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George Fisher
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  • Gabelli Utilities Fund: Mid-Cap Value with a Focus on Consolidation and Monthly Distributions
    Gabelli Utilities Fund AAA (GABUX - $6.48) is an interesting, actively managed mutual fund for utility and income investors. While not usually keen on mutual funds, GABUX has a few intriguing attributes that should be appealing to income investors. GABUX is portfolio weighted to mid-cap value and is focused on being well positioned for the continuation of the consolidation trend in the utility sector. 
    GABUX is ranked 4 Stars overall and 5 Stars for preceding 3-yr period, and 4 Stars for the preceding 5-yr and 10-yr periods by Morningstar. GABUX is compared with 83, 83, 78, and 52 Utility-Specialty funds, respectively. From Wikipedia, “Gabelli is a leading proponent of the Graham-Dodd school of security analysis and pioneered the application of Graham and Dodd's principles to the analysis of domestic, cash generating, franchise companies in a very wide range of industries. His proprietary Private Market Value methodology is now an analytical standard in the value investing community.”
    From their 2010 Annual Report:
    “Our Approach
    For several decades, utility companies have acquired other utilities and utility assets for the sake of gaining economies of scale and efficiency or divested non-core utility assets to focus on core competencies. Despite over 90 completed utility mergers/acquisitions since 1993, the electric and gas utility sector remains fragmented, with over 60 electric utilities and 30 gas utilities. This is 50 more than we need from the standpoint of economic efficiency. 
    The balkanized structure of the industry is inherently inefficient, and competitive forces combined with constant changes in regulatory policy pressure marginal players. The big companies feel the need to be bigger to achieve scale economies or gain a strategic benefit, while the small companies are selling out as the cost of staying in the game rises. It is only because of a complex and lengthy merger review and approval process that the industry remains as fragmented as it currently is. Our investments in regulated companies have primarily, though not exclusively, focused on fundamentally sound, reasonably priced mid cap and small cap utilities that are likely acquisition targets for large utilities seeking increased bulk.
    We also like the beneficiaries of developing trends. This has led to our ongoing focus on nuclear power utilities and utilities with material wind development pipelines as a way to benefit from the need for more power from carbon free generation. We favor utilities with pending transmission line developments and also focus on natural gas pipelines and storage operators as a way to take advantage of the growing demand for natural gas in the U.S.”
    Gabelli Utilities AAA has historically paid a high distribution on a monthly basis. The current per share distribution is $0.84 annualized, or $0.07 per month and represents a 12.5% distribution based on a current market price of $6.48. Distributions have not been raised over the past five years. 
    The majority of distributions are classified as a return of capital. For investors, this classification reduces share cost and is not taxed as current income. For example, $0.73 of the $0.84 distributed in 2010 was return of capital, as was $3.08 of the $4.20 distributed over the past 5 years. In 2006 and 2007, return of capital represented 55% and 60% of distributions, respectively.
    A return of capital distribution reduces the adjusted cost basis of the shares held by an equal amount. When the cost basis reaches zero, the distribution is then considered income. It may be advisable to trade out of shares when their cost basis reaches zero as capital gains tax exposure may be less than the exposure on income. At Its current 5-yr average distribution and current share price, it may take as long as 11 years for a full return of capital. Holding shares in a tax advantaged account eliminates this situation. 
    GABUX carries an annual fund management fee of 1.43%.   Investor returns, including reinvestment of distributions, compared to the S&P 500 Utility Index and the Lipper Utility Fund, as of 12/31/10, is:

     1 yr3 yr5 yr
    S&P 500 Utility Index5.5%-5.7%3.9%
    Lipper Utility Fund10.2%-4.4%5.4%

    The portfolio consists of the following industries:
    Utility and Energy
    Electric Integrated
    Natural Gas Utilities
    Electric Transmission
    Global Utilities
    Diversified Industrial
    Utility Services
    Natural Resources
    Water Utilities
    Merchant Energy
    Alternative Energy

    Cable, Satellite
    Equipment & Software


    T-Bills Short Term
    The top ten fund holdings as of 12/31/10:
    Natural Fuel Gas (NYSE:NFG)
    Constellation Energy (NYSE:CEG)
    Consol Energy (NYSE:CNX)
    NextEra Energy (NYSE:NEE)
    Southwest Gas (NYSE:SWX)
    Southern Union (NYSE:SUG)
    Verizon (NYSE:VZ)
    Exelon (NYSE:EXC)
    FirstEnergy (NYSE:FE)
    Edison Int’l (NYSE:ED)
    Pertinent fund performance 2006 to 2010:
                                           2010          2009       2008       2007       2006
    Distributions                   $0.84        $0.84      $0.84      $0.84     $0.84
    Return of Capital            $0.74        $0.71      $0.70      $0.44     $0.50
    Operating Fees               1.43%      1.47%    1.43%      1.42%     1.43%
    Turnover                         19.0%      12.0%    19.0%      19.0%     24.0%
    Total Return                    13.0%      15.5%    -20.9%      8.6%      23.1%
    NAV (yearend)               $6.38        $6.46     $6.43       $9.12     $9.19
    The fund’s prospectus is found here (pdf):
    The fund’s 2010 Annual Report is found here (pdf):
    While not a big fan of most mutual funds due to management fees and “phantom capital gains tax exposure”, along with underperformance by most, I am a fan of Mario Gabelli, and have followed him for years.   For diversification, utility and income investors should review his mid-cap value specality utility fund.
    As always, investors should conduct their own due diligence, should develop their own understanding of these potential opportunities, and should determine how it may fit their current financial situation. 

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Apr 21 10:51 AM | Link | 1 Comment
  • Utility Spectrum by Industry and Market Capitalization
    Utility investors come in all shapes and sizes. Some gravitate to larger capitalization companies while others may gravitate to small company selections. Depending on an investor’s portfolio strategy and investment needs, creating exposure to some of both is a well-liked approach. 
    While utilities are usually lumped together as a sector, it is important to appreciate the specific industry in which each company operates. While as a group, utilities tend to move together due to the influence of competitive dividend yields, or lack thereof, underlying economic conditions along with political and regulatory pressures will affect utility industries differently. 
    For example, a rising natural gas market may increase profits at low-cost nuclear merchant power producers as rising input costs for electricity generated from natural gas may lead to a firming of auction pricing. Rising overall electric rates may negatively impact profitability at water utilities as electricity to power the distribution pumps is a large expense throughout the industry. 
    Within a utility portfolio, multiple selections should be made that diversify across industries and market capitalizations. While bigger is not always better, and smaller is not always smarter, a combination of these following twenty-four companies could create an interesting portfolio.
    The largest market capitalization utility companies and their respective market caps, in order, by industry are:
    Diversified Utilities  
    Exelon (EXC $27.3 bil), PG&E (PGC $17.5 bil), Public Service Enterprises (PEG $16.0 bil)
    Electric Utilities
    Southern Company (SO $32.3 bil), Dominion Resources (D $25.9 bil), Duke Energy (DUK $24.1 bil)
    Gas Utilities
    Sempra Energy (SRE $12.8 bil), EQT Corp (EQT $7.4 bil), ONEOK Inc (ONK $7.1 bil)
    Water Utilities
    American Water Works (AWK $4.9 bil), Aqua America (WTR $3.1 bil), California Water Service (CWT $775 mil)
    The smallest market capitalization utility companies and their respective market caps, with a trailing 12 month PE greater than 0, in order, by industry are: 
    Diversified Utilities
    Unitil (UTL $257 mil), CH Energy (CHG $780 mil), MGE Energy (MGEE $935 mil)
    Electric Utilities
    Central Vermont Public Service (CV $311 mil), Empire District Electric (EDE $905 mil), Ormat Technologies (ORA $1.15 bil)
    Gas Utilities
    Gas Natural (EGAS $72 mil), RGC Resources (RGCO $78 mil), Delta Natural Gas (DGAS $106 mil)
    Water Utilities
    Artesian Resources (ARTNA $150 mil), York Water (YORW $221 mil), Connecticut Water (CWTS $229 mil)
    This list could provide utility investors with some interesting choices. After reviewing your current selections by industry and market capitalization, adding some of these companies may dovetail into your investment profile. Further research on each as to their specific fundamentals and market valuations may provide a few new selections that meet your criterion, from either side of the spectrum.
    As always, investors should conduct their own due diligence, should develop their own understanding of these potential opportunities, and should determine how it may fit their current financial situation. 

    Disclosure: I am long EGAS, EXE.

    Additional disclosure: Author has been a shareholder of EGAS since 2007 and of EXC since 2011.
    Apr 01 12:31 AM | Link | Comment!
  • Emera Inc: Underfollowed Canadian Utility with Shareholder Friendly Management
    Emera Inc (EMRAF.PK, EMA.TO) is a Canadian-based electric utility on the move. Its main regulated subsidiary is Nova Scotia Power (NSPI). EMA has been expanding in the US through acquisitions and joint ventures, along with expanding in the Caribbean. Like all good Canadian utilities, Emera is moving towards the minimum 25% of power generated through alternative power sources by 2015 and 40% by 2020. EMA has $6.3 billion in assets (all numbers will be in Canadian $)
    NSPI comprises about 66% of 2010 operating income with the balance from regulated utility Bangor Hydro in Maine, Caribbean-based Grand Bahamas Power (80% ownership) and Barbados Power (80% ownership), transmission construction services, and a natural gas pipeline. 
    Emera recently completed a secondary stock offering to assist in improving its balance sheet after an active 2010. In Dec, EMA purchased Maine and Maritime, a Maine-based transmission company. In addition, EMA established a joint venture with Algonquin Power (AQUNF.PK, AQN.TO) that purchased California transmission assets from Sierra Pacific Power (NYSE:NVE).  Last year, EMA increased ownership in both of its Caribbean utilities. Emera is making headway with several alternative energy projects involving biomass, wind and hydro. These growth initiatives call for investments of upwards of $4 to $5 billion through 2016.  
    Emera has an interesting relationship with Algonquin Power. Not only are they joint venture partners, but EMA has become a major shareholder in Algonquin. As part of the California acquisition, Algonquin offered EMA the opportunity to buy into the company to the tune of 8% of shares outstanding. In addition, EMA has the right to buy another 12% upon completion of Algonquin’s previously announced acquisition of Granite State Electric and Energy North Natural Gas from National Grid (NYSE:NGG). 
    The partnering of Algonquin and EMA is an interesting marriage. Algonquin has historically been a wind and hydro-electric merchant power producer, and its potential acquisition by EMA down the road would assist in achieving government-mandated renewable energy requirements.
    EMA has a market capitalization of $3.6 billion, has about 120 million shares outstanding, and carries net debt of about $3.4 billion. The current dividend yield is an acceptable 4.2%, after the dividend was increased by 15% in November of last year.  Management has increased the dividend 4 times during the past 3 years. 
    Management is very shareholder friendly as demonstrated by the average 5-yr dividend growth of 10.8%. However, the payout ratio is a bit high at a current 76%. Return on invested capital (NASDAQ:ROIC) has a 5-yr average of 3.8%, with a 2010 ROIC of 4.4%, a bit below the average utility of around 6% to 7%. After Emera was appointed a place on the board of directors of Algonquin in 2010, they raised their dividend as well.
    EMA generated record earnings per share in 2010 of $1.68, up from $1.56 in 2009. Including the added shares from the recent secondary offering, eps are anticipated to be $1.70 this year and $1.83 next.  Cash flow from operations in 2010 was $416 million, up 34% from $310 million reported in 2009. The increase is attributed to stronger operating results.
    Electric utility investors should review Emera. While not particularly undervalued at its current share price of $31, conservatively managed EMA offers a steady utility investment with growth prospects for both earnings and dividends. I was a shareholder from 2003 to 2007 and am giving serious consideration to jumping back in.

    As Emera is a Canadian company, buying on the Toronto Exchange is preferred due to liquidity.  However, if investors are unable to do so, Emera does trade on the US Pink Sheets, like many foreign-listed companies.  However, due to low trading volume, limit orders should be used.  Entering and exiting using multiple limit orders should not be a problem for long-term investors. 

    Three year chart comparing the outperformance of EMA vs the S&P Utility ETF (NYSEARCA:XLE) is below:

    As always, investors should conduct their own due diligence, should develop their own understanding of these potential opportunities, and should determine how it may fit their current financial situation. 

    Disclosure: I am long OTCQB:AQUNF.

    Additional disclosure: I have been a shareholer since 2009
    Mar 30 6:06 PM | Link | Comment!
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