JotCast | 5/12/21 Conrad's Utility Investor Live Chat

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5/12/21 Conrad's Utility Investor Live Chat

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Lee O.

2:16

aqn - with large pull back do you see this as buying op

Roger Conrad

2:16

I had thought Algonquin's share price had gotten ahead of itself earlier this year. That's no longer the case following the pullback, a 10% dividend increase and the release of robust Q1 result and guidance.

As I indicated in my answer to a question earlier in the chat and also discussed in the May issue of CUI, the money that rushed into anything green and pushed prices to such extended levels earlier this year is now running out. Algonquin was not as closely identified with green themes as NextEra Energy, for example. But it's been carried up and down in the same way.

The important thing is that the company has been solid on the inside all along with growth plans intact. It's hard to forecast where the exact bottom will be for the share price, since that's likely to also depend on the overall stock market. But I think this is a great entry point for long-term investors.

Philip B

2:23

Dear Roger,

Many thanks as ever for your excellent advice over the years. Would a significant rise in interest rates be likely to have negative impact on Hannon Armstrong’s business model?

Roger Conrad

2:23

Not immediately, as the company has pretty much eliminated its former reliance on variable rate debt. As basically a BDC (business development company) organized as a REIT, Hannon's cash flow and dividends depend on the spread--what it can earn on its debt and equity investments less its cost of capital. So long as demand for its specialized financings is strong, the company will likely be able to keep its spreads robust and earnings growing. That seems likely with renewable energy and energy efficiency projects in heavy demand--possibly very heavy if there is a federal infrastructure bill this year. Meanwhile, management has improved the scale of the company greatly the past few years with strong growth of loans and equity investments--which is why they've been able to increase dividend growth.

What could hurt them would be a combination of rising borrowing costs and slumping demand. BDCs do go through such cycles--Hannon has largely avoided one in recent years because of the nature of its business.

Roger Conrad

2:25

This is, however, one reason why investors do want to watch the price of HASI carefully. I took full profit earlier this year when it hit $72 and change because I thought the stock too expensive for its potential risk as well as inherent business risks. I think it's much more attractive now after this selloff.

Wayne H.

2:35

There appears to be an unlimited opportunity for utilities to invest in solar and wind power and battery storage to make an impact on total electricity production. But is there a limiting metric on utilities that would indicate that they are entering an area of higher financial risk by overzealously investing in such efforts?

Roger Conrad

2:35

Utilities depend on having a good working relationship with regulators on the state and local level. And at this point, there's no indication whatsoever officials are reconsidering what has been robust support for an "energy transition," which to date has largely meant shutting down the aging fleet of coal-fired power plants. The fact that the price of components like solar panels has fallen so dramatically the last decade has also increased their appeal. So has the recent extension of tax credits for wind and solar by Congress, and so would any ramping up of infrastructure spending.

The limiting factor is that wind and solar are intermittent sources of energy and therefore not dispatchable to ensure grid reliability. And however much batteries have advanced, they have a long way to go before they'll be powerful and economic enough as providers of storage to eliminate that shortcoming of renewables.

I'm not buying the claim of some Texas politicians that frozen wind turbines etc were the principal cause of

Roger Conrad

2:39

the state's power outages in February. Certainly they contributed to the general chaos. But it's clear from my analysis of energy companies and utilities that the primary financial damage was caused by a lack of natural gas supplies--which contributed to a dramatic spike in fuel costs and therefore customers' bills. The transmission and distribution utilities are going to pass through those costs by securitizing them in bonds, which customers will pay off over time. But generation companies like Vistra Energy were left high and dry by Texas market rules that essentially forced them to buy gas at astronomical prices or else shut down facilities entirely.

2:42

Getting back to your question about the limits of investing in renewables, I think the lesson of the Texas power crisis is electric utilities can't afford to be dependent on a single source of power. That's nothing new. In fact, over the 35 years or so I've followed this business, there have been many examples of companies becoming dependent on one source of power and getting burned. I think right now that's natural gas--and my view is the industry is going to be a lot more conservative about locking up firm supplies before next winter and possibly this summer to avoid exposure to price spikes.

2:44

That incidentally is very good news for companies like Kinder Morgan Inc, which realized a $1 bil windfall during the crisis because its facilities kept running. It also was able to sell electricity back into the grid in Texas by cutting back oil and gas production.

dudleycurtis

2:52

Just picked up NEE. Your thoughts? Thanks

Roger Conrad

2:52

My view for some time has been that NextEra Energy is the best in class of the electric utility group, combining an enviable electric utility franchise that's strongly supported by Florida regulation with the leading contract wind and solar generation franchise in the US. The management team's foresight that wind and now solar would come down in price and be adopted at scale allowed it to be a first mover, and it's maintained its advantage as strong Q1 results and a massive pipeline of new projects attests. They've also proven the resilience of the yieldco model, with NextEra Energy Partners signing the largest third party asset purchase in its history in April.

My problem with the stock for a long time has been valuation of 30x earnings plus. In fact, I've recommended investors take money off the table several times in the past couple years. That's not because NextEra hasn't continued to grow and prove its business model, but because the stock has become closely identified with green and ESG themes. And as

Roger Conrad

2:53

as a member of 160 different stock indexes, it's attracted a lot of the same money that bid up earnings-less companies into the stratosphere earlier this year. Now the stock is taking on water because it's being unloaded along with all of the junk. That's set up a solid buying opportunity and I'm happy you've been able to take advantage.

2:55

I can't really forecast how soon the stock will turn--in a momentum led stock market like this one is increasingly, selling and buying can continue a lot longer than makes sense from a business valuation standpoint. But from the current price, the combination of high quality, very safe yield and robust, sustainable dividend growth is extremely compelling in my view. And the next time investors warm up to green investing, you can bet NextEra shares will be off to the races again.

Guest

3:02

Hi Roger, Can you give me your current insights on VST? I notice it is down in my portfolio. Also, with inflation looming and the price of gas so high, what do you recommend in terms of buying in the near future?

Roger Conrad

3:02

Where Vistra is trading now is entirely due to the financial hit they took from the Texas February Freeze. I've commented on the stock extensively in Conrad's Utility Investor since, as well as the April 27 Alert "Why I'm Sticking with Two Laggards." The bottom line is several natural gas producers they had contracted for supply from declared a force majeure to avoid having to made good on commitments, so Vistra had to go shopping for fuel as prices were spiking. At this point, it's highly uncertain what recourse they have, though they are pursuing compensation on several fronts. And the upshot is management is pushing back their target of attaining investment grade metrics by a year.

The good news is there were no real surprises in Q1 results from what management has previously guided to. The company's expansion plans--primarily renewable energy and storage--are on track. And the dividend as declared is well covered. I have more details on the numbers in Utility Report Card comments. Buy my view is this

Roger Conrad

3:06

company's ascent has only been delayed, not derailed. And I expect to see the share price recover over the next 12 to 18 months, possibly sooner if there's a takeover offer. As for inflation, Vistra sells a commodity (energy) that will likely gain value in such an environment. That in turn will boost free cash flow--which the company will generate $400 mil of in 2021 even after its February hit. That means the ability to pay off debt rather than refinance it.

jim N

3:10

I never heard of the Colonial Pipeline prior to last week. Is it part of one of the stocks you follow?

Roger Conrad

3:10

The main owners are Royal Dutch Shell and one of the Koch brothers' companies. Shell is obviously a huge company with multiple earnings drivers, the most important being oil prices. And as strong Q1 numbers attest, it's doing quite well with Brent crude now at nearly $70 a barrel.

Bottom line, I don't expect the Colonial pipeline hack to have much impact on Royal Dutch Shell's earnings in Q2--which would be the impact quarter. It could well affect refiners and distributors to the extent they're exposed to higher retail fuel prices. And of course, it's hitting all of us at the pump who live in the eastern half of the US.

jeff

3:18

Roger what is your take on CWEN? Its been awful.

Roger Conrad

3:18

The share price is off by about one-third from its January 7 high point, though its still up about 26% over the past 12 months. My view is Clearway is rightly identified as a green company. That was bullish in the second half of 2020 and has been bearish since early January as money has come out of renewable energy identified stocks in a big way.

The important thing for us, however, is the underlying business is still quite solid, the dividend is safe and its growth trajectory is sustainable. That's the clear message from Q1 results and management's affirmation of 2021 guidance, which I highlight extensively in Utility Report Card comments this month. The acquisitions expected to lift cash flow this year have either closed or else are on track to do so on schedule. The company took a $25 mil cash hit for plant outages during Texas' February Freeze and may take another $5 mil hit. But its facilities are performing well and should be in good shape to capitalize on stronger demand in California and Texas.

Roger Conrad

3:21

When a stock reports strong results but continues to dip, I think it's always important to find out why--and if there's something we're overlooking. But in Clearway's case, this looks like a case of money coming out of renewable energy stocks, whether the underlying companies have earnings or not. And so long as Clearway stays strong on the inside as Q1 results indicate, recovery is only a matter of time. In the meantime, it's a great time for patient investors without positions to enter.

Bonnie

3:28

Hi Roger, thank you for this chat. What are your current recommendations for VST? I notice it is down in my portfolio. Also, with gas prices high and inflation, what are your recommendations now for buying or adding to specific stocks?

Roger Conrad

3:28

Hi Bonnie. I believe I just answered your question, posted under a reader as "Guest." Was that you? Anyway, another thought on Vistra that occurs to me concerns natural gas--which as we saw in Q1 is a primary input, and its price can have a huge impact on company profitability. Under normal conditions when the company can count on supplies, it can match the cost to the price of electricity output. What went wrong this time was so many of its suppliers did not deliver under previously agreed contracts. That's hard for a power generation company to protect itself against. The good news is the company does appear to be doing some things now to prevent a potential repeat. But generally speaking, it should be able to manage its gas costs going forward. In fact, Vistra is likely to be a beneficiary of inflation because it produces a commodity--electricity.

Jim T

3:33

Roger, I have tried to buy IERNOVA 6.3% Notes and have been told by S-N that the smallest amount I can buy is $400,000. Do you have any suggestions/

Roger Conrad

3:33

I'm not aware that's a company or exchange minimum. You might try another platform, such as Interactive Brokers.

In any case, the security ID number is EJ5584903. The ISIN number is MX911E060003 and the FIGI number is BBG0044H5K54.

I'm looking forward to a time when buying utility bonds makes more sense that it does now with rates so low. At this point, given rising inflation and interest rate risk, the better yields relative to risks are going to be with individual stocks.

Jim T

3:38

Also, what are your current thoughts on AETUF, ERF and PBA for this fall and winter?

Roger Conrad

3:38

I think ARC Resources, Enerplus and Pembina Pipeline are all solid companies--though Pembina is by far the best choice for safety and yield as it is a contract midstream company, while the other two are mid-sized producers. I think after roughly a decade of depression due to transportation constraints (caused by the US shale output explosion), conditions are improving for Canadian energy companies. Not only is capacity opening up on US pipelines south but there are new pipes opening up to get the country's oil, gas and natural gas liquids to other markets--including two new NGLs export facilities now running in British Columbia.

This is really a better Energy and Income Advisor question, since only Pembina is tracked in CUI as well as EIA. Happy to talk more about them at the EIA chat later this month. But at this point, I view all three stocks as buys, with AETUF and ERF best suited for more aggressive investors.

Jim T

3:38

Thanks, JT

Roger Conrad

3:38

Thank you!

3:38

On your Utility Report Card, you mention some important positive attributes of Crown Castle. The stock yields 2.9 percent and the dividend is on track to grow much more rapidly than overall economic activity. Your quality rating is A, and the company is reducing its debt-to-EBITDA ratio. Yet you only rate the stock a hold. Is your caution due to elevated valuation metrics such as price-to-FFO? If so, are these other metrics really relevant in the face of the likely trajectory of dividends over time?

Roger Conrad

3:44

As you indicate, there are a lot of moving parts in my analysis when it comes to deciding on what's a good highest recommended entry point. In the case of Crown & Castle, this is a very high quality company with a secure and growing franchise in US telecom infrastructure, with blue chip clients like Verizon set to ramp up investment in fiber broadband and 5G wireless. The balance sheet is much stronger in my view than a BBB- rating would indicate. And the current mid to upper single digit percentage annual dividend growth rate should be sustainable. That said as you point out, the CCI's share price has risen a lot since March, when it was trading at a decent entry point under my quality plus yield plus growth criteria. That's the reason for caution now along with the rising valuation--enterprise value 29 times trailing 12 months EBITDA. And I think shares will give us a better entry point down the road.

Howard F

3:51

on your reconendation I bought MPW. What do you think of O and BSRTF

Roger Conrad

3:51

Medical Properties Trust hasn't moved a lot since we added it to the CUI Plus Portfolio and recommended it in the REIT Sheet. But the Q1 results were solid and we have already had a mid-single digit dividend increase. I think we'll eventually see the share price catch up to the acquisitions-led growth. But in the meantime, It's a buy up to 23.

I cover Realty Income Corp in the REIT Sheet, currently as a hold. I'm still digesting Q1 results announced earlier this month. But what was reported did show business momentum coming out of the pandemic year, both in the US and UK. I want to see what happens with the VEREIT merger before getting aggressive, especially given the high level of debt (net debt to EBITDA 5.3 times). But this one could earn an upgrade.

As for BSR REIT, it's not one I currently track but I will look into it. Thanks for the suggestion.

Roger Conrad

3:54

By the way, if anyone is interested in my REITs coverage, the REIT Sheet is a quarterly with coverage of 80 individual real estate investment trusts in the US and Canada. The heart of the issue is a table that's along the lines of the Utility Report Card. I also produce a twice annual audio/visual presentation on REITs. For more information on how to sign up, you can contact Sherry Roberts at 1-877-302-0749, Monday through Friday, 9-5 ET.

BKNC

3:59

Hi Roger, Thanks for your help for all of us. Well a nasty day in the market. I see Vistra was already addressed. The other problem holding is AGLXY. Would this be in hold mode, buy on weakness or just cut our losses and go. There has been nothing positive for a long time but I also realize our vision is long term.

Roger Conrad

3:59

Unfortunately, I think the time to sell AGL Energy was a couple years ago when the Australian Labour Party lost an election it was expected to win to the ruling Liberal/National Party coalition government. That ensured the country's regulatory dysfunction would continue, with populous states like Victoria and New South Wales pushing rapid conversion to wind and solar energy and the federal government backing fossil fuels and aggressively intervening in the so-called competitive electricity market to push down customer rates. AGL has continued to invest in renewable energy, natural gas, energy storage and distributed solar to replace aging coal power plants. But it's had no help even as wholesale power prices have plunged and retail demand has dropped during the pandemic.

This company is still Australia's leading power producer from both fossil fuels and renewables, as well as its leading retail electricity distribution and rooftop solar/distributed energy company. And as I note in the May issue of CUI,

Roger Conrad

4:02

management has affirmed both fiscal 2021 guidance (end June 30) and the progress of its demerger--which should create a sum of the parts windfall from the current price as generation operations that appear to be fetching a below zero valuation as part of AGL are spun off from the rest of the company. That plus the now very low valuation make me inclined to keep holding on to AGL--but the rating now is hold. Before I recommend anyone buy more, I want to see some improving numbers. There is also another election coming up that Labour is again favored in.

Richard

4:08

Hello Roger, I always ask you about SO. So here goes, are we out of the woods yet? Long time holder and finally feeling better about things. If they can just stay away from the science projects. Also, I also hold AY, CWEN. Thinking about adding TRSWF. Should all 3 be about equal weight? Dividends safe? As always, thanks. Richard

Roger Conrad

4:08

Thanks Richard. I have to say I was very encouraged by Southern Company's latest progress report on Vogtle nuclear plant construction. Mainly, they've been able to start hot functional testing at reactor 3. And assuming all continues to go well the next few weeks, that's the last step to loading fuel and then start up. They're not all the way home yet. And because of that, I'm not willing to raise my highest recommended entry point from the current 60--which is actually a bit below the current price. But a successful test and the start of fuel loading on the current schedule will definitely earn SO a bump, probably to 65. Not only would that rule out heavy costs from missing deadlines for unit 3 but it would greatly increase the odds unit 4 will start by November 2022--as management will be able to apply lessons learned.

Regarding Atlantica, Clearway and Transalta Renewables, I like a strategy of spreading bets. Dividends at all three are safe, as they're backed by long-term power sales contracts with strong

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