley will go over the financials from the quarter and then I’ll talk a little bit about forward strategy and then we’ll answer questions. Moving to Slide 5, the third quarter was another strong quarter for Black Hills Corporation. We posted solid earnings and made great progress on our growth goals for our existing businesses and we also made excellent progress towards our pending acquisition of SourceGas. Related to SourceGas on August 10th, which was less than 30 days after the deal was announced we filed joint applications for acquisition approvals in all four states. A week later, just a little over a week later, we received our Hart-Scott-Rodino antitrust clearance, we now have procedural schedules established in three of the states with the fourth state pending. The discovery process is ongoing and we still remain on track to close on the first half of 2016. Also, on the acquisition front we did close on July 1st, on our $17 million acquisition of about little less than 7,000 customers in Northwest Wyoming and notably related to that acquisition they were 100% integrated on to all of our systems and process on day 1 after close. From a business environment perspective, during the quarter we had warmer than average weather in our utility service territories, a slight positive for the electric utilities and a negative for the gas utilities and then energy commodity prices particularly oil and gas remained at very low levels. Moving on to Slide 6, utility highlights for the quarter, Black Hills Power is preparing to commence construction later this quarter on 144-mile, $54 million electric transmission line routed from Northeast Wyoming to Rapid City, South Dakota. Cheyenne Light recorded a new all time peak load of 212 megawatts on July 27th, that’s the third new peak for Cheyenne Light this summer, highlighting the strong growth in the Cheyenne area service territory. On October 21st, Colorado Electric received approval from the Colorado PUC to acquire the planned 60 megawatt Peak View Wind project which will help our utility meet the Colorado renewable energy standards. A third-party wind developer will build the project, we executed a build transfer agreement with that developer and we’ll take ownership upon commercial operations in the fourth quarter of 2016. Total cost of the project will be approximately $109 million. Our capital investment and a return on that capital and all expenses will be recovered through customer adjustment clauses and a base rate increase won’t be required for the first 10 years of the project. Moving on the Slide 7, a continuation of our utility highlights, we continued construction on our $65 million, 40 megawatt gas combustion turbine at our Pueblo Airport Generating Station, that’s being built for our Colorado Electric subsidiary and is expected to be in service in the fourth quarter of 2016. We also completed here just in a last couple of weeks our field service optimization project. We rolled it out to all of our utility techs in all of our states. Really that project is a deployment of tablet and GPS technology to automate and improve the efficiency of the lot of our field processes, including dispatching. We’re excited about the benefits of that project. On the non-regulated side or non-utility side we initiated a process to evaluate the possible sale of a minority interest in our Colorado IPP generating assets and we drilled the last of 13 horizontal Mancos Shale gas wells for our 2014 and ’15 drilling program in the Southern Piceance Basin in Colorado. We have six wells on production and we just started to flow back operations for the final three wells. We expect to have the test results on those three wells by year-end. And our results for the program continued to meet or exceed our expectations. Slide 8, which is corporate highlights for the quarter, the Board last week declared the quarterly dividend of $0.405 continuing the level we’ve been at for this year equivalent to an annual rate of $1.62 per share. During the quarter, we entered into the $250 million of interest rates swaps, really to mitigate any future interest rate risk associated with some of our future debt issuances, primarily related to the SourceGas transaction. And we continued our cost containment efforts which we started earlier this year to really help mitigate the impacts of low oil and gas prices and the moderate weather that we had earlier in the year. Moving on to Slide 9, financial highlights for the third quarter we earned $0.64 per share as adjusted from continuing operations during the quarter about a 5% increase compared to the same quarter last year, a really good result considering the negative impacts of our oil and gas business. Slide 10 provides a reconciliation of our third quarter 2015 income from continuing ops as adjusted against our 2014 results for the third quarter. Strong performance in nearly all of our businesses more than made up for poor performance in our oil and gas subsidiary. With that I’ll turn it over to Rich for the financial update. Rich? Rich Kinzley All right, thanks Dave. As Dave mentioned our core utility and utility like businesses continue to demonstrate strong performance. In the third quarter each of these businesses improved operating income compared to the third quarter of 2014, in particular our electric utilities posted strong year-over-year operating results. Our oil and gas business continued to manage through a challenging commodity price environment. Despite that challenge we posted a strong quarter. On Slide 12, we reconcile GAAP earnings to earnings as adjusted on non-GAAP measure. We do this to isolate special items and communicate earnings to better indicate our ongoing performance. In each of the first three quarters of 2015, we’ve incurred non-cash ceiling test impairments at our oil and gas business and in the second quarter of 2015 we also impaired in an equity investment at our oil and gas business. These impairments are due to low natural gas and crude oil prices and our non-cash charges that are not reflective of ongoing operational results. We also incurred external acquisition related cost in the second and third quarters of 2015 associated with the SourceGas acquisitions, such as financing and other third-party costs which were non-recurring in nature. Our third quarter as adjusted EPS reflective of ongoing operations was $0.64 per share compared to $0.61 per share in the third quarter last year and our trailing 12 months as adjusted EPS was $3.05. Slide 13 displays our third quarter revenue and operating income, on the left side of the slide you’ll note that revenue was flat in 2015 due to the lower gas utility revenues from the lower pass-through gas cost in 2015 and lower revenue from the oil and gas business due to lower receipt prices. These revenue reductions were offset by strong revenue growth at our electric utilities. On the right side of the slide you can see that strong performance in the third quarter at our core utilities, coal mine and Power Gen businesses more than offset decreased performance at oil and gas, resulting in a more than 10% increase in consolidated operating income as adjusted year-over-year. I will elaborate on each business unit in the following slides. Slide 14 displays our third quarter income statement comparing third quarter 2015 to third quarter 2014 gross margin increased 7% driven by strong electric utility results. Operating expenses increased 6% due largely to margin additive activities at our electric utilities. DD&A and interest expense increased primarily from added plant in-service and borrowings associated with our October 1, 2014 in-service of the $222 million Cheyenne Prairie Generating Station. The DD&A increase was partially mitigated by lower ongoing depletion at our oil and gas business, which I’ll explain in a few slides, as adjusted EPS grew 5% year-over-year and EBITDA increased by 8%. Moving to our business unit results, Slide 15 displays electric and gas utilities’ gross margin and operating income. In 2015 we changed from discussing revenue to gross margin for our utilities, as we feel gross margin is more relevant to understanding ongoing results, since revenue includes fuel cost pass throughs. On the left side of the slide you’ll see our electric utilities’ third quarter 2015 gross margin increased by 14 million from 2014. 9.5 million of this increase was driven by additional return from investments in our generation facilities with completed rate cases in late 2014 and early 2015 in Colorado, South Dakota and Wyoming. Gross margin also benefitted by nearly 3 million from the combination of higher commercial and industrial demand and the addition of two small Wyoming natural gas utility acquisitions in 2015 that Dave mentioned. These small utilities our subsidiaries of Cheyenne Light and we report their results in the electric utilities segment. Residential usage was favorable across our electric service territories and totaled up 4.6% comparing third quarter 2015 to 2014. Cooling degree days in our electric utility service territories for the quarter were 36% above 2014 adding 3.3 million to margin year-over-year. Overall weather impacts at our electric utilities were $300,000 favorable compared to normal. Operating income during the third quarter for our electric utilities improved by 8 million or 19% year-over-year, as a result of increased gross margin and solid cost management. Operating expenses including depreciation increased only 6 million year-over-year despite the addition of Cheyenne Prairie and the two small Wyoming acquisitions, the combination of which accounted for approximately half of the $6 million expense increase. Looking at the right side of Slide 15, our gas utilities gross margin increased slightly in 2015 compared to 2014. Increased margins from a rate case completed in Kansas in late 2014 and higher transport and industrial volumes were offset by unfavorable weather impacts. While weather isn’t a large driver for our gas utilities in the third quarter, it’s worth noting 2015 heating degree days in our gas utility service territories were 61% below 2014 and 57% below normal for the period, resulting in a 400,000 negative impact to margins in the third quarter compared to the prior year and compared to normal. So, if you take the electric and gas utilities combined weather was really flat compared to normal and total for the third quarter. Third quarter 2015 operating income at the gas utilities increased 800,000 compared to 2014 thanks to strong cost management which reduced operating expenses 600,000 year-over-year. On Slide 16, you’ll see Power Gen’s operating income improved by 1.4 million compared to last year’s performance. Power generation benefited from annual power purchase agreement price increases partially offset by decreased capacity payments since we sold the 40-megawatt CT2 to the City of Gillette in the third quarter of 2014. These last revenues were partially mitigated by the cost sharing benefits we enjoy as we operate this facility for the city. Cost management efforts at Power Gen have allowed us to reduce operating cost by 300,000 year-over-year. On the right side of Slide 16 our coal mining segment saw improved operating income in the quarter by $400,000 from 2014. While tonnes sold were slightly down year-over-year, our average overall coal price received increased 13% comparing Q3 2015 to Q3 2014. And strong cost management contributed to another solid quarter at the coal mine. Power Gen and coal mining continue to deliver solid results. Moving to oil and gas on Slide 17, you’ll see we sustained and as adjusted $7.2 million operating loss for the quarter. Commodity prices negatively impacted results in the third quarter of 2015 as our average received prices inclusive of hedges were down 27% for crude oil and 37% for natural gas compared to the third quarter of 2014. Overall, third quarter production increased 17% comparing the same period in 2014, driven by increases in both natural gas and crude oil production. On the cost side, our Q3 operating expenses increased slightly comparing 2015 to 2014 due primarily to employee severance cost as we reduced staff in the third quarter, which will reduce future period’s operating costs. Despite increased production volumes, DD&A decreased by $0.5 million in the third quarter compared to 2014 due to a substantially lower depletion rate. The reduction in the depletion rate resulted from a lower-cost pool due to the ceiling test impairments we incurred in the first and second quarters of 2015. In the third quarter we incurred a $62 million pretax ceiling test impairment charge related to our oil and gas holdings, in addition to the impairments we incurred in the first and second quarters. The ceiling test utilizes rolling 12 month average prices for crude oil and natural gas, prices for these commodities began to fall in the fourth quarter of 2014 and have remained low throughout 2015 compared to 2014. Consequently the average prices used in our ceiling test impairment evaluations have continued to drop each quarter in 2015. We are likely to incur an additional impairment charge in the fourth quarter, if crude oil and natural gas prices remain at current depressed levels. Also as a result of the third quarter ceiling test impairment we expect and a lower depletion rate again in the fourth quarter. Despite the challenges presented by the low commodity price environment we continue to be pleased with the momentum we have improving up our Piceance Mancos Shale play. We expect to substantially complete our drilling, completion and testing program as we finish out 2015. The play is well-positioned to potentially serve our cost of service gas model we filed in six states for regulatory approval and for additional upside value capture when commodity prices improve. We have right sized our cost structure in the oil and gas segment and expect a much lower depletion rate in 2016. We’ve also substantially reduced our expected capital spending in our oil and gas segment for 2016 and 2017. Dave is going to talk a little more about that in a couple of slides. Slide 18 shows our current plans for the SourceGas financing as well as other financing activities in the 2016-2017 horizon. We completed syndication of a bridge facility to give us flexibility with the timing and structuring for the permanent financings for the SourceGas acquisition. As previously disclosed we will be assuming 700 million of existing SourceGas debt and financing the remainder of the acquisition through potential asset sales and new debt and equity issuances. At our recent Analyst Day we discussed our financing plans for the SourceGas acquisition and indicated we will finance the acquisition in a manner that will support our strong investment grade ratings. We are currently reviewing our options for financing the recently announced $109 million Peak View Wind project and our other strong utility growth oriented capital activities in 2016 and beyond. To support an ongoing CapEx associated with our continued growth for SourceGas acquisition closing, we are considering the implementation of an at-the-market equity program in 2016. Slide 19 shows our current capitalization, at quarter end net debt to cap was 56.7%, an increase from June 30th that was primarily driven by the third quarter non-cash impairment charge in our oil and gas segment. Given expected cash flows from operations for the remainder of the year in our revolver capacity, we have ample funding available for planned CapEx and dividends in the fourth quarter. Slide 20 demonstrates our strong earnings growth performance over the last six years. Our third quarter results demonstrate the continuing strong operational performance and growth characteristics of our core businesses. While low crude oil and natural gas prices impacted our oil and gas segment in 2015 and tempered 2015 earnings growth, we expect to grow earnings again in 2016, which brings us to Slide 21. In our press release on October 7th, we increased our 2015 earnings guidance range to $2.90 to $3.10 per share as adjusted which we reaffirmed with our press release yesterday. We also yesterday issued our initial earnings guidance for 2016 to be in the range of $3.15 to $3.35 per share as adjusted. The assumptions for this guidance are listed on Slide 21. Most notably the assumptions exclude the SourceGas acquisition any material asset sales and any significant new debt or equity issuances. If any of these items occur we will issue updated guidance. As we previously disclosed, we believe the SourceGas acquisition if closed in the first-half of 2016 as planned will be meaningfully accretive to 2017 earnings per share. And with those comments I’ll turn it back to Dave. David Emery Thank you, Rich. Moving onto Slide 21 forward strategy, we group our strategic goals in to four major categories and we’ve done this for a couple of years. The overall objective being an industry leader in all that we do. Those four major goals are profitable growth, valued service, better every day in a great workplace. On Slide 24, I noted this earlier but we’re making excellent progress on our acquisition of SourceGas, we’re on track for closing in the first-half of 2016 as I said earlier and we have a very experienced leadership team guiding our integration effort. Our goal on the integration is to be fully integrated by the end of the year 2016. Moving on to Slide 25, strong capital spending drives our earnings growth and we forecast the total of 1.25 billion of investment for 2015 through 2017. Our projected capital spending far exceeds depreciation driving earnings growth. It’s important to note that this table on Slide 25 does not include any capital related to either the SourceGas acquisition or capital spent in the SourceGas territories post acquisition. On Slide 26 as I said earlier, we’re continuing to make great progress constructing a new turbine at the Pueblo Airport Generating Station. We commenced construction in June, we’ve spent about 27 million to-date out of the projected total of 65, construction is a little over 20% completed and we have no safety incidents to-date. On Slide 27, Monday of this week we announced that we received the necessary approvals and executed the necessary agreements to purchase 109 million 60 megawatt Peak View Wind Project in Colorado. I mentioned this earlier it will help us meet the renewable energy standard in Colorado for our Colorado electric customers. We expect construction to commence in the second quarter of ’16 and be completed by year-end. Slide 28, our electric utilities have demonstrated solid earnings growth year-to-date in 2015 and Rich covered that earlier. One aspect of that has been strong industrial growth in all three of our electric utilities. The overall growth rate has been 16% year-to-date. That growth has come from several different industrial customers and industry segments with the data center load growth particularly in Cheyenne Wyoming being the most notable. On Slide 29 a significant growth opportunity that we are pursuing is this utility cost to service gas supply program that we’ve been talking about for a well over a year now. Under cost of service gas program our direct investment in natural gas reserves would provide long-term price stability for customers while providing increased earnings for shareholders, an excellent win-win situation. We submitted cost of service gas regulatory applications now in a total of six dates, we hope to pursue and receive approvals on those programs in 2016. We’re continuing to evaluate producing properties and growing prospects for inclusion in that program and that certainly includes our Mancos Shale gas properties in the Piceance Basin in Colorado. On Slide 30 and we discussed this in quite a bit of detail on our Analyst Day, but in light of continued low oil and gas prices, our oil and gas strategy is really focused on providing cost to service gas cost effectively to our utilities. We’re working to finish up our 2014 and 2015 Mancos drilling program and then focusing on minimizing other capital expenditures and operating costs. On Slide 31, there’s an illustration of the impact that low crude oil and natural gas prices have had on our quarterly forecast ceiling test that Rich mentioned earlier. We do expect another impairment in the fourth quarter as Rich stated earlier if product prices remain at current levels. Slide 32, provides a well by well detail for our Mancos drilling program, it includes all wells drilled from 2013 through 2015. The top-six wells on the page have all been placed on production in 2015. We have good test results on those wells. We just started flowing back the three final wells that we intend to produce this year, that are in the Whittaker Flats area and should be tested and on production prior to year-end. On Slide 33, we continue to be very proud of our dividend track record, having increased our annual dividend to shareholders for 45 consecutive years. On Slide 34, we do have a strong balance sheet, strong cash flows and solid investment grade credit ratings and as we’ve discussed last quarter all three agencies reacted favorably as we expected to our SourceGas announcement. Slide 35, illustrates the continuing focus we place every day on operational excellence and on being a great workplace. Our safety performance year-to-date has been outstanding, our total case incident rate for the year of 0.7 is the lowest ever for Black Hills Corporation. Finally, on Slide 36, is our scorecard, this is our way of holding ourselves accountable to you our shareholders, we’ve done this for quite a few years now, we lay out our goals at the beginning of the year and literally keep you informed as to our progress throughout the year as we make progress towards those goals. Now, that concludes all of our remarks. We’d be happy to take questions. Question-and-Answer Session Operator Ladies and gentlemen, we are ready to open the line for questions. [Operator Instructions] Our first question comes from the line of Dan Eggers with Credit Suisse. Your line is now open. Dan Eggers I guess, if we step back and kind of think about the priorities around the earnings outlook, the commodity price assumptions in the E&P business are above the street, can you just explain how you kind of got to those numbers, or the sense to at least slog and kind of why you guys have settled, decided to settle above the curve right now? David Emery The curve changes every day and typically what we do Dan is we take a basket of multiple forecasts and try to use that to come up with a reasonable estimate for the future year. I mean, literally the curve changes every day and if we revise our forward look every time the curve changes, that’s all we do. So, we try to look at several forecasts, and bank forecasts the strip and other things, obviously weighted a little more heavily probably towards the strip and some of the other things and set a forecast at the beginning of the year that we think we can live with regardless of whether that price fluctuates up and down a little bit throughout the year. Dan Eggers And then, did I hear you currently say that on the Wind acquisition that there is no base rate increase for the first 10 years? David Emery Correct, yes, the way that we are going to get recovery for that is it’s basically going to flow through three different cost adjustment clauses that we have and we’ll earn the same amount basically but it’s going to go through the adjustment clauses, and then it’s going to be up to us to decide whether we want to continue that or go in for a base rate case in year 10, I think the commissions preference at least at this point would probably be that we do a base rate case in year 10. Dan Eggers Now we’re going to see a distortion in your tax build because the DTC is being generated will bring your tax expenses down, so a part of the return is going to come on that asset through the tax line effectively? David Emery That’s correct, Dan. Dan Eggers And then how much will that effect the tax rate for the next year or the year after if we want to try and bear any expectations? David Emery It won’t affect ’16 obviously because it’s going to go into service late in ’16 but in ’17 I don’t even want to guess. Dan Eggers I am sorry maybe I should ask what’s the right utilization rate you guys are expecting off the project? David Emery Yes, high-30s, low-40s right in there for our capacity effects. Operator [Operator Instructions] Our next question comes from the line of Insoo Kim with RBC Capital Markets. Your line is now open. Insoo Kim Just back to SourceGas, are you able to give any more guidance on potential timing of the equity issuance whether it’d be before the end of the year or after? David Emery Basically what we wanted to do is get our third quarter financials out and then essentially we’re going to watch the market conditions and be prepared to go to the market. There is obviously some holiday and things in there, but we’re looking at anytime basically between a couple of weeks from now and closing would be our idea of timing. And we’re just going to evaluate market conditions and make a decision on timing as things evolve. Insoo Kim And regarding the financing of the deal, are you currently actively looking for buyers of your non-core E&P assets to help with the funding or is there not really a good market right now given the lower oil and gas prices? Rich Kinzley Yes the non-core assets in E&P aren’t going to generate I would say a material amount into that the Colorado IPP is the big thing there obviously. So we’ll opportunistically look for opportunities on the non-core E&P but it’s not going to be a huge number. David Emery Yes, it’s more just cleaning up the portfolio on the labor involved in managing it all than it is about big dollars on the capital side. Rich Kinzley Right. Insoo Kim And finally if the deal does close on time in the first-half of ’16, I know in ’17 you do expect some material earnings accretion, but in ’16 do you still expect some neutral to slightly accretive scenario for the ’16? David Emery It really depends on timing Insoo and if you think about SourceGas is no different than most gas utilities that makes a huge portion of its income in the first quarter. And so if you called after the first quarter as already you have relatively small piece of the income remaining and a relatively large piece of the expenses remaining for the year. So it’s going to depend on timing if we close right after winter for example we’re going to have three quarters of a year of expenses and roughly and half a year in income. Insoo Kim And then just one more question if I may, at the utilities with the strong industrial growth there that you’re seeing for the year is there any re-through to forecast for 2016 and potentially beyond? David Emery Well, I think we’ve accounted for that growth in our guidance if that’s what you’re asking. Insoo Kim Yes, I was just wondering if, I mean it’s pretty 16% industrial growth you say that is very strong and just wondering modeling out for ’16 kind of what levels we should be expecting? David Emery Well we’ve talked a little bit — the biggest piece that will be continuing is really the Microsoft piece and there is quite a few public disclosures around Microsoft they have made some announcements in Cheyenne related to their plans and they are continuing with additional expansions of datacenters there in Cheyenne. So we expect that to continue for a while. Operator Thank you. [Operator Instructions] I am showing no further questions. I’ll turn the call back to David Emery for final remarks. David Emery All right, well thank you everyone for attending the call this morning. We certainly appreciate your continued interest in Black Hills and for those of you who are going to be at EEI we look forward to seeing you next week. Thanks and have a great day. 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Spark Up 12.5% Yields With Edenor Yankee Bonds, Maturing October 2022

Summary Edenor is the largest electricity distribution company in Argentina. It registered a more than 200% increase in its profit from continuing operations for the first six months (ended June 30) of 2015, compared to the same time period in 2014. Currently, Edenor stock is up 47% from the beginning of 2015. This week we focus on a monopolistic company providing an essential service within its captive market. Empresa Distribuidora y Comercializadora Norte S.A (NYSE: EDN ) is the largest electricity distribution company in Argentina, providing service to a large majority of Argentina’s largest city, Buenos Aires. After many years of government imposed tariff rates, recent legislation has not only provided additional revenues, but has laid the groundwork for a long-overdue increase in the rates Edenor can charge to its customers. These additional revenues have had an extremely positive effect on Edenor’s financials, with the company registering more than a 200% increase in its profit from continuing operations for the first six months (ended June 30) of 2015, compared to the same time period in 2014. With Argentina’s national elections next month, the international business community is anticipating the positive economic reforms that may come from a new ruling government, including long-overdue tariff increases for electricity distributors and generators. These slightly longer seven-year bonds, couponed at 9.75% and currently indicated a yield of about 12.5% when discounted to about 87.5, offer very high cash flow and represent an excellent opportunity for savvy investors to participate in the renaissance of the Argentine economy. Therefore, we are targeting them as a strong addition to our FX1 and FX2 income portfolios. Argentine Yankee Bonds Three years ago, we began finding great opportunities in many of Argentina’s nicely discounted dollar-denominated short-term bonds. While the high yields that were indicated turned away many of the typically more conservative fixed investors, the previously recommended Argentina bonds, as a group, have continued to remain on track toward producing remarkably high yields that are over 8% (and some upwards of 14%). As a group, the Yankee bonds from Argentina have significantly outperformed all other segments of our global high-yield portfolios. About the Issuer Empresa Distribuidora y Comercializadora Norte S.A. (Edenor) is the largest electricity distribution company in Argentina in terms of number of customers and electricity sold. Through a concession, Edenor distributes electricity exclusively to the northwestern zone of the greater Buenos Aires metropolitan area and the northern part of the city of Buenos Aires, which has a population of approximately 7 million people. Edenor’s ultimate parent company is Pampa Energia, the largest, fully integrated, electricity company in Argentina. Pampa is involved in all aspects of electricity, including generation, transmission and distribution. Edenor has a geographic monopoly in the area where it provides electricity service. In Argentina, each distributor supplies electricity to consumers and operates the related distribution network in a specified geographic area pursuant to a concession granted by the Argentine government. Only one concession is granted in each area. Increasing Tariff Rates After over a decade of frozen tariff rates, the Argentine government is finally conceding to the need for increased rates in the electricity sector. In March of this year, Argentina’s Secretary of Energy passed legislation that will pave the way for Edenor and other distributors in the country to raise tariff rates for the first time since 2007. Until those rates are officially increased later this year, the government will transfer funds to the company to cover the difference between current rates and actual distribution costs. The big picture of this legislation for Edenor in 2015 is an estimated US $455 million in additional revenues. In fact, Edenor had already received an additional $262.8 million as of June 30, 2015. This legislation (known as Resolution 32/15) has been well received by the financial markets, with Edenor stock rising to its highest point in March 2015 since the company’s stock began trading in 2007. Currently, Edenor stock is up 47% from the beginning of 2015. Edenor also has been anticipating the long-awaited rate increases and is in the process of drafting a new 10-year investment plan to update and upgrade its distribution network. Political Changes Argentina’s much anticipated elections will take place on October 25, 2015. Due to term limits, current Argentine President Kirchner will not seek reelection. Many Argentine citizens, as well as many in the financial world, are anticipating that the next ruling government will enact changes long overdue under President Kirchner’s watch. These changes include lifting trade barriers, amending price controls and reducing subsidies. The heavily subsidized electricity industry, which currently experiences outages during peak demand times, will likely be one of the first areas the new government will address. With the recently enacted legislation, industry experts predict the first order of business will be to raise tariff rates to a level more reflective of the actual costs for energy distribution. These higher rates will definitely favor Edenor, increasing the company’s cash flow, bolstering its operating margins and improving its credit rating. Financials Edenor’s financials have shown marked improvement with the addition of the revenue tied to the March 2015 legislation. For the six months ended June 30, 2015, the company had a profit of AR724.7 million from continuing operations compared to a AR722.8 million loss for the first six months of 2014. Q2 2015 also showed an impressive year-over-year increase in adjusted EBITDA. Edenor registered an adjusted EBITDA of AR310.0 million compared to a loss of AR$479.3 million for Q2 2014. As one might expect, Edenor has significant asset value in its property, plant and equipment. As of June 30, 2015, the company recorded $807.5 million (in US dollars) in asset value for its property, plant and equipment. This value well exceeds the company’s dollar-denominated debt of $191.2 million. Risks The default risk is Edenor’s ability to perform. After over a decade of artificially low tariff rates, it’s encouraging that the Argentine government is finally acknowledging the need to adjust rates to more accurately reflect the actual cost of electricity distribution. Edenor’s cash flow and operating margins have improved significantly since legislation was passed earlier this year to direct additional revenues to the company to more closely match actual operating expenses. Given Argentina’s history of government regulation in the private sector, there is certainly some geopolitical risks involved for bondholders of Edenor. With national elections only a month away, the international consensus is that whatever new government comes to power will need to contend with remedying the many areas of Argentina’s economy that have suffered under the current ruling party, including the aging electricity infrastructure. This will most certainly involve reducing subsidies (to shore up Argentina’s reserves) as well as raising electricity rates, which will translate to increased income for Edenor. Also, as electricity is an absolute essential need for any modern society, the government will do whatever is required to ensure Edenor’s viability. Edenor’s current dollar denominated debt totals $191.2 million (in US dollars). A decline in the Argentine peso would increase Edenor’s interest payments on this debt as their revenues are recognized in Argentine pesos. Even if a devaluation of the Argentine peso occurs after the upcoming election (as many are predicting), the expected increase in tariff rates for Edenor will help to balance peso volatility. These bonds have similar risks and yields to other Yankee bond issues reviewed on BondYields.com , such as the 8.875 Transener Yankee bonds , the 9.5% Autopistas Del Sol Yankee bonds and the 7.75% Hidroelectrica Piedra del Aguila Yankee bonds. Summary and Conclusion Edenor provides an essential service to the citizens of Argentina’s largest city, Buenos Aries. Although the company has had challenges in trying to match revenue with costs due to the long-standing tariff freeze, the tide has turned, as evidenced by the recent rally in Edenor stock, with the Argentine government moving toward allowing rate increases by the end of this year. Any such increase will have a positive effect for Edenor – increasing operating margins and allowing the company to update its aging systems. For bondholders, Argentina represents an excellent diversification opportunity into a country poised to make significant economic progress with the advent of a new ruling government. These 9.75% couponed bonds have a slightly longer duration than many of the bonds previously reviewed, but we like the monopolistic position of Edenor along with the essential service it provides to the city and country where it operates. Consequently, we believe the high 12.5% yields indicated with these bonds will make an excellent addition to our Fixed-Income1.com and Fixed-Income2.com global high yield fixed income portfolios. Issuer: Empresa Distribuidora y Comercializadora Norte S.A. (EDENOR) Coupon: 9.75% Maturity: 10/25/2022 Rating: B2/B CUSIP: P3710FAJ3 Pays: Semi-annually Price: 87.5 Yield to Maturity: ~12.5% Disclosure: Some Durig Capital clients may currently own Edenor’s 2022 bonds. Please note that all yield and price indications are shown from the time of our research. Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients. As a result of our institutional association, we frequently obtain better yield/price executions for our clients than is initially indicated in our reports. We welcome inquiries from other advisors that may also be interested in our work and the possibilities of achieving higher yields for retail clients.

Stable Belgium Can Give A Decent Profit

Summary EWK, an ETF based on Belgian shares, has significant relative strength. There are no serious threats to the Belgian economy. Government crisis and bankruptcies in the banking sector are in the distant past. The iShares MSCI Belgium Capped ETF (NYSEARCA: EWK ), based on the shares of Belgian companies, ranks extremely high in the ETF World Matrix with Cash list, edited by investment company Dorsey Wright. To gauge whether this extremely interesting ETF’s ranking is justified, it’s worth looking at what exactly the situation in the Belgium economy is like. First, we should explain how the ranking is done. Dorsey Wright compares selected ETFs with each other (one each for each). There are 34 ETFs that are ranked. The main factor is relative strength of each fund. Relative strength tells us how much the price of the company (or of the fund) grows in comparison to other companies (funds). The relative strength indicator, in conjunction with fundamental analysis is quite effective. Why? On the stock exchange, there is a principle of inertia: a company (or fund) that is growing strongly is hard to stop. Below, you can see top of the World ETF Matrix with Cash ranking order. EWK is in third position. The Guggenheim S&P 500 Equal Weight ETF (NYSEARCA: RSP ) is ranked first and the iShares Dow Jones U.S. ETF (NYSEARCA: IYY ) is second. (click to enlarge) Source: Dorsey Wright So, let’s take a glance at the fundamental situation in Belgium. The Political Situation The political situation in Belgium is now stable. Charles Michel has been at the helm of the government since 11th October, 2014. The Kingdom of Belgium is a federal parliamentary democracy under a constitutional monarchy. It is divided into 3 regions: Brussels – the Capital Region, the Flemish Region and the Walloon Region. Since 1993, there are three levels of government (federal, regional, and linguistic community). In 2012, the sixth state reform transferred additional competencies from the federal state to the regions and linguistic communities. It is worth recalling that a few years ago, Belgium was without a viable government due to a political deadlock between the Flemish and Walloons . This political crisis had paralyzed the country’s political apparatus from June 2010 till December 2011 (for 589 days, Belgium was without a federal government). In this period, the 20 biggest companies index, BEL20, went down 23%, and the 10-year bond yield went up from 3,097 to 5,910 (91%). Euronext Brussels BEL20 Index (BEL20) vs. BELGIUM 10-Year Bond Yield (10BEY.B) Source: Stooq The European Parliament is based in Brussels. For this reason, the city is often witness to protests. Economy and Finances Belgium is a small but highly urbanized and industrialized country. Poor in natural resources, it imports raw materials in great quantity and processes them largely for export. Exports account for around two-thirds of Belgium’s GDP. Almost 75% of its foreign trade is with other European Union countries, so the country is highly exposed to business tendencies in the EU. Belgium is the world’s most congested country, with drivers losing 51 hours a year , on average, to traffic jams (in Brussels, 74 hours). The cost of traffic jams in Belgium is 10.58 euros per hour , according to Leuven transport researcher Sven Maerivoet. Efficient mobility is a big problem for society of Belgium, and traffic jams are causing real harm to the economy. From Q2 2013, Belgium’s GDP growth rate is stable, but rather poor (0-0.5%). In Q2 2015, the country’s economy expanded 0.4% over the previous quarter. The indicator almost perfectly reproduces what is happening in the EU economy (please look at the chart below). The unemployment rate is projected to decrease from a ten-year high of 8.5% last year to 8.1% in 2016 as job creation in the private sector picks up – according to European Commission data. We can name it a “slow-moving recovery”. GDP growth rate: Belgium vs. the EU (click to enlarge) Source: Trading Economics What are the weaknesses of Belgium’ economy according to the European Commission’s “Country Report Belgium 2015” ? Chronic underutilisation of labour, with a low aggregate employment rate A high overall tax burden Competition in several key service sectors remains low One of the most interesting facts about Belgium’s labour market is presented at the chart below. Labour costs in the country are indirectly linked to productivity developments. Productivity and Wage Evolution (2009 = 100) It is no wonder that Belgium falls lower and lower on the index of economic freedom. Belgium – Index of Economic Freedom in 2015, Score: 68.8 (100 represents the maximum freedom) Source: Knoema What is worrying is that the country’s ability to make future payments on its debt is decreasing. Government debt as a percent of GDP (106.50% in 2014) is skyrocketing from 2008 and is higher than the EU average (92%). But what’s interesting is, it’s still below Belgium’s average level from years 1980-2014 (108.96%). Government Debt-to-GDP: Belgium vs. the EU (click to enlarge) Source: Trading Economics Public finances in Belgium are in a condition that is characteristic of those in almost all EU countries: poor, but stable. The country can only dream of having a budgetary surplus. (click to enlarge) We need to put a question mark on the 2015 budget. The Federal state budget deficit plan for 2015 was 8.50 bln EUR . As the end of July, it was 8.33 bln EUR. Yes, the budget deficit is seasonal (tax revenues are notably higher in the second half of the year than in the first half), but it seems that the first half of the year was a bit too wasteful. We should remember also that foreign investors own a majority of Belgium’s treasury certificates and linear bonds. This dependence makes the country very susceptible to a loss of market confidence. And what about ratings? Fitch Ratings : Rating AA affirmed, outlook negative (24/07/2015) S&P : Rating AA affirmed, outlook stable (17/07/2015) Moody’s : Rating Aa3 affirmed, outlook changed from negative to stable (07/03/2014) DBRS : Rating AA (high) confirmed, stable trend (13/03/2015) Japanese Credit Rating Agency : Rating AAA affirmed, outlook stable (01/07/2014) Rating and Investment Information, Inc . : Rating AA+ affirmed, outlook stable (31/08/2015) The Banking Sector In the years 2008-11, Belgium was struggling with a banking sector crisis, which revealed the incompetence of EU regulators and ratings agencies. In October 2011, the country nationalized big bank Dexia ( OTC:DXBGF ), which had passed stress tests year earlier. What’s the situation right now? KBC Bank ( OTCPK:KBCSF ) has repaid 7 bln EUR of federal loans, and it’s in good condition. Dexia is not an active bank. Fortis was rebranded as Ageas ( OTC:AGESF ), and is now an insurer (without toxic assets). What is interesting is that in the next three years, a great consolidation is expected in the Belgian banking sector – according to Ernst & Young’s “European Banking Barometer – 2015” presentation . According to the same report, Belgian bankers expect stabilization in the economy and in the banking market. The Real Estate Market If we look at the chart below, the bubble appears to be growing… (click to enlarge) … but property price levels remain moderate compared to those in other EU member states. Average price/m² of a 120 m² apartment located in the capital (in EUR) (BE – Belgium) Source: Global Property Guide Remember, of course, that in the charts above, we see the effects of extreme easing of monetary conditions in EU. Summary The political situation in Belgium is stable. The economy is in a slow recovery. Federal state finances are not in good shape, but where are they so (speaking about the EU)? The banking sector is recovering. Belgium does not stand out like on the plus side, but there are no serious threats for this country either. The investment mood has been very good, despite China’s fundamental problems. In fact, there are a few good reasons to invest in European equities . For example, quantitative easing provides support to consumption and money supply in the eurozone. Result? Better growth. Those who are already invested in the European and Belgian markets could patiently wait for further developments. For investors who like medium amounts of risk, invest in ETFs with exposure to Belgium. How to invest in the country There are some ETFs with exposure to stocks listed in Belgium. EWK has the largest exposure. 5 ETFs with the largest exposure to Belgium (click to enlarge) Source: ETFdb.com And here we have the most economical solutions: 5 cheapest ETFs with exposure to Belgium (click to enlarge) Source: ETFdb.com You may ask: Where is EWK in this ranking? Well, it’s in the 11th position, with ER = 0.47%. Not so bad. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.