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2/11/20 Conrad's Utility Investor Live Chat
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AvatarRoger Conrad
2:09
A. Thanks Bill. I don’t really have anything to add to my discussion of AT&T in my answer to the previous chat question. They have apparently spent big in the spectrum auction. I’m not sure I agree with the statement that they “wasted billions” in previous spectrum auctions. In fact, the wireless business has been a real bright spot for the company throughout the pandemic, and was once again in Q4.
 
I do believe that 5G uptake in a real reason for optimism for AT&T by the second half of 2021, as it is for the rest of the US Big 3 Verizon Communications (NYSE: VZ) and Deutsche Telekom’s (Germany: DTE, OTC: DTEGY) US unit T-Mobile US (NSDQ: TMUS). I think we’ve seen the needed proof of concept in results from China Mobile. In fact, the delayed rollout in this country may actually wind up working to providers’ benefit, as more applications are being developed.
 
2:10
It’s true our money in AT&T hasn’t gone anywhere actually for several years. That’s true of almost every telecom except T-Mobile in fact, which to date has been the one sector stock big institutions have been willing to hold. But the question now is whether or not there are catalysts to change that this year.
 
My view for a while has been that there are, and that the current valuation implies investor expectations that won’t be difficult to beat. My feeling is the two most likely catalysts for a major jump in shares would be a sale of DirecTV and a recovery at Warner Media as the pandemic recedes. And so long as AT&T’s wireless business is this solid and free cash flow projections are this robust, I’m willing to wait on them.
 
I do, however, believe selected renewable energy stocks are also a good place to invest—particularly the recommendations in the February Feature article.
 
 
Q. Hi Roger. If you recall our earlier discussion on distribution of power generation and delivery, you might remember my comments on a system engineer’s view of the world. Covid has stressed our systems enough to make these observations more obvious to all. You look at the usage data and the data tells you the degree of centralization, regionalization and localization that makes sense for your system.
 
In the power example, you need big, centralized generation and distribution close to big cities (consumers), smaller, regionalized generation close to medium sized cities and local generation for remote consumers. Many think there is a trade-off between system efficiency and system resiliency. Any systems engineer who has worked with real, large systems can tell you that is not true. The distributed, resilient systems always turn out to be the most efficient in the end.
This article is showing the same pattern for food generation and distribution. The last article I sent you shows the same pattern for drug distribution.

https://www.washingtonpost.com/outlook/2021/02/05/pandemic-food-resili...
 
--James R.
 
2:11
A. Thank you for sending that piece. It’s always interesting discussing these larger picture issues. I have been generally a skeptic of distributed energy stocks over the years, largely because none of the popular names have been able to demonstrate they have a sustainable business model.
 
Tesla, for example, is perhaps the most popular company in America right now. But its Energy, Generation and Storage (EGS) unit appears no closer to finding a profitable business model than it was under the old SolarCity name. In fact, despite falling costs and demonstrable advances in capability for batteries, EGS is still demonstrating the same perverse, reverse economics of scale.
Tesla’s 2020 EGS revenue, for example, rose by 30.2% from 2019 levels. That’s quite impressive, until you consider the company’s cost for every dollar of that revenue was 99.1 cents. That also compares to a cost of 87.6 cents per dollar of revenue in 2019, and 87.8 cents in 2018. And it looks even worse when you consider those are only gross margins that don’t include selling, general and administrative costs or debt interest.
 
I’ve pointed out that rooftop solar company SunRun (NSDQ: RUN) appears to be moving toward a sustainable business model since merging with the former Vivint Solar last year. That’s by aggregating output of megawatts of capacity it deploys to homes and businesses under a long-term contract with utility Edison International (NYSE: EIX).
 
If this deal works, it could become a model for future developer/grid owner deals that further decentralizes generation and accelerates solar adoption, while improving grid efficiency and boosting profitability of both parties. That’s promising for SunRun, which last year bled almost $1.2 billion in free cash flow. And it’s potentially promising even for Tesla’s EGS division as well.
 
The irony is getting there will depend on successfully doing deals with utilities like Edison International—rather than trying to compete with them for business. That too in my view is a clear sign of how much scale advantage still matters in the power industry, just as it has been since Edison and Tesla were laying out their competing visions in the late 19th century.
 
Again, that’s not to say localizing systems doesn’t improve reliability and resiliency in an increasingly complex world, far from it. It’s just that larger entities with better reach, access to low cost capital and experience running large systems are likely to win the business in the long run. That’s why the “death spiral” theory for utilities of several years ago proved dead wrong. And it’s why Tesla’s EGS unit hasn’t fared any better so far than its former affiliate SolarCity, again despite rapidly falling battery costs and improving efficiency.
 
 
2:12
That's what we had in the email queue. Now let's get to the live questions.
Pam M.
2:16
Thank you for doing these valuable chats! President Biden is getting some pushback on his decision to shut down Keystone pipeline as well as possible others. You mentioned last year that the TRP is strong enough without the pipeline. Your current opinion?

Thank you!
AvatarRoger Conrad
2:16
Hi Pam. That's still very much my opinion on TC Energy, the former TransCanada. Specifically, they have upwards of $30 billion in "commercially secured" energy projects in North America besides the once again stalled Keystone XL pipeline, which is more than enough at their current cost of capital to keep up mid-to-upper single digit annual dividend growth--their target has been 8-10%--the next few years. Q4 earnings and guidance are due out Feb 18 and I'm interested in the progress of those projects, as well as strength of contracts. But this company has positioned itself very conservatively over the years, to the point of actually offloading most of the financial risk for Keystone XL to the Alberta government and First Nations. I continue to rate it a buy up to 50.
AvatarRoger Conrad
2:20
As an addendum, specifically in regards to Keystone XL, I'm not wholly convinced this project is completely dead. Senator Manchin (D-WVA) is now effectively the gatekeeper to President Biden's energy policy, at least for whatever requires more than an executive order. And he's publicly requested reopening the case. Pipeline politics are always highly fungible. But the point is TC doesn't depend on Keystone XL going ahead for growth. In fact, it hasn't for almost a decade. And as I've told our Energy and Income Advisor members, the more oil and gas pipelines prevented from being built (or that are shut down) the greater the element of scarcity as demand recovers from the pandemic--and the more valuable operating infrastructure like TC owns. And the company will get an earnings lift this year from acquiring its TC Pipelines LP uni as well.
Jeffrey H.
2:30
Greetings, Hope you are well. I always find these chats extremely valuable. I would appreciate hearing your thoughts about Dominion's Convertible Preferred, DCUE. I bought it a tad below par.
I understand that the upside might be limited. But how much do I need to worry about the downside? The fixed income is nice.
Many thanks
AvatarRoger Conrad
2:30
I've become more interested in this asset class as it's grown over the past couple years. We have one of them as a CUI Aggressive Holding--a Centerpoint Energy preferred that mandatorily converts September 1 of this year into a range of common shares. The best time to buy in is when the common has dropped and the preferred along with it. That's what we were able to do with CNP P, and as you've said what you've done with the Dominion preferred, which is a 7.25% (paid quarterly) that will convert into between 1.1275 and 1.3529 common shares on June 1, 2022. The minimum Dominion share price needed to reach the target value at conversion of 100 is $73.91. In my view, it should comfortably exceed that by then. Owners of this preferred will receive a higher dividend than they would simply owning the common now. But they will not share in upside until Dominion rises above $86.92.
AvatarRoger Conrad
2:32
In my view, Dominion common will provide a superior total return between now and June 1, 2022 and that's my preferred way of owning the company. But this would have appeal for someone more concerned about income. And I think this is an area I will feature for a future issue that's focused on high yield. Anyway you own it, I like Dominion.
Christopher B.
2:39
Hello Roger,

Update on AGLXY AGL Energy Limited just reported earnings yesterday February 10, 2021.

The stock is trading at record lows

I have not been able to listen to the earnings call yet
AvatarRoger Conrad
2:39
I answered an emailed question on AGL Energy a bit earlier in the chat. Adding to what I said there, the most important takeaway from the earnings and guidance call is management is sticking to its guidance for both EBITDA and NPAT (net profit after tax) in a year where they face several major cyclical headwinds--mainly pandemic induced weakness in energy demand and therefore wholesale electricity prices. The company is, however, in my view moving where it needs to regarding the big secular trend in Australia's electricity market, which is more renewables, energy storage and natural gas, and a lot less coal. That's been AGL's push the past few years. The strategy has kept it at odds with Australia's ruling Liberal/National Party policy on the federal level, but aligned with the Labor Party policies of the country's most important states where it operates. I was pleasantly surprised by the dividend declared. But the main reason I continue to hold it is the company is resilient at what should be the bottom
AvatarRoger Conrad
2:40
for the energy cycle in Australia. So while in retrospect, I should have recommended selling when Labor lost the election in 2019, I do see a lot more upside than downside at this point and advise continuing to hold on.
William S.
2:48
Could you comment on the recent takeover bid of IPPLF?
AvatarRoger Conrad
2:48
Inter Pipeline Ltd is a Canadian midstream energy company I've tracked for years--it's currently in the Energy and Income Advisor in our Australia and Canada coverage universe. In retrospect, the multi-year strategy of investing in European infrastructure rather than going all in to build scale in Canada--as for example Pembina has--did cost this company earlier this year with a substantial dividend cut. But this company has valuable assets, the balance sheet is sound and the long-term outlook is positive--with either Line 3, TransMountain or both pipelines on the verge of greatly expanding oil and gas takeaway capacity from Alberta and demand set to recover as the pandemic recedes. My view is Brookfield isn't going away but will have to pony up a higher bid to get a deal done. In the meantime, our advice is to hold on and see what happens.
Dwayne E
2:52
AGL Energy has been a lagger now for some time. What is your current assessment?
AvatarRoger Conrad
2:52
I don't have a whole lot to add to what I said in my two previous answers to questions on AGL. It is the only Portfolio stock at this point trading below its Dream Buy price, which is noteworthy on a couple of fronts. First, it demonstrated the company is moving to a somewhat different cycle than our US recommendations--which is hurting us now but as history shows is likely to help us later. Second, Dream Buys are set at levels that should only be breached under extreme conditions--and AGL is most certainly facing a perfect storm right now of reduced wholesale electricity prices, pressure on retail prices from competition and Australian federal government energy policy that's wholly at odds with the country's state governments--with officials who aren't shy about bashing utilities. Again, what's impressed me is how resilient AGL has been financially and therefore able to push its long-term energy transition strategy--which is really the key to big returns from here.
AvatarRoger Conrad
2:54
It bears mentioning that when we first picked up AGL early in the previous decade, it was at a similar place in its cycle. Management made a bet that wholesale prices would recover in Australia as new LNG export facilities were built which paid off richly and increased its market dominance. I think the bet they're making now on the country's energy transition will pay similar returns--and I'm willing to be patient to wait for that to happen.
2:56
I will say the next time I believe we're at the top of the cycle, I will consider more strongly cashing out. I didn't this time because I thought the energy transition investments would keep expanding earnings--which the Labor Party's defeat in 2019 made problematic. But AGL is a very high quality company and because of that we will have another chance to ride the cycle from this low point.
Pat M.
3:02
Hello Roger,

 I would find it very useful if your basic portfolio chart had not only the maximum buy price but also the dream buy and the (partial) sell price. These prices would help me understand where the current price fits into the larger context in one, easy to find chart.

Thanks for your thoughtful and consistent efforts through the years!
AvatarRoger Conrad
3:02
Thanks Pat as always for the suggestions and the kind words! Hopefully, at some point we'll meet up in person again.

Our thought has been to post the Dream Buy and Trading Above Target tables--which are in the Portfolio section of every issue--under the Portfolio tabs on the CUI website the next time we do renovations. Maybe adding a column of columns to the existing Portfolio tables is something we can do faster. I will check into it.
Ben F.
3:05
Roger -

Good morning from New Mexico.

Thoughts on: (a) PNW; and (b) AGL Energy earnings yesterday. 

Cheers
AvatarRoger Conrad
3:05
I've more or less given you all I have on AGL in the answers to the previous questions. Again, I think they did the important things in their FY first half (end Dec 31) for us to continue to bet on a comeback. There is a lot of negative sentiment on the company now that will only shift positive when Australia appears to be moving to a better place--of course a Labor victory in elections that must be held by the end of 2022 would be an immediate and major positive. But I think this is one we're going to have to be patient with, though the big semi-annual dividend helps.
AvatarRoger Conrad
3:10
Regards PNM Resources, shares are basically going to follow the progress of the merger with Avangrid (NYSE: AGR). The deal recently cleared a couple of regulatory hurdles as I've noted in the February CUI. And it seems to be avoiding controversy so far in New Mexico, which has been a generally tough jurisdiction for utility mergers over the years. The cash offer is $50.30 per share, which is about 3% above PNM's current share price, which indicates this deal has a high probability of going through. My view is downside on deal failure would be the low 40s. But the good news is the company is pretty solid and capable of growing on its own as it transitions to renewable energy with regulatory support. So I don't see much risk from holding on to the close at this point--if the price went over $50 I would probably advise taking a profit.
Ed
3:18
For those of us who fortunately purchased per your recommendation CNPPRB (Center Point Energy Mandatory Convertible Preferred Stock) that converts on 9/1/21 to CNP shares, would you recommend at this point holding or liquidating that CNP position after the conversion date
AvatarRoger Conrad
3:18
I do continue to recommend the Centerpoint mandatory convertible preferred at a price of 42 or lower, and it's slightly below that now. I like the high yield. But as I've said before, the difference maker for returns (what it's worth at conversion) will be whether or not Centerpoint can sell its 50% GP and 53.7% LP interest in Enable Midstream on reasonable terms between now and when the preferred converts to common stock on Sept 1. With 50% GP and 25.49% LP owner OG&E Energy (NYSE: OGE) apparently also considering a sale--and energy demand likely to recover as the pandemic recedes--I still believe that will happen. When it does, CNP shares should get a nice boost, which could get even bigger depending on what it does with the money and whether or not it gets a post-sale takeover offer itself. The only real question in my mind is timing--will it happen before or after the preferred converts. But at this point, I'm planning to hold until there is a sale of Enable, whether that happens before or after.
AvatarRoger Conrad
3:19
I will add that I won't continue to hold Centerpoint in any form if the underlying business appears to weaken--and we do have earnings coming up on Feb 25,  Enable's are Feb 24.
Neil
3:30
Roger,
Thanks for your long and steady service, I have been a follower for nearly 20 years.
In the Feb-21 issue, you mentioned the Australia national government being at war with its states over renewable energy.
I have noticed this phenomenon in the U.S. also, both by anecdotes from residents (i.e. effect on local property values, contract disputes over inadequate transmission line egress from tower areas, etc.) and in the media, e.g. -

https://www.americanexperiment.org/2021/02/sign-up-to-testify-on-thurs...

It looks to me that national governments and their client institutions have enormous leverage on this subject, with consequent effect on the investment narrative. Would you commentate on how investors should process long term concerns by locals relating to any downside of renewables?

Thanks!
AvatarRoger Conrad
3:30
Thanks for posting the link. I don't think you have to be a Marxist or conspiracy theorist to recognize that money and power walk together, and thereby shape policy. And in an essential services sector that serves literally everyone, companies can be at great risk if they run afoul of regulators.

Sometimes it's worth the pain, as I think it will be for AGL in the long run. But that stock's underperformance the past few years also shows the perils for shareholders when that happens. And that's one reason I'm increasingly cautious on New York utilities like Consolidated Edison, which is facing threats to its franchise from the Governor over alleged poor response to last summer's storms.

Utilities have, however, by and large been doing a very good job getting on the same page with state regulators in the US, as they've pushed a goal of "net zero CO2 by 2050." And we saw the last four years, in the US states have a lot more control over what utilities do than the federal government, particularly
AvatarRoger Conrad
3:33
when it comes to policies that have strong economic underpinnings like replacing aging coal fired power plants. I will also say that it works both ways--utilities as leading local/regional employers do tend to carry a great deal of influence on the state level. That's helped them on a number of issues in recent years to turn business threats into opportunities, such as the growth of distributed solar energy adoption. The rules forged on the state level have in fact strengthened grid economics greatly in recent years--that's been opposed by some DE advocates but it has certainly helped utility investors.
Lou G.
3:40
Roger,

Thanks again for hosting the live chat for subscribers. I provides quite a bit of depth on the subjects you present in the newsletter.

With energy on a definite upswing, you have presented the case for both super-oils and selected mid-stream providers in CUI. Can you identify your best-in-class stocks in these areas and your forecast for the next 6-12 months?
AvatarRoger Conrad
3:40
I do track a handful of energy companies in Conrad's Utility Investor that I consider to be most utility-like as far as business model--that is they stack up most competitively on the five part Quality Grade system: Sustainability of dividend policy, revenue reliability, regulatory relations, balance sheet/refinancing risk and operating efficiency.

What that boils down to is a few midstream energy companies like TC Energy and Pembina Pipeline (TSX: PPL, NYSE: PBA) in the Conservative Holdings and Kinder Morgan Inc (NYSE: KMI) in the Aggressive Holdings. Kinder last month posted Q4 earnings and guidance that proved its resiliency. I expect TC Energy (Feb 18) and Pembina (Feb 25) to do so later this month. Over the next few months, I look for all three to recover to price ranges they held in early 2020, as investors get more comfortable that $50 plus oil is sustainable.

Regards the super majors, in a normal cycle they generally make up shortfalls at E&P due to lower prices for oil and gas with better results
AvatarRoger Conrad
3:44
downstream, as lower prices spur demand. The past year's pandemic environment prevented the demand recovery. And though it seems to be happening slowly but surely, investors have understandably focused on the big writeoffs and the need to raise capital after funding CAPEX and paying dividends. In a normal environment of course, no one raises an eyebrow when a super major sells stock or bonds to pay its CAPEX. But we're at the low point of the energy price cycle, so investors are demanding companies generate free cash flow after dividends. This the super majors will do this year even at a low $40s oil price, thanks to aggressive cost cutting. And I look for them to also recover to early 2020 price levels this year, as investors get comfortable with plus $50 oil.
3:46
My favorite super oils right now are Total SA for its successful and aggressive pursuit of counter-cyclical income streams in renewable energy as well as low debt and Chevron for its recent purchase of Noble Energy and low debt. We also recommend ExxonMobil in Energy and Income Advisor as the big oil likely to benefit most from the current oil and gas investment deficit--as demand recovers in coming years.
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