GLG News by Utilities and Power Generation Industry: Financial Statement Analysts

George PughPresidentGeorge Pugh & Co

Transmission? Bet the Line!

February 9, 2007

Analysis of:Money on the Lines | online.wsj.com

 

The US is beginning a major building cycle for electric transmission assets.

The increase spending on transmission assets roughly $ 8MMM per year is up 16% from last year and nearly 65% from 2003, which was the year of the big blackout. Part of the effort is simply catch-up as the investment has been a low priority for many years. Now the potential rates of return have increased under FERC regulation for certain projects, and because increased transmission will result in increased revenue on a fixed cost base. Neil Kalton of A. G. Edwards the author of the report predicts increased returns on equity for transmission plant which will be in 11-14% range.

Part of the increased spending will be for enhance reliability and improvement in the grid for greater flexibility. Other investment is to integrate green assets into the grid, and also to allow easier movement of power between pools.

These projects represent a real sea change for the industry. Until very recently, nobody thought that it would be possible to build any new transmission in certain areas, which will have them now.

George PughPresidentGeorge Pugh & Co

FIN 48: What and Why?

January 31, 2007

Analysis of:FASB to Implement Tax Changes Without Delay | www.msnbc.msn.com

Many companies and others are making strong arguments that the implementation of FIN 48 which modifies SFAS No. 109 be delayed. On January 17, 2007 the FASB said that implementation would not be delayed, but better guidance would be available in time for the first quarter 2007 filing date. See the following CFO article for more information:

http://www.cfo.com/article.cfm/8547954/c_8552964?f=TodayInFinance011807_h

It seems that everyone, the FASB and the SEC are in a hurry to begin implementation but the targets are not. Robert Herz, FASB chairman, said: "Investors we've talked to say this is needed information and it's needed now. The overall benefit to investors and the capital market of getting this done and getting it done in the time frame we've talked about is the overriding objective."

The speed in which this rule has been written and imposed will result in the need for much clarification, and evidence that any investors want this information in this way seems to very scant indeed.

George PughPresidentGeorge Pugh & Co

Please Re-Lease Me

January 23, 2007

Analysis of:IASB, FASB Announce Working Group Members | accounting.smartpros.com

This piece is thin, considered alone, however there has been a lot written about what new rules might and should do. The paper is not due until 2008, though meetings will begin on the subject before that. The original documents are as follows:

www.fasb.org/news/nr071906.shtml FASB Formally Adds Project to Reconsider Lease Accounting

www.sec.gov/news/studies/soxoffbalancerpt.pdf Sec Staff Report On Off-Balance Sheet Arrangements Special Purpose Entities and Related Issues

The issue refuses to die, however for that reason I will revisit some of the issues in an earlier article in a different way. http://news.glgroup.com/cm/Analysis/Logs.aspx?a=p&lid=7002&pid=3039

The following analysis explains why capitalizing operating leases is both illogical and contrary to fundamental GAAP.

George PughPresidentGeorge Pugh & Co

I Love Leases to Pieces

January 11, 2007

Analysis of:Grant Thornton LLP Supports Review of Lease Accounting Rules as FASB/IASB Working Group is Named | home.businesswire.com

Grant Thornton has gotten out in front of a very old issue, changes in lease accounting, which is now subject to a review by the Financial Accounting Standards Board (FASB), and the International Accounting Standards Board (IASB). This project has been in the works for a long time, with the first meeting for February 2007.

"The current lease standards need to be changed to give investors greater transparency in the reporting of financial information," said Grant Thornton LLP CEO, Edward Nusbaum, when asked "should lease accounting rules be revised to give investors more transparency." Though there maybe opposition, GT shows that 63% of senior controllers and CFOs agreed that "lease accounting rules need to be revised to give investors more transparency."

In the Grant Thornton presentation, however, people claim to speak for investor needs and desires, with no investor actually cited. The only implication is that for reasons of their own, some accountants want the rules changed, without an analyst in view.

George PughPresidentGeorge Pugh & Co

Insiders Catch a Break

January 3, 2007

Analysis of:Insiders with a curious edge | yahoo.businessweek.com

 

The SEC under Rule 10b5-1 has created a safe harbor for executives to manage their portfolios without fear of insider trading violations. Under this rule, the plans must be set up when the executives have no insider information and have set dates or prices of the trades in advance. http://www.law.uc.edu/CCL/34ActRls/rule10b5-1.html provides the substance of the rule.

The best part of the plan is that the planner does not have to specify the number of shares, can stop and start plans at will or run multiple plans at once. Not only that, but the plans allow execs to trade around earnings announcements and other significant events which are normally "blackout dates."

The author cites a good deal of research to show that the plans have out performed the market, and that people have use the plans judiciously in the case of Aetna’s (Gen. Custer’s life insurer), management where they got out before a major share-price correction.

George PughPresidentGeorge Pugh & Co

Gran Vitesse? Quel Dommage!

December 28, 2006

Analysis of:Vitesse Explains Firing of KPMG | www.cfo.com

 

On December 20, Vitesse Semiconductor issued an 8-K in which: "The Board of Directors has dismissed KPMG LLP based on its lack of independence. The Board is in contact with other independent public accounting firms and will work to engage a new independent public accounting firm as soon as practicable." This new found lack of independence is based on company plans to sue the auditor after an internal investigation found evidence of a broad range of accounting problems including option backdating.

Mr. Kiima wrote a delightful piece on the issue but I think that there are some things other than ‘shock and awe’ at the total silliness of the situation.

George PughPresidentGeorge Pugh & Co

Balm in Gilead?

December 27, 2006

Analysis of:Gilead Sciences Early Warning | www.auditintegrity.com

Audit Integrity believes that Gilead is at risk of both legal action and declining market performance.

Audit Integrity rated Gilead Sciences ‘Very Aggressive’ with an AGR® (Accounting & Governance Risk) score was 21 for the 2Q 2006, its lowest score over 12 quarters based on signs of financial engineering related to investment and acquisition accounting.

Audit Integrity believes that the Gilead’s compensation structure places it at risk of declining market performance, law suits and enforcement actions, centered on the high level of merger activity and overly aggressive accounting, manifested in Gilead’s low AGR® score.

George PughPresidentGeorge Pugh & Co

LBOs Suits and Elections

December 8, 2006

Analysis of:Investors Sue 13 Private Equity Firms | www.cfo.com

"No matter whether the Constitution follows the flag or not, the Supreme Court follows the election returns."
-Peter Finley Dunne

LBO’s and their creators have been the object of perhaps envious scrutiny as long as these deals have been done. Similar complaints have been at new deals where private equity funds buy control, then upstream dividends, and resell the target at a profit (hopefully). This particular suit involves the former rather than the latter, though the attack rhetoric is generally much the same.

On November 13, 2006, an investor group filed a class-action lawsuit against 13 private equity firms for bid-rigging which deprived the investors of the target company the full economic value for their holding. Justice has launched an informal investigation into alleged collusion covering LBOs. Bloomberg provides a more complete story at: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aKTQ50WmoW6w

What actually happened was that the suit, was specifically referenced to the HCA LBO.

Further the 20-page complaint doesn't provide any details on how the firms allegedly fixed prices.

The following describes the issues raised and whether they are particularly valid.

George PughPresidentGeorge Pugh & Co

Is NutriSystem Really Just a Bloater?

November 28, 2006

Analysis of:NutriSystem Early Warning | www.auditintegrity.com

This group has developed a following for being able to pick problem stocks out of the herd, with an emphasis on the likelihood of future litigation. For this particular company they record a number of areas of concern:

• Increased inventories relative revenue that is inventory turnover.
• High insider sales.
• Recent stock repurchase viewed as a sign of weak governance.
• Low score of 1 out of 5 from the firm’s equity model.
• High, 8.8% probability of a class action suit in the next year is 2.6X the probability of such a suit for similar companies.

Quite a list of troubles it would seem, but what really might the problems be?

George PughPresidentGeorge Pugh & Co

Say Hey for M&A

November 27, 2006

Analysis of:M&A Synergies? Don't Count On It | www.businessfinancemag.com

This article is based on a survey of corporate executives that states that there is evidence that M&A doesn’t necessarily greatly translate into shareholder value, but there are mergers that do, and that is why people keep at it. Of those surveyed only about half thought that there were either revenue or cost synergies. The strongest agreement in the poll was that it helped mergers helped retain the right people both for the buyer and seller, increased customer satisfaction.

Changes in the tax situation are important too, and were not noted in the article

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