JotCast | 8/13/20 Conrad's Utility Investor Live Chat

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8/13/20 Conrad's Utility Investor Live Chat

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3:10

Assuming we ever get to a point in the US economy where we have inflationary pressures with rising interest rates, can you provide any insight on how utilities generally perform in such an environment?

Roger Conrad

3:10

The effect on earnings and balance sheets will basically depend on each company's relationship with its state regulators--will they be allowed to recover increases in prudently incurred costs? Would allowed returns on equity be increased to keep pace with higher borrowing costs? Experience tells us that will likely vary by state, which in turn means the effect on companies' health and investor returns would vary as well.

I do think utilities are much better protected from future inflation now than they were say in the 1960s on the eve of that era of rising costs. First, reliance on fossil fuels--which historically have had volatile prices--is declining. Second, with some exceptions such as Southern's Vogtle plant and offshore wind facilities planned for the Atlantic Coast, utilities' CAPEX is focused on smaller projects that are faster to build and therefore not vulnerable to inflation. And third, companies are taking advantage of record low corporate borrowing rates to lock in low debt costs. But impact

Roger Conrad

3:10

really does depend on how fast inflation becomes.

3:12

What I will say is, contrary to what has been popular belief, there is no lockstep relationship between inflation, interest rates, Fed policy and utility stock returns. Rather, utilities are going to follow the overall stock market, which historically has done better when the economy is in good shape, and worse when it's not. Utilities are stocks, not bond alternatives or substitutes. They do best when companies are earning and paying out more, which historically has happened with inflation at a wide range of levels.

eugene clervi

3:18

bius

Roger Conrad

3:18

Hi Eugene. Are you asking about the closed end fund Blackrock Utilities, Infrastructure & Power Opportunities Trust (NYSE: BUI), which I track in Utility Report Card and recommend in the CUI Plus service?

If so, I like it a lot in the CEF universe and rate it a buy up to 23. The fund proved its model of investing in very high quality stocks with little leverage this past spring by being one of the few CEFs that didn't see a big drop in value due to forced liquidations. It trades at a very low premium of about 1% to net asset value, which is well below the high of nearly 18% last year but also compares to big discounts of many CEFs. That's the result of the market valuing the safety BUI provides by not using heavy leverage, and I think it's a price worth paying given how much uncertainty this market and economy is still facing.

Roger Conrad

3:19

Of course, if that's not what you're asking about, please feel free to resubmit your question and I will get to it. Thanks

Hans

3:25

CHL has not been doing well lately and I know you still have it a buy what is your outlook for this stock with all the China problems we have. Thanks

Roger Conrad

3:25

I really liked the Q2 earnings China Mobile posted today. And though some of that big gain today has eroded, the stock has recently been showing some signs of life.

Once we get Algonquin Power & Utilities' results later today, I'm going to produce an recap/analysis (probably tomorrow) of the five Portfolio companies that had not reported calendar Q2 results as of the August issue posting. One of them is China Mobile. In brief, this was a quarter no one expected would produce big numbers. But they basically held flat the first six months of the year versus 2019 on both revenue and earnings--thanks to 5-G deployment that is beating everyone's expectations including their own.

I said earlier this year that the combination of US government sanctions against Huawei and social distancing from Covid-19 could really light a fire under China's 5-G deployment. And that appears to be the case, with China Mobile also benefitting from lower costs as Huawei needs to sell into its home market. The company now has more

Roger Conrad

3:26

than 70 million 5-G customers--which is by far more than any other carrier in the world and appears to be more than twice the numbers of rivals China Unicom and China Telecom, which have combined their efforts. Anyway, I

3:29

I'll have more detail in my report tomorrow. But I think this is a deeply undervalued stock (9.7 times expected 2020 earnings) of a company that's actually been able to turn the pandemic to its long-term benefit, despite taking a short-term hit to earnings from such things as dropped service, bad debt and reduced handset sales. We're underwater a bit at this time and the stock is trading below its Dream Buy price. But I'm not giving up on it.

Al C.

3:35

Roger,

I want to convert my BEP shares into BEPC to get rid of the irritating schedule K.

Is that a bad idea in any way?

I planned on selling BEP and buying BEPC, but BEPC is priced higher than BEP and I would lose money on that transaction.

Is there another way to convert from BEP to BEPC? Thanks

Roger Conrad

3:35

At this point, the only way you can "convert" BEP into BEPC is to go out and sell it, then buy back BEPC. But before you do that, I would strongly advise looking into how much tax you might incur by selling the partnership units--which depending on how long you've held could be quite a bit more than the current price difference of roughly $3 a share/unit.

It could be that at some point, BEP management will offer some sort of conversion option on a 1-to-1 basis, since it would not involve any dilution and if there were a price "step up" as there is now it could compensate investors for some of the taxes from conversion. They might also be able to figure out a way to avoid taxation entirely, as Hess Corp did for Hess Midstream last year.

But at this point, I don't believe there is that option and my advice is to hold both BEP and BEPC--which are just two different ways of owning the same company with only difference being how dividend distributions are taxed.

I

Paul

3:41

Thanks for all you do Roger. While you're still on AT&T, I like it I would like to buy more. Do you have an opinion on how much of a single stock is too much in a portfolio? I know a lot to consider how much other telecom do you have..... but take a stab at it if you don't mind.

Roger Conrad

3:41

Thanks for reading Paul. Yeah, I do have that rule for not overloading on any single stock--but of course what constitutes real balance and diversification is going to vary from reader to reader.

Regarding AT&T, I was basically looking for three things with Q2 results and guidance--which I assumed going in would be weak, mainly because of the pandemic's impact on Warner Media. Those were number one that free cash flow be basically in line with guidance and therefore able to cover industry-leading CAPEX and dividends with room to spare for debt reduction and possibly stock buybacks. Second, I wanted to see signs that the wireless business was holding its own both on customers and margins. And third, I wanted to see progress on the profit building initiatives in their deal with Elliott Management.

As it turned out, they made on free cash flow with room to spare, cut churn and maintained wireless service margins and kept the pressure on costs. They also indicated some green shoots at Warner Media and made

Roger Conrad

3:43

progress on asset sales. Debt maturities in the next four years have been reduced by $23 billion this year, with the company effectively using record low borrowing costs to slash interest expense and greatly extend maturities from levels taken on with the Time Warner merger. and management again this week affirms the target 60s dividend payout ratio of free cash flow.

3:45

I think AT&T earnings and shares aren't likely to fully recover until Warner Media does--which isn't going to happen in full until this pandemic runs its course. And I think even with the stock at just 9.7 times expected 2020 earnings, we have to be patient . That's made easier by the dividend yield of nearly 7%. And at the end of the day, this is a resilient though unloved company that if it stays on course should be well north of 40 the next few years.

barry

3:49

Gentlemen: Question - to the best of my knowledge, you have never listed EPD or MMP as a company to purchase even though we have KMI as one. Your thoughts of either of them? Thanks.

Roger Conrad

3:49

I do track Enterprise Products Partners and Magellan Midstream Partners in the Utility Report Card coverage universe, along with a small handful of other North American energy midstream companies. I currently rate both as buys because they have the asset diversification, focus and strong balance sheets to not only weather this extremely difficult environment for energy but to emerge more dominant than ever in what's increasingly a mature industry--but one that will eventually cycle out of this downturn to reward the survivors. Kinder Morgan is another in this category, and we also have Pembina Pipeline and TC Energy as examples as well.

These are both Portfolio picks in Energy and Income Advisor--which has much greater coverage of the energy sector up and down the value chain than CUI does.

Rick P

3:56

Hi Roger

What will it take to get EPD’s price action moving in a good direction? Hard to believe the stock price is less then half its all time high!

Still a believer in EPD? How safe is the dividend ? Thanks

Roger Conrad

3:56

I don't make a habit of saying many 9% plus dividend yields are safe but that is my view on Enterprise Products Partners. And it's been reinforced by what were solid Q2 results under the worst operating conditions I've ever seen in North American energy. The coverage ratio of 1.6 times for the distribution in Q2--a quarter where volumes at every operation except NGL fractionation were challenged--really does say it all. So does the BBB+ credit rating with a stable outlook and extremely low cost of debt capital--with January 2060 bonds yielding just 3.63% to maturity today.

Believe it or not, we actually panned Enterprise at Energy and Income Advisor back in 2014 as extremely overvalued. But they now pay a dividend 24% higher than they did then and have proven they have the strength to keep building scale in what for all practical purposes has been a six-year downtrend for midstream. Bottom line: They're a more valuable company than they've ever been, and still sell for less than half their all-time high.

John C

4:04

Rather than invest in Dominion, NEE, or other utilities (owned by BUI) singularly, couldn’t I simply invest in them by utilizing BUI? The yield is excellent and BUI owns quality stocks at a discount. Please opine. Thanks!

Roger Conrad

4:04

Like I said, I do recommend the Blackrock fund--NYSE symbol BUI--in CUI Plus, and it's so far consistently done what I've required of it: Paying a consistent monthly yield of 12.1 cents per share are generally holding its value. And the yield at 6.5% is higher than it is for the vast majority of high quality essential services stocks--NextEra for example is now less than 2%.

But there are two critical reasons why I prefer it as one portfolio holding, rather than as a substitute for a portfolio by itself. First, while I like how this fund's management has performed, I'll never know what exactly is inside it unless I'm named manager. And in that case, I would be prohibited from telling anyone, other than when the fund makes its regular SEC filings. That means I'll never really know how safe or at risk the monthly distributions are until it's too late to do anything about it.

Second, buying these stocks through a fund means I'm sacrificing the key driver of long-term capital growth from owning them--which is

Roger Conrad

4:05

the steady and consistent rise of dividends paid. Theoretically, the fund gets that. But the benefit will depend on position sizing, timing of purchases and a hundred other factors. And chances are management isn't going to waiting around in any holding long enough to get that benefit.

4:07

There's also the risk that management will at some point choose to leverage performance to a particular stock or sector and that the bet will sour. And again we won't have any control if that happens. Yes, we also have to trust management when we buy stocks of companies. But by spreading our bets and keeping tabs on our companies ' health, we can control our actual exposure. With a fund, it's all a black box essentially.

Mike C.

4:13

Hi Roger – First, thanks for the outstanding, rock-steady work over the years. It’s much appreciated.

A handful of questions in advance of the chat: what are your thoughts on PCG, and likely price recovery now that it’s out of bankruptcy? Thoughts on UGI – it’s had a wave of insider buying last week. And finally, thoughts on CHL, both from a political risk perspective and price growth perspective.

Many thanks

Roger Conrad

4:13

I think PG&E should be at least a mid-teens stock a year from now, provided it doesn't get absolutely steamrolled by this year's wildfire season in California. Management is certainly focusing all of its resources on making that happen. And the state's new wildfire insurance fund does provide some cushion. But until the rains return to the state, this is going to hang over the stock. I think it's worth betting on for investors who can stomach the risk--but this is very much a show me story, and given this company's spotty track record it's no wonder there are so many skeptics and the stock is under $10 now.

I think UGI is a very solid company that's basically structured its fuels distribution businesses in the US and Europe as an essential service. The stock tends to get traded on the basis of weather-related expectations, which is understandable given how dependent earnings are on heating demand. But I think what people have missed here is the cost cutting benefit that's available from building scale.

Roger Conrad

4:14

That's what was behind the increased guidance following FYQ3 results (end June 30). And I think at 12 times consensus expectations for FY2020 and a yield of nearly 4% UGI is a solid bargain. Its also very much a potential takeover stock at $7 bil or so market cap.

4:18

Finally, I gave a pretty extensive answer on China Mobile a bit earlier in the chat. One thing I didn't touch on was political risk. I don't see a lot of it from the Chinese government to shareholders--as that country is trying to encourage investment and this company's dividend policy remains very shareholder friendly. Rather, the risk is from the US government--specifically if the Trump Administration follows through on its often repeated threat to delist Chinese companies from the NYSE and Nasdaq on the grounds their accounting is somehow substandard. I don't believe that's the case, especially for a large asset-based company like China Mobile. And in any case, the company is a lot faster posting its financial data with the SEC than many US companies are I've found.

4:20

On the other hand, in an election year, it's not unheard of for politics to override economics. And let's face it, the president's campaign has been trying to make China an issue. So the question is what happens if China Mobile is forced to delist and is this a real risk to US investors?

4:25

The most likely outcome would be a huge increase in the company's volume on the Hong Kong Exchange--where it trades under the number "941". But there's also a five-letter share traded over the counter in the US--"CHLKF"--which actually does pretty good volume. Whereas CHL is an American Depositary Receipt representing 5 ordinary HK listed shares, CHLKF represents one HK listed share. So if China Mobile ADRs are delisted and the company liquidates them, US shareholders would wind up holding 4 CHLKF for every one CHL they now own. More likely, the company will keep the ADRs and trade them over the counter, hoping US/China relations ultimately return to a more cordial tone. But in any case, US investors in CHL should be whole no matter what happens. And the real drivers of returns are going to be earnings and dividends at the company itself, which as I noted above have quite bright prospects.

Ben F.

4:33

Roger -

Thoughts on FE and the recent stock drop? Any chance of adding it to the portfolio?

Thanks for all the hard work.

Cheers

Christopher B.

Roger Conrad

4:33

Thank you for reading and participating today! Adding First Energy is certainly something I'm considering at this time. The dividend yield of 5% plus is well covered and I think still likely to be increased in November, as Q2 earnings proved resilience to Covid-19 fallout. There has been a delay in filing the 10-Q, which is a bit worrisome as the company specifically noted the US government probe of Ohio state politicians as the reason--along with shareholder and customer lawsuits in connection to the probe.

Based on what we know at this time, in order for there to be real liability from this case for First Energy, there's going to have to be some sort of proven financial link to Energy Harbor--the former power generation unit of the company. And the two have had separate operations, financial management and governance since 2016--which again based on available information should predate this case substantially. There was an ongoing bankruptcy proceeding for Energy Harbor, which First Energy settled with

Roger Conrad

4:35

a large payment. And the risk is here that somehow gets reopened. But what this really looks like to me is a case of a tremendous amount of uncertainty weighing on a stock, which will keep the price at a low level until there's more detail. I don't have a call for you today on this stock. But it's definitely on a short list right now for potential Aggressive Holdings.

Christopher B.

4:35

AGL Energy Ltd (AGLNF) CEO Brett Redman on Q4 2020 Results -

To me this company seems to be changing rapidly and hopefully coming a better company. Below are notes from the conference about the changes and can you provide your opinion on the company?

My Notes
This company is changing to more Renewable energy and Natural Gas providing transition energy until !00% Renewable is reach if that is possible but still the right direction. A big boost to earnings would Southern Phone providing Broadband & Phone to people with I would believe low capital spending since electrical lines are already running to the home. Third special dividends and share buy backs.
Notes are quote from the transcript

Customer markets is moving from being a leader in electricity and gas retiling only to becoming a leader in the provision of multiple essential services, including broadband and the delivery of other roads and services. Integrated energy is about moving from a carbon intensive large asset portfolio with a long exposure to

4:38

Is CHL China Mobile Limited the like the "Dow Dog" is CHL the "Telecom Dog" from Utility Investor Portfolio?
I have noticed that my Templeton Dragon Fund Inc a Chinese based stock CEF ... NAV keeps on climbing and after Buying a few more shares of CHL now is seems so is CHL.

BUT ON SECOND Question
The market seems to be setting up for one of those October dips?

You know when all those managed funds scramble to make everything look good to shareholders .... "Do Not Sell My Fund Investor and here's Why"

Roger Conrad

4:38

Hey Christopher, I hope you saw my answer to your question on AGL earlier in the chat. Bottom line is I'm staying with it because I think the shares are cheap and the company is successfully navigating through a very tough environment--preserving balance sheet strength, paying generous dividends and positioning for future energy in Australia.

I hope you also saw my answer on China Mobile--also trading below the Dream Buy price and also I think a solid bargain for patient investors.

Roger Conrad

4:44

As to your second question, I certainly don't think we can rule out another big drop in the stock market this year. There are just a lot of moving parts here and the most important is one we clearly have been unable to either control or even get a reliable read on this year--which is what's going on with the pandemic and its impact on the economy. I think the fiscal and especially monetary (Fed) US government largesse--which by the way has been picked up all over the world including Europe--has been essentially providing a floor under the stock market since later March. And there's now a hope that a Covid-19 vaccine may be ready by early next year, which would eventually remove the pandemic as a concern for health and the economy. Market momentum is still very positive, though "value" has yet to take the lead as it will have to if this market rally is to continue. And you have to give it the benefit of the doubt while that's the case. But again, the economic news still isn't great and it's quite possible

4:49

guidance companies have been providing will not be met--including for some of the essential services companies in our coverage universe. I've posited a three-point strategy for dealing with this environment for some time and highlight it again in the August issue Portfolio section. I think it's the right approach for keeping us invested as fundamentally long-term, patient income seekers. And as I said in the CUI issue, the Q2 results of Portfolio companies make me comfortable holding them, even if second half 2020 doesn't get much better and the pandemic remains a major depressing factor. I also think the fact these "value" companies haven't really kept up with the S&P 500 should limit risk. But again, I think this is a time to be very careful--not fearful or running for the hills but certainly cautious and while invested nonetheless ready to light up if needed.

Bill G.

4:58

Hi Roger: I sold KMI at the start of the year after holding it for many years.
Looking to get back into some form of O & G holding I bought ENB.
Last chat you were strong on OKE, now, not so much?
Recently, you have supported KMI. Any thoughts today on OKE vs. ENB.
Something better for the long term?

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