Tuesday, October 14, 2014


From the motion:

"Dow Jones & Company, Inc. (“Dow Jones”), publisher of The Wall Street Journal, Dow Jones Newswires, and a variety of other news and information publications, respectfully submits this response to the Debtors’ request (DN 92) to file an unredacted version of the Supplemental First Day Declaration of Daniel W. Squiller (the “Supplemental Declaration”) under seal, or in the alternative, to file the full document in the public docket. [...]

During an adjournment in the initial hearings on October 9, the courtroom was cleared to address this motion. Only the United States Trustee and counsel for Apple and the Debtors were permitted to participate. On information and belief, this closed hearing continued for at least twenty-five minutes. [...]

More than the Supplemental Declaration is at stake. Dow Jones is concerned that information submitted as the cases progress that touches in any way on Apple, or falls within the expansive terms of the confidentiality agreement (DN 92-3), will be subject to seal, redaction, or other restrictive terms. [...]"
  • The Supplemental Declaration Does not Qualify for the Limited Exceptions to the Right of Public Access Described in 11 U.S.C. §107(b).
  • Preventing Public Access to the Supplemental Declaration Would Also Run Afoul of Critical Constitutional Principles.
  • In the Alternative to Full Disclosure of the Supplemental Declaration, the “Least Restrictive” Means of Balancing the Public’s Right of Access with the Limitations Described in Section 107(b)(1) is to Closely Redact the Document – Not to Seal it Entirely.
  • The Court Should Also Release Any Transcripts and Recordings Made of the Closed Hearing Held on October 9, 2014.

Monday, October 13, 2014

Municipal Natural Gas Prepayment Deals

The second largest holding in the NAZ muni ETF is Citigroup Energy I: Salt Verde Prepay. Here's an article from 2008 about municipal natural gas prepayment deals:

A gas prepayment is a contract under which an agreed amount of discounted gas is supplied over a period that can range from 10-30 years. Crucially, the main difference between a typical commercial prepayment transaction and one involving a municipal utility or public agency is that the latter purchase is financed through the issuance of tax-exempt bonds.

"A public agency can issue such bonds and then use the proceeds to prepay for a specified, predetermined stream of natural gas," says Troy Black, managing director of financial products at BP in Houston. "The municipality passes the proceeds of the bond issuance by virtue of prepayment to a prepay supplier, which then has the obligation to deliver a steady stream of gas."
The article has a hilarious quote: "The market interest rate spreads are not currently conducive to meeting some of the economics that people became accustomed to by the middle of 2007"

Sunday, October 12, 2014

Economist On Sustainability of Low Oil Prices


"Demand for oilfield equipment and services has outstripped supply, which has also increased development costs. Even before the latest swoon in oil prices, overall costs had been outstripping revenues by 2-3% a year. The result is that nearly half of the projects the industry has under development will need oil prices greater than $120 a barrel to achieve positive cashflow."

Credit Spreads Suddenly Wider $HYG

This is a dramatic widening in credit spreads. And from the look of the chart, the trend in spreads is very bullish (wider).

That has a lot of implications. Mood shift. Flight away from risk to Treasuries. The LBO bid for companies falls or goes away entirely.

A correspondent writes in,
"I believe that most market observers have forgotten that in past rate cycles market driven rate increases always lead Fed increases. Here we have the junk bond market beginning the tightening well in advance of the Fed. Quality spreads will widen across the curve. Watch CDO issuance collapse as the risky tranches become hard to place. Watch for private equity deals to dry up. And what dry powder does that Fed have to stop it? Is the next QE going to purchase lower rated CDO tranches and junk bonds instead of treasuries and mortgages? Would a revived QE directed at treasuries do anything other than exacerbate the flight from junk and risk to safe and upwardly trending treasuries? This is how collapse starts as it moves from the fringes of the credit market toward the 'safe and secure' center."

Update on Ceres Global Ag Corp: Building The Northgate Commodity Logistics Hub $CRP

Press release:

"Ceres Global Ag Corp. (TSX: CRP) announces that it has received equity and debt financing proposals to advance the construction and development of the Northgate Commodity Logistics Centre. The major aspects of the proposals include: 1. an offering of rights to purchase common shares for gross proceeds of C$70 million. VN Capital Fund C, LP, a limited partnership controlled by the two principals of VN Capital Management, LLC, James Vanasek and Patrick Donnell Noone, and funds managed on behalf of Whitebox Advisors, LLC, have announced their intention to fully backstop the rights offering."
Ceres is up 40% since it was mentioned here in December 2011. Here's the current business description:
"a Grain Storage, Handling and Merchandising unit, anchored by its 100% ownership of Riverland Ag Corp., and a Commodity Logistics unit, containing its 25% interest in Stewart Southern Railway Inc. and its development of the Northgate, SK Commodity Logistics Centre.

Riverland Ag Corp. is a collection of nine (9) grain storage and handling assets in Minnesota, New York, and Ontario having aggregate storage capacity of approximately 47 million bushels. Riverland Ag also manages two facilities in Wyoming on behalf of its customer-owner. Stewart Southern Railway Inc. is a short-line railway with a range of 130 kilometres that operates in South-eastern Saskatchewan. The Northgate Commodity Logistics Centre is a proposed $96 million grain, oil and oilfield supplies transloading site being developed in conjunction with Riverland Ag and several potential energy company partners, connected to BNSF Railway."
The way you make money in grain storage is to buy grain, store it in your elevators, and sell it forward. In order to be profitable, that strategy requires the futures market to be in contango: future prices that are higher than the spot price. And in order for the market to be in contango, there needs to be a glut of the commodity. Basically, the grain storage facilities get paid the most when there is a lot of commodity to store, which makes sense.

When we wrote the 2011 post, corn and hard red spring wheat were both in backwardation - future prices lower than spot prices. That has changed and now corn and wheat are in contango. Dec 15 corn is 14% more expensive than Dec 14 and the wheat is 10% more expensive. There ought to be some money in storage now.

I don't know much about the grain storage business, but Ceres has 48mm bushels of capacity. I would think the economics are that you could buy and store say $160mm worth of corn and sell it a year later for $183mm, for $23 million in profit minus financing costs. But in their investor presentation, their 2014 EBITDA projection for the Riverland segment is $2.6mm. Of course, it's only recently developed that grains are in contango again.

The Stewart Southern Railway is a Bakken play. They own 25% of it, it does 40 railcars a day full of oil, $5.8mm annual EBITDA. Ceres' original investment in the SSR in December 2010 was $1.7 million for its 25% interest. So they picked a very high rate of return project once before.

Neither the SSR nor the Riverland segment seem like that much earnings power for a company with a $100 million market cap. So what do VN Capital and Whitebox see here? Maybe it's the company's Northgate project,
"We are in the process of constructing a new commodity logistics centre on 1,300 acres of land, located on the border between Northgate SK and Northgate ND, effectively linking Saskatchewan’s resources to the U.S. Midwest. The Northgate Commodity Logistics Centre is designed to utilize high-efficiency rail loops, capable of handling unit trains of up to 140 railcars. The site will initially contain a grain handling and shipping facility, followed by the construction of an oil and natural gas supply logistics centre to facilitate exports from Saskatchewan’s and Western Canada’s energy sector. A frac sand, pipe and cement unloading centre will be added to bring these products in from the United States to service Western Canada’s energy industry."
This could be interesting. Here's a map of where the Northgate project will go:

That looks like a good place for a rail link. Here's what they say about the cost:
"an additional investment of approximately $112 million over the next 3 – 5 years, is required for NCLC to reach full capacity including a 2.2 million bushel grain elevator, 7 2 ,000 barrels per day of oil capacity and 29,000 gallon per day in natural gas liquids capacity. Within th is budget, approximately $35 - 40 million is required to complete the first phase of the project which would enable the movement of grain, oil and natural gas liquids."
In the investor presentation, management thinks that the Northgate grain operations could generate $3.8 million in EBIT and the oil and NGLs over $20 million in EBIT.

Here is what VN Capital said about Ceres in their investor letter,
"Formerly an agriculture sector closed-end fund, Ceres is now a fully-fledged operating company with grain elevators and storage and processing facilities in the US and Canada. Last quarter we said that we would likely have more to say in 2014 regarding our investment in Ceres. We certainly do. In one fell swoop in June, we purchased 7% of the entire company. Like any other investment we make, this investment is grounded in fundamentals and is based on the opportunity to realize long term value. This situation, however, is different in that it puts us in a position where we, as the largest owner, can contribute meaningfully to the direction and pace of developments at the company, and we have wasted no time. After many years of incoherence, mismanagement and, most importantly, a lack of vision, Ceres is now moving ahead aggressively to resurrect its legacy grain business as well as build out its greenfield Northgate Commodity Logistics Hub on the North Dakota/Saskatchewan border. This last project is an enormous opportunity, the likes of which is not normally available to an investment vehicle such as the Partnership, which is why we have been aggressive in devoting capital as well as time and energy to Ceres. We have an exceptionally talented Board of Directors that is up to the task, and, although a lot of work remains to be done, we expect that Ceres will turn a corner at some point to become a meaningful contributor to the Partnership’s future returns. Our holdings of Ceres represent 11.1% of the Partnership’s assets."
They also discussed it in Value Investor Insight (this was in 2012, before some of the recent significant changes to the business,
"The backstory here is that Ceres was formed in late 2007 by Front Street Capital to invest in the then-hot agricultural commodity boom. Within a year those markets crashed as the recession hit and management shifted focus to hard assets with the purchase of a dozen privately held grain elevators from a Minnesota-based hedge fund manager, Whitebox Advisors. In 2011, Ceres announced it was going to run off its investment portfolio and reinvest the cash into similar operating assets. As we studied grain elevators, we concluded the business was similar to that of the cement business, where we’ve invested with some success before. There are high fixed-cost assets, with a good that is fairly low in value but bulky and expensive to transport. That allows cement companies to have natural monopolies near their plants because it’s a lot cheaper to buy cement from the guy who’s 10 miles away than 200 miles away. The same thing applies with grain elevators, but kind of in reverse. If you’re a farmer, it’s a lot cheaper and easier to transport your grain to the elevator that is very close than one that’s far away. In these situations it comes down to what you pay for the fixed assets – the lower the price, the higher your return. In Ceres’ case, we believe we were able to buy those fixed assets for free.

The current market cap is around C$83 million. Using year-end March numbers, reflecting a full harvest season, Ceres had around C$40 million in cash and run-off investments. It owned C$160 million worth of grain in its elevators, against which it had C$80 million of debt. At the fund level there was also another C$40 million in debt. So for less than C$5 million at today’s price, you’re getting the grain-elevator assets and the profits they generate. It recent years those profits have been as high as C$12 million, with an average of around C$8 million. Discount that average annuity at 10%, and that’s C$80 million in value right there.

One significant thing happened in the third quarter of this year, which is that the Canadian Wheat Board officially lost its monopoly to purchase Canadian wheat. That opens up a significant new base of potential customers for Ceres’s assets, many of which are located in the U.S near the Canadian border. The business will continue to fluctuate somewhat based on weather and crop yields, but the new demand should have a positive long-term impact on both capacity and pricing. Another upside we see here is that as the non-elevator portfolio is sold off, there will be no need for Ceres to maintain its closed-end fund structure. Savings related to that could add another C$2 million or so annually to the bottom line."
The company looks worth keeping an eye on.

S&P Futures Below 200-Day Moving Average

This ought to be good for a pretty good correction. See Hussman.

Hussman On The Impending Crash


"Fed easing is effective provided that risk-free cash is considered an inferior holding. Fed easing is useless if investors actually prefer to hold risk-free cash as a safe haven.

There’s certainly a feedback circle to this: the purely psychological belief that Fed liquidity is a magical risk-removing fairy dust can certainly support increased risk tolerance, but that tolerance should still be read directly out of market internals and trend uniformity. When investor preferences shift toward risk aversion, more liquidity doesn’t support stock prices. Yield-seeking speculation fails to emerge because low or zero interest rates on cash are preferred to the prospect of steeply negative returns. As the market collapses of 2000-2002 and 2007-2009 demonstrate, aggressive Fed easing does not prevent extraordinary market losses once investors have the risk-aversion bit in their teeth."