Transalta Power needs Capital efficiency

Transalta Power is an utility that generates power in Canada but much of it is in Alberta where power prices are down almost 33%.It also has a lot of traditional power generating stations that could use some updating.However Transalta has a lot of earnings;it reported $1 billion in EBITDA in 2013.Some of this will have to used to(a) make existing plants more efficient and (b) have more power generating stations outside of Alberta.
      Capital Power's method
Capital Power had a coal-fired generating station at the Genesee coal mines.It was basically a steam generating operation.They just arranged to buy new Mitsubishi J series gas turbines.These are combined with a steam heat recovery generator to make a combined cycle generating station.This is a top of the line generator and is much more efficient than the original coal-fired operation.This is the way of the future for utilities with old traditional generating methods.Transalta which has a tremenduous amount of internally generated cash must follow suit.They must adapt old structures with new generating methods in order to adjust to the existing power prices.
     Australia and beyond
   In July28,2014 Transalta  announced that it had agreed to build,own and operate  a 150 MW combined cycle gas plant in South Hedland, Australia.This at a cost of $570 million.This plant should be in commercial operation by late 2016.This will be an additional 150 MW of generated power and will increase total EBITDA for Transalta.Sometimes building from scratch is easier than modifying existing plants but this will give TA the necessary expertise with which to modify their Canadian coal  operations and some hydro operations.This is better than waiting for Alberta and Canadian power prices to come back.In  addition, Transalta Power may soon approach $1.25 to $1.40 billion in  EBITDA.

Northland Power still on track

On January12,2015 Northland Power announced an update on developments at several Canadian projects.Also they announced that they will meet guidance on 2014 EBITDA and 2015 EBITDA and on their payout ratio.They stated that they will give more details in their annual report on February 18.Northland has taken on two big projects(both wind projects in Europe);one is called Gemini which will produce 600MW and it has a 2.8 billion Euro price tag and the second a 332 MW project in the North Sea near Germany.The second is called Nordsee and has three components(Nordsee One,Two and Three).Nordsee One is under advanced development and has  been awarded power contracts already.Nordsee One may be ready for commercial operations by late 2016 or early 2017.
    Canadian projects
Northland Power has made developments  in four Canadian projects.This ,in effect, tightens things up for their two big projects.The first is Kirkland Lake Generating station and it has a new 20 year contract up until August 2035 for a 30 MW gas generating station;it provides stable revenues until 2035.The second is the Cochrane Generating station.It will get an extended contract until May 2015.This will give it time  to negotiate a new  long term contract.The third one is Phase 3 of their ground mounted solar projects which has a capacity of 40MW.They signed a contract with two First Nations organization which gives them a combined 37.5% equity interest in 4 Phase 3 solar projects in Northern Ontario.The total consideration is for $46 million for which about $15 million will be a take-back loan.This is the final 4 of the total of 13 solar projects.Northland has had good increases in cash flow for the last two quarters and is expecting an increase in Q4.It is clear that Northland needs profit from it's Canadian operations to finance these two large international projects and they are getting it. 
      How well are they doing
Northland Power has had significant increases in cash flow and is expecting continued increases.It's Canadian operations have been very successful to date.But Northland is planning for the future with it's two large European projects.Many brokers may have underrated their profitability.Northland says it is on track to meet 2014 and 2015 guidance.If true then earnings per share measured by EBITDA would be around $2.50 per share.However a better measure would be adjusted EBITDA which would be properly about $2.25 to $2.35 per share.In 2015 if they meet guidance, e.p.s. could be as high as $2.50 to $2.60 per share.This can easily support a price per share of $19.Some brokers may worry about their rising payout ratio but Northland says even as it rises, their dividend will be safe.So it is fairly clear that Northland is still on track and is preparing adequately for it's Gemini project. 

Capital Power gets regulatory approvals

On January 8,2015 Capital Power announced that it had received regulatory approval for new and the most advanced gas turbines to be used in their Genesee 4 and 5 power projects.Capital Power(CPX) also announced more detail on the nature of the agreement with joint venture partner Enmax.The capital cost of the project will be $1.4 billion with Enmax looking for a 50% interest.CPX announced that it has already executed agreements with Mitsubishi Power for the most advanced natural gas turbines (J series) with a capacity of 1060 MW of power.There will be two 530 megawatt units.The facility consists of natural gas turbines, steam turbine generators and a heat recovery steam generator.The first of two units could be completed in late 2018.
  The Genesee station
  The new installation will be at the existing Genesee generating station near Edmonton.The Genesee plant was originally a coal-fired generator.The new plant will make use of existing water intake/discharge structures and the existing transmission interconnections.The first unit will add 530 MW to CPX's 3071 MW of generating capacity for an increase of almost 20%.This will be an efficient and cost effective generator and will replace some of Alberta's more expensive coal-fired generating units.It may also allow CPX to sell off some of it's more expensive units for cash.Capital Power has lots of time to decide on it's replacement options.But when built it will ensure that Capital Power does not get caught in an expensive power shortage like it did this year.This equipment is more flexible than any of the other turbines to handle power fluctuations.

Superior Plus-an Overview

This is the second blog on the same piece of information about Superior Plus, that is, their third quarter report.The other blog was written on January 9 on Blogdaleupsome.It was a more detailed blog as Superior used some accounting concepts that had to be explained.However doing this missed the overview of Superior Plus.                                                                                               SPB takes a healthy restructuring charge from earnings;in the last quarter they took a restructuring charge of $150 million.This is because in 2011 or 2012, SPB had some damage at one of it's plants and took a $300 million impairment charge.Since then Superior Plus has been rebuilding facilities.Consequently it has built new hydrochloric acid facilities in Port Edwards,Wisconsin and chloralkali facilities in Saskatoon.Now it has moved it's  Construction Products division  at a cost of $3 million to Dallas and is expecting increased profit  here.The propane distribution business has had small improvements also.This blog expects that restructuring will likely be smaller  in 2015.But there will likely have to be improvements made to their new Dallas operation.
  Superior Plus made a forecast of earnings(AOCF) in the second quarter of $1.65 to $1.95(AOCF) and now has raised it to $1.75 to $1.95 per share.For 2015 the forecast is for $1.80 to $2.10 per share.Superior Plus expects modest increases for all divisions.This blog thinks this is a little low but recognizes that the newly improved Construction Products division will be the wild card here.Their propane distribution division should have modest increases in sales and margin but the Specialty Chemicals could show a healthy increase with their new facilities in place.
       2015 Improvements
 SPB has just raised it's earnings per share for 2014 and expects an improvement for 2015.But with new facilities coming onstream results could be up more than 5%;depending on the American market results could be up by 15 to 20%.Also SPB has just raised it's dividend so it looks more attractive to investors.Superior Plus was trading at $15.00 per share in August and so could easily hit $13.50 even if the American market does not materialize like expected.

Crocodile Gold terminates net cash flow agreement

 Crocodile Gold is one of the junior gold stocks that I watch;it is interesting for a number of reasons.It had one operating mine in the Northern territory of Australia and several sizeable deposits.But in 2012 it bought two almost abandoned mines in Victoria State in Australia from Aurico Gold.It paid a lump sum and got a net cash flow agreement with Aurico Gold to share profits from the two mines.Most investors thought that mine life for these abandoned mines would not be very long because although Crocodile Gold produced 155,000 ounces in 2013 and 210,000 ounces of gold in 2014 the price of their shares rarely went above $.25.In earlier blogs on Blogdaleup (on Blogger) I had advised Crocodile Gold to invest more in equipment and resources to increase production,especially at the Fosterville mine which had a high grade of ore.Now it is clearer that increasing production would not benefit Crocodile Gold that much because of it's net cash flow  agreement.Profits would have to be shared almost on a 50/50 basis until cumulative net cash flow of  C$120 million was reached and thereafter on a 20% basis on an ongoing basis.
    The New Agreement
 Under the old agreement Crocodile had to pay a significant percentage of net cash flow to Aurico Gold.In fact, after $C60 million was reached they had to pay 100% of the next $C30 million.However Crocodile did have a button to push;they could and did take heavy write-offs and reduce net free cash flow.In effect, they could plow profits back into the development of the two mines plus other undeveloped property.So Aurico decided to make a new more effective agreement.They would take $C20 million on the date of the agreement and a 2% net smelter agreement royalty on the Fosterville mine and 1% royalty on the Stawell mine;this is a production royalty.For example,in 2014 the production royalty would give them about $2.5 million on Fosterville production and about $.5 million on Stawell production (assuming $1200 on ounce).This was in comparison to a payment of $2.7 million for 2014 with the old agreement.But now Crocodile  will start to increase production at both mines.This will benefit Aurico also as the royalty will increase as production from the two mines increases.This was not necessarily so under the old agreement.
The size of the mines
  The profitability of the new agreement depends on the size of the resource at both the Stawell and Fosterville mines.The Cosmo mine and the Maud Creek mine are not affected. New production coming out of Fosterville in 2014 barely included any production from the new faults discovered by Crocodile Gold;these faults contained the Phoenix and Lower Phoenix ore bodies.The length of these faults has not yet been discovered by Crocodile Gold.So the total Fosterville deposit could be bigger than 5 million ounces. An earlier blog on Workathon (July 27,2014) predicted that the size of the resource at Fosterville might be as big as 3 to 5 million ounces.Crocodile ,itself, stated in an earlier press release in May that there were about 2.1 million ounces at the Fosterville mine but now this is clearly understated.This new agreement will give more cash to Aurico right away and the amount of cash will increase over the life of the mine.Under the old agreement they would have gotten a bigger percentage of a small amount of net cash flow.It will also increase their production and will give more cash to Crocodile Gold, eventually much more.This will certainly give Crocodile enough money to soon develop it's 100% owned Maud Creek mine. 

Huronia VI ( a change in structure)

Huronia 3 and 4 are  included as earlier blogs on Workathon.Huronia 1,2,and 3, are consulting pieces on possible improvements to Midland.Huronia 4,5 and 6 are blogs  on  improvements to Wasaga Beach.Huronia 4  is also included in an earlier blog on Workathon.Huronia 5 is  one of my blogs on Wordpress called Econothon.Here is Huronia 6, also a piece on Wasaga Beach.
  Huronia 5
 The basis of Huronia 5 is that there are a number of things that the town council can do to improve business coming into Wasaga.The   town council can do a number of things easily and cheaply to increase traffic into Wasaga Beach and keep visitors longer.This includes programs to encourage restaurants on Mosley Street(the main street) to reduce prices and try to increase the number of visitors.Also to buy up abandoned properties on the main street and use them for community businesses such as thrift shops or even a drop-in centre.This will require  little expenditure and little change to the structure of Wasaga Beach.
    Bigger changes                                                                           The changes mentioned in Huronia 5 will not have a big impact.Wasaga Beach has a population of 17,000
according to the census figures but the town sign says it has a population of 18,000. Both are the peak population and do not reflect the population in the winter.It is somewhat comparable to another town further along the beach called Port Elgin.Port Elgin is on Lake Huron and is built along the beach.It has a population of only 10,000 to 11,000 but is within 3 to 4 kilometres of another town called Southampton.Their total population is about 18,000.It's main street is very similar to Wasaga as both have empty lots and houses and cottages on their main street.But I believe that Port Elgin has more new construction;it has a new Walmart,Canadian Tire and two or three new subdivisions, all in the east end.Both towns have a steady base of population from campers.Camping facilities are excellent in both towns.
 Both have small libraries as only a small percentage of the population use it. But Wasaga definitely has more motels -both low-priced and higher-priced motels.Port Elgin has more cottages for rent and generally visitors stay longer in cottages than in motels.Port Elgin has the headquarters for two small bus companies and they have maintenance facilities for the buses here also.Also their bus terminal is a little bigger as it connects to more towns than Wasaga Beach.Both Port Elgin and Wasaga Beach have a few higher-priced motels for high end visitors.But neither really counts on getting much traffic here.In summary, their structure is similar.
   A new platform
 Small towns need some kind of platform to jump from a small town to a mid-sized town, for example,a town like Hanover or Peterboro.Unless a town has a very special situation such as an industry or a software company that is in town the usual platform to growth is agricultural or lumber processing.First the town must have successful farming or  forestry around the town.The  processing would be done inside the town.Examples abound, for example, Creemore has a brewery,Bobcaygeon has a milk factory,Owen Sound has grain milling and other towns have small lumber milling plants.Hanover has a small grain milling operation as well as a meat processing plant.These plants cannot compete with multi-national plants but they will satisfy the region and have fresher products.Here is the most popular way for small towns to jump to the next level. But it is far from easy to do.Both Port Elgin and Wasaga Beach need a big investor  and some kind of guarantee of low wages (at least for the initial period).And they need some people with special skills. 

Measuring the performance of a stock

There are three or four performance measurement indicators for a stock.They can be used to tell if a stock is doing better or worse?The three main indicators are the earnings per share(e.p.s.) and the price/earnings ratio(p/e) and the yield or dividend per share.But all three depend on the earnings per share.Movement in the e.p.s affect the other two.This is the key measurement tool to determine how well a stock is doing.
   EBITDA versus funds flow
 The two main indicators of earnings performance are EBITDA and funds flow.The difference between the two is that EBITDA is earnings before interest, taxes and depreciation and amortization.Funds flow is EBITDA after (ITD and A) which are non-cash items have been removed from earnings.But these four items are not directly related to performance.Both amortization and depreciation are arbitrary expenditures.There is a lot of scope in the amount taken each year or quarter.The amount taken is affected by the value of the asset and the value of the equipment being depreciated.Resources with a long life such as oil pools and mines and industrial equipment can be depreciated at a slower rate.Other assets with a short life should be depreciated more quickly or at a larger rate  each year.In addition, an asset with a big value such as an oil pool worth $10 billion will still have a large depreciation charge even if the rate is only 2 or 3% a year.So the amount of the depreciation charge has little to do with the earnings or the performance of the stock.
 The second indicator of earnings per share is the funds flow method.This is EBITDA after all charges have been taken( both cash and non-cash items).This is the  amount available to shareholders, chiefly for dividends and capital expenditures.But also to preferred shares and to some debt charges.
          How do REITs do it
    REITs and real estate companies have come up with another perfmorance indicator;it is called adjusted funds flow from operations(AFFO).This indicator starts with funds flow and makes some adjustments,chiefly foreign exchange gains or losses and financial charges.REITs typically take large depreciation and amortization charges.So typically AFFO per share is substantially less than FFO per share.This is a figure that is usually used as e.p.s for REITs.They do not use adjusted EBITDA per share as an earnings measurement.But other than the large depreciation and amortization charges, the main difference between AFFO and adjusted EBITDA per share is the taxes.It is good to remember that adjusted EBITDA per share will always be larger than AFFO per share. AFFO has deductions for foreign exchange losses and financing charges.But in a case where taxes have been deferred as in some utility stocks, taxes will not be significant either.But the amount of the depreciation and amortization charges will always make AFFO and adjusted EBITDA different.And almost always AFFO will be smaller. 
Funds flow is still Useful
  Some companies will use funds flow as their measure of e.p.s.But it is less useful in comparing to many other companies.Canadian companies like to use adjusted EBITDA per share.Yet funds flow still has it's uses.It is more useful to look at debt and interest coverage.Funds flow is the amount of money available to pay interest if it were all used for that purpose.It is a measure of protection for debt holders.A standard multiple of debt coverage is 2.5 to 3.5 times funds flow.
   Secondary indicators
 Once you have a good steady measure of earnings the other two can be derived from there.For example, a p/e ratio of 15 is high and 5 times is fairly low.A yield of 3% is ample and a yield of 7.5% is quite high.However the higher the dividend  the greater payout to shareholders of earnings.And if earnings do not increase then the divdend will not likely increase.Both secondary indicators are directly affected by the earnings per share.First the investor must be sure that the right measure of earnings per share has been used.
   send emails to daleandmac@gmail.com for financial advice