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5/12/21 Conrad's Utility Investor Live Chat
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AvatarRoger Conrad
1:58
Hello everyone and welcome to the Conrad's Utility Investor live web chat. There is no audio. Just type in your questions and I'll get to them as soon as I can comprehensively and concisely. We will send you a link to a complete transcript of all the Q&A following the chat, which will also be posted on the CUI website.
1:59
Per usual, I'm going to start the chat by posting answers to questions I received prior.
Q. Dear Roger. By some strange circumstances and as a result of their bankruptcy last year, I just received some shares of Frontier Communications (symbol: FYBR; first traded Tuesday. 5/4?). Based on your prior comments about Frontier and your current comments related to the OTC symbol, FTRCQ in the Utility Report Card, I intend to "unload" (Sell) these shares promptly. But before I do so, I wanted to verify that you don't have any different feelings about the newly minted shares. 
 
I truly value you and all the hard, professional effort you have always expended for your subscribers in every publication you have ever authored or advised since the 1980s. There is not another advisor I trust and admire more than you. Thank you!--Charlie Shiverick
A. Thank you Charlie. I really appreciate that. My understanding based on Frontier's bankruptcy exit plan was that shareholders would be pretty much wiped out, as the company swapped the bulk of its debt ($11 billion) for shares of stock. That appears to be more or less what happened, with the FYBR shares going almost entirely to bondholders but old FTRCQ owners getting a fraction of the FYBR issued as well.
 
Frontier's focus going forward is going to be investing in fiber broadband connections, with a "phase one" expansion of doubling homes passed with its network to 6 bil. The near term goal is passing 495,000 new locations by the end of 2021. The post bankruptcy company should be more capable of doing this than the pre-Chapter 11 company, if for no other reason than it has less debt. But it still has the same underlying problem as it did before bankruptcy: Rapidly eroding revenue as more of its rural and small town customers cut the cord on traditional phone service and the company loses business to large
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much better financed competitors even in its broadband operations.
 
Q1 revenue, for example, was -13.2% lower than a year ago. The rate of decline was much lower sequentially from Q4 at -1.1%, which will be hopeful if sustained. But the company's recent progress cutting operating expenses also halted and the result was operating income declines actually picked up to -6.5% from Q4. Frontier also saw a -1.5% year-over-year decline in revenue for data and internet services, the business that's supposed to compensate for eroding voice (-7.9%) and especially video (-20.3%). Sales declines were actually steeper for services to business customers (-7.5%) than they were for consumers (-5.6%). And despite its fiber building efforts, the company actually lost broadband data customers over the past year (-4.1%).
Nearly wiping out common shareholders by swapping debt for equity has bought the company some time. And it's possible broadband incentives from the US government will help the company accelerate its broadband development plans, potentially with increased subsidy. But based on what we're still seeing, Frontier is still a shrinking business fighting a losing battle against companies that can afford better networks. And until the numbers speak otherwise, it's just as much a stock to avoid under the new symbol FYBR as it was under the old ones of FTR and later FTRCQ.
Q. What 's happening with China Mobile (NYSE: CHL, HK: 941)?--George A.
 
A. Hi George. Unfortunately, for US investors who didn't sell earlier this year, China Mobile ADRs are still delisted from the NYSE. And it appears that the Biden administration isn't interested in reversing the Trump Administration's ban on US investors owning this company.
 
As I pointed out in the Utility Report Card comments for the company in the current issue, China Mobile shares are still quite liquid on the Hong Kong stock exchange under the number "941." At their current price and the Hong Kong dollar's exchange rate--which is pegged to the US dollar--the ADRs would be worth in the low to mid 30s right now were they still traded.
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The company itself continues to grow its 5G customer base at a rapid clip. It added 15.6 million in March alone and now serves more than six times as many users as it did a year ago. And the result has been fast revenue and EBITDA growth, despite some losses of 3G wireless users. Average revenue per user in Q1 was up 10.5% sequentially from Q4. That should mean another mid to upper single digit percentage dividend increase in August, when the company next declares its semi-annual payout. 
 
China Mobile is, in other words, healthy and growing. The problem is there doesn't appear to be any way for US investors to even sell their shares at this point. In fact, one of our Conrad's Utility Investor members informed me their brokerage shows their ADRs as worthless. That's definitely not the case. And in fact, this company looks poised to add to the gains it's already made this year, as it proves the business case for 5G.
This is the first time in my career I've seen the US government actually ban US citizens from owning stocks of a particular country. It's still hard to believe and I can't help thinking there will be some relief at some point. But at this point, I think the only thing US investors can do is keep their records and see what happens. Sorry I don't have a more encouraging answer.
Q. Roger. I have always wondered if you personally invest in the stocks held in the portfolios (conservative/aggressive),which are featured in CUI. I have been a subscriber since your previous publication and wish to thank you for many years of successful investing. John R.
 
A. Hi John. First, thank you for your loyalty. Second, I have been an investor in the stocks I've recommended professionally as long as I've been in the business, which dates back to the mid-1980s. 
 
Like all industry professionals, I abide by strict guidelines that govern when I can buy and sell stocks I've mentioned for publication. That also applies to the more regulated businesses I participate in. And it means the primary way I own CUI stocks is through dividend reinvestment plans, which I've built up over the years. But I do very much believe in eating my own cooking so to speak. After all, this is the corner of the market I know most about, so it makes sense to concentrate there. Thanks for your question.
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Q. Roger. For those of us who hold CNPPRB (Center Point 7% Mandatory Convertible Preferred of Sept 1st 2021) will you be providing your us with a recommendation of either to hold or sell the acquired issued CNP shares?--Edward
A. Hi Edward. I hope by now you've had time to read my update of the Centerpoint preferred position in the May issue of Conrad's Utility Investor. It's in the Portfolio Update. The gist of it is, though we already have a nice gain in this position, I believe enough good things have happened to the company for me to raise the highest recommended entry point on the preferred to 45.
I also intend at this point to hold the preferred through to the conversion, at which time we'll receive shares of Centerpoint common stock. And after that I intend to continue holding the common of this company, which after closing the sales of its ownership in Enable Midstream and gas distribution utilities in Arkansas and Oklahoma this year will be smaller, more focused and financially stronger than ever--and therefore a takeover target. At that time, the company will also most probably earn a Quality Grade boost to A.
 
As I point out in the article, my view is there's a good chance Centerpoint common will rise to the $27.25 per share level needed to push the preferred to a value at conversion of $50. But again, whether that happens or not, my intent right now is to hold the preferred to the conversion to get the common. For more on Centerpoint's Q1 results, see my Utility Report Card comments.
 
 
 
 
Q. Hi Roger. I trust all is well. Any reason not to keep accumulating Vistra Corp (NYSE: VST) or is it dropping in value for a rational reason? Do you think the dividend is safe? Absent a compelling reason to sell, my intent is to hold VST for a long time. Thank you--Arthur H.
 
A. Hi Arthur. I’m pretty confident they can cover the dividend with cash flow and are committed to continuing to pay it. The price they’re paying is it will take another year to achieve investment grade credit ratings. But management stated in the Q1 call they’re prepared for that.
 
I’m not a big fan of really loading up on a single stock. But I do intend to hold onto VST. For more on the Q1 numbers, see my Utility Report Card comments as well as the other discussion of the company in the May issue.
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Q. Roger--I have been reading a bit about Evergy (NYSE: EVRG) lately.
Would you consider the shares a good buy relative to other mid-western utilities such as WEC Energy (NYSE: WEC), Alliant Energy (NYSE: LNT) or Xcel Energy (NYSE: XEL)? Thanks for all of your help in this unprecedented time.--Don C.
 
A. Hi Don. My current highest recommended entry point for Evergy is 62. It's a bit above that level now. As my comments in Utility Report Card indicate, the company did report a solid Q1. I like the company long-term but I would continue to observe that price and buy only on a dip. 
 
I also think the same thing is true of Alliant, WEC Group and Xcel Energy. All are strong best in class companies and each of them reported a strong Q1, again as my URC comments indicate. But they've also run up a bit lately and each trades somewhat above my highest recommended entry points--which are based on Quality Grades but also yield and long-term growth rates targeted at delivering average annual total returns of 10% or bet
In the meantime, there are dozens of companies of equally high quality that investors aren't so enamored with at the moment, and therefore are better buys--the short list is on the first page of the May issue. For more on Q1 results at all of these companies, see by Utility Report Card comments.
 
Q. Hi Roger, How concerned are you that Enbridge Inc’s (TSX: ENB, NYE: ENB) Line 5 will be shut down as a result of the Michigan Governor's opposition, and if it's shut down, what would be the impact to revenue? Also, what do you think about the building opposition to Line 3? 
 
Is Atlantica Sustainable (NSDQ: AY) a good buy in this range ($36)? Is there another, such as NextEra Energy Partners (NYSE: NEP) you like better? Finally, are you still positive on Atmos Energy (NYSE: ATO) now that it's over $100? Thanks in advance for your excellent work through the years!--Michael L
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A. Hi Michael. Thanks for those kind words. Large and broadly diversified midstream and power companies like Enbridge Inc have many levers to pull to offset the shutdown of a single pipeline, no matter how important.
 
In the case of Line 5, if the governor does ultimately order the shutdown, I would expect an immediate appeal to the courts for an injunction to keep it open, which is likely given the uncertain impact on local supplies of fuel and economic health. And it appears the Canadian government will join any litigation immediately. 
 
To this point, my view has been that both the company and the governor were basically playing a high stakes game of chicken and would eventually reach a compromise--most likely a deal to replace the existing Line 5 with the already proposed concrete-encased tunnel. That seems the best way to resolve environmental concerns without major regional economic disruption
That hasn't happened yet, which raises the risk we will see further escalation of this battle before there's a solution. But as far as Enbridge investors are concerned, the company appears to be adequately protected financially from the worst-case scenario of a shutdown. The same can't be said for consumers, businesses and shippers who will have to find alternative arrangements.
 
In the case of Line 3, I think the project is getting more difficult to stop pretty much by the day. Yes there are protestors who are attempting to disrupt construction. But legal options to halt progress have about run out. And with the Minnesota state government in support, the Biden Administration does not appear willing to throw up additional roadblocks. It’s never over until its over. But the company now expects to get all of the pipes in the ground by “late summer,” which would just leave testing to complete startup on schedule later this year. And in any case, this company is much bigger than Line 3 or Line 5.
I do think Enbridge shares have become a bit rich and would wait for a pullback to our highest recommended entry point, which is now 40.
 
As I noted in the May issue of CUI, the momentum that pushed virtually any stock considered "green" into the stratosphere earlier this year is now running the other way. And though the likes of Atlantica--my May Aggressive Spotlight—May Conservative Spotlight stock Brookfield Renewable, Clearway Energy, NextEra Energy, NextEra Energy Partners, Algonquin Power and AES Corp posted their best Q1 results to date, their shares have continued to weaken as theme-focused investors have gone the other direction.
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If you've been an investor for income and long-term capital growth for any length of time, you know this type of action is par for the course. And right now, it's our more oil and gas focused companies that are getting the benefit for capital inflows--just as no one seemed to want to own them last year. The way we play this is by buying companies that are strong on the inside when the tide is running against them and prices are lower.
 
Conversely, we take at least partial profits when stocks run up well past their business fundamentals, as we did with Brookfield et al did earlier this year. The key is that the underlying companies are solid on the inside. And unlike many of the renewable energy stocks that were so popular earlier this year, the green stocks we own have sustainable business plans, growing earnings, strong balance sheets and very real dividends.
They may dip further the next few weeks and they may not. What we do know is they're already trading at prices where they make sense for value as well as growth. And that makes them buys for those who don't own them, including Atlantica, which now has a highest recommended entry point of 38.
 
As for Atmos, I have raised my highest recommended entry point in the stock to 105, in light of the company's strong fiscal year second quarter results and the apparent resolution of how it will pass through extraordinary natural gas purchase costs incurred during Texas February Freeze. 
 
 
 
Q. Cheers from New Mexico. Do you have thoughts on Pinnacle West (NYSE: PNW), the utility in Arizona?—Ben F.
 
A. Hi Ben. As my Utility Report Card comments indicate, I thought Pinnacle West had a very strong Q1 that confirmed two major positives. First, its rate base-focused growth strategy is going to the bottom line. Second, its service territory is still expanding despite the pandemic, with 2.1% year over year customer growth and rapid construction of data center infrastructure stabilizing commercial and industrial sales--which were basically flat against the year ago quarter. 
 
The big issue for the company this year is the ongoing rate case in Arizona, which management now believes will stretch into Q4. There's no reason at this point to expect anything but an amicable outcome, despite the fact that last year's election brought in some new faces on the utility commission. But my view is Pinnacle will likely trade at a discounted valuation to other high quality utilities until there is a decision. My
highest recommended entry point is 85.
Q. Shares of both AES Corp (NYSE: AES) and Clearway Energy (NYSE: CWEN) stumbled after earnings. Do you have updated guidance? Also, -- and I know this is a bit like comparing apples with oranges -- but if a person had a satisfactory amount of both utilities and midstream pipelines, but still wanted to put a bit more money to work in one or the other sectors, do you think total returns (appreciation plus dividends) would be greater after five years by investing in AES/CWEN or PBA? Thank you.--Jeffrey H.
 
A. Hi Jeffrey. All three of those stocks are currently trading below my highest recommended entry points, so they're each a buy in my view: AES up to 28, Clearway under 33 and Pembina up to 38.
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As I noted in answering a question a bit earlier in the chat--and explore at length in the May issue of Conrad's Utility Investor--stocks perceived as "green (including AES and CWEN) ran up sharply earlier this year. Most have sold off since as theme-focused investors have moved on elsewhere. Both of these companies, however, turned in strong Q1 numbers and 2021 guidance, which is what's important for investors interested in income and long-term capital growth. So long as they're solid on the inside as businesses, pullbacks below our highest recommended entry points should be viewed as times to buy. 
 
Conversely, when prices move to levels well beyond what their business growth would justify, it's often time to take money off the table by taking a partial profit. And we did that in several green stocks earlier this year, including a full sale of Hannon Armstrong Sustainable that at its high point in the low 70s represented a nearly 300% total return from our initial entry point. But now trading at much lower
prices without any negative change in business fundamentals, these stocks are again buys.
 
As for Pembina, I also liked its Q1 results, which I believe demonstrate the company is fully adjusted to the current environment, where producers are focused on free cash flow rather than growing or even sustaining output. I think this stock is going to go a lot higher as the energy cycle continues and higher prices eventually mean a return to system volume growth. But in the meantime, the company has proven its resiliency.
 
As for your broader question, I think it's always a good idea for investors to consider owning stocks across a broad range of sectors in their overall strategy. That's the basic idea behind my companion service CUI Plus, a managed portfolio that holds best in class companies across a wide range of industries.
Q. Good Morning Roger. Thanks for all the hard work you do on CUI and CUI Plus and the excellent communications! I won’t be able to attend the webinar live but I’ll look forward to the transcript. Since you are still recommending Clearway Energy (NYSE: CWEN) below $33, I just bought some more around $26.38 this morning. Can you share your latest wisdom on CWEN? Regards--Kerry T.
 
A. Hi Kerry. Thank you for your kind words. Sorry you can't attend the chat live, but as you can see your question is participating!
 
In a momentum-driven market like this one has been for a while, selling often leads to more selling. In Clearway's case, it's not the only "green" stock investors seem to be unloading now as briskly as they were buying earlier this year. But the important thing is unlike the Fuel Cell Energy’s of the world, Clearway has a real value proposition, which is a contract power generation business that makes money and pays a safe and rising dividend.
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The dividend increase we saw this month along with solid Q1 results and reaffirmed 2021 guidance confirm Clearway is strong on the inside. So does the company's successful green bond issue, which management pulled off shortly after announcing a financial hit from Texas February Freeze. And so does the close of a 264 megawatt wind farm in West Virginia in late April that's now adding to cash flow. 
 
I can't say when Clearway shares will start moving in the other direction (up not down). And I'm not a big fan of really loading up on any one stock, no matter how cheap it looks and how much I like the underlying company. But I do continue to recommend this one for safe and growing income, as well as long-term capital gains as management continues to grow its operations at low cost. For more details on the Q1 report, see my Utility Report Card comments.
NextEra Energy (NYSE: NEE) coming down, still too expensive for this retired hombre. Would like American Water Works (NYSE: AWK), but again, way too expensive...1.5% dividend is worthless to me. Can I still have my cake and eat it too with Algonquin Power & Utilities (NYSE: AQN)...water...regulated electric...renewable power generator? How much quality does one give up with AQN?—David O.
 
A. Hi David. Both Algonquin and NextEra Energy draw "A" Quality Grades, meaning they match up well to my five criteria: Sustainable dividend policy, reliable revenue mix, constructive regulatory relations, minimal near term refinancing risks and strong operation efficiency.
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Both companies have the same basic business model. That is they combine secure regulated utility franchises backed by robust and reliable rate base growth with unregulated wind and solar contract generation. The stability of the utility supports the more rapid growth of the unregulated business. And once facilities are built and contracted--generally to utilities, governments and investment grade corporations--they produce revenue that's in most environments as reliable as regulated utility sales. They also both have successful "yieldcos" (NextEra Energy Partners and Atlantica Sustainable) that they can use as alternative financing vehicles.
 
One key difference between them is size. NextEra has a market cap of $147 billion and annual sales of $20 bil give or take. Algonquin's equivalent numbers are slightly less than $10 bil market cap with about $2.2 bil in revenue expected this year. Scale matters in this business, as it makes it easier to access capital for growth as well as to absorb inevitable market
disruptions. A pretty good case in point is NextEra took a roughly $180 mil loss for customers' unpaid bills in Texas during the state's February Freeze, yet still produced record Q1 results. It would be more difficult for Algonquin to overcome a blow like that, though it's unlikely it would given the diversification of its assets.
 
Another difference is geographic diversification. Operations at NextEra and NextEra Energy Partners are entirely located in the US. Algonquin has assets in Canada as well as Bermuda and Chile. And in addition, about half of Atlantica's cash flow is earned outside the US. Most of those assets are contracted in US dollars, especially Atlantica's, so there's not much currency risk. But Algonquin and Atlantica are exposed to non-US regulation--not necessarily a bad thing, but definitely something to keep tabs on. And it appears to me that both companies intend to make more investment outside the US as well.
In the past, I've called Algonquin a mini-NextEra trading at a much lower valuation. And I think that's more or less an accurate description. I've been familiar with the company since its origins as a Canadian income trust back in the '00s. The former CEO Richardson has now moved on. But in growing the company from a small unregulated contract power producer to its current size, he and his team built a culture and discipline that seems to me really similar to what NextEra CEO Jim Robo and his team have done over the past decade or so--albeit on a larger scale.
 
Algonquin does offer a higher yield at 4.4% versus NextEra's 2.2%. And recent years' dividend growth has actually been pretty similar, with Algonquin growing its payout 10% a year with the most recent bump this month and NextEra raising by 10% back in February--though it had been growing in the 12% to 15% range. I do think both are likely to slow their rate of growth to an upper single digit percentage over the next several years.
One more thing these stocks have in common is momentum appears to be moving against them about as much as it was moving in their favor up until late January. Considering both companies just posted some very strong Q1 results--which I highlight in Utility Report Card comments this month--I believe they're now both pretty strong buys. If you want the higher yield, the pick is obviously Algonquin. But i think both of these stocks are going to generate some big returns going forward and are great to buy and lock away at these prices. 
 
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Q. What is the ticker symbol for Centerpoint Convertible Preferred in the CUI aggressive portfolio? You can answer during 5/12 web chat. It is listed in May issue as CNP-P. Thanks—Tom L.
 
A. Hi Tom. Unfortunately, there's still no universal way to enter symbols for preferred stocks across all brokerages. Some I've seen use a prefix "pr," others use an underscore, some the letter of the series and some use simply a “p.” So you'll have to research how the trading platform you use does it. 
 
The Centerpoint Preferreds can be identified several ways. First is the full name, which is: Centerpoint Energy 7% Mandatory Convertible Preferreds of 9/1/2021. The exchange symbol listed by Bloomberg Intelligence is "CNP B", and the company itself refers to these as the "B" series. The security identification number is EP0561928. The Cusip number is 15189T503.
One thing that should make your search less complicated is this is only preferred stock Centerpoint Energy Inc has listed currently. Also, as I'm answering you, I see the preferred's price has moved back under my maximum recommended buy price of 45, so now would be a good time to enter.
Q. Please beg whoever is responsible for the narrow, difficult-to-read comments section to return to the format from April and previous months where the text is spread across the page. PLEASE! Thank you.-- Teresa P.
 
A. Hi Teresa. The format for the Report Card is back to normal for the pdf version. We had some technical difficulties with our website system this time that prevented being able to post the website tables the normal way. My apologies for any confusion. We will do our utmost to make sure this does not reoccur. Thanks for your patience.
 
 
 
Q. Hi Roger. Could you give us some insight on the reasons behind the performance divergence between stocks like NextEra Energy Partners (NYSE: NEP), Brookfield Energy Partners (NYSE: BEP) Brookfield Energy Corp (NYSE: BEPC) and other renewables like WEC Group (NYSE: WEC) and Xcel Energy (NYSE: XEL). Why is the first group under so much pressure since the beginning of the year, while the last 2 are recovering nicely? Is it just because they outperformed strongly and reached unsustanable high valuation levels? Thanks for your comments—Pierre H.
 
 
A. Hi Pierre. I think the main reason for the divergence is NextEra Energy Partners and Brookfield Renewable (partnership units and C-Corp shares) are identified with "green" and ESG (environmental, social, governance) themes, while WEC Group and Xcel Energy are not nearly as much. NEP, BEP and especially BEPC are listed in indexes and therefore are held in ETFs that focus on those themes. WEC and Xcel are not.
Earlier this year, there was a massive wave of ESG-focused money that washed into those green ETFs, which took stocks like BEPC, NextEra Energy, Clearway Energy and others to new highs. That's reversed since, and the result is these stocks have all come down equally hard.
 
The important thing is that all of these companies are doing very well as businesses, as indicated by robust Q1 results I've highlighted in the Utility Report Card. They're all therefore high quality companies and worthy holdings for long-term growth and income. 
 
Earlier this year, the ESG surge gave us a great opportunity to take profits in the green names. The receding of that wave is now giving us a great opportunity to pick up shares of best in class companies at good valuations. By contrast, WEC, Xcel and similar names were a superb bargain earlier this year. Now they're fully valued, though not yet to levels where they'd merit taking partial profits.
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I think we're going to see more rotations like this one so long as this increasingly momentum driven, 12-year plus old bull market for stocks lasts. But our task hasn't changed. That's to build positions in these best in class essential service companies when prices retreat to good valuations, to take money off the table when the buying momentum runs too far, and the rest of the time to collect dividends and watch our money grow. Right now, the renewable energy names with strong earnings that we've been recommending are the place to look for value. Thanks for writing.
OK, that's it for the questions received prior to the chat.
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