Westshore Terminals - An envious problem

I had a few comments on my last blog regarding WTE. While I scaled back on my total equity holdings over the past few months due to a possible recession in the U.S and a slowdown in China, I continue to hold a "reduced" position in Westshore Terminals because;

Westshore clearly benefits from a captive customer base which I believe should persist going forward. Management noted the following constraints including: 1) the difficulty in competitors obtaining regulatory and permitting approval; and 2) the bottlenecks associated with shipments coming into other terminals which limits total throughput capacity.

The biggest problem is too much demand. In a market environment in which companies and industries are struggling to entice demand, Westshore clearly does not have this problem. Mr. Horgan stated that the company is unable to take on new customers as the terminal’s capacity has been accounted for by existing customers. The significant take-or-pay contract from Teck (~16-17MMt), plus the locked-in volumes announced by recent agreements with Grande Cache

Coal and other coal producers, is a clear indication of the demand for export coal. While coal demand remains robust, the lack of infrastructure and ability to ship the commodity is exasperating the already heavily tilted demand and supply imbalance. Westshore believes this developed through decades of insufficient infrastructure spending when coal was at USD$40-$50 per tonne and will likely persist as expansion and infrastructure projects are slow and difficult to develop.

The state of Wyoming alone produces close to 400MMt of thermal coal per year, as compared to 70MMt of all coal production per year in Canada. Producers in Wyoming and other Northeastern U.S. mines are itching to export their coal as demand has grown and prices have increased; however, the infrastructure isn’t there to support this potential export demand. The key here is that even if there is demand moderation for met-coal, the demand for thermal coal will likely more than make up for any shortfalls and keep the total supply and demand imbalance intact. In 2010, WTE shipped roughly 5.6MMt of thermal coal from the U.S. and has already shipped 6MMt in 2011. Management noted that the demand is there for the terminal to ship another 10MMt of thermal coal if they had the capacity to do so.

While the earthquake in Japan created huge disruptions to the country’s steel production, producers are starting to rebound and are nearing full capacity again. Mr. Horgan noted that for the coal year (which runs from April to March), Japanese producers are on track to produce 109MMt of steel, which is roughly 90% of the countries total steel production capacity.

Economies of scale and the size of China are certainly driving a multiplier affect on the met-coal

market. The demand from Chinese steel producers is a key catalyst in the met-coal market which Westshore believes will drive long-term demand. A startling data point that Mr. Horgan stated was that Chinese steel producers have grown from roughly 120MMt per year in 1999 to over 600MMt in 2010 - an increase which represents the steel production output of four to five Japans.

Westshore is making investments in their operations that are driving both increases in the terminal’s capacity and improvements in their existing operations. On the supply side, significant capacity constraints limit the export of coal and underscore the scarcity of Westshore’s service offering. Management noted several key areas and bottlenecks in the system that, if overcome, could improve both the terminal’s efficiency and capacity. While stated throughput capacity is currently at 28MMt, expansion programs are set to increase this to 33MMt by the end of 2013.

"Do you know the only thing that gives me pleasure? It's to see my dividends coming in." - John D. Rockefeller

I would have to concur with J.D. that receiving dividends is one of the most enjoyable experiences an investor can have. Like most people, I don't like seeing my stocks get hammered, but I have faith that they will eventually rebound. Knowing that I will receive a dividend keeps me from doing something foolish - like selling in a panic!

This is one of the chief benefits of dividend stocks - they help you stay calm when everyone around you is gripped by fear. Experts agree that keeping your emotions under control is one of the most crucial prerequisites for becoming a successful investor.  What else do I like about dividends?

You're rewarded for laziness
 
When you have a job, you usually have to show up to get paid. Not so with dividends. Even if you sleep in until noon, the company still pays you. And nobody will haul you down to HR for a chat.

Your 'salary' will grow

By focusing on companies that raise their dividends - pipelines, power producers, banks and well-known consumer-goods companies, as well as DRIPs - you can be fairly certain that your income will grow over time. This protects you from the effects of inflation.

You get income AND growth

A common misconception about dividend stocks is that they're stodgy, slow-growth companies. Not true. RBC Dominion Securities reviewed data going back to 1946 and found "a strong positive link between dividend payment and prospective earnings growth." What's more, a dividend strategy has proven successful in beating benchmark returns in almost every decade since the 1930s." True, occasionally a dividend-growth company flames out - Yellow Media Inc., anyone? - but most Canadian banks, utilities, pipelines and global consumer companies keep chugging along.

You benefit from compounding

Harnessing the power of compounding is another important element in a successful investing strategy. This is a snap, thanks to dividend reinvestment plans that automatically use your dividends to purchase additional shares - which means I'm buying at the best time - when prices are down.

You get paid to wait

You often hear this when a stock has been going sideways or losing for a while, and it's true: As long as the dividend cheques keep coming, it's easier to ride out stock market drops, such as the one we're experiencing now. In fact, as bad as things seem, I'm feeling quite a bit of a pleasure!

Extendicare REIT Yield: 8.3%

Extendicare REIT is a fully integrated owner/operator of skilled nursing and long term care facilities in North America. It is one of my top 5  holdings currently for which I purchase in December 2010. The REIT's owned and leased portfolio comprises more than 220 facilities with a resident capacity ~25,000. Extendicare also manages, on behalf of third parties, more than 30 facilities with a resident capacity ~ 3,000. Approximately 70% of the REIT's owned and leased beds are situated in 12 northern U.S. states. The REIT's Canadian operations are predominantly carried out in Ontario, but also include properties and businesses in Alberta, Saskatchewan and Manitoba.

Extendicare REIT ("EXE") recently reported Q1/11 results. Q1/11 FFO/unit (diluted) of $0.25 was virtually unchanged from Q1/10’s $0.26 and below estimates. The bottom line “miss” was primarily driven by a shortfall at the EBITDA line where cost pressures stunted margin expansion in what we expected to be an easy YoY comparison in light of favourable changes on the reimbursement front in late-2010.
Since the Q1/11 release, EXE's units have declined >10%. We believe this reflects the weaker than expected results, compounded by ongoing uncertainty, most notably on the reimbursement front. While EXE's U.S. SNFs are currently enjoying YoY double digit Medicare and Managed Care rate growth (owing to the transition to RUGs-IV), the potential for an 11% funding reduction (noted by CMS in late-April 2011)beginning Oct-1-11 has investors on edge.
I Still See Interesting Total Return Potential For Investors With Adequate Risk Tolerance. An attractive distribution (>8% annualized yield) combined with unit price upside over time, appears to offer interesting total return potential for the more risk tolerant. The current $0.84 annual distribution equates to ~80% of revised 2012E AFFO.
Following CMS’s final determination of reimbursement rates for 2012 (expected in the next 3 months), the Board will consider a distribution increase “in the context of other potential value-enhancing opportunities”.

Westshore Terminals (Yield: 5.2%)

Westshore Terminals Ltd. has been in business since 1970 and operates the largest coal loading facility on the west coast of North and South America, located at Roberts Bank, British Columbia. Westshore generates revenues on a throughput basis and receives a handling charge from customers based on volumes of coal exported through the Terminal. Westshore does not assume ownership of the coal and is therefore not directly exposed to the price of the commodity.

I continue to rate the shares as Outperform I also believe the likelihood of an acquisition by the likes of a pension player.

Westshore Terminals released Q1 results that were below our estimates as known issues, including harsh winter weather and equipment failures, impacted coal shipments more than expected. Coal shipments were 5.9MM tonnes in the quarter vs. our 6.5MM tonnes estimate leading to EBITDAR of $23MM vs. our $30MM estimate and revenue of $50MM vs. our $55MM.

Maintaining distributions. Westshore’s distribution of $0.27/unit was as expected and I note that the Board tends to make Q1 on the low side and ramp distributions through the year. Therefore maintaining the full year distribution estimates which reflects this seasonality. I  also note that the $43MM double dumper project and $10MM chute refurbishment project will be funded out of cash on hand and term bank debt and will not impact distributions.

No change in outlook. Although there is a fair amount of room to exceed the provided guidance, I note that management did not change their outlook despite the difficult Q1 operating environment. Management continues to expect 2011 volumes to exceed 2010 levels which came in at 24.7MM tonnes. I also note that Teck Resources reiterated their FY11 sales guidance for 24.5-25.5MM tonnes after revising Q1 sales lower giving us further confidence in our expected full year shipping volumes.

Costs set to decline. I note that it took Westshore approximately two weeks to replace a damaged gearbox and complete repairs in order to resume regular operations. Coupled with increasing levels of trained employees on automation and higher overtime costs to combat the harsh winter weather, I expect these costs to decline in the coming quarters leading to margin improvements.

Volume locked-in with long-term contract. Westshore announced at the end of Q1 an agreement with Grande Cache Coal to exclusively handle its annual coal tonnages that it ships through West Coast ports through to 2022. Although little detail was provided, I believe that the 1.3MM tonnes that Grande Cache Coal shipped in 2010 will likely expand as there are positive indications that they will look to increase their coal production to over 3MM tonnes in the next few years.

Capacity set to increase. In an indication of overwhelming demand, WTE will be proceeding with the capital upgrades involving the change out of the existing single dumper with a double dumper. The anticipated costs for this project will be approximately $43MM (to be financed by term bank debt) and will take until the end of 2012 to complete. Once complete, it is anticipated that the rated terminal throughput capacity will be approximately 33MM tonnes, up from the current capacity levels of approximately 28-29MM tonnes. Ensuring sufficient liquidity,  management noted that there will be no large principle repayments required until maturity on the anticipated term bank debt.

Income From Dividends

I will share my journey with you on my quest for achieving a income from a dividend stream from stocks with above average dividends, which consistently increase their distributions over time.

Why?

Reason 1- Because the marginal tax rate on eligible dividends is now lower than the rate on capital gains in most caandian provinces at most income levels. In fact, at lower income levels, the marginal tax rate on eligible dividends is often negative. That is, adding more eligible dividend income to your tax return can actually reduce your overall tax bill.. What a bargain!

Reason 2 - For those looking for safety and security from their stock portfolio, dividend-paying stocks remain attractive. Over time, dividend payers have historically outperformed other investments, with quite a bit less volatility -- a win-win for investors.