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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Bonnie

6:06

Thank you Roger for your help. Yes, the Guest was me, wasn't sure it was processed.

Roger Conrad

6:06

You're very welcome. And thanks for participating today.

Michael L

6:15

Hi Roger, thanks again for all the great work on our behalf. I would appreciate your thoughts on the future of WMB. Q1 looked good as you note in your URC, but is this a company that has additional levers for growth, or are we just riding the price increase that follows a dividend increase?

Roger Conrad

6:15

I do think that safe and high dividend plus reliable dividend growth is a strong value proposition for Williams Companies this year. They also have considerable and I think unappreciated headroom with system expansion the next couple years, even with overall US natural gas and gas liquids pipeline volumes likely to flatline--as US shale producers focus on generating free cash flow rather than maximizing output. And like you said, I did think the Q1 results are solid, and am encouraged by the raised guidance for 2021 as well.

Williams shares have rebounded to roughly where they traded in early 2020 before the pandemic hit full force. They do not, however, by any means reflect the current level of oil and gas prices north of $60, or arguably even upper 50s per barrel oil. That's also true of most energy related companies. And I think it's a very good reason to stick around, particularly in such as financially solid company as Williams. And it's easy for me to see WMB trading at least low 30s in the next 6 mos.

Tom

6:23

Hi Roger. Much gratitude again for your HASI sell call. A stock I had owned for a long time and was nervous about, but was just a deer in the headlights watching it go up. Sold it when you made your call, along with a good chunk of BEP and all of BEPC. Thank you! My question regards the continued disconnect between BEP and BEPC. BEPC went up stronger and dropped more, but is still trading higher than its MLP brother. I have been adding back (yesterday and today) some of the BEP shares I sold before, but I can't help wondering if BEPC might be the better long-term investment because of its availability for institutions. All of course assuming an eventual resumption of an upward trajectory for renewables.

Roger Conrad

6:23

Nice going Tom. I can tell you that was a tough decision to take profits on HASI, as well as BEPC, BEP and others earlier this year. It always is when you have a solid company that has made the right business moves that are paying off and arguably deserves a higher price. But all of these were trading so far above "profit taking" levels in my system that there really was no other choice for me.

As I've said, the only real difference between Brookfield Renewable partnership units traded as BEP and the C-Corp shares traded BEPC is how dividends are taxed. It's the same ownership and same dividend.

The fact that institutions prefer C-Corp shares and individuals are still skittish of anything to do with MLPs does I think explain the huge discount of BEP to BEPC. For a long time, it was so wide that in my view it made no sense to favor BEPC over BEP, no matter how much one hated K-1s. I do think, however, that we're at a point where one could make a reasonable choice to go with BEPC, for the more simple

Roger Conrad

6:25

structure as well as the fact that institutions are likely to favor it, the next time there's a rush back into green stocks. I think no matter which way you buy Brookfield at this time, you're getting a great company at a good low valuation. As for which to choose from, you will get a slightly higher yield with BEP and tax advantages if you hold it outside an IRA. And odds are you'll get slightly more upside potential with BEPC, simply because it's easier for institutions to buy.

Ron K.

6:32

Thanks Roger for all your hard work. I've been trying to analyze some of the valuations for these green energy companies, specifically AY and CWEN. The EPS doesn't come close to covering the dividend, and the PE on AY is almost 350! and on CWEN is over 50! Compare that to SO and PPL at about 20. Why such a large disparity? However, the RSI on AY and CWEN is certainly at a good point to accumulate. What am I missing?

Roger Conrad

6:32

The short answer is that GAAP (Generally Accepted Accounting Principles) earnings per share are more or less irrelevant as a measure of profitability for these "yieldcos." Like REITs and MLPs, yieldcos are structured to pass through more cash flow to investors as dividends. Minimizing taxable EPS is critical to that mission as it reduces the tax burden. The GAAP measure that's more relevant is EBITDA--earnings before interest, taxes, depreciation and amortization--which is a much better gauge of the company's ability to pass through cash. Yieldcos also publish a non-GAAP measure called "cash available for distribution," which is akin to "distributable cash flow" used by MLPs. Basically, it's cash flow after subtracting out taxes, debt interest and maintenance capital spending. It's before CAPEX on "growth" or asset expansion, which is one reason I like take things a notch further by comparing dividends to free cash flow (operating cash after all CAPEX taken out).

Roger Conrad

6:36

In the case of Atlantica, it's pretty much had to live on its own resources since the bankruptcy of its former parent Abengoa SA. Algonquin has been a better parent than Abengoa. And Atlantica has now gained the scale to finance its own moves, which is accelerating growth. But it has been paying its own bills. Clearway has fared better with Global Infrastructure Partners as a parent. But projected free cash flow this year will also cover its dividend by more than a 3-to-1 margin, so it's certainly capable of paying its own way as well.

6:40

As for the question of valuing these stocks, the best way in my view is to use a simple benchmark such as dividend yield plus sustainable dividend growth rate. Because they're set up to pay dividends, these yieldcos are over time going to valued on what they pay. And share prices are going to follow those yields higher over time. Investor appetite for green investment will from time to time push values higher or lower. But the return over the next 3 to 5 years on an annualized basis is generally going to yield plus dividend growth. In Atlantica's case, the yield is 5.1% at the current price and sustainable growth is 5-8% a year. For Clearway, it's 5.3% with 5-8% annual growth--strong value propositions for both, particularly when you consider how view renewable energy investments there are with a safe, high yield--you're not going to find it with green bonds.

Tom

6:47

Roger, you have a buy-under for HASI at 55, implying a pretty good deal at today's close of 45.22. Since it is also sports an underwhelming 3% dividend growing at low single digits, are you banking on an outsized stock price rise again when renewables turn around? Thank you!

Roger Conrad

6:47

That's pretty much my thinking on Hannon Armstrong. I have been favorably impressed with the way the company has been able to build scale, both with assets/loans and ability to raise capital. They fact they've raised projected annual earnings growth to 7-10% a year (from low single digits) and have lifted projected dividend growth to 3-5% a year is evidence of that and is very encouraging from both a value proposition standpoint and because it demonstrates Hannon is likely to grow faster the bigger it gets.

But the bigger factor here at least as far as upside in the next 3-6 months goes is this is the only game in town when it comes to a renewables focused business development company of meaningful size. And it has gotten noticed--as a member of 143 different stock indexes and many green ETFs. I think that's going to pay off with a great deal of upside in coming months, even as the business keeps on growing.

Pamela

6:53

Hello Roger, and again thank you for all your sound wisdom over the years. I own AWK and am a little alarmed by the high valuation. What do you think accounts for the spurt in its stock price over the past year or so? Also, other than Essential Utilities; Artesian Resources and York Water, what water stock looks attractive right now for fresh money? Thanks

Roger Conrad

6:53

Thank you Pamela. Yes, American Water Works' high valuation is definitely a deterrent for me for recommending the stock, though the share price has come down a bit since last November. On the business side, there's really nothing not to like about a utility able to raise dividends 10% a year because of strong rate base growth and ability to acquire and absorb water systems on the cheap, especially with Fair Market Legislation passing in many states and providing a gauge for pricing buyouts of financially challenged municipal systems. But with a 1.6% yield and trading at almost 35 times expected next 12 months earnings, high valuation has become a noticeable headwind for the stock.

I think the driver for AWK shares is the same as it is for all water stocks. This is a very reliable business that now has a reputation for being extremely reliable and almost never dishing out negative surprises for balance sheet issues, dividend safety or even growth. Essential Utilities--formerly Aqua America--does get a

Roger Conrad

6:56

slightly lower valuation because it owns natural gas distribution as well. That's despite the fact that those assets are actually growing rate base faster than the water utility is. But gas distribution is currently facing down doubts about whether there's life for pipes in a decarbonizing world, which they're only gradually overcoming by emphasizing development of renewable natural gas from farms and ultimately hydrogen. And in the meantime Essential is likely to trade at least at a small discount to AWK, SJW and others.

6:58

In my view, it's very difficult to find value in the water utility stock universe right now. I continue to like Essential as you know. But really aside from Artesian Water as a potential takeover target, they're all holds until they back off to lower prices. We did see that last year for a short time. i think we will again and that will be the time to strike--at least on everything except Essential and Artesian, which are good buys now.

Pamela

7:04

Oh and just one more question. Any idea if and when EPD and ET will ever fully come back? Thank you.

Roger Conrad

7:04

A bit earlier in the chat, I answered a question about Williams Companies with the comment that most energy stocks aren't pricing in $50 per barrel oil, let alone $60 plus. Williams is the exception, having recently rallied back to its level just before the pandemic, when oil was holding around $50. But Enterprise at the time was trading in the neighborhood of $30, well above its current low 20s level. Energy Transfer was in the low teens, versus a level just under $10 currently.

Why are energy stock prices not reflecting the recovery in oil? I think the main reason is few investors really believe oil can hold $50 a barrel, much less $60. That's born out of the hard lesson of past years, when prices surged only to fall back to even lower levels than before. But while it's certainly understandable, the pessimism also ignores the fact that we're in a very different place in the energy price cycle than we were just a couple years ago.

The biggest difference is investment has pretty much dried up, up and down

Roger Conrad

7:06

the energy value chain. Again this is a subject we'll be talking about at length on the Energy and Income Advisor live chat in a couple weeks. And I strongly urge anyone interested in oil and gas contact our own Sherry Roberts at 1-877-302-0749, Monday through Friday from 9-5 ET.

7:11

That lack of investment, though, is something we didn't see prior to the pandemic. It started coming on in the second half of 2019 and went into overdrive when the pandemic hit last year. This year, CAPEX levels for many leading midstream companies, for example, are more than -80% lower than in 2020, which itself was a low point for the cycle. It's what we always see at cycle bottoms. And combined with rising demand coming out of the pandemic, it means a new and more profitable stage of the cycle for energy companies.

7:15

As we point out in the current issue of EIA, one of the most encouraging recent sector developments is despite strong Q1 earnings, industry leaders are still sticking to conservative financial strategies. Both Kinder Morgan Inc ($1 bil) and Energy Transfer ($2.5 bil) made windfalls off of the Texas February Freeze--but rather than boost CAPEX or dividends, both used the entire cash pile instead to cut debt. That not only makes them stronger companies but it affirms companies are going to keep things conservative this time around.

7:19

Our view is that as demand continues to recover from the pandemic, investors are going to get more comfortable not just with higher energy prices but also the fact that these companies are successfully adapted to handling sub-$40 oil--and literally raking in the cash with prices at current levels. And within the next 3 to 6 months, stocks like Enterprise will be trading at levels where they have historically when oil has been over $50. I think Energy Transfer is likely to take longer, owing to last year's dividend cut. But it too is shaping up for a big rebound. Bottom line, we advise continuing to be patient. And again if you want a bigger position in oil and gas stocks, check out Energy and Income Advisor.

dudleycurtis

7:24

Hi Roger....other than CNP, what's your best preferred idea ? Thanks Dudley from Va.

Roger Conrad

7:24

Hi Dudley. In general, I prefer common equity to preferred stock because high quality companies will raise them over time. But I do like these mandatory convertibles, because they pay higher dividends and do offer upside from a rising common stock price.

One of the things I really like about these live chats--and this one is now 5 plus hours old--is the ideas that come our from readers. And I confess to being very intrigued by the PG&E mandatory convertible I answered a question on earlier in the chat, as a way to play an eventual recovery in that stock.

For now, I'm only recommending the Centerpoint Preferred--which I do review at length in the May issue of CUI. But you can expect to see more of this asset class in the future.

richard

7:30

What's happening with EIX---is it still doing OK please

Roger Conrad

7:30

Hi Richard. Basically, the story with Edison is the same as it is with PG&E--investors appear to be very concerned with the utility's preparedness going into California's wildfire season--and despite a generally bullish outlook from Wall Street with 14 analyst buys versus 4 holds and no sells, most people appear to be taking a wait and see approach. That's more than reflected in the share price at 12.9 times expected next 12 months earnings versus 17.4 times for the Dow Jones Utility Average.

It's difficult to predict weather. But the consensus is California is headed for perhaps its worst wildfire season yet, following 2020 that was the worst to that point. Edison has avoided material damages the past two years. Despite extensive investment hardening its grid and improving sensor and data technology, it's a safe bet it will face a steep challenge this year. And in fact the California Independent System Operator is already warning about the possibility of summer blackouts. But it's also safe to say

Roger Conrad

7:34

investor expectations are about as low as they've ever been for Edison. And the stock is getting no credit at all for the massive rate base investment opportunity it has for the next couple decades as the state decarbonizes and electrifies transportation. It's pretty clear to me that Edison shares are going to trade at a discount at least until investors are more comfortable with its wildfire preparedness. But management knows its challenges and it continues to prove its ability to weather them. And from a place of such low expectations, that makes Edison a solid buy in my view.

Pamela

7:36

Thanks Roger, I am a long term holder of Essential Utilities which I own in a DRIP and have been very happy with. I also own Artesian. So would you recommend SJW now or would you wait? What about Middlesex? A hold as well?

Roger Conrad

7:36

I'd really wait on both at this point. SJW is looking more interesting after sliding towards 60 today. But these are such high valuation stocks with very low yields, especially Middlesex. I think we can afford to be patient for lower prices.

Jimmy

7:45

Roger: Can you name the gas companies that stiffed VST in the Texas fiasco by dishonoring their contracts?

Roger Conrad

7:45

Hi Jimmy. Vistra has not given out that information to this point, other than to say 70% of the force majeure claims received from gas suppliers occurred before the Texas grid operator began ordering power cuts on February 15. There are several likely reasons why they may not be going public.

They may consider that kind of information non-public, or that may be mandated by contracts that are still in force. They may be doing so in hopes of negotiating some kind of compensation. They may also be staying quiet because they're preparing litigation.

Whatever the case, we do have a pretty good idea of the magnitude of the wind fall a large number of producers and midstream companies achieved as the result of higher selling prices for natural gas. And we're talking about big dollars that some may be willing to share in return for locking down more business with such a large natural gas consumer as Vistra.

The fact that Vistra does not include any recovery of its costs in current guidance means there's only

Roger Conrad

7:47

upside here--the worst case is reflected and already priced in. And every earnings report starting with Q2 in early August is an opportunity to surprise to the upside. Vistra is still a buy for patient aggressive investors--at least for anyone not already fully invested.

OK. Well that looks like all we have in the queue this time. I want to thank everyone who participated in this chat--as well as everyone reading the transcript. We really appreciate your trust and your business.

7:49

As I said, we will be sending you a link to the complete transcript of all of the Q&A in the near future. And it will also be posted under the "Live Chat" tab on the Conrad's Utility Investor website.

Thanks again everyone. I'll look forward to chatting with you next time!

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