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.
Tuesday, 23 June 2015
Sunday, 14 June 2015
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.
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.
Monday, 1 June 2015
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.
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.
Wednesday, 27 May 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 $.85 per share.Was the quarterly report wrong or did something else explain this behaviour?So,in conclusion, always check the data in a company's press releases,if you can.
It is hard to shake the tendency for companies to tell their shareholders that things are going well and earnings will be 10 to 25% better next quarter.Especially when writers like me believe them and tell the same story.It is ,of course,incumbent on writers to check their data and make sure it is as correct as possible.Sometimes all companies have to estimate certain values;this will always be the case.
Experience is worth a 1000 words
The Chinese proverb is that a picture is worth 1000 words.But every writer knows that experience is also worth 1000 words.I used to work in the federal government and I am used to the situation where the data in one department does not jive with that of another department.It was always better to use Statistics Canada data when you could get it;it was always more reliable.When you could not get Statistics Canada data you had to blend data from two uncertain sources.This is what I must do here is blend data from broker's database and from company press releases.Where possible check data in a quarterly report against company data.However now Workathon will likely have less reporting of company press releases and quarterly reports.That will be the domaine of my other blog called Blogdaleupsome.
The Crocodile Gold Syndrome
Sometimes it is possible to get data or information in a press release that is nowhere else found.This situation I saw several times.The first time I came across it was for Crocodile Gold.This stock trades on the TSX.They had purchased two mines that they had estimated to get two years production from.They did some exploratory work and found(supposedly) a huge ore body.No final estimate was given but it could have been as big as 4 to 5 million ounces.The stock was trading at about$.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.
Tuesday, 12 May 2015
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.
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.
Tuesday, 28 April 2015
"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.
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.
Sunday, 5 April 2015
Three press releases
Workathon is the site I use to handle business matters that are slightly different or not normal business reporting.In this blog I cover press releases given by three separate companies:Holloway Lodging,Capital Power and Chorus Aviation.They are not reporting quarterly nor annual business reports and they are not big enough to be handled in one blog so I bundle them together.All are certainly significant and positive factors for the companies involved.The first to be discussed is Chorus Aviation.
Chorus Aviation
Chorus Aviation is a regional aircraft service that has a semi-regulated connection to Air Canada.Prices and a part of their costs are set by Air Canada.There was a revision of the agreement in 2014 and it has been loosened up slightly.But revenues and profits are largely determined by Air Canada.However Chorus has been investing in other opportunities outside of the regulated umbrella.To that point, they announced on March12,2015 that they have purchased a holding company that owns Voyageur Airways, a leading provider of specialized aviation services.Voyageur is a Transport Canada approved operator;it operates medical, logistical and humanitarian flights for government agencies.It has 18 aircraft of which 13 are owned.The majority are Bombardier Dash 8-300 and CRJ-200 aircraft.It operates in Canada, Africa and Central Asia.It also has specialized engineering and advanced maintenance operations and has a number of certificates for modifications and improvements to Bombardier aircraft.
It has full in house design engineering and aircraft modification capabilities;it also does sales of parts and some manufacturing.Plus it has storage and parking capacity for up to 65 aircraft.It had adjusted EBITDA of $17 million in 2014.Chorus paid $80 million with $47 million in cash and $8 million in Chorus B shares and $25 million in deferred cash payments to acquire it.
Closing
This is seen as a good price as it is 4.7 times adjusted EBITDAand will be immediately accretive.A good rule of thumb is 4 to 5 times operating income for a going concern.This opens up new opportunities for Chorus but it will also require more investment in this multitasking business.It is possible that Chorus may sell the operation in North Bay as it is not too close to it's main operation in Halifax.Chorus will probably sell off the international operations and the certificates.But it is easy to see that the specialized engineering and advanced operations will fit in nicely with the existing Chorus operation.It is not clear at this time how profitable the medical and logistical operations will be. Only time will tell here.
Capital Power
On April 2,2015 Capital Power announced that Epcor,an Edmonton utility,sold in a secondary offering 9,450,000 shares of Capital Power for $23.85 a share.The proceeds were $225,382,500.Epcor still owns 9.1% of Capital shares now and before the offering owned about 21% of Capital shares;Capital Power has about 85 million shares outstanding.
These almost 10 million shares were a drag on Capital Power shares and prevented Capital from rising beyond $24 a share.Now that this tranche of shares has been bought there will be more pressure on the demand side to buy shares up.This acted as a damper on the share price while EPCOR was selling.Now with a good quarterly report coming up this could send Capital Power into the $25 level again.
Holloway Lodging
On April1, 2015 Holloway Lodging announced that it had sold it's Travellodge franchise for $21 million and a gain of approximately $6.5 million.The purchase was made through a $16 million cash payment and a issue of $5 million subordinated notes.Travelodge was a part oif the assets that Holloway got with the acquisition of Royal Host, a lodging company listed on the TSX.Travellodge was considered as a non-core asset and let go for $21 million.Holloway will use the $16 million of cash to repay the loan used to finance the acquisition of Royal Host.This has been seen as a positive move by Holloway as the shares rose $.50 this week.
Chorus Aviation
Chorus Aviation is a regional aircraft service that has a semi-regulated connection to Air Canada.Prices and a part of their costs are set by Air Canada.There was a revision of the agreement in 2014 and it has been loosened up slightly.But revenues and profits are largely determined by Air Canada.However Chorus has been investing in other opportunities outside of the regulated umbrella.To that point, they announced on March12,2015 that they have purchased a holding company that owns Voyageur Airways, a leading provider of specialized aviation services.Voyageur is a Transport Canada approved operator;it operates medical, logistical and humanitarian flights for government agencies.It has 18 aircraft of which 13 are owned.The majority are Bombardier Dash 8-300 and CRJ-200 aircraft.It operates in Canada, Africa and Central Asia.It also has specialized engineering and advanced maintenance operations and has a number of certificates for modifications and improvements to Bombardier aircraft.
It has full in house design engineering and aircraft modification capabilities;it also does sales of parts and some manufacturing.Plus it has storage and parking capacity for up to 65 aircraft.It had adjusted EBITDA of $17 million in 2014.Chorus paid $80 million with $47 million in cash and $8 million in Chorus B shares and $25 million in deferred cash payments to acquire it.
Closing
This is seen as a good price as it is 4.7 times adjusted EBITDAand will be immediately accretive.A good rule of thumb is 4 to 5 times operating income for a going concern.This opens up new opportunities for Chorus but it will also require more investment in this multitasking business.It is possible that Chorus may sell the operation in North Bay as it is not too close to it's main operation in Halifax.Chorus will probably sell off the international operations and the certificates.But it is easy to see that the specialized engineering and advanced operations will fit in nicely with the existing Chorus operation.It is not clear at this time how profitable the medical and logistical operations will be. Only time will tell here.
Capital Power
On April 2,2015 Capital Power announced that Epcor,an Edmonton utility,sold in a secondary offering 9,450,000 shares of Capital Power for $23.85 a share.The proceeds were $225,382,500.Epcor still owns 9.1% of Capital shares now and before the offering owned about 21% of Capital shares;Capital Power has about 85 million shares outstanding.
These almost 10 million shares were a drag on Capital Power shares and prevented Capital from rising beyond $24 a share.Now that this tranche of shares has been bought there will be more pressure on the demand side to buy shares up.This acted as a damper on the share price while EPCOR was selling.Now with a good quarterly report coming up this could send Capital Power into the $25 level again.
Holloway Lodging
On April1, 2015 Holloway Lodging announced that it had sold it's Travellodge franchise for $21 million and a gain of approximately $6.5 million.The purchase was made through a $16 million cash payment and a issue of $5 million subordinated notes.Travelodge was a part oif the assets that Holloway got with the acquisition of Royal Host, a lodging company listed on the TSX.Travellodge was considered as a non-core asset and let go for $21 million.Holloway will use the $16 million of cash to repay the loan used to finance the acquisition of Royal Host.This has been seen as a positive move by Holloway as the shares rose $.50 this week.
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