|Shares Out. (in M):||0||P/E|
|Market Cap (in $M):||72||P/FCF|
|Net Debt (in $M):||0||EBIT||0||0|
Written up last year at $31.50, I want to explain why Maine & Maritimes (MAM) has upside potential of over 100% and a margin of safety that implies almost no downside. The intrinsic value of the core business alone is worth 15-60% more than the current stock price.
MAM owns a regulated electric utility called Maine Public Service (MPS) which owns transmission and distribution assets in
What exactly is causing the discrepancy? In 1986 the
MPS consistently generates about $37m in regulated revenue, and a new unregulated service company (USG) is already on a ~$4m run rate from several wind farms being built. There will be some lumpiness here, but they’re basically the only electric e&c company in
You can’t use p/e because GAAP income gets killed by the non-cash stranded cost amortization. How bad is the distortion? TTM, reported eps was $1.76 but would’ve been $4.43 excluding the charges (I am only talking about the non-cash stranded amortization charges, not all non-cash charges such as plant depreciation). 2008 eps will probably be around $2.00, but would be more like $5.20 without the same charges. The GAAP earnings power of this company is being dramatically understated. Cheap utilities trade for ~13-15x trailing eps, but some as low as 10x. Let’s just say 10x for normalized eps and the stock’s worth about $52/share.
There is no dividend currently so we’re out of luck on that. Before things got screwy though, they maintained a payout ratio around 70% on average. This is high because their assets don’t require much reinvestment (they have the lowest expenses per line mile of any public electric utility) and there aren’t many growth opportunities for them. Theoretically, they could support a dividend of about $3.64 based on the current normalized eps of $5.20, which if we applied an industry-high yield of 6.5% to, puts fair value at $56/share.
You might be rolling your eyes at my eps and dividend valuation, it’s an obviously tough sell since assumptions must be made. So let’s look at what’s real: cash. The same group of utilities trades for 7-9x EV/EBITDA, which if we applied the low end to $20m in EBITDA and $33m in debt, gets us to a value of $61/share. Even little companies with similar growth such as Central Vermont (CV) are trading at almost 9x while MAM is only at 5x despite having a much lower debt/EBITDA ratio of 1.7x vs average of 4x. MAM is actually the least levered of comp electric utilities. And free cash flow? TTM they reported $3.00/share in FCF, so the stock is trading at 14x trailing FCF, but even this is in some ways being depressed by another $1.00-1.50/share because they’re paying off deferred taxes. I’d tell you what FCF multiple other electric utilities trade at but none have positive FCF (alas, they do have dividends). A quick look at their most recent 10Q shows they’ve already done $8.4m in operating cash flow and $4.2m in FCF through the first half of the year…reminder, the market cap is $73m.
Anyway, I believe that the core business’ intrinsic value is between $50-70/share. At absolute worst, I think we’re about fairly valued right now.
MAM and Central Maine Power (CMP) are in a JV for the Maine Power Connection (MPC) project, which is a potential transmission line with a total price tag of $620m (MAM is a 30% partner). The line is initially needed because Horizon Wind, a very large wind farm developer, is trying to build an eventual 800 MW wind farm in
After several years of jointly studying the project, MAM and CMP released their findings earlier this year, which show the MPC meets several goals. First and most importantly, the long-run costs are outweighed by the benefits, thus it creates economic benefits to ratepayers in the region. Their own studies, along with that of Horizon’s, put total long-run cost savings at over $1 billion from switching off natural gas, which is very expensive in the Northeast. Second, the MPC would help the region satisfy various state-level initiatives for more renewable energy. While every state in
But what really gives credibility to the project is that it’s not just the parties that stand to benefit who are confirming the viability of the project. ISO-NE (the administrative body for all
There are basically two major hurdles to overcome. The first, and largest, is for the other members of ISO-NE to grant the project socialization status, which would all but guarantee the MPC gets built asap (mid 09). Socialization means that all of
Mass is holding the process up for this reason as well as a new energy bill that Governor Deval Patrick signed. The bill has a lot of provisions which actually help the MPC, and one that hurts it. The good things are that it calls for much more power to come from alternative sources like wind, and it will even force Mass utilities into long-term supply agreements with alternative power generators, thus helping spur wind/solar/bio development. A description of the new Mass energy bill is here: http://www.boston.com/news/local/massachusetts/articles/2008/07/03/state_starts_a_green_era/?page=full. It is an ambitious piece of legislation, and it works much to MAM’s advantage. The governor has stuck his neck out on being a “green” advocate, and it gives MAM a great deal of leverage over Mass.
The one negative part of the bill is that ideally, Mass wants all this wind/solar/bio generation to be in-state. Specifically, the Mass governor wants to see the
The second hurdle for MAM will be financing. This is an unknown to me, but based on conversations with management, I don’t think it will actually be that difficult to raise $186m. MAM has already been approached by numerous investment banks offering ideas and pledging future assistance. And if MAM can’t get financing the company would likely just get bought by someone like Northeast Utilities, Energy East, NSTAR or Emera…frankly I’m surprised it hasn’t happened yet. I’ll get more into this below.
There are two other big opportunities for MAM associated with the MPC. First, the $620m project has $186m budgeted for substation construction, and there would be additional line connection needed for the wind turbines themselves. MAM would be a bidder for a lot of this unregulated work, and in fact favored to work on it. How much work could they possibly get, unfortunately I don’t know. But the normally reserved management has been unusually excited about this opportunity when I’ve discussed it with them. The service work could easily cause reported eps to accelerate during construction and help generate cash which they could plow right back into construction. Second, there is a proposed 3rd phase of the project which would connect
What’s the value to MAM if the MPC goes through? There are some obvious financing assumptions you have to make in terms of debt/equity, the price at which they can raise stock, and how creative they can get in terms of pushing down holding company debt to the utility as equity. But really, I think the valuation is surprisingly simple…I believe this is how most people in the utility industry eyeball it. The way to look at this is by asking a) what’s the total value of MAM after the MPC is built, and b) how much of the company do they have to sell to get it done. From the total value perspective, MAM will be generating about $20m in earnings. $12.1m will be coming from their 13% ROE on the $92m invested in the MPC, while $8m is coming from the utility after the stranded costs expire. I would say there is little risk to this $20m earnings number. I am going to say this $20m is worth about 12.5x earnings, for a total value of $250m. Tackling part b, if we assume that MAM has to raise the same $93m in new equity sometime around 2010-2012, that means they have to sell an additional 38% of the company, which would increase the total share count from 1.7m to 2.7m. Dividing the $250m by the 2.7m shares outstanding gets you to a $90/share valuation, so we could say that the MPC adds an incremental $20-40/share in value. The table below shows MAM’s value at different multiples. Future eps also shows that eps should be able to grow at 25-30% cagr over the next 5 years.
[d] Total Value
[e] = a x d MPC % of MAM
[f] = c / e New Shares
[g] = (b / (1 - f)) - b Total Shares
[h] = g + b Value/Share
[i] = e / h EPS
[j] = a / h
The big risk here is that they price an offering too low and not enough of MPC’s value accrues to existing shareholders. Management doesn’t own much stock at all, so I wonder how much they would fight to price this deal correctly. But I take some comfort in the fact that I’ve gotten to know the CFO and think he’s pretty smart about this stuff, and he seems to be aware of the issue. Of course, the company could just sell now and get it all over with and no one would have to worry about this. Because the MPC has future phases that offer even more growth, I think an acquiring utility would be willing to pay between 12-14x for MAM’s earnings. But you can see that even at a very conservative multiple MAM is about 42% undervalued.
The MPC and Horizon Wind projects aren’t layups, but they’ve already got a ton of support from
We have a business with a going concern value between $50-70/share. We have what’s probably a binary option with additional value of $20-40/share. Then we have as yet unquantifiable upside in the form of construction work and future project phases. So in all, we’re looking at a $43 stock with a quantifiable valuation range of $48-110, and a good probability of the options paying off. I think this is a classic value investment. And for whatever this is worth to you, Leucadia National bought 57k shares last quarter…hopefully this helps to further validate the story and help it get discovered.
|Entry||08/20/2008 01:04 PM|
|What are your thoughts on Osborne selling down recently below 5%?|
|Entry||08/20/2008 02:41 PM|
|i was disappointed he decided to sell, but wasnt really surprised. they denied him a board seat and rejected his suggestion of reinstating the dividend sooner. he got frustrated with management and decided to sell. i spoke with him at the annual meeting and i like him. he would've been a great add to the board because of his utility background, but more importantly his stake in the company. i've spoken to him recently and while we agree on valuation, he just didnt feel like putting up a fight for this because of other opportunities on his plate that wouldnt require all the additional headaches.|
|Subject||RE: RE: Osborne|
|Entry||08/24/2008 07:21 PM|
|So what are your own thoughts on the factors driving a potential dividend reinstatement? Do you see it on the horizon?|
|Subject||RE: RE: RE: Osborne|
|Entry||08/24/2008 10:34 PM|
|straight from the horse's mouth, page 14 of the 10k: "Although the Company cannot definitively predict when it will resume paying dividends quarterly, with the improvement in cash flows during 2007, the increase in consolidated earnings and the repayment of the debt associated with the discontinued operations, the Company will likely be in a position to reinstitute a dividend to common shareholders toward the end of 2008 or early in 2009."|
so it's going to happen relatively shortly, which should open MAM as an investment to plenty of utility funds and other managers that can only invest in yield. it'll be a small catalyst when it gets reinstated.
i agree that mgmt could easily reinstate a small dividend right now, there's no reason not to, and it would let them underpromise/overdeliver. we made similar suggestions as osborne at the annual meeting (my group and osborne were the only two non-local holders in attendance). financially it's not even in doubt as debt has gone from $45m at the end of 06 to $33m currently, and they did $2.50/share in FCF for the first half of 08. it's just in the hands of mgmt at this point.
|Entry||09/01/2008 06:04 PM|
|1) after speaking with management i've revised my own 08 eps number down. Q2 should've been significantly higher but looked weak on account of two things. first was they had a $500k accrual for stock comp. second was they screwed up one of USG's contracts (they're currently working on two separate wind farm projects) and had to revise the profitability down. it was a rookie mistake on their part...disappointing nonetheless. it'll look more like $1.80 unfortunately. the big thing here is USG which should've added about $.30-.40/share in eps. |
2) let's just look at 07 to see what i am doing for the normalized eps. MAM reported $2.54m net income or $1.53/share. but they had $7.6m in non-cash stranded amortization costs in the form of Seabrook, Deferred Fuel, Incentive Refunds, and Cancelled Plant - see page 26 of the 10k. so assuming a tax rate of 40%, a normalized net income would be about $7.1m, or $4.25/share. i am doing the same basic calculation for future years, based on the amortization schedule the MAM has filed with ther MPUC. my 08 normalized eps number comes out to $5.10 after revising USG.
3) on the ROE, MAM is reinvesting more into pp&e over the next five years because they are playing catch-up for years past as well as being able to maintain their rate base. they plan to invest $7m/year for the next 5 years, which would increase their book value by $20m.
4) the capital committment schedule for MAM regarding the MPC is in the MPUC filing. MAM's committment is back-half weighted...$16m in 09, $30m in 10, $19m in 11, $27m in 12.
5) the equity raise assumption is and isnt aggressive. yes, on its face it's aggressive because the stock is at $42 and it's a tiny company and management doesnt own anything. on the other hand, this is how they price these deals, based on some high single digit earnings yield for new investors. i am just looking at this they way they usually do it. if nothing else it's a way to highlight the true value of the company. if they cant do the deal at a good price this is where you'd hopefully see them sell the company...or a fight from shareholders to have them sell. i will agree that it's a tricky path from here because of the circumstances, but i see a lot of value in their assets.
|Entry||09/02/2008 03:57 PM|
|abrams, when i replied last night i didnt have my full model with me. i just checked it over because i thought something didn't seem right regarding my 2008 eps numbers.|
to clarify, i am still at roughly $2.00/share for 2008 eps assuming the stock doesnt spike up again and we're not hit with more non-cash compensation charges like the one from Q2. i am at a loss of $.15 for Q3 and a $1.01 profit in Q4, which is a 79% improvement over last year's second half. here's how i am getting there:
1) inclusion of USG business. i assume their two contracts finish up towards the end of Q3, beginning of Q4. i am assuming $2.85m in 2H revenue at mid-teens margins. this adds about $.15 to eps vs 2007
2) the thing i missed was that one of the cash stranded costs, Maine Yankee, is set to expire in Q3 of this year. the 2H charges in 08 will be $600k vs $1.44m in 2007. this should add almost $.30 vs 2007. if you go to the MPUC website and search docket # 2003-666 you will be able to find the same schedule i am using.
on my normalized eps of $5.20, i think i made an error here. my 2009 normalized eps number is $5.20, while my 2008 eps is $4.55 and TTM is $4.32. the large jump in 2009 is because of the same reasons as above. i apologize for the error.
|Entry||10/20/2008 04:30 PM|
|Sorry if I missed it in your two reports or the messages, but why doesn't management own a material amount of stock if it is a great investment? Is there some technical reason? I don't get it, because on the surface this looks like a great idea. Thanks for your work.|
|Subject||RE: Insider Ownership|
|Entry||10/20/2008 06:15 PM|
|Thanks a lot, I'm always happy to talk about the stock. I'll admit the insider ownership is disappointing and we have been communicating this to management and the board basically since we first bought it. Some of the directors (see page 14 of the proxy) do take most of their fees as stock units, but other than that, it's all cash all the time.|
One of the problems is that the company went public 50 years ago and has less than 2m shares outstanding. They never really utilized option plans and havent granted options since the old CEO. But they did approve a new option plan and set aside 85k options (5% of basic shares outstanding) for employee awards. Not monumental, but it's a step in the right direction, at least they are starting to get it. I would really like to see some open market purchases.
Unrelated, I thought it was interesting to see Gabelli go over 10% in September, forcing them to deal with the additional filings.
|Entry||12/01/2008 05:56 PM|
|If anyone in VIC-land still owns this, good things are happening. FERC approved the MPC and the requested 150 bps ROE premium. FERC basically sided with MAM on all points; hopefully this creates a lot of momentum and validation when the MPUC considers it in 2009...the thought is that it should make their decision somewhat easier. Management was really encouraged by the response. They had been worried (as had I) that the delay in approval (they were supposed to have received a decision in October) was a bad sign.|
As for financing - Tim had wondered about this - it's still pretty unknown right now from MAM's perspective. Central Maine Power is now owned by Iberdrola who have plenty of capital so no real worry there. At least MAM's commitment is back-end weighted and there no need for cash until at the earliest mid-2009.
PRESQUE ISLE, ME, Nov 19, 2008 (MARKET WIRE via COMTEX News Network) -- Officials at Maine Public Service Company (MPS), a subsidiary of Maine & Maritimes Corporation (AMEX: MAM) (NYSE Alternext U.S.: MAM), confirm that the Federal Energy Regulatory Commission (FERC) has conditionally approved transmission rate incentives for the Maine Power Connection Project (MPC Project) sponsored by MPS and Central Maine Power Company. The companies requested a 1.5 percent incentive rate equity adder and recovery of prudently incurred costs if the project is abandoned as a result of factors beyond their control.
FERC authorized the requested incentives on the condition that the project is included in ISO-New England's Regional System Plan as a Market Efficiency Transmission Upgrade.
View the Order as filed at FERC's e-library: