Algonquin Power gives guidance for the next five years

Algonquin Power gave a press release on December1, 2015 that outlined it's five year investment program.They expanded their old program and stated that they would invest $4 billion over the next five years.It may not have gotten much attention because most investors will regard this as merely "pie in the sky".Or more clearly nobody will remember this promise five years from now.But this blog believe that this is an accurate prediction of what will happen.Algonquin also states in the same press release that they will be investing $180 million in a solar project called the Great Bay Solar project in Maryland.And a possible further $207 million for a 10% share of the North East Supply Path in U.S.A.
        Facts versus Fantasy
  Algonquin has already outlined  plans for another $400 million over the next two years.This is in addition to the investment in their two major projects coming up in the next two years.Their two large projects are the Park water System in United States and the O'dell wind farm in  Utah.These are both billion dollar projects;the Park water System will be in operation before the O'dell wind farm.But Algonquin has already lined up it's financing for both projects.In fact, Algonquin has just completed a $150 million equity issue and had another one completed for $150 million about two months ago. This diluted the stock price for a month or so but now investors appear to believe that Algonquin will carry out some of these investment plans.While investors are waiting for these projects to be completed Algonquin already has new solar operations coming onstream in the next quarter.In fact, Algonquin has a steady stream of projects coming onstream through 2015 and 2016.But their two big projects will have a major impact on their income stream.
        The Last five Years 
  The best indicator of whether Algonquin will be able to carry out these ambitious plans is the last five years.Did Algonquin show indications that it would be able to carry out these kind of plans in the last five years?In 2011 revenues were $270 million and in 2014 they were $943 million;operating income was $53 million in 2011 and were $137 million in 2014.Revenues increased to $900 million for the first nine months of 2015 and operating income increased to $180 million.This also is up from 2014.This pattern of rapidly increasing revenues and operating income is evident in the last five years.Management has done it in the past and should be able to do it again.Especially if their two big projects work out well.
       Possible Glitches
  This blog believes that Algonquin Power will be able to carry out this ambitious investment program in the next five years just as it has in the  past five years.However it is their tendency to buy distressed projects and renovate them in the jurisdiction of American regulators that has worried this blog.It has put itself in the hands of a few American regulators.And they cannot continue to count on quick and healthy rate decisions as they have received in the past.However Algonquin has invested recently in a number of wind and solar projects with power contracts as well as a joint venture in  a gas transmission projectThis blog finds this as a healthy trend and will help to diversify risks for it's shareholders..
see Workathon for analysis of utilities;see Workathon for analysis of utilities;use Workathon for analysis of utilities

Another strange quarterly report by Chorus Aviation

 On November13, 2015 Chorus Aviation released another unorganized report.The form of Chorus' reports is always different than other listed stock.It includes costs under the CPA agreement with regular costs and CPA agreement revenues with regular revenues.Now it mixes in revenues from it's newly acquired subsidiary as well as leasing revenues and charter revenues.On the positive side the restructuring at Chorus that was talked about in Workathon for  three blogs(see Nov.18,2014 and Oct.23,2013) is starting to take shape.
      Operational Statistics
   Chorus' regulated operating revenues decreased from $433 million in Q3 2014 to $412 million in 2015.Chorus suffered a $28 million loss from foreign currency this quarter compared to a $18 million loss in 2014.However they earned revenue from newly acquired Voyageur Airways,and from leasing operations and from maintenance operations.In total, adjusted EBITDA was $65 million up 16% from $56 million in 2014.Adjusted net income was $31 million or $.26 per share.
    New revenues,new Reports and new CPA agreement


       Past quarterly reports have talked about revenues coming in from the Chorus maintenance operation.It had a maintenance operation in London, Ontario and one in Halifax.It sold the London operation and moved everything to Halifax.Then it invested more into the operation to increase it's size and complexity.Next it bought a maintenance operation called Telesys that is a specialized maintenance company.By all accounts the maintenance revenues should have increased.This report shows that other(maintenance ) revenues increased by $6.5 million in the quarter.This blog calls for increased revenues from this category in 2016.Chorus got big increases in revenue from aircraft leasing and chartering.This category has to increase more before it stabilizes; at the present time this revenue is hard to predict, both have shown large increases in this quarter.The wildcard here is the newly acquired Voyageur Airways.It gets foreign charters and medical contracts and other specialized contracts.It is likely that more investment in new equipment must be carried out before this operation is producing a steady revenue source.
  The original CPA agreement was only put in place to give Chorus(then Jazz) to get started.It was not expected to provide a major competitor for Air Canada.Chorus has done well within the old existing agreement but it was time for an amended version.Air Canada gave them a new one last year and it gives Chorus much more scope.So that it leased 10 new aircraft in this quarter to enable them to be prepared for the new business in 2018.Strangely Chorus gives no guidance on the revenues expected  from the amended CPA in 2018.This blog feels that the impact of the new CPA agreement will be felt even as early as the next quarter.Assuming new revenues from Voyageur this blog expects that EBITDA may hit $70 to $75 million in Q4.
   The last expected change is for Chorus to break down it's non-regulated income even more in future quarterly reports.This has got to come!Another change that must come is more of an overview on revenues and costs.Regulated costs must be grouped together as well as regulated revenues.Non regulated costs and revenues will soon be given more space and a separate category.This will all aid the restructuring of Chorus Aviation;the increase in the price will follow.            use Workathon for advice on Cdn jun ior listed companies;use Workathon for research on Cdn. junior companies;use Workathon for research on Cdn. small caps
 

Interrent buys more property

 On November 27, 2015 Interrent announced that it had an unconditional agreement to acquire a property in  the Le Plateau-Mont-Royal area of Montreal and it had an unconditional agreement to sell a property in Brampton.Interent is a reit with properties in  Quebec and Ontario.The property being acquired is 127 units and worth $21,550,000 while the property being disposed of had 44 units and worth $8.7 million.These actions are taken after it had a good third quarter report.Their dividend had just been raised by 5% and net operating income went from $10.2 million to $13.3 million for Q3 in 2015.Also their AFFO went from $4.6 million in 2014 to $6.4 million in the third quarter of 2015.More importantly their AFFO per share (earnings per share) went from $.08 per share to $.09 per share.
       Growth Strategy
 The first part of their strategy is to have good operational statistics.Their third quarter report showed that they indeed have good operating metrics.Gross rental income increased by $5 million or 30% while average monthly rentals increased by 6%.Net operating income increased by 31% over the same quarter in 2014.Their weighted average interest rate was down a few basis points from Q3 in 2014.And lastly their debt to gross book value of debt  only moved from 50.5% in 2014 to 51%.Interrent is watching it's debt ratios very closely.
 The second part of their strategy is to pare down properties with low growth possibilities and low capitalization rates.Their property in Brampton was a small one at 44 units and the capitalization rate (although it increased) was only 4.4% at the time of sale.This property brought in a small amount of net operating income but had accrued a significant amount of capital gains as the value at the time of sale was $197,000 per suite.This is a nice gain and the capital can be better deployed in a property with higher leverage and a higher capitalization rate.In addition, Brampton is an industrial town and not likely to have greater increases in rent nor valuation. The second property is in a quite good part of Montreal and has a low going- in cap rate of 4.6%.This shows good potential for increases in an influential part of town.
       Summary
          Interrent did report a good quarter as AFFO went up by almost 40% and AFFO per share went up from $.08 to $.09 per share.But they are also deploying their capital smartly.Too many other reits acquire properties and hold on to them;they don't divest when there is little growth potential left in them.Interrent shows itself to be an active rather than a passive manager and adept at improving their portfolio.This blog hopes that other reits are watching and learning from Interrent.                 

 ;use Workathon for financial analysis;use Workathon for reit and real estate analysisuse Workathon for analysis of reits and real estate

BTB Reit outperforms

  On November3 BTB Reit reported it's third quarter results.It had another in a series of good quarters.Almost all of it's operational statistics were substantially ahead of results a year ago.This is a reit that is gradually getting bigger and more profitable.This blog believes that it is a well managed reit.It's assets have increased considerably over the last two years and so have it's profits.
 Operational Statistics
 BTB had a 9% increase in rental income to $19 million.And it had a 14% increase in operating income to $11 million.Funds from operations (FFO) went from $3.8 to $4.3 million in Q3 2015.While adjusted funds from operations (AFFO) went from $3.6 to $4.7 million.More importantly FFO per share went from 11.3 to 12.5 cents per share for the quarter.And earnings or adjusted funds flow per share went from 10.8 cents to 13.5 cents per share.Annualized earnings per share are on track to hit $.50 to $.60 per share.
  BTB does all the little details well also;as it reports that it's weighted average interest rate went from 4.13% to 3.93%.While the average maturity of it's debt went from 4.7 years to 5.5 years.BTB also had a 5.6% increase in rents on 125,000 square feet of space.And it has kept it's occupancy rate at a healthy 91%.
  It refinanced two properties that had rates of 5.26% and 4.0% and got refinancing at 3.77%.And it acquired two office buildings in Ottawa.BTB  has most of it's properties in Quebec but recently has started to diversify into Ontario.Ottawa is a natural leap for BTB as it is close to the Quebec border and so is easy to manage.These acquisitions bring their total assets from $592 million in Q3 2014 to $650 million in 2015.
     BTB gets bigger
  BTB Reit is a  small junior reit that  is little followed by many analysts.Some brokers show their assets and earnings as less than they actually are because they don't bother to be accurate about a small reit but it is growing.BTB raised it's dividend two quarters ago and their payout ratio became a little high.It didn't appear safe at that time but since they have brought in very good results and now their payout ratio has dropped from 83% to 68%.For awhile it was near 90% but BTB has worked hard to bring it in line.Another good quarter or two and they may be ready to raises it again.As BTB quietly moves up closer and closer to $1 billion in assets.
  see Workathon for financial analysis of reits; view Workathon for analysis of quarterly reports  

Why oil prices must inevitably go up

 My last blog on LinkedIn talked about the process whereby the price of oil will eventually go back up,although how high is not clear.It made a few good points but LinkedIn did chop it up and move stuff around on it.The main points made were twofold.The cost of new oil discovered and delivered to market is more than earlier discoveries.So the average cost of oil will go up and the average price of oil will follow.Price is based on the cost plus a margin and the cost will move the price back up.The second main point is that the elasticity of demand is substantial in the long term and this increases the demand for oil more than  any of the official estimates show.Old estimates show the daily production of oil at 94 to 95 million barrels per day but new and more accurate estimates show it closer to 100 millon barrels per day.This blog believes that the latter estimates are correct.Studies done by the University of Calgary show the long term elasticity of demand much greater than the short term elasticity.
         The Recovery Rate
   Some of the controversy has come because of the different estimates of the recovery rate from oil wells.It was conventionally thought that the recovery rate for light oil was 25 to 35%.While the recovery rate for heavy oil is about 30 to 40%.But it is clear that there are new enhanced oil recovery (EOR) methods that increase the recovery rate beyond these rates.They inject various substances into the wells that increase the pressure and recovery in the well.The problem is that these methods are costly.Producers cannot afford any substantial enhanced recovery at these prices.Substances injected into the well vary from water to water vapour to carbon dioxide.The recovery rate varies with each substance.
 In 1956 M. Hubbert introduced the peak production theory.It proposed that at first in 1970 and later in 1995 that production would outstrip oil from new discoveries.So reserves would be falling not increasing.This has been changed to the year 2000 now as hydro fracturing has increased potential reserves.Once again the size of reserves depends on the recovery rate and the price of recovery.
       Elasticity of Demand
    The University of Calgary has done extensive studies on the elasticity of demand.That is, what is the percentage increase in demand with a percentage change in the price.It has found that there is little change in demand in the short term but there is significant change in the long term,that is ,over 4 to 6 months.     The base demand is generally considered to be around 92 million now.With the decrease in the price of oil many studies have pegged the new demand at 94 to 95 million per day.But there has been a 55% reduction in the price of oil over the last six months.This is enough time for a long term change in demand.And the new studies peg demand at around 100 million barrels per day.In fact, this blog believes the new studies are correct as the long term elasticity kicks in.
   Studies have shown that the slope in the demand curve to be less than .4.From 2000 to 2009 the increase in production was  900,000 barrels per day.From 2010 to 2015 production increased(according to American studies) by 1.2 million barrels per day.That is when the price of oil was $90 to $100 per barrel.Now that the price is about $45 a barrel this blog calls for an increase in production of 3 to 5 million barrels per day over 2015 to 2017.That means that the recent studies showing 100 million barrels per day of consumption are probably correct.
        Summary
            It is very likely that demand for oil is higher than most official estimates and growing faster than expected.If price stays in the present range of $45 to $55 a barrel per day then the slope of the supply curve will  increase closer to .75 or .85.If this happens then the demand for oil may be as high as 110 million barrels per day in late 2016 or early 2017.This definitely will decrease reserves.EOR will only be important if the price is at a level that will allow covering the cost plus a profit margin.If price falls below this level then EOR will be curtailed.For sure, from now to 2017 the marginal cost of producing oil will rise and more expensive oil will replace the cheaper oil.So the average cost will rise and the average price will follow.By then oil reserves will be considerably smaller.                                               see Workathon for analysis of resource stocks; use Workathon for consulting on resource stocks

Penn West makes a recovery

Penn West has fallen from $7 and $8 a share,a year ago, to a low of $.80 recently.But  during this period oil fell to a low recently of $38 a barrel.Oil is now about $50 a barrel and Penn West has recovered to about $1.50 a share.But Penn West has not recovered only because of the price of oil.It has sold off a lot of non-core assets to reduce it's senior debt.Unfortunately it's equity has been reduced also so it's debt/equity ratio has improved only slightly.
   Non-core Assets
Penn West has sold mostly smaller parcels of land with proven reserves.Earlier in the year they sold a 9.5% interest in their
 Weyburn property in southeast Saskatchewan for $205 million.Upon completion of the sale they will have raised $810 million in proceeds for 2015.They gave guidance that they would have non-core asset dispositions of $650 million and have surpassed their target.They intend to continue to pursue additional asset divestitures in 2015.
         Before this sale they announced that they sold their Mitsue properties  in Alberta for $192.5 million.In the first half of 2015 The Mitsue properties had produced 4500 barrels per day.The sales price was 14 times implied net operating incomehere and 13 times for the Weyburn property.
   Debt Reductions
     Debt has fallen since Q2 2014 by $1.4 billion and that has principally come from the sale of non-core assets.Debt fell from $3.2 billion to $1.9 billion but the debt/equity ratio only moved to .34 from.36.Penn West has used the sales to stabilize their capital expenditures and continue drilling on their explored land to increase it's value.This blog believes that drilling on unexplored land has probably been reduced.Drilling will be focussed on step-out wells near already discovered reservoirs. Work will be focussed on expanding existing resources and finding oil that is easy to deliver to market.This makes a noticeable increase in the value of already partly explored land.And they have  streamlined production which has made cost savings.The cost savings  in operational expenses have helped to increase their netback on oil.This helps to increase cash flow.Successful drilling is a key part of the Penn West program.That is why the reduction in the value of total assets has fallen lately.Some of the remaining land has gone up in value.
    The Book Value
Penn West has a large book value of their assets;it is $10.6 per share according to Yahoo Finance.They also show the price/book value of assets at about .12.Penn West was forced to find a way to increase the market value of their assets even with the falling price of oil and they are starting to do so.The price of oil may stay around $50 per barrel for awhile and they must continue to have strategic and successful drilling while costing less per well.The rest is up to the West Texas Intermediate  price of oil.
      The rest of 2015
   Experts are calling for further sales of assets in 2015.Some are calling for the sale of part of their jewel in Saskatchewan- their Viking property.This blog notes that the multiple of net operating income fell from 14 times to 13 times for their last sale.That is because the production was greater at the Mitsue property but the Weyburn property overall is more valuable.So the multiple was greater on the Mitsue properties.This blog calls for them to retain their Viking properties and sell further non-core assets that are contiguous to other producing properties.This however may include Viking properties with very small production figures.The key is to keep up their successful drilling to enhance the value of existing land and not to sell core assets.This will tie them over until the price of oil heads towards $60 a barrel.Over the last month it is looking like investors see the value of their strategy. see Workathon(blogger) for analysis of resource stocks; see Workathon(blogger) for corporate analysis

Perpetual Energy -perpetual poster boy for central Alberta

 Perpetual Energy is an Alberta company(a junior gas producer) that I have followed for several years.For seven or eight quarters it had constant(or perpetual production) at 19,000 to 21,000  boe/day.But it always had an active and productive drilling program.It bought land and discovered significant natural gas reservoirs in the Edson structure in central Alberta.This is a little known structure in central Alberta.At first it seemed like there was only natural gas in the East Edson area but later liquids were found in the West Edson area also.This changed everything about Perpetual Energy.
       The Swap
    On April1, 2015 PMT announced that it had swapped all joint interest lands in West Edson together with the wells with a production of 5,750 boe/day of natural gas production for 6.75 million Tourmaline Oil and Gas shares (TOU).It previously announced that it had a joint venture with Tourmaline for only a portion of the West Edson production.At the time of the April announcement Tourmaline shares were selling for about $38 a share.The deal was worth about $250 million.This however reduced Perpetual's production from 22,819 boe/day in the first quarter to 16,621 boe/day in the second quarter.Natural gas production at 86 MMcf/day was down while natural gas liquid production was only marginally lower than that in 2014.In addition, crude oil production was down almost 15% from 2014.
     The Remaining Operation
  Exploration and development spending for Q2 2015 was $13 million.$12 million of this total was spent to complete construction of the East Edson gas plant.Total expenditures were about $31 million on the processing plant along with gathering systems and tie-in operations of the wells.Also on April 10,2015 they sold land in east central Alberta  for $21 million to reduce debt.However  funds from operations(FFO) fell from $25 million in Q2 2014 to $3 million which was partly affected by the West Edson swap.Operating netbacks in Q2 were $10.16 boe which was 64% higher than Q1.This partly reflected cost savings and partly a small increase in prices.PMT also recorded gains of $135 million on other asset swaps and asset dispositions.So total debt was down from $360 million to $120 million.This aside from the TOU shares  they had valued at $253 million.
    The East Edson property
  The original discovery in the Edson structure was at East Edson.It is not known how far west Perpetual still owns.But next West Edson was discovered and then PMT made a joint venture to develop it faster.Now most of it has been sold but there may be the southwest corner that remains with PMT.Development at East Edson is continuing on the construction of a gas processing plant.It opened in July,2015 but PMT expects to expand it another 50% in the third quarter.It may drill another two well pad here as there are another 87 undeveloped drilling locations and a further 22 future development locations.East Edson seems to be a large property and the Tourmaline shares may only be used to develop this land.
      Outlook
 The outlook for Perpetual Energy  looks brighter now than it did at the start  of the year.It's total assets have increased from $747  in 2014 to $845 million in 2015 while debt has fallen from $359 million to $120 million in 2015.Perpetual has 5 wells and one being converted in a pool at their Mannville heavy oil property.But they will not develop this with the present oil prices.They have a substantial capital expenditure program and will spend almost it all on East Edson.Their gas processing plant will be soon expanded  by 50% and allow for increased production.Perpetual says that with the present size of the gas plant that they have replaced all lost production from West Edson.If this is true then when the processing plant has been expanded in the third quarter they will finally see production go higher than 22,000 boe/day.Two questions remain for investors.(1) Did they keep the southwest corner of West Edson for their own production? and (2) How far west does their East Edson property extend?This will determine whether Perpetual Energy goes back up beyond $1.00 per share.Either way Perpetual Energy is a successful driller in a little known area -the Edson structure and made it work.                             

Transalta Renewables arranges cheap financing

On September 24,2015 Transalta Renewables announced that it priced a $442 million bond for a subsidiary.The bond will be secured by a first ranking charge on Transalta Renewables ;it is senior secured debt.The interest rate will be 3.834%which is a  good rate  and it will mature in 2028.The bonds will have a rating of BBB.This is an above average to good commercial rate and is only two rankings below A-A-A-.
  Operational Statistics
 Almost all operational statistics have improved over the same quarter last year.EBITDA at $52 million and funds from operations(FFO) at$43 million have increased by $16 million over 2014.And earnings at $22 million was up from the $6 million recorded last year.These increases are due partly to the contribution from the  newly acquired Australian assets.In May they completed the $1.78 billion investment in Transalta's 425 MW gas fired generation assets in Australia.
    The New Bond
The new bond will be a $442 million senior secured bond maturing in 2028 and carrying an interest rate of 3.834%.Net proceeds of the financing will be used to make advances to Canadian Hydro Developers on "an intercompany loan agreement".Payments will be made on loans on three facilities (two in Shelburne,Ontario and one on Wolfe Island,near Kingston).The facility at Shelburne is a 200MW wind powered generator and at Wolfe Island also a 200MW wind powered generator.The projects are 100% contracted to IESO and utilize proven turbine technology.
       RNW  Increases Equity
 Transalta spun off 16 wind powered assets and 12 hydroelectric powered generation facilities into Transalta Renewables (RNW).The facilities have an installed generating capacity of 1856 MW.And it has an ownership interest of 1680 MW in the facilities. Transalta put some of the most profitable assets in RNW.In addition,RNW bought for $1.8 billion most of Transalta's Australian assets.With the closing of the Australian transaction RNW increased the dividend by 9% and will increase it another 7% upon completion of construction.                                                                                   The new $442 million bond will be used to pay an intercompany loan with Canadian Hydrodevelopers.The nature of the loan agreement is not clear but it is possible that the loans are secured by equity that Canadian Hydro has in these assets.It is also not clear whether Cdn. Hydro will still have equity in these assets after these payments.If so then RNW will be able to issue other bonds as it does not appear to have much debt and it will soon have new assets coming onstream in Australia.
         Summary of the Transaction
There is not much information available on the RNW capital structure so this blog will try and estimate it.Transalta spun off  their wind and hydroelectric assets but did it take any debt with it?Probably not much if any.The investment in the Australian assets did not take on much debt and so it is possible that this $442 million bond is about the first debt taken on.If this is approximately true then RNW has lots of debt capacity to buy back assets or expand existing assets.There are other estimates of RNW''s capital structure but at this time neither Transalta nor RNW is making it very clear just how much debt RNW took from it's parent.But we do know that BBB is a good credit rating and 3.834% is a pretty good interest rate.It does not look like the credit rating agency saw much debt on the books. workathon has financial analysis;workathon does utility analysis;workathon does corporate analysis

Huronia IX Lindsay-old town;new town

This is another in the Huronia series that offers consulting and possible improvements to a number of towns in the area around Lake Simcoe.This segment focuses on Lindsay and the sharp dichotomy between the old part of town and the new buildings in the west end of town.Many towns have a gradual separation between the older part of town and newer buildingsAlso many towns have newer buildings in several areas so the contrast is not so stark.But in Lindsay the newer construction is mostly on the west end of Kent Street (it's main artery);all in one area.
     The History of Lindsay
   Lindsay started along the Scugog river which is part of the Kawartha Lakes system.First a dam was built then a sawmill and after a grist mill.More construction developed that emanated from the corner of Lindsay and Kent Street.Building devlopped along Lindsay Street south and Kent Street westwards.Most of the original buildings are still there and there are many old brick buildings.Then a railway connected Lindsay to Port Hope and the station was built at St. Paul and King Street.Next there was another line built to Fenelon Falls.In total, there were five lines going through Lindsay which made it a pretty active town.All of the buildings and stations were in the old town.In fact, in these days there was no new town.
      Old Town
What I am referring to as the old town is contained within one square mile of the intersection of Kent Street and Lindsay Street.The Lindsay Armories is about the centre of this area.It goes north from Kent Street to about Queen Street and south to Durham or Mary Street.It goes west down Kent Street to Angeline Street where the hospital is.The hospital is relatively new but not as new as the new construction on Kent Street;the Ross Memorial hospital is transitional (not old and not new).
  This area now has a few abandoned buildings and a lot of barely used buildings.Many of the old brick buildings have not been renovated for 25 years.The products sold tend to be more traditional products and some of the styles are older as well.The store fronts need to be refurbished in a more modern style.But at this point in time very little money is being invested in this part of town.All of the new money is being invested in the west end of Lindsay.There is now starting to be more repetition of products  and competition between the outlets in the west end.
    New Town
     This part of town goes from Angeline Street (or the Ross Memorial hospital) right up to highway 35.The road is in better shape and there is new electrical service,sewers and new store fronts.There are a lot of gas stations,fast food outlets and stores selling newer products such as Mark's Work Warehouse,Staples and Midas Muffler.There are new buildings coming onstream also.Here is where the majority of retail sales are made in Lindsay.
   The Future of the Old Town
   Many older towns have found themselves in the same position.New York city along their harbour area ,Toronto in the harbour area and the old warehouse area and even Ottawa in their old market area.All these towns have decided to renovate what used to be an important and even the centre of town.Money has been invested and these areas have become rejuvenated.This is a probable solution for Lindsay also.Abandonned buildings need to be torn down and buildings underutilized need to have new functions.An earlier blog on Workathon discussed the possibility of developping a new inter and intra city bus terminal.There are many places to put a new bus terminal in the older town.Some new mid-rise(not high rise) apartment buildings could replace the older brick underutilized buildings.Even a new plaza or two with newer companies and newer products might come in here.Especially if they are built beside a mid-rise apartment building.Lindsay will have to find the money and it will take a lot of money to redevelop.
       Other Cities have done it
  As previously mentioned other cities have torn down and renovated the old and original parts of their town.These renovated ,formerly central, parts of town once changed have again become important parts of town.The warehouse district in Toronto is getting millions of dollars coming into the district.So is the market area in Ottawa.It may not look the same after new money has come into it but it will again be a functional and vibrant part of town.And this has helped all these towns grow as it will Lindsay.

The Lindsay Truck Centre- a model

 This is a possible model for a project I proposed in another blog on Econothon on Wordpress.The Lindsay Truck Centre was a name I gave to a project that would be owned and operated on the outskirts of Lindsay.It would be built on land on or near Walsh Street near the operation of Marbert Transport.This blog is a refinement of the earlier blog on Econothon.
        The Model
  This is an example only; if the city of Lindsay does go ahead with it they may decide to use some of the features shown here.First the truck centre should cover 4 to 6 acres and this entire area must be levelled and paved.The land purchased must be near or adjacent to Marbert Transport which is located on Walsh Street.This land is chosen because  Marbert is already in intercity transport.All the truck companies should operate from the same location.This makes it easier to build common facilities.First the lot must be serviced; it must have water and sewer and electrical services.Services must go into 5 to 8 units.So all services must go into each of the 5 to 8 units.The city may also install loading docks for each unit.The individual company will install it's own building for storage and loading.A new service that is springing up is fleet telematics.This service uses computers to monitor the location of trucks on the road.It can be modified to find out  when loads are ready to be moved and when trucks are ready to pick it up.A more advanced system would have the amounts of individual items needed by an individual store(such as Loblaws) and where it can be obtained most cheaply.This is ambitious and not likely to be used for some time.But I am pointing out that this type of computer operation is available.
      Specific Locations
 The main location served,of course, would be Lindsay and the main objective would be to use the truck centre to deliver a number of items (mostly food) to Lindsay stores.If it is successful then other items would be transported as well.For example, hardware and alcohol and some small car parts. Secondary locations to use this service might be Fenelon Falls,Bobcaygeon and Omemee.A transport truck could use a half load to Lindsay and a half load to Omemee.This would potentially cut the transport( and the total ) cost to both towns.        Contact Workathon for consulting advice

Just Energy shows better numbers

On August 13,2015 released it's first quarter results and they were improved from the same quarter in 2014.Just Energy is a retailer of natural gas,solar and green energy.It buys from wholesalers and sells to  retail customers.It's operational numbers are down from the previous quarter as are it's net additions.But it's net earnings are up from the previous quarter.As a result Just Energy(JE) was able to raise it's annual guidance for EBITDA by $20 million.
Operational Statistics
 Just Energy tells us that the first quarter is traditionally a weak quarter for it.That aside,revenues of $933 million were 14% ahead of Q2 in 2014.Their gross margin of $151 million was 22% higher than the same quarter in 2014.Base EBITDA of $39 million had an increase of 29% over the second quarter of 2014.The payout ratio of 63% was an improvement over 198% a year ago.While base funds from continued operations increased by 91%.Importantly long term debt was $676 million compared to $774 million at June 30,2014.
        Improvements
  Just Energy's customer base is 4.6 million residential customers which is up 2% from 2014.They made a change on the accounting of commission prepayment which they believe will improve finances.Just Energy believes their new prepayment of commissions policy will add $20 million to annual EBITDA.Net additions were down this quarter but JE believes they have made it tougher to be a customer now and are trying to get customers that"meet their profitability profile" now.
  Just Energy made a number of financial changes;they reduced their dividend in July 2014 from $.84 per share to $.50 per share.This is so they could increase their capital expenditure program.Also they have increased their credit facility.They got a sizeable amount of non-operating income this quarter and investors need to wait for next quarter to see if it is a recurring item or not.

Is Transalta at the bottom?

Transalta Power reported it's second quarter revenues on August 10,2015.This is a stock that I have owned in the past and have covered recently in Blogdaleupsome (on Blogger).It's operational statistics were all down this quarter and some of them considerably down.Recently it transferred it's Canadian coal operations into a separate subsidiary called Transalta Renewables and did pick up some cash here.It is also starting to diversify which may have provided a backstop to a stock that had a bad quarter.
       Operational Statistics
  Revenues were $438 million compared to $593 million in the first quarter and a net loss of $120 million compared to net earnings of $19 million in the first quarter.While earnings per share were negative $.47 per share compared to $.03 per share in Q1.There was a  dramatic change in operating cash flow;it had a decrease of 176% from the same quarter in 2014. A financial analysis service called Capital Cube calls this reduction  average amongst it's peers.But this blog calls it a dramatic reduction in cash flow.Transalta also shows operational figures for it's subsidiary,Transalta Renewables.All the figures show only a slight reduction from the last quarter and cash flow had only  a decrease of 9%.This blog expects Transalta Renewables to show improvement in both the third and fourth quarter.This has also helped to buoy up the Transalta stock price.
       Canadian coal Operations
Transalta told investors in their last report that they were modernizing their coal operations.So some of this operation was shut down for upgrading in the second quarter.This lowered their revenues for the second quarter but TA says that operation has been finished  now.This will be reflected in the next quarter's results.TA adds that their results from the Canadian coal and Energy Marketing division were well below expectations.They expect this division to deliver $40 to $60 million in revenues for the year.So it will deliver a stronger performance in the second half.
     Forecasts for the Second half
  Some brokers are expecting that the price of oil will move up in the second half and push up the price of Transalta shares with it.Capital Cube appears to be one of those.But this blog remains cautious because of the tremenduous change in the cash flow.Like many other prognosticators I too expect the price of oil to bounce back but not to hit $60 a barrel by year end.I think that $53 to $57 per barrel is more reasonable.This may not be enough to produce positive net earnings (at least for the third quarter).Also TA had  EBITDA of $1100 for 2014 and for the first half had only EBITDA of about ($40 million).Even a good second half will not bring EBITDA to $500 million.This is too big a drop to see the price move beyond the $7 range.In fact, it still has some downside risk.
    My Forecast
 I did a blog on Transalta on my other blog on Blogger called Blogdaleupsome after the first quarter results.The stock price was hovering around $12 per share and EBITDA for 2014 was $1100.It was clear that the spot price of power in Alberta was low but I counted on a quick recovery and forecasted Transalta to be at $15 a share.However the price of oil went down much more than forecasted as demand for power fell.Now the stock price is around $7 per share and EBITDA is at ($40 million) for the first half.So it does not appear that a quick rebound is too likely.
 That said Transalta has a few things going for it that will prevent it from falling much further now.Their Canadian coal operations have been modernized and their marketing group is expected to deliver $40 to $60 million for the second half.They also expect to deliver $10 to $20 million from their new Australian operations  for this year.They will need to modernize more of their operations but a return to profitability of the Canadian coal operations should be sufficient to keep TA close to it's present price of $6.87 and ready to move up a little in the fourth quarter.

Huronia VIII- The land of milk and honey

This is part of a continuing series on consulting and advising small towns in the vicinity of Lake Simcoe and Kawartha Lakes on options they could have to increase their growth and population.Huronia VII was on Lindsay and discussed the possibility of constructing a small or maybe a large marina just downstream from the lock in Lindsay.Huronia VIII takes a different approach completely;it looks at agricultural processing in Lindsay.                            

    The Usual Platform
   Many small towns need a platform to grow from a town of 20,000 or under to a town of  30,000 to 50,000.The usual platform is agriculture or lumber processing.There are quite a few towns in Ontario that are in the 15,000 to 20,000 population category that want to increase in size to 25,000 to 30,000 and then bigger.This growth gives the municipal government the means to do more things.This gives the town more facilities.
  Towns in this higher tier of population include Hanover,Owen Sound and Orangeville.Towns in the lower tier of population include Lindsay, Collingwood,Wasaga Beach,Midland, Port Elgin and many others.All towns  in this tier count on growing their econonomy through tourism.It is a natural process because it is easy to do;these are not "high tech" jobs.The problem is that there are only so many tourist dollars to go around.Not all the towns can benefit to a large degree from the tourist dollar.Also the towns benefit only for a certain period of time.And the jobs that are added by tourism are  low paying service jobs.Often this means that two or three more jobs are added at the Mcdonald's Restaurant and Tim Hortons in the summer and released in the winter.                                                                                          Often the towns that move to the next tier have agricultural processing or lumber processing.These jobs that are added are permanent jobs.There are  many kinds of processing that a town can adopt but it depends on the kind of land around the town.Lindsay, for example, does not have deep soil but is suitable for beef and dairy farming and growing corn and cereals (or grains)This would naturally lead to dairy and meat processing and grain processing.But probably it would allow specialized  processing such as sausage production and cheese or  yogurt production.But in Lindsay's case dairy production is almost impossible because of the milk plant in Bobcaygeon.It must look at other possibilities.
   Speciality processing- grains and honey 
 One form of processing that is not so popular is making honey- an apiary.There aren't as many bees nor honey produced but on the other hand honey consumption is down also according to Statistics Canada.The price of honey has been steady recently but has increased over the last ten year period.There is an apiary in Eganville (north of Pembroke) but it is almost closed.This might make a secondary operation to work together with one in Lindsay.This new and combined operation could serve much of central and eastern Ontario.This is a longshot but if it worked would add income and a few new jobs in Lindsay.
   The most likely kind of agricultural processing to benefit Lindsay is processing grain.Lindsay could have a grain processing plant to serve it's needs and the surrounding area.It is true that a bigger flour mill (such as in Newmarket) could produce flour cheaper than in Lindsay.But the cost of transportation must be added to it.In addition,Lindsay would not have to rely on only one source.It is possible that good local flour may be sold here even if at a premium because it would have local and fresh flavour.It could be sold to all the local bakeries such as the Kawartha Bakery in Lindsay.There are also other bakeries in town and in Fenelon Falls and Bobcaygeon that might be customers.
 

Atlantic Power strengthens balance sheet

On July27,2015 Atlantic Power  had a press release describing two events that strengthened their balance sheet and lowered their risk profile.These facts are not yet recorded in the other databases so this blog will rely on facts given in the press release..ATP used most of the proceeds (of $350 million) to complete the early redemption of $311 million of 9% senior unsecured notes.They redeemed them early and so had to pay $104.50 to par;they were due to expire in November 2018.The total cost of redemption then was $330 million.The extra expenses of $20 million will be recorded in the next quarterly report.
       Sold the wind farm
Atlantic Power had 5 wind power plants in Idaho and Oklahoma.ATP sold them to Sun Edison and made a large capital gain.In fact, they made about $350 million from the sale and transferred $250 million of debt to the purchaser.So most of the proceeds paid off the $330 million early redemption of the senior unsecured notes.Atlantic Power states that it now has consolidated debt of $1.1 billion and this is a reduction of $800 million since the end of 2013.However Qtrade (a broker)  shows more debt on their books than this.Probably ATP's data is more accurate here.Atlantic also shows that there was $250 million of debt on the wind assets that has been eliminated with the sale of the wind assets.
  Atlantic adds that this is the early redemption of  it's most expensive debt and over 9 months  it has reduced total debt by almost $800 million.It, of course,will continue normal debt reduction by amortizing it's term loans and project debt.And now it has remaining corporate debt of about $305 million (in convertible debentures) which mature in 2017 and 2019.Atlantic is trying to lengthen their maturities.
      Ontario Superior Court denies motion
On July 24, 2015 the Ontario Superior court of Justice issued a decision denying the plaintiff's motion for leave and certification of a class action suit against ATP.The Superior court concluded that there were no misrepresentations about disclosing material changes by the defendants and no possibility that the plaintiffs would succeed in a class action suit against ATP.Furtermore the court added if the defendants did succed they would have to reimburse the plaintiffs for their cost of responding to the motion.Also ATP made a successful motion in  March,2015 in U.S District court to dismiss the class action suit.Nevertheless the plaintiffs are scheduled to make an appeal to the U.S court of Appeals in August and September.In order to succeed the plaintiffs must introduce new and relevant facts to change the former decision.
      A New Leaf
Atlantic Power has in the recent past traded higher than it's present price and had a higher dividend.But investors punished the stock price because of excess debt and reduced cash flows.Atlantic Power had to cut the dividend to keep it's capital program intact.Since 2013 it has made a number of astute investments such as acquiring the wind power assets.Now it has pared down some expensive debt and made it's debt profile look better.It probably still needs to sell one more asset that can produce another nice gain.A gain here might help to redeem one issue of  their convertible debentures.A successful asset sale and an early redemption of debentures might help to raise their credit rating.All of these actions will help to gradually raise their cash flow again.

Oil producers adjust to fallen oil prices

Since the spring there has been considerable volatility in the price of energy-both oil and natural gas.The price of oil has come down from the $80 and $90 per barrel to $65 at first and then to around $50 per barrel.For awhile it went back into the $65 per barrel range and now has returned to the $47 to $50 per barrel.This volatility has had a dramatic affect on the Canadian oil producers.For awhile they were adjusting to $50 per barrel but then the price moved back up.Now it seems to be "zoned" in the $50 price range.
      Strategies
 There are really only a couple of strategies that a producer can have.The most likely strategy is to cut the capital expenditure program.This will reduce the number of drilling rigs and the number of wells drilled.This strategy  doeshave it's problems .Over time the production rate of all wells starts to decline.Less oil in the well and less pressure lead to a natural decline.If new wells are not discovered to find oil to replace the oil  decline then overall production will drop.This will cause the price of the company's shares to drop.This reduces the ability of the company to finance future activities and to buy equipment.
      One strategy used is to sell off non-core assets for cash..Although the price of acreage will be down somewhat from peak times it drops in price slower than the price of oil does.Certain companies have purchased in the past a tremenduous amount of acreage and will not likely use it for quite a while.Other companies with more cash on hand find this a good time to buy acreage at a reasonable price and build their inventory of oil producing lands.All of this land has already been explored to some degree;so there is little probability of a sizeable oil company acquiring uneconomical acreage of  oil or natural gas bearing lands..All of the companies in the oil patch know or can find easily good estimates of likely oil reserves on any land they are interested in.But some companies are still doing enough exploratory drilling to increase the value of their undiscovered land.The price of oil goes down but the likelihood of a bigger reservoir goes up.                                Penn West is an example of a company that has kept it's exploratory drilling up and has increased the value of it's proved and probable reserves and the land that contains it.There are three categories of land-proven,almost proved and probable.Exploratory drilling will increase(sometimes dramatically) the reservoirs in probable acreage.One or two wells may increase the size of the reservoir and the value of the acreage                                                                                              In addition,horizontal drilling can expand the size of the reservoir in proven and almost proved acreage.And horizontal drilling is usually cheaper than vertical drilling.Horizontal drilling goes horizontally from an existing well and explores the dimensions of the reservoir.Sometimes the reservoir is bigger than originally recorded. This is the strategy that Twin Butte Energy has used.The extra oil discovered has allowed it  to dispose of non-core assets. But  the increase in the  value of their existing assets has caused a reduction in the value of total assets to a lesser extent.Cash obtained from non-core assets will be used to pay down debt.Debt goes down by 15% but  the total value of assets is reduced by less than 15%. This is a necessary strategy by producers to preserve value.
 The second Strategy- Productivity 
  Not all companies are in the position of  having good unexplored land or oil pools that are larger than originally recorded.Many companies have reasonable information on the size of their reservoirs.Extra drilling may not increase the probability of having a bigger oil pool.Then the best strategy is to try and reduce the cost of exploration or delivering oil to market.Twin Butte reports that it has reduced the cost of drilling a well by about 22%.Other companies are looking at using new drilling rigs with lower costs of production.So even with a lower price per barrel a reduced cost of production will minimize the drop in the netback per barrel of oil or natural gas.This will help producers to survive in a low price environment and thrive once the price of oil goes back to the long term trend.

Huronia VII -the Kawartha Marina

Workathon is the blog where I cover a number of more irregular subjects.One of these subjects is regional consulting;I have started a series called Huronia Consulting.It provides interesting ideas on towns in the southern Georgian bay area.Huronia I,II and III relate to Midland.Huronia IV and V and VI refer to Wasaga Beach.Huronia VII relates to Lindsay,Ontario.
   The Trent Severn Waterway
 I looked at several ways of increasing the regional economy in the Lindsay, Ontario.This entailed a look at several ways of increasing the population such as increasing student population and putting in a new bus terminal just slightly off the downtown core.But it was  felt that more investment would come into Lindsay if a new marina was constructed below the Lindsay lock.The idea is that boats both from Peterboro and Lake Simcoe and maybe even a few from Port Perry would come in order to have a bit of a vacation without having tremenduous expense - a day trip or a weekend trip.There is also a large build up of boats in Lake Simcoe(Barrie,Orillia,and Georgina) that presently can only travel around the lake.But the question is how much do you spend and how big should you build the marina?
 A field of Dreams
 The famous line in the movie called Field of Dreams is "build it and they will come".Using this line of thinking would mean build the ideal and biggest size that you can and the vacationers will come.The figures used in my blog called Econothon in Wordpress  were $6 to $10 million for construction and $3 to $5 million for dredging. And this would not include any dredging south of Lindsay(in the Scugog River).It was also thought that dredging must continue every two years after that for another almost $1 million every two years.                                                                This however is for the maximum size.Lindsay need not start with the maximum size until it is clear that they indeed will come.The smartest strategy would be to build a smaller  marina and see how it is received.This would involve excavating some of the land in Mcdonnell park.The first phase would be to move the river edge over to the present sidewalk and moving the river edge on the other side  back to the stone wall.This will add to the width of the river an extra 35 feet in the park and about 25 to 50 feet on the other side of the river.The distance from the start of the river wall (at the bridge)to the curve in the river (or the sidewalk) is about 225 feet.It is about 10 feet down to the riverbed on the north side and maybe 5 feet on the south side.In total this would be about 100,000 cubic feet to excavate. This is the widest part of the river now and will be another 50 feet wider after construction.This means drilling and removing the present concrete wall (on both sides) and excavating  down to the riverbed.This phase will not look at removing the Queen Street bridge although it is realized that this restricts the size of boat coming into the marina.The most likely alternative for the bridge would be to put in a steel swing bridge or lift bridge.The swing bridge would be like the one in Burlington in the Hamilton Bay harbour.
  Phase 1
 Phase 1 should cost only $1 to$2 million and require little dredging.Once again dredging every two years of the Scugog will be a part of this plan.This is the deepest part of the Scugog and the marina is only intended for small draft boats at this stage..If this is successful then we can look at phase 2 which would require reengineering the bridge and  a lot more dredging(even up to Sturgeon Lake).This strategy however( even with the lift bridge)  will  get only minimal investment on Lindsay Street north.However if the marina is full all the time this will be the signal to move to phase 2. 
   

Connacher Oil and Gas finallly recapitalizes

 Workathon is the blog I use for irregular company reports and those with sketchy data.This is one of those reports.Connacher Oil and Gas has talked about recapitalizing for some time and it appeared as though it would never happen.But they brought in a completely new board of guys with experience in turnarounds and startups.And they have pulled it off.
     Recapitalizatuion


  The conversion starts  by exchanging approximately $1 billion of debt (including unpaid interest) for new common shares.They will also issue $35 million of "new convertible notes" and the interest will be compounded and accrued.The recapitalization will save $80 million of annual interest expense.The First Lien Term Loan Credit will replace the old revolving credit facility which was less secure.This will result in a consolidation of the common shares on the basis of 800 new shares for each old common share.Connacher Oil and Gas will then have 28,300,000 outstanding shares.
      Conclusion
 This blog has followed Connacher Oil and Gas for some time.The advice given in this blog was to keep increasing production and not to recapitalize.When we first started looking at Connacher, production was only 11,000 barrels per day;now it is at 15,100 barrels per day.Of course,neither Connacher nor this blog counted on the drop in the price of oil.Now Connacher has replaced it's debt with new common shares and reduced interest expenses by almost $100 million(in total).The new board seems very sharp and experienced and if anybody can pull this off it looks like they can.Connacher has already worked hard to get their production up to 15,100 barrels per day and their chances of succeeding are better now than when production was at 11,000 barrels per day.However now they are limiting capital  expenditures to maintenance and production increases are even more important.A lot of money has been spent on their second facility called Algar and they need to spend a little more to get production from this facility they have been working on since 2010.This blog predicts gradual declines for revenues,and the stock price unless they get more production from their second facility at Algar.Or else they will have to sell off some non-core assets to get capital needed to bring the stock price back to the original conversion price.

Capital Power brings onstream new wind project

 This is another of those press releases that I have mentioned in Workathon before(in this case an Alberta utility) .The details are a bit sketchy but it does show that Capital Power has begun commercial operation of a wind project called K2 in southwestern Ontario.Capital tells us that it was  under construction for 18 months.The power generated will be 270MW which makes it one of the largest in Canada.Capital owns it in combination with Samsung Energy and Pattern Enegy.Capital Power and Samsung sold 33% to Pattern and now all are equal partners in the K2 wind project.So in effect,Capital owns 90MW of new power generation in K2.
  Capital has most of it's facilities in Alberta  which has had low power prices for the last year and a half. K2 will fetch higher power prices in Ontario and help Capital diversify further.Capital Power(CPX) gets energy from a variety of energy sources.CPX owns more than 3200 MW of power generation from 17 facilities and another 371 from a power purchase agreement.Also an additional 545MW of owned generation capacity is now under construction in Alberta and North Carolina.
            Summary
  This sounds like a good deal for Capital Power.It will bring on more revenues and hence increase adjusted EBITDA,But selling about 17% to Pattern Energy when it was completed should have been at a good price.There are no details to calculate whether the profit on the sale almost paid for their share of the project costs but it should be easier to carry after the sale to Pattern Energy.Also Ontario power prices should bring a bigger margin than Alberta prices.Capital did not offer guidance  on whether this changes their forecast for adjusted EBITDA for 2015 or not.But this may help to bring them in at the top end of guidance. 

Regulating Canadian telephone rates

 I did another blog on rate setting for Canadian utilities in general on another site.It looked at setting rates for essential services such as telephone,cable,electicity and water provision.This blog will focus on regulating telephone rates.And it will focus on the operation of the CRTC(Canadian Radio,Television and Telecommunications Commission).This blog will look at the effect on the service provider,namely,Bell Canada and Telus.
  Most essential services are provided for by a monopoly  whether it be gas or water or telephone..The equilibrium output for a monopoly is less than market equilibrium that is, less than the market demands.And the price is higher than the market equilibrium also because a monopoly sets it's own prices..That is to say, if there were several providers the rate would be lower and the output higher than with a single provider.This is where the regulator fits in;it lowers the prices and increases service to consumers over what it would be with a monopoly.The market is not at equilibrium for the monopoly nor the consumer.
      The Rate Hearing
  The process starts with an informal meeting of both parties that are fairly familiar with each other.The Commission will be informed of the utility's intentions and a rough idea of what rate increases are sought.No adverse reaction will be followed by a formal rate application which is likely to be a lengthy document.This will be followed by a notice to the public asking for interested parties to inform the CRTC that they wish to intervene in the rate making process.This will be followed by a notice to the public setting the date for the hearing and the likely length of the hearing.An agenda will be made that covers all interested topics and the time expected to hear them.
            The Allowed Rate of Return for the telcos
  This section will diverge from my other blog done on another website.It dealt with the allowed rate of return in a general sense.But a discussion of regulation has to be different when dealing with two important companies that have not only an important impact on consumers but also on the entire technology sector.Their services are not only essential  in rural communities but to many Canadian businesses. Also the resulting rates have a significant impact on a large number of Canadian investors.The CRTC,in effect has an extra variable to consider the price of Bell Canada stock and Telus stock.A decision that all consumers love and sends the price of either stock down by 10 to 20% will be frowned upon by it's boss the Minister of Communications. A healthy Bell Canada and Telus stock is very important to the entire investment community.CRTC must set rates that generate earnings that will be a positive force for these stocks. 
      The Decision
  The decision will be careful to consider any poignant points made by intervenors throughout the hearing.As always it must address the size of the investment program and certain areas that it wants to see more investment in.Here the commission must encourage and cajole rather than try to force investment in these areas.The quality of service must be addressed at length.This will bring it to the allowed rate of return that the rates generated in their test year.The CRTC will not explicitly mention the expected price of the utility stocks but they will have a firm grip on their expected price.Then lastly and importantly they will mention the reasonableness of rates generated by their decision.

Algonquin Power raises new debt

On April 30,2015 Algonquin Power  gave a press release telling investors that it has closed a  private placement of $160 million senior unsecured 30 year notes with a coupon of 4.13%.The 30 year financing is quite attractive and made possible by a 20 year signed agreement for the delivery of water to Liberty Utilities.They tell us that the proceeds of the private placement will be used to partially fund the $327 million needed to pay for their Park Water System located in California and Montana. ParkWater Systems operates 3 regulated water utilities. in southern California and Western Montana. The deal is expected to close in the second quarter of 2015 and will bring some new revenues and earnings in the third quarter.The acquisition is expected to have property,plant and other assets of $259 million for rate making purposes.
  Review of 2014
 The closing of this transaction is taken as an opportunity to review Algonquin Power's performance in 2014.This information is taken from past quarterly reports and from information in databases.Revenues for 9 months were $684 million compared to $470 million for 9 months of  2013.While net earnings of $45 million  were obtained for 2014  compared to $43 million in 2013.Also they earned  adjusted EBITDA of $206 million versus $160 million for 2013.So we can see that Algonquin has  had good growth in revenues and adjusted EBITDA but slight growth in net earnings in 2014.However Algonquin made two significant acquisitions in 2014 and both will be closing in 2015.This will make a ssinificant change to it's balance sheet.These transactions are the acquisition of the Park Water Systems(which is discussed above) and the Odell wind project.The Odell wind project is located in Minnesota.These two projects are valued at about $640 million and  both are located in U.S.A. Algonquin has also constructed two small wind projects in Canada in 2014.
   Too many eggs in the Regulated Basket
 This blog has been critical of Algonquin having too many projects generating revenues and earnings from  American regulated utilities.Algonquin would be quick to add that it has gotten quite a few good rate awards here.This blog counters with the fact that the probability of continued large awards is decreasing over time.The probability of any rate awards in 2015 being as substantial as in 2013 is slim.This risk has continued with the acquisition of Park Water Systems;this is another regulated utility albeit in a new jurisdiction.Their other large American acquisition,the Odell wind project  is not regulated.And it has a 20 year contract with Xcel Energy.This helps to reduce overall risk.                                                                           Algonquin has taken two countermeasures to soften the risk of getting two or three bad American regulatory decisions..First Algonquin has sold  8 million subscription receipts to another Canadian utility (Emera) so that now Emera owns approximately 25% of Algonquin shares.Secondly it has made several new offerings of  common shares to the Canadian public.This does stabilize the ownership but it does not  eliminate the probability of  a trend to lower rate awards starting to  come from American regulators.At least Algonquin has spread it's assets over several  state regulators.But it is the position of this blog that Algonquin needs more assets (like the Odell wind project) with long term contracts in place.However Algonquin's tremenduous growth in revenues will continue in 2015 with significant new revenue coming onstream from both the Park and Odell systems.
     Growth versus stability
Algonquin Power has specialized in acquiring American water and energy assets at distressed prices.It has done very well here and has picked up very good growth in revenues and adjusted EBITDA.Net earnings have not grown as fast but that is partly as a result of  large asset write offs.That aside,Algonquin is on track to hit between $280 and $300 million in adjusted EBITDA  in 2015 which is tremenduous growth since 2011.The price of the stock has not yet kept up to the growth in adjusted EBITDA and net earnings since 2011.

Interrent REIT reports

On May 12 Interent reported its' first quarter results.It is a REIT that owns and manages apartment buildings.This market is solid but not as strong as it was in 2010 or 2011.Interrent is typical of the apartment REIT sector.It's assets and revenues have grown considerably from 2010 but have slown down recently.Revenues have been basically flat  in 2014 and the first quarter of 2015.Consequently the price has stalled recently.Nevertheless it has gradually improved most of it's financial statistics.In addition, it bought one new apartment building in Montreal- a new market for Interrent.We will look at the data in their quarterly report below.
      The First Quarter Report
The Interrent report has a lot of operating statistics all of which show a small improvement.Monthly rents increased 3% and the net operating income was up by 16% while funds flow and adjusted funds flow was up about 15%.The interest coverage ratio improved from 2.62 to 2.38 times and the debt service ratio improved from 1.55 to 1.37 times.  This means that earnings are adequate to cover interest payments and service the debt.Consequently the debt to gross book  value  ratio moved from 49% to 47%.Interrent is  managing it's debt adequately.                                                                             All of these statistics improved slightly.The quarterly report is optimistic  but there has been no significant improvement in this quarter.Interrent's revenue and adjusted EBITDA have been almost flat since the first quarter of 2014.However it has improved slightly every quarter.This has caused the stock price to remain in a very tight range since the end of 2013.And it will likely remain flat unless their operational statistics improve more in 2015.
 

Press releases and quarterly reports

Many of the blogs in Workathon and all in my other blog called Blogdaleupsome have gotten their data from company press releases and their quarterly reports.At first the data did jive with other data such as the price of the stock and other corporate information.But gradually the information was not coroborating as much with other external data.Other press releases started to show less and less logic;in fact,they became confusing in some cases.Their forecasts of revenues and earnings were hard to believe.
           It is hard to shake the tendency for companies to tell their shareholders that things are going well and earnings will be 10 to 25% better next quarter.Especially when writers like me believe them and tell the same story.It is ,of course,incumbent on writers to check their data and make sure it is as correct as possible.Sometimes all companies have to estimate certain values;this will always be the case.
     Experience is worth a 1000 words
   The Chinese proverb is that a picture is worth 1000 words.But every writer knows that experience is also worth 1000 words.I used to work in the federal government and I am used to the situation where the data in one department does not jive with that of another department.It was always better to use Statistics Canada data when you could get it;it was always more reliable.When you could not get Statistics Canada data you had to blend data from two uncertain sources.This is what I must do here is blend data from broker's database and from company press releases.Where possible check data in a quarterly report against company data.However now Workathon will likely have less reporting of company press releases and quarterly reports.That will be the domaine of my other blog called Blogdaleupsome.
       The Crocodile Gold Syndrome
   Sometimes it is possible to get data or information in a press release that is nowhere else found.This situation I saw several times.The first time I came across it was for Crocodile Gold.This stock trades on the TSX.They had purchased two mines that they had estimated to get two years production from.They did some exploratory work and found(supposedly) a huge ore body.No final estimate was given but it could have been as big as 4 to 5 million ounces.The stock was trading at about$.20 per share and once I reported this I expected the share price to move towards $1.00 per share.But it now trades at only $.35 per share.Still this situation has not been clarified.Is the ore body as described or is it not.No other news source has reported the actual size of the discovery.
  This situation also occurred to other companies such as Twin Butte and Chorus Aviation.News reported only in press releases  and nowhere else reported.Often the news is beneficial to the stock but rarely does the share price react.Twin Butte ,for example, bought a company with light oil resources.They found multi-layering of oil pools and oil pools not discovered by the previous company.The stock should have moved up considerably but it moved down to it's present level of about $.85 per share.Was the quarterly report wrong or did something else explain this behaviour?So,in conclusion, always check the data in a company's press releases,if you can.

Atlantic Power reports first quarter results

  On May7,2015 Atlantic Power reported it's first quarter 2015 results.It was a lukewarm report.Atlantic Power is an electric utility with 28 operating power generating projects;some are in Canada and some are in United States.It produces 2945 MW of power and has it's headquarters in Boston.
    Highlights of the quarter
The big item  for this quarter is the sale of 5 wind asset facilities for $350 million which is 13 times it's expected cash distribution.This is considered a good price as developing business will often sell for 5 to 6 times operating income.Some of these facilities (like the Rockland plant) are quite recent acquisitions.The proceeds of the sale will be used to redeem a $311 million 9%  unsecured note.It also repaid $24 million of a term loan and $16 million from discretionary debt.None of the proceeds will be included in EBITDA.Other utilities might have included a portion in the EBITDA calculations as there will be a loss of EBITDA for the rest of the year from disposing of these facilities.
    Quarterly project adjusted EBITDA
Project adjusted EBITDA was reported as $59 million - an increase of $2.2 million over Q1 last year.This was partly due to project generation availabiltity rising from 92.7% to 97.6% Atlantic is an efficient generator of power.But adjusted EBITDA from the 5 wind assets was excluded(although income was earned for 3 months) as was income from one other facility.Also $9.6 million of general and administrative expenses(G&A) were taken from adjusted EBITDA.So the reported EBITDA figure should have been $68 million.It also is not clear whether the payment of the discretionary debt was taken from EBITDA or from the sale of the wind assets.Most utilitites use the term comparable adjusted EBITDA but ATP's figure is not comparable to other periods or other utilities.However this blog takes the position that ATP may be getting closer to discarding their project adjusted EBITDA methodology.
  EBITDA Calculations
     Atlantic Power does not own 8 or 9 facilities;it owns large parts of 28 facilities.Also it(like most utilities) reports it's earnings on an adjusted EBITDA basis.However it does not use what is called comparable adjusted EBITDA.Instead it uses project adjusted EBITDA methodology.It includes the percentage of earnings that it has of total equity in it's EBITDA calculations.In one case it owns only 50% of the total equity;this however is the exception.It also excludes G&A expenses  from EBITDA, so it's EBITDA is smaller than other utilities.It is not clear if they do include payments on discretionary debt and amortization of some loans also.These are items that Atlantic must clear up in the future.But it is clear that ATP's project adjusted EBITDA is less than what it is called total adjusted EBITDA.And it is not comparable adjusted EBITDA.
     Guidance for 2015
  Atlantic Power gave guidance in it's annual report of project adjusted EBITDA of $265 to $285 million.In this quarterly report it changed it's guidance to $200 to $220 million.This is after 5 wind assets have been sold.But this might be as high as $285 to $300 million if ATP used a comparable adjusted EBITDA.

"Small caps" boost economic growth

Many Canadians know that Canada is coming to the end of a "U" shaped business cycle.The"U" shaped business cycle is characterized by a longer cycle with slower growth at either end and faster growth in the middle. So the end of the cycle is characterized by slow growth.Years of 2 and 2.5% growth before the cycle turns down.In these years the government will spend billions of dollars to boost economic growth.But  these macro measures are not as effective as the economic growth that comes  organically or from small companies with 1 to 100 employees.It is the contention of this blog that it is "small caps" that deliver economic growth to the country."Small caps" are defined as a company with a market capitalization of less than $1.5 billion.A lot of steady employment comes from larger companies but new growth comes from the smaller ones.That is, companies with a market capitalization or value of less than $1.5 billion.
  Industry Canada in it's website shows that from 2001 to 2011 small firms accounted for 43% of all jobs.And the biggest increase comes from companies with less than 100 employees.Still it is true that the greatest number of employees in the work force are employed by companies with more than 500 employees.But growth in the work force comes from employees with 100 employees and less.                                                                                              These companies also usher in innovation and new ways of doing things.Small companies ,by their nature, need a new way of doing things or a cheaper way in order to attract customers.If the new product is successful it may actually increase the size of the entire market.That is, innovation can increase demand;it is not always a win-lose situation; it sometimes is a win-win situation.In other words,the business that a "small cap" makes is not always taken away from a bigger firm sometimes it is new demand created because the new product brings in new customers.An example of this situation occurred in the telephone handset market in Canada.In order to keep integrity in the telephone market Bell Canada had for many years refused any third party to interconnect to it's system.But the CRTC overruled that decision with their interconnect decision.Suddenly other producers entered the market and because of the new features on the new handsets the total market increased in size as did Bell's market share.This was a  win -win situation.
  " Small" caps bring innovation and productivity
 Canada trails all G-8 countries in productivity.But what is productivity?It is a measure of the amount of inputs used to produce a given amount of output.Being productive means that you use less inputs to produce the same output as previously.So less productivity originates in large caps.They have production lines and processes that tend to rely on repetivity in order to produce economically.Costs remain down but so does productivity."Small caps",in order to break into a market,need to bring in new ideas.They have to offer something that is not already on the market.This requires a new way of doing things or even making things.This often means that their products are more expensive and that their profit margin is smaller.But it also means that productivity is raised.Many of these new ideas come from recent university graduates.They like to challenge the existing way of doing things but it is more expensive.
      University graduates and Innovation
    New ideas and new processes come from schools and universities.But these new ideas must be applied and "small caps" provide the vehicle to do this.As a large number of university grads get hired by "small caps" that are amenable to new ideas.It is believed  that university grads have an easier time getting hired by "small caps" than by the more rigid larger companies.Hence this is another source of innovation.
       Next year's forecast
    The theme of this essay is that "small caps" can and do give a boost to economic growth.But it would be seen to be more important when economic growth is lacking than if it was robust.So how much is a boost needed this year?I take my forecast from the TD bank website.They predict that growth this year will be 2% and again 2% for 2016.They also predict growth of .5% for the first quarter and perhaps as low as 1% in the second quarter.They feel that growth will be more vigorous in the second half of the year.Low interest rates  until 2016 should help the labour market and the housing market.However their growth forecast depends on the assumption that the price of oil will stay around $50 a barrel in 2015 and only move up to $65 a barrel in 2016.This should prove to be a little conservative.Nevertheless it should not change their forecast of unemployment by too much;they predict a 7% unemployment rate.
 This blog considers that the TD bank forecast will be substantially correct even allowing for a correction in the price of oil.So 7% is a considerable number of qualified unemployed workers.And this rate may understate the unemployment of skilled workers.Here is where "small caps" can be most beneficial.
    "Small caps" affect unemployment rate
"Small caps" according to Industry Canada create almost half of the new jobs.It is the position of this blog that their job creation is skewed towards skilled jobs.The salaries are lower but they are easier to get jobs in "small caps".It is likely that more of the new jobs created by "small caps" are for skilled workers.Also a skilled worker in a large corporation must start at the bottom position and may find it less interesting.So it is possible that without these new jobs in "small caps" that the unemployment rate may be skewed higher in the skilled worker ranks.Consequently it appears that the new jobs created lower the unemployment rate in the ranks of skilled workers.These are the jobs that have more innovation and productivity increases.Here is the fulcrum that "small caps" have in boosting economic growth.This will not make a dramatic change in the economic growth rate nor the unemployment rate but it will affect both. Also it is more efficient than spending billions of dollars on macroeconomic policy to create a .5% increase in economic growth.