Gimme Credit

Jarden's second quarter was solid--one concern of investors is that the company grows by acquisition and accounting magic rather than organically but the 3.1% organic net sales increase allayed these concerns to some extent. Total sales grew over 12% to almost $2 billion in the quarter largely due to the Yankee Candle acquisition. Gross margin also improved year over year and adjusted EBITDA (after exclusion of onetime items and restructuring) was $258 million versus $219 million in the prior year period. Jarden's credit measures are strong and its resiliency to economic woes has been good especially in the rather weak retail environment so far in 2014--the company even raised guidance slightly. But bond prices are still elevated and we see no reason to change our underperform rating (based on price) with the 2022 bonds still trading at a y.t.w. under 3.5%.

Supervalu's (SVU) fiscal 2015 first quarter sales were better than expected driven by solid gains for Save-A-Lot. But stronger sales came at the expense of margins with adjusted EBITDA in line just shy of the consensus estimate. For the quarter ended June 14, SVU's sales were flat at $5.2 billion. Identical store sales increased a robust 5.6% at Save-A-Lot and a modest 0.6% at Retail Food, but sales fell 2.6% at Independent Business. The adjusted EBITDA margin contracted 20 basis points as lower fees earned under the transition services agreements with Albertsons and incremental investments to lower prices was mostly offset by cost saving initiatives and lower employee-related costs. As a result, adjusted EBITDA decreased 5% to $226 million, just short of the $228 million consensus expectation. For the latest twelve months, coverage and leverage were 3.5x and 3.6x and 2.6x and 4.2x on a rent adjusted basis. The supermarket operator ended the quarter with $908 million of liquidity. We will update our projections and review our rating shortly.

GPK posted a solid second quarter with an almost 3% increase in revenue (after adjusting for divested businesses). The company is transforming into a pure play packaging business after sale of its multi-wall business to Mondi last month. In the meantime, despite softer demand in some areas, GPK is improving margins and registered an uptick in adjusted EBITDA for the quarter of almost 9% to $190 million. However, the sale of businesses likely will reduce EBITDA going forward. We are updating our estimates and our bond opinion and will have more details on the quarter in an upcoming full report soon. The 2021 bonds we rated outperform earlier this year are now trading at a y.t.w. near 4.5%.

DTE Energy second quarter operating earnings of $128 million, up $19 million from a year ago. DTE Electric was the main driver, with YOY earnings up $40 million to $129 million, primarily due to the non-repeat of 2013 O&M expenses and revenue decoupler amortization. DTE Gas lost $4 million, a negative swing of $12 million, but a "return to normal." All told, DTE's growth businesses earned $138 million, up $27 million YOY, while the loss at Trading increased by $8 million to $10 million. YTD cash from operations of $1.1 billion funded $1.1 billion of capex (on track for full-year capex of $2.33 billion). Dividends of roughly $200 million were debt-funded, but as YTD GAAP net income was $450 million, the borrowing did not increase leverage, which stands at 50.3% (including half of DTE's $480 million of junior subordinated debt as equity). DTE affirmed full year EPS guidance of $4.20 - $4.40 per share, despite a YTD uplift of $.27 due to favorable weather. DTE says cooling degree days thus far in July are 28% below normal, so it is comfortable "banking" the uplift for weather and other contingencies. DTE expects to finish 2014 at the high end of its 50-52% debt/capitalization target range, but also the high end of its 20-22% FFO/TD range. No equity will be issued in 2014, but $200-300 million in both 2015 and 2016. DTE's short-term borrowings and current maturities of long-term debt totaled $740 million as of June 30. YTD debt issuance has been $1.05 billion, versus 2014 debt issuance guidance earlier this year of $2.1 billion. So more bonds to come.

AEP reported strong second quarter results, with operating earnings of $390 million, up $33 million (9.2%) from a year earlier. All segments participated, although the vertically integrated utilities operating earnings of $154 million were up only $2 million. AEP reported the vertically integrated subsidiaries (Appalachian, Indiana-Michigan, Public Service Co. of Oklahoma, Southwestern Electric Power, and a couple others) benefitted from higher off-system sales, as well as successful rate proceedings. AEP's Generating and Marketing segment contributed operating earnings of $98 million, up $8 million YOY, on favorable power prices. But the big earnings driver was increased investment in transmission, both in the T&D Utilities and AEP Transmission Holdco. In the T&D utilities (Ohio Power, AEP Texas Central, AEP Texas North) operating earnings were up $15 million (20%) to $90 million on rate-based transmission investment. AEP Transmission operating earnings were up $29 million YOY, also on increased investment. AEP announced it is increasing transmission investment guidance by another $100 million, to approximately $1.9 billion for 2014. Economic conditions in AEP's service territories are "encouraging" particularly in areas with shale gas development, where industrial sales were up 39%. For the first half of 2014, AEP's consolidated FFO was $2.3 billion, versus capex of $1.9 billion and dividends of $490 million (51% of reported net income), for a FCF deficit of just $91 million. Cash at the end of June was $190 million. Total debt, including $2.5 billion of securitization debt, was $19.6 billion, a stable 54% of capitalization. Between short-term debt of $732 million and current maturities of long-term debt of $2.5 billion (combined, up $1.65 billion from YE2013), we suspect there will be a number of bond issues from AEP in the near future.

Orange Capital issued a statement today regarding its investment in PNK shares--urging PNK to separate into an opco/propco structure (similar to Penn National and GLPI --see our recent reports). The request was issued originally on April 16 and outlined a "compelling" case for Pinnacle to separate its owned real estate into a listed REIT which would be distributed to shareholders via a tax-free spinoff in order to realize a "60-90%" increase in PNK's share price. Orange is a group of hedge funds and is asking for a special committee of independent directors to retain financial and legal advisors to explore the option. Shareholders seem to be benefiting at least initially from the REIT spin off which gets a higher multiple valuation that a regional gaming company. But we doubt PNK management is ready to tackle the difficult transformation after its relatively recent acquisition of Ameristar and the integration of such a large merger. In the meantime, PNK like other regional gaming operators is reporting soft results due to economically challenged customers and significant new openings in competitive markets. We viewed the second quarter results reported today by PNK as weak and they failed to meet market expectations. We will have details on the quarter and an updated bond opinion in a full report soon.

Dow is another of the big industrials we follow that is in the middle of a drawn-out process of reinventing itself, with the structure of its "chlorine carve-out" not to be specified for some time yet. But in discussing its second quarter results management did talk about other sources of divestitures of noncore assets, such as corporate assets and joint ventures, with some of this expected to take place in the next six months. Meanwhile the company had a reasonably "clean" quarter (i.e., no major "special items"), with sales up 2% and earnings up 16%, reflected in EBITDA margin expansion of more than 40 basis points to 15%. Continued cost and productivity gains more than offset higher input costs. Sales rose in every segment but not in every region, although by broader geographic measures sales rose in developed and emerging markets in the low single digits. The profitability stars were the Electronics and Functional Materials and Performance Materials segments, posting excellent margin expansion although benefiting from easy comparisons. The company does not issue a cash flow statement, but net debt increased in the quarter, as share repurchases exceeded estimated free cash flow. As the shortfall was funded with cash on hand, gross debt was unchanged, and with EBITDA on a trailing twelve months basis up 10%, leverage fell slightly to just over 2x, continuing a five quarter trend of declining year-over-year leverage. The business is improving, mainly on the cost side, but there remains considerable uncertainty regarding the pending "carve-out" and future financial policies.

Rite Aid appointed a new CFO to replace Frank Vitrano who will be stepping down in September. The new EVP and CFO is Darren Karst who was tapped from Roundy's a leading Midwest grocery chain where he has been chief financial officer since 2002. Prior to that time he was with Yucaipa companies. We don't view the appointment as signaling any change in strategy although we note both recent weak results and also a leveling out of the stock and bond runup.

On a consolidated basis, Caterpillar's sales and revenue in the second quarter fell 3%, while its earnings adjusted for restructuring costs rose 12%. On the sales side, volume in the Resource Industries segment was again the major culprit, somewhat offset by price realization and good performance in Construction Industries. Demand for new equipment and spare parts from mining customers is not showing any signs of coming back, and in the Resource Industries segment, CAT saw sales plunge nearly 30% on top of a similar decline last year (when the segment had a slightly different definition). Sales in this segment were down big in every region, and both volume and pricing fell. This led to a plunge in the segment operating margin of more than eleven percentage points. Yet margin expansion in Construction Industries and Energy & Transportation miraculously offset this, leading to operating margin expansion in the Machinery, Energy Transportation group (ME&T) as a whole (in an easy comparison) to 10.7%. With capital spending needs abating, CAT is generating strong free cash flow in the ME&T group but spending more than this on share repurchases, having raised its dividend substantially as well. The company expects to spend $2.5 billion on share repurchases in the current quarter, by far its largest quarterly buyback in recent memory. Still, the ME&T balance sheet remains extremely strong, with debt/EBITDA of just over 1x. The stock market seems to be disappointed by the company's slight reduction in its full year sales forecast, even though it increased its E.P.S. forecast. We would prefer to see outsize share repurchases commencing after evidence of a mining industry recovery, but the urge to reward shareholders appears to be too strong to resist.

FCH announced the closing of a new $140 term loan and proceeds (along with cash on hand and line of credit) will be used to redeem the remainder of the 10% secured notes due this year ($234 million). Although the redemption of near term bonds improves the maturity profile, the use of asset sale proceeds to accomplish the redemption would have been more of a credit positive. As it is, the action is neutral to a slight negative although the new loan is at an efficient rate and is secured by limited assets. We maintain our outperform on the bonds (and would recommend purchase on weakness).

Husky Energy reported Q2 net earnings of C$628 million, up approximately 4% YOY, with cash from operations essentially flat at C$1.5 billion. Upstream production was up, and downstream throughputs were down (on planned turnarounds at the refineries and Lloydminster Upgrader.) Upstream production averaged 334,000 boe/day, up 24,000 from a year ago. Crude oil and NGL production was higher YOY by 7,000 boe/d, but 9,000 boe/d lower sequentially, to 233,000 boe/d. Natural gas production was up almost 20% to 604,000 mcf/day, representing 30% of production. Husky's Liwan Gas Project, one of its growth pillars, is selling natural gas into the mainland China market, recently adding regular shipments of NGLs and condensate. Husky realized 88% of WTI on its crude oil in the quarter ($90.33), up from 83% a year ago ($77.98). In downstream (Chicago market), Husky's realized refining margin of $14.40 was 74% of crack spreads in the quarter, versus $20.24 per barrel (66%) a year ago. Husky consumed all but C$48 million of the C$1,097 million of cash it had at YE2013. As a result, even though total debt was unchanged at C$4.1 billion, net debt increased $1 billion, from 13% of capitalization to 16%. Six-month FFO was C$2.6 billion, versus C$2.4 billion of capex (2014 guidance: C$5 billion) and C$0.6 billion of dividends, for a FCF deficit of approximately C$0.4 billion. Working capital consumed C$110 million from operations, and C$608 million from investments. Husky renewed a C$1.6 billion revolving credit facility, now set to expire June 2018. Husky continues to look for a new CFO, to replace Mr. Alister Cowan, who left July 18 to become CFO at Suncor Energy. Husky's Treasurer, Mr. Darren Andruko, is serving as Acting CFO.

PepsiCo reported a 0.5% increase in second quarter revenue. Adjusting for unfavorable foreign exchange translation (-3%) and minor structural changes, organic revenue rose 3.6%. The organic increase included a 5% gain for global snacks and a 2% increase for global beverages. Organic revenue surged 8% in developing and emerging markets, led by double-digit growth in China. Management expects organic growth in the mid-single digits for 2014, while foreign currency is likely to have a negative impact of 3%. Consequently, we are looking for overall revenue growth of just over 1% in 2014. Gross margins expanded 100 basis points because of tapering commodity inflation, better pricing, and the impact of its productivity program. But higher SG&A spending resulted in only a 10 basis point increase in EBITDA margins. PEP is on track to deliver free cash flow of roughly $3.4 billion this year. However, share repurchases are likely to be around $5 billion. Acquisition spending is difficult to estimate exactly, but we figure it may be a couple hundred million dollars. With cash outlays far exceeding free cash flow, PEP will need to add more debt. The company has already increased debt by $3.2 billion through the first half of the year. Although we expect EBITDA to improve, we still project that leverage will rise to 2.6x from 2.4 at year-end 2013.

EQT's Q2 adjusted earnings were $88.3 million, up less than 2% from a year ago. Adjusted operating cash flow was essentially flat, down $2 million to $317 million. The flat YOY earnings and cash flow were despite a 17% YOY increase in sales volume to 110.1 Bcfe. Sales volume was approximately 4% below guidance, due to delays in hooking up 22 wells from 3 pads (by a matter of weeks -- all on line now.) Regional basis drove EQT's average realized price per Mcfe to $3.85, down 10% from a year ago, versus a 14% increase in the NYMEX price of natural gas, which averaged $4.67 per MMBtu. Basis averaged a net $.78 per Mcfe, versus a net $.02 per Mcfe in Q2 2013. EQT expects negative basis to expand to an average $1.00-1.10 per Mcfe in the second half of 2014. EQT ended the quarter with total debt of just over $2.8 billion, but cash and equivalents of nearly $1.3 billion, for net debt of $1.55 billion, or 27% of capitalization. Guidance calls for 2014 capex of $2.3 billion (we used $2.4 billion in our most recent projection) which is still likely to produce a FCF deficit of $800-1,000 million. With the establishment of EQM (EQT Midstream Partners), EQT has an additional source of liquidity for funding its growth. By virtue of the June 2014 "Nora asset exchange" with Range Resources, EQT picked up 73,000 net acres and over 900 producing wells (28% oil, 47% NGLs, 25% gas) in the Permian Basin, giving up 138,000 acres of coal-bed methane in the Nora Basin (Virginia), plus $145 million. More after the 10Q is filed.

Fiscal first quarter revenue (ended June 30th) declined 2.4% at CA Inc., the ninth consecutive quarter in which revenue has declined. In Mainframe Solutions, its biggest segment, revenue fell just under 1%. But revenue dropped 2.6% in the Enterprise Solutions segment and more than 11% in the Services unit. Management blamed the weak results in the Enterprise Solutions segment on a decrease in new product sales last year. Service revenue was hurt by a decrease in the size and number of professional services engagements, including non-core engagements with government customers not directly related to software product sales. Unfortunately, management guidance calls for further revenue declines over the remainder of the year. Based on the midpoint of its forecast, fiscal 2015 revenue will be down about 3%. The good news is that margins were up substantially, reflecting lower personnel costs, the timing of selling and marketing expenses, and costs associated with the workforce rebalancing last year. Free cash flow was nominal in the quarter, but we estimate the company will generate between $450 and $500 million for the full year, which is slightly more than last year. Share repurchases were modest in the quarter. Yet they exceeded free cash flow, and based on the recently announced share repurchase authorization, they could easily exceed full year free cash flow, requiring more debt.

Encana reported good results in a very eventful second quarter, with liquids production up significantly, and total debt down $1 billion YTD (cash up $0.1 billion to $2.7 billion) after closing on the $2.9 billion Eagle Ford acquisition. ECA raised 2014 FFO guidance from $2.9-3.0 billion to $3.4-3.6 billion. Capex guidance was also increased by $300 million (attributable to Eagle Ford assets, where capex of $300-320 million is expected, with cash flow in excess of capex of $200-205 million) to a new range of $2.6-2.7 billion (plus $100 million for corporate purposes). ECA said it expects to generate 2014 free cash flow of $500 million. (ECA's free cash flow definition is basically FFO less capex and net acquisitions and divestitures, but before dividends of approximately $200 million.) ECA's transition to liquids production is progressing well, with Q2 oil production of 34,200 bpd, up 49% YOY, and NGL production of 34,000 bpd up 38%. The Eagle Ford acquisition will add approximately 19,000 bpd to ECA's liquids production on an annualized basis, which ECA has revised to a midpoint of 88,500 bpd, up 25% from previous guidance. ECA expects to close on the sale of its Big Horn (western Alberta) assets by the end of Q3, for $1.8 billion. We also noticed ECA has increased its hedging activity a bit, protecting against declining natural gas and oil prices. Almost 90% of 2H2014 natural gas production has been hedged at $4.17 per Mcf, with approximately one-third of 2015 production hedged at $4.37 per Mcf. ECA has also hedged 30,400 bpd of 2H2014 oil production at an average price of $97.34 per barrel. ECA declined to comment on recent rumors that it is getting close to a buyer for its Deep Panuke natural gas play. Also declined to be specific about uses of "excess cash", but listed the logical uses is this order: 1) debt reduction, 2) "some form of return to shareholders" and 3) investing back into the business. Good quarter, and a confident outlook.

Hanesbrands (HBI) second quarter adjusted EBITDA was ahead of consensus expectations and the company again raised its 2014 guidance to reflect margin growth (excluding the recently announced acquisition of DBA Apparel). This strong performance was despite continued headwinds from a "restrained consumer-spending environment" while SG&A savings from the Maidenform integration (acquired last October) is progressing ahead of schedule. For the second quarter, revenues increased 12% to $1.3 billion, due to the inclusion of Maidenform as adjusted for Maidenform's $141 million contribution, revenues on a constant currency basis were up a more modest 1%. Reflecting margin enhancement initiatives (Innovate-to-Elevate strategy) supply chain manufacturing efficiencies, tight control of SG&A expenses, and the benefits from the MFB acquisition, the second quarter EBITDA margin adjusted for acquisition related expenses widened 190 basis points. As a result, second quarter adjusted EBITDA increased 25% to $254 million, easily exceeding the $229 million consensus estimate. For the latest twelve months, coverage was 8x and net leverage was 2.2x within the company's previously disclosed target range of 1.5-2.5x. Guidance for 2014 revenue was fine-tuned to $5.075 billion, while HBI raised its forecast for adjusted operating income to $710-730 million, up from $665-685 million, and cash flow from operations by $25 million to $500-600 million. We remain constructive regarding HBI's longer term credit prospects.

AT&T added more than one million postpaid subscribers in the second quarter, including more than 700K postpaid smartphone net adds and 366K postpaid tablet net adds, its best performance in almost five years. But wireless revenue only increased 3.7%, far weaker than the average gains over the past few years, as ARPU plus Next billings were down 4.5%. Service revenue actually declined in the quarter, reflecting that fact that greater than 50% of smartphone gross adds and upgrades chose AT&T Next plans, or installments plans, rather than device-subsidized plans. Worse yet, EBITDA margins dropped more than 200 basis points. The deterioration was attributable to increased adoption of Mobile Share Value plans, the move toward more installment sales, and more promotional activities. Management pointed to the fact that the Next plans help reduce churn, including a 16 basis improvement versus Q2 of last year, so they are positive for the company. On the wireline side, AT&T added 190K U-Verse TV customers, bringing penetration to roughly 20%. However, declines in business led to a 0.9% decline in revenue. Wireline margins fell more than 250 basis points due to content cost increases, declines in legacy services, and costs associated with Project VIP. Free cash flow was negative in the quarter and we expect only about $1.5 billion for the full year as capital spending of $21 billion is weighing heavily on cash generation. Since share buybacks have exceeded the free cash flow, AT&T had added more debt. Consequently, reported leverage is up to 2.0x. However, after quarter-end AT&T used proceeds from the America Movil disposition to slash debt. Therefore leverage should be down to 1.9x by year-end, before giving consideration to the DirecTV acquisition.

CMS Energy reported second quarter earnings sufficiently strong (after a very strong Q1) to raise the bottom end of its full-year EPS guidance by two cents, to $1.74-1.78. Net income of $83 million was up $3 million YOY. Operating income was also up $3 million, with strength in the gas utility and Enterprises offsetting a $6 million decline at Consumers Energy (to $195 million). Electric deliveries were up 2.3%, with Industrial deliveries up 13.7%. Residential deliveries were down 2.2% (down 1.1%, weather adjusted). We note that an important component of YOY EPS growth was lower benefit costs due to retiree healthcare cost sharing and a change in pension discount rates and asset values - $.05 in Q2, versus consolidated EPS growth of just $.01, and $.11 for 1H2014, half of the consolidated EPS growth of $.22. Total debt as of June 30 (including $71 million of securitization bonds) was $8.1 billion, up $134 million from YE2013, primarily on higher cash at the holding company (bond issues in April). Consolidated cash and equivalents were $358 million, up $186 million. Down to basic "blocking and tackling," with rate-based system investment to increase reliability and increased generating capacity (growth, coal plant retirement, projected MISO Zone 7 shortage in 2016.)