Tag Archives: debt

Dynegy: Too Early To Buy

Summary Dynegy shares have been cut in half in 2015 as investors run for the exits. While metrics are improving, the company still doesn’t generate significant operational cash flow. Additionally, I have concerns over whether cash flow problems have impacted the company’s ability to properly maintain its assets. It’s still to early to buy. If you really want a piece of this company, buy the preferred shares instead. Dynegy (NYSE: DYN ) is a holding company that owns a large portfolio of power generation assets throughout the United States, with a heavy concentration of these assets located in the Northeast and Midwest. The company operates regulated utility operations while also competing in the wholesale electric business, where it provides electricity to utilities, power marketers, and industrial customers. Unlike traditional regulated utilities that are the sole source of power for their customers, the wholesale market pits many players against each other in the name of driving down costs. Dynegy operates approximately 26GW of generation assets, with the vast majority of production evenly split between modern combined cycle natural gas plants and legacy coal plants. In acquiring and developing these assets, the company has had both an interesting and volatile past. Dynegy emerged from bankruptcy in 2012 with a little help from the renowned Carl Icahn , only to make a $6.25B acquisition (12.4GW) of coal and gas-fired assets from Duke Energy (NYSE: DUK ) and Energy Capital Partners just a few short years later in 2014. While the debt load may appear large given the company’s size and recent bankruptcy, the acquisition was viewed favorably by most ratings agencies in regards to improving earnings by acquiring some retail regulated business. However, this debt didn’t come cheap – weighted average interest rate of the debt was 7.18%, quite high given our current position in the interest rate cycle. Operating Results (click to enlarge) As one of the largest merchant energy providers using natural gas, you might expect operating results to have been a little bit more favorable than this post-bankruptcy. There are some sparks of improvement for investors to grab on to, such as improving gross margins. The retail Duke Energy/Energy Capital Partner assets have improved the company’s margin profile, and spark spread improvements due to collapsing natural gas prices have also boosted margins. SG&A expenses have also grown quite slowly, indicative of the scale that is present in many utilities. Bigger is generally better in this sector. Like the income statement, cash flow generation hasn’t been much better. Dynegy generated negative operational cash flow in 2013 and 2012, and was only generated marginal cash flow in 2014. 2015 is set to be a better year, but the company still struggles to generate enough cash to sustain itself. Through this point in 2015, the company has barely spent any money at all on capital expenditures ($500M over three and a half years). Even after taking into account the change in the business from the acquisition, this still seems woefully low. Great Plains Energy (NYSE: GXP ), another company with heavy coal exposure and nearly identical enterprise value, has averaged $600-800M in annual capital expenditures. I’m not sure I buy into just $130M in capex to support the company’s 16 power plants in 2014. This company is a long way away from supporting itself from a cash flow perspective, never mind instituting a dividend that can be healthily supported. I do like the company’s natural gas operations. Citing industry trends, management itself notes that it expects ~50GW of coal power plants to be phased out of markets that Dynegy competes in due to a variety of factors, such as falling natural gas prices, increased capital expenditure requirements, and burdensome regulatory costs. However, I can’t help but feel this leads to a negative in and of itself as well. This bullishness on natural gas generation seems to run contrary to the assets picked up from the Duke Energy deal, as a sizeable (roughly 40%) portion of those assets were coal-fired. Duke Energy has been reluctant and slow to shift generation away from coal, and while these were non-core assets for Duke Energy (the company has decided to focus on its East Coast operations), Duke Energy management wouldn’t have taken a poor deal just to dispose of these assets. Conclusion Dynegy is too early in the turnaround stage for me to recommend it, and it is too early to go bottom fishing, despite the stock getting halved in price in 2015. While I’m not going to call it a short (I would have six months ago), the company is still years away from being what investors want in a utility: consistent cash flows, a healthy dividend, and a fair valuation. The preferred issue is probably the better play here if you’re deeply interested in the company. The preferred currently yields 8.49%, and is convertible into 2.58 shares of Dynegy if you choose to later on. At $59.22/preferred share at this point, if this thing ever does recover, you’ll be sitting pretty and will have been paid a healthy dividend to boot while you wait.

5 Outperforming CEFs That Are Insulated From Market Corrections

Summary The 2015 market correction caused a 10% drop across the market, but some CEFs were unaffected. Investing in market-neutral CEFs can help you protect your portfolio in the event of an event. I present a list of the 5 most profitable CEFs that are also uncorrelated to the general market. The previous market correction was a three-day selloff that led us to a market that trended sideways for two months. In total, the market lost 10% of its value before climbing back to its original place: (click to enlarge) Knowing not to freak out and to hold onto your investments is good, but having investments that are uncorrelated to the general market in the first place is better. This article is a follow-up to two other articles on investments uncorrelated to the S&P 500. The first article was on investment categories; the second on index funds. This article will be on CEFs, as per a reader request: (click to enlarge) Correlation In my previous article, I used a five-year lookback period. But if we are to really consider these investments uncorrelated to the market, they should not fall when the market does. Hence, the following comment: For this purpose, in this article, I will only be looking at the most recent market correction as my lookback duration. Thus, the correlation calculation will be from August to November, 2015. Whenever we look at the correlation of two investment instruments, we must use the log of those investments. In this way, we find the correlation of returns, not simply price movement. The result will tell us whether two investments are likely to give the same returns over our lookback period. I wrote some R code to screen CEFs according to the following criteria: Trading above $5 (therefore not a penny stock). Has a correlation of less than 0.3 (in magnitude) to the SPDR S&P500 Select ETF (NYSEARCA: SPY ). I then arranged those CEFs in order of greatest return over the past year. I chose the top five CEFs in this list to present to you. Because the top five actually had 3 municipal bond CEFs, I went down the list to add 2 more CEFs outside of this category. The Winners Nuveen Long/Short Commodity TR (NYSEMKT: CTF ) This CEF is a portfolio of long and short futures contracts. CTF purposefully plays a flat game, not taking too many long or short positions. Though it would have been nice to see CTF short energy, making their shareholders lots of cash over the past couple years, CTF has avoided such high-volatility trades. Though CTF’s Nav growth is rather slow, dipping into negative territory, this CEF is trading at a decent discount: -4.36%. The yield is currently 7.54%. Whether CTF can maintain these payouts at its current Nav growth is questionable. The discount is disappearing, however. The discount bottomed out at over -20% in 2014 and has recently bounced back. Thus, if you’re interested in getting in on this high-yield CEF, you should consider doing it soon. Remarkably, CTF is the only CEF in the top five that is not a bond-based fund. Correlation with market-correction phase SPY: 0.27 Babson Capital Corporate Invs (NYSE: MCI ) Here, the focus is on non-investment grade corporate debt. The equities involved are conversion rights, preferred shares, and warrants. Because of the inclusion of conversion rights, the debt here is convertible, which can lead to a dilution of shares. Nevertheless, the yield is high, at 6.80%. However, the surge in price has caused MCI to outgrow its Nav. The Nav sits at a stable 14.70, while the CEF trades at over $17. This CEF is selling at a 10.82% premium. If you buy this CEF, you will be overpaying for the portfolio. But for a long-term investment, MCI seems to provide noteworthy returns. Correlation with market-correction phase SPY: 0.19 Municipal Bond CEFs EV NJ Municipal Bond (NYSEMKT: EMJ ) Blackrock VA Municipal Bond (NYSEMKT: BHV ) Blackrock Muniyield Arizona (NYSEMKT: MZA ) These CEFs offer generous distribution rates of around 5.00. Both BHV and MZA trade at a premium, while EMJ trades at a slight discount. That discount is soon to be gone, as it has been shrinking over the past year. Buying a municipal bond fund can especially benefit you via tax exemptions if you live in a state with high taxes, as these bonds are tax-free investments in most cases. However, realize that EMJ will cause you to pay capital gains taxes on your investment, as it is currently trading at a discount. All of these regions – New Jersey, Virginia, and Arizona – are, to my knowledge, in good shape. But you should perform due diligence and ensure that the local governments aren’t facing problems of paying their debts. Residents in states with high taxes, such as New York, New Jersey, and California, should consider these CEFs. EMJ’s correlation with market-correction phase SPY: -0.09 BHV’s correlation with market-correction phase SPY: 0.25 MZA’s correlation with market-correction phase SPY: -0.11 Doubleline Opportunistic Credit (NYSE: DBL ) With a yield of 8.22, it’s no surprise that DBL isn’t trading at a discount. DBL has almost consistently been trading at a premium. But there have been dips into the discount region. An investor looking for a good deal might keep an eye on DBL and buy at one of these rare discounts. Just remember that a drop in the premium/discount will also typically drop the yield toward the sector’s average. In addition, as time goes on and rates increase, credit-based CEFs such as DBL will likely take a hit. You should also consider leverage here, as rates will likely be rising in the future. Higher leverage implies higher borrowing fees for the fund. DBL might be a good short-term hold, but you should consider dropping it for non-credit CEFs with less leverage before rates rise. Correlation with market-correction phase SPY: 0.02 Strategic Global Income (NYSE: SGL ) Speaking of leverage, here’s a non-leveraged CEF. Previously trading at one hell of a discount, SGL is now trading at “only” a -4.12% discount. This offers the highest discount of all the market-neutral CEFs we looked at today, with a yield of 9.42%. As the name suggests, SGL invests in global bonds. Its holdings branch from Argentina to Russia. These bonds are diversified, with both sovereign paper and corporate notes in the mix. Although a portfolio of such a wide geographical array of holdings is more likely than a focused portfolio to encounter a holding that cannot repay its debt, the fact that SGL is diversified should minimize such problems. The risk is there, but the reward is higher, I believe. This fund doesn’t have many downsides other than the exposure to iffy countries (the average credit rating of SGL’s holdings is still A) and the fact that SGL is taxable. Correlation with market-correction phase SPY: 0.11 Conclusion Overall, we have a wide selection of market-neutral CEFs that can help us generate stable income even during a market correction or crash. Of the five we looked at, I would recommend SGL most to investors in low-tax states, while recommending the municipal bond CEFs to investors in high-tax states. But no matter your choice, rest assured that these CEFs will be least affected by another market correction. Obviously, I simply don’t have the time to cover every industry. While reading this article, you probably thought of at least one investment that should have gone in my “Winners” section. Let me know about it in the comments section below. Request a Statistical Study If you would like for me to run a statistical study on a specific aspect of a specific stock, commodity, or market, just request so in the comments section below. Alternatively, send me a message or email.

Future Growth Opportunities For Duke Energy After Piedmont Acquisition

Duke Energy expands its reach from the electric utility industry into the natural gas business. Increases Duke Energy’s stake in very profitable Atlantic Coast Pipeline while tripling gas customers. Expect to see increased EPS for Duke Energy. By Matt De Jesus I have a strong buy recommendation for Duke Energy (NYSE: DUK ) after its acquisition of Piedmont Natural Gas. Duke Energy acquired Piedmont for $4.9 billion, and will also assume around $1.8 billion of its debt, representing an enterprise value of close to $6.7 billion for Piedmont. Duke Energy paid a 40% control premium on the acquisition, paying out Piedmont shareholders $60 in cash for each share outstanding. Reasons they paid this high premium are related to the possible synergies related to the deal. This acquisition is a good deal for Duke Energy, as they try to grow in the utilities industry and possibly expand nation wide. Duke Energy is the largest electric power holding company is the country, and is headquartered in Charlotte, N.C. Before acquiring Piedmont, Duke Energy was known for producing electricity, and not a big name in the gas industry. However, with the electricity industry showing signs of stagnant growth, Duke Energy wanted a piece of Piedmont Natural Gas for a couple of reasons. First, the natural gas industry is growing, whereas the electricity industry is not. Utilities are going through a period right now where natural growth is slow, so companies, like Duke Energy, must grow through acquisitions. The natural gas market, according to Wall Street analysts, is bullish right now, so everyone is trying to get into the gas business, adding significance to Piedmont’s acquisition. They will receive all of Piedmont’s existing customers, thus tripling its number of natural gas customers from 500,000 to 1.5 million. Also, with Duke’s established brand and stake across the southeast, I expect these numbers to grow further. The second reason Duke Energy acquired Piedmont was because of the Atlantic Coast Pipeline. Now owning Piedmont, Duke Energy increases its stake in the $5 billion Atlantic Coast Pipeline to 50%. More importantly, because of the state regulations on Piedmont’s fuel delivery incorporated with the pipeline, the acquisition provides Duke Energy with a steady and predictable profit, which is very important in the utility industry. Much of a utility companies growth is based on a rate base, which is the value of property on which a public utility is permitted to earn a specified rate of return. So, utility companies make money off returns on investments in property for the company. This is why the regulated returns on the Atlantic Coast Pipeline are so important, as they are consistent and profitable. Third, the move is in line with the company’s possible plans to grow throughout the U.S. and not just stay in the Carolina, southeast area. By establishing itself in the gas industry, Duke is scaling itself for the long-term next step in its growth, which may be to take the company nationwide. This move would not be any time in the near future, as Duke must first establish itself in the gas industry. Some may question Duke Energy’s paying such a high control premium to buy out Piedmont, but in the long run, this is a great deal for the company. The deal enhances Duke’s forecast EPS rate of 4% to 6%. To give some perspective, Piedmont’s rate base and EBITDA have been rising annually at about 9%. Duke’s stock price is currently at $67.32, and has been down recently because of the debt involved with the deal and slowed growth in the electric utility industry. The 52-week low on the stock is $67.07, with the high being $89.97. This deal, in the end, will be good for Duke, and it’s investors because it will enhance EPS. The stake in the Atlantic Coast Pipeline is very integral to this, and will provide regulated profit for the company even when the market for electricity is down. Also, the market for natural gas is bullish, and with a big company like Duke Energy providing natural gas, investors will reap the benefits of the profits Duke will make from Piedmont. We’ll see Duke Energy grow in these next months/year, but it will take some time before we see the major benefits from this deal.