You are viewing the chat in desktop mode. Click here to switch to mobile view.
X
Return toCapitalist Times
August 2023 Capitalist Times Live Chat
powered byJotCast
AvatarRoger Conrad
1:43
Hello everyone and welcome to our Capitalist Times live chat for August. We’re looking forward to another lively session today and truly appreciate your business and participation.
 
As always, there is no audio on today’s chat. Just type in your questions and we’ll get to them as soon as we can comprehensively and concisely. If you can’t stick around until your question is answered, we will be sending all of our readers a link to the transcript of the complete Q&A session. And of course, we will also post it on our various websites.
Per usual, we’re going to start with answers to questions we received prior to the chat.
 
Q. What company is your best takeover candidate within the next 12 months for utilities, MLPs, and energy stocks?—Kurt C.
 
A. Hi Kurt. Rule number one for us we never want to recommend a takeover target that we wouldn't want to own if there never was a deal. That means we usually steer clear of weaker companies desperate for deals as an exit strategy, a description that applies to almost all smaller telecommunications companies now. And that includes TDS/US Cellular, which has announced it's basically up for sale but now appears fully priced for that possibility--given US Cellular is shedding revenue and customers to larger rivals.
1:44
 
Regulated electric, gas and water utilities are an area always ripe for consolidation, though the current regulatory environment has made closing deals highly problematic for the moment. The only ongoing deal is Avangrid (NYSE: AGR)/Iberdrola's (Spain: IBE, OTC: IBDRY) attempt to buy PNM Resources (NYSE: PNM)--with the New Mexico Supreme Court deliberating on whether to send the case back to state regulators who are now most likely to approve it.
 
I think a deal for Hawaiian Electric (NYSE: HE) would make sense at this time, given the damage to the stock over the past couple weeks and the fact that potential wildfire liability concerns may have been hugely overblown. But the state's rejection of NextEra Energy's (NYSE: NEE) bid for the company back in 2016 will very likely deter buyers, barring something extraordinary.
 
 
 
On the other hand, M&A is picking up in the North American energy sector, particularly among producers but now spreading to midstream. Scale is increasingly essential for growth in a tepid volumes environment, where the cost of capital is elevated and regulators have all but slammed the door on major new projects. 
 
As noted in the August issue of Energy and Income Advisor, for more conservative investors, I think Plains All-America Pipeline (NYSE: PAA) is a standout candidate, with a growing and leading energy transportation franchise in the Permian Basin. Potential buyers include super majors like Chevron Corp (NYSE: CVX), which has already made several midstream acquisitions and has targeted the Permian for output growth.
 
An acquisition from another midstream MLP is preferable from a tax standpoint. Energy Transfer LP (NYSE: ET) is one candidate. And if they can complete their merger, ONEOK/Magellan Midstream would be as well.
1:45
Any deal for PAA would have to involve its 34.49% owner Plains GP (NYSE: PAGP). 
 
For more aggressive investors, I'm starting to warm up to Equitrans Midstream (NYSE: ETRN). The key here is getting the Mountain Valley Pipeline (MVP) completed and in service by the end of the year without significant new costs.
 
The decision of the federal Pipeline and Hazardous Materials Safety Administration to require massive testing of "pipeline integrity" across MVP's 303-mile length is the major remaining hurdle on the cost side. But construction has been ongoing since August 4, with the company reporting rapid progress and courts rejecting further challenges--citing the provision eliminating challenges to federal permits for MVP in the debt ceiling agreement passed by Congress.
 
If/when MVP enters service, Equitrans will be valuable property. Possible acquirers include former owner EQT Corp (NYSE: EQT), still its major customer and a recent acquirer of other midstream companies. Other owners of MVP are likely to monetize their interests--including Altagas (10%), Consolidated Edison (10%) and NextEra Energy (30%), providing EQT an opportunity to own the whole thing. There's still the risk of an ETRN dividend cut, if MVP runs into further delays and costs. So this stock is still not for the faint of heart. I expect to be writing a lot more about midstream mergers in EIA.
 
Q. Roger and Team. In viewing the stocks you all follow, I noticed Northwest Natural Holding (NYSE: NWM), a natural gas distributor. The stock is near its support and yearly low with a 5% dividend with many years of small increases. Thoughts?--Ben F.
 
A. I've covered Northwest Natural for many years in the Utility Report Card coverage universe.
1:46
It's a well-run natural gas distributor that's also building a multi-state water utility franchise. I'm currently rating the stock a buy at 45 or lower. That follows solid Q2 results, and management's affirmation of both its 2023 earnings guidance range and annual growth of 4-6% through 2027. The gas franchise continues to add customers at a solid 0.8% rate and Oregon regulators are supportive of plans to decarbonize the system, in part with use of renewable natural gas harvested at the utility's own facilities.
 
 
Q. Dear Folks, I would appreciate an update on three positions deeply underwater for me First, the Canadian REIT Artis (TSX: AX-U, OTC: ARESF). Is it a hold or a sell? And why for either. Second, the Canadian utility Innergex (TSX: INE, OTC: INGXF). Is Hydro Quebec still supportive enough a backstop to maintain dividend? And lastly, Next Era Energy Partners (NYSE: NEP). I've always been a fan of the Next Extra family, but NEP’s continued downward slope is more than a little disquieting. It looks
1:47
like it's priced for a dividend cut. What is your take on the situation? Many Thanks (and may you all have a Happy Holiday).--Jeffrey H.
 
A. Hi Jeffrey. REITs in general have been under pressure this year, particularly those involved in real estate considered to be more cyclical. In Artis' case, that's retail, industrial and office properties. And while operating results have been generally solid--Q2 net operating income up 6.9%--the assumption in the sector is revenue will come under pressure in coming months from lower occupancy and slower rent growth.
 
The REIT like others also has a challenge with debt, which I think is the impetus for the strategic review launched earlier this month. I did drop Artis from the REIT Sheet recommended list earlier this year, mainly because of concerns about financing with interest rates rising so rapidly. It's down a bit since but I think now prices in the challenges and I rate it a hold in our REIT Sheet databank.
 
I track Canada-based power company Innergex in the Conrad's Utility Investor Utility Report Card. The company reported Q2 results just after the August issue posted, so its numbers are not shown in the URC edition currently on the CUI website.
 
I will be providing a full review in the September issue URC. But in brief, the highlights were 18% higher EBITDA from the year ago quarter, with asset expansion a primary driver. Production was still just 90% of the long-term average, down from an also low 92% a year ago. The company had better production at hydro facilities in western Canada and stronger wind conditions in France, offset by weaker wind elsewhere.
 
These seasonal fluctuations should even out over time, and more important the company should be better able to offset weather conditions in one region with another the more it expands. Free cash flow was down, which pushed the payout ratio to 127%. But support of Hydro-Quebec is strong, with the
company signing a 30-year power sales contract for a 102-megawatt wind project during the quarter. Bottom: Despite the lack of a dividend increase in five years, I still think the stock's a buy for patient investors at 12 or lower.
 
As for NextEra Energy Partners, I think it's been weak for four reasons. First, stocks of renewable energy companies have been under pressure since Duke Energy (NYSE: DUK) announced the sale of its unregulated commercial renewables assets to Brookfield Renewable Energy (NYSE: BEP) at a lower multiple than some expected. That was primarily because the sale meant the end of tax credits at some facilities. But there's concern these assets have been valued too highly, which probably will remain until the next major sale--could be at Dominion Energy (NYSE: D).
 
Second, NEP relies on drop down acquisitions from parent NextEra Energy (NYSE: NEE), and there's concern higher for longer interest rates could restrict the pool of targets and therefore pressure target 12-15% annual dividend
1:48
growth. Third, NEP/NEE have yet to announce a sale of the Texas gas pipelines. And until they do, there will be some uncertainty about whether the price fetched will be enough to execute the debt reduction plan. And fourth, wind conditions were poor in Q2 at NEP's facilities, raising concerns about whether the company will meet 2023 guidance.
 
One thing I can say is the dividend is not at risk of a cut. The growth rate could be reduced, if the pipeline sale proceeds are far less than expected and NEP's interest costs rise meaningfully from here. But at a yield of nearly 7%, even a growth rate of 3-5% is arguably very attractive. And if NEP is able to get the pipeline sale done, I would look for a pretty strong recovery. Thanks for your questions. Have a nice Labor Day as well.
 
 
Q. Hi Roger. I'd appreciate it if you'd comment on, and your recommendation
on Kimbell Royalty Partners (KRP). They seem to have growing volumes, a PE of 6.65, and pay 10.29%, and closed at $15.29. Seems very good. I've been with you and Elliot since your days at Personal Finance when we were all much younger. Thanks for your insightful work--
Mr. G
 
A. Thank you for your loyalty and your question. Kimbell is not one we currently track. But I think we will going forward. It's a relatively small royalty trust at $1.4 billion in market cap. And it's somewhat acquisitive, buying assets in the Permian Basin and Mid-Continent earlier this month for $455 mil. That's required raising capital in a hostile environment, with the company selling another 7.25 mil shares earlier this month.
 
The dividend is volatile, tracking oil and gas prices on a quarterly basis. That should be a positive going forward, though Black Stone Minerals (NYSE: BSM) and its leverage to natural gas
1:49
and somewhat larger size ($3.6 bil market cap) are a better bet in the royalty trust space in our view. Thanks for the suggestion to add to coverage.
 
 
Note: Here’s a brief email exchange I had over a couple days with a reader about Hawaiian Electric (NYSE: HE) and the Maui wildfire:
 
Q. Thank you for your recent Income Insights on utilities, wildfires and Hawaiian Electric (NYSE: HE). I had 400 shares I inherited. After holding for 12 years and reinvesting divvies, I sold in 2021. It seemed bondlike to me-rarely ever moved out of the low $30s and owned a bank-incongruous for a ute to own a bank. If indeed the bank piece is valued at $12.50, then HE is now selling for about the value of the bank only and the mkt. is assigning a $0 value to the ute.
IMO, the likely outcome will be a bankruptcy filing-Guggenheim is now involved-to try to staunch the flood of litigation that is coming. Actually, sooner may be better for bankruptcy. You are correct in positing that the state will not let the ute fail-but HE may be ordered to divest itself of the bank to raise cash. What will come out on the other end is anyone's guess, but I don't think it will be a PG&E (NYSE: PCG) likeness.
 
In my view, a buy would be wildly speculative at this point. I was against NextEra Energy (NYSE: NEE) buying HE in 2016, as to me HE was deadweight-I own NE. I'm fairly sure NextEra management is now happy HE, for some unfathomable reason, rejected NE's offer. Good article.—James G.
 
A. Thanks for your insights James.
1:50
It looks like my statement in the August 24 Income Insights that "anyone speculating in this stock now should be prepared to roll with the punches, which could come at the company with considerable force" is already coming true. The company today announced it would suspend its dividend to hold in cash. The Maui government initiated a lawsuit charging negligence. And S&P announced another pretty much pointless credit rating cut, this time to B-, with the stock still on credit watch for further downgrades. That reflects an expectation the utility business will file bankruptcy, though the bonds of December 2028 still aren't trading at a distressed yield (8.3% to maturity)--which indicates the continuing expectation of sufficient ring fencing of the parent and banking unit.
 
Not surprisingly, the stock is off a couple points today and the price is now at single digits. And I think today's news and the reaction to it is a clear sign of more volatility to come. 
 
In one interesting development, lawyers currently suing Hawaiian Electric for alleged negligence are charging the company with essentially destroying evidence as part of restoration efforts. That would seem to indicate no one has yet found the "smoking gun" that would really shake the money tree. But clearly this is a developing story. And while I'm confident the utility will survive this challenge--mainly because the state has no choice but to save it--a lot can still happen to drive down the share price in the meantime. Thanks again for your comments.
 
 
Q. Thanks for the response, Roger. The HE bank, American Savings Bank, was prominently featured on Pg. C1 of today's WSJ. I guess it took me mentioning it to you for a pub to catch up to the bank-and the fact that even though I don't like the mix, the bank has been an outsize contributor to HE's earnings stream for quite awhile. As I said yesterday, I believe the ute is preparing for a b filing and I would do it sooner rather than later-witness the J&J
1:51
and 3M fumbles. At the same time, you are correct in that the state will not let the ute die-it is a case of "too vital to fail". Unfortunately, I think the HE debacle has reminded investors of the PG&E debacle and has weighed on the prices of electric utes since Maui. PG&E has come a long way since its mess-I guess we'll just have to see how HE fares. Lots of action to come......and I'm certain you will keep us updated. –James G.
 
A. Hi James. An interesting twist in the HE story today--with the powerline accused of starting the fire having been shut down for six hours before ignition, and what appears to be firm evidence to back that up. When the trial lawyers started accusing the utility of destroying evidence I thought this wasn't going to be as clear cut as it looked initially. 
 
 
There's a money tree to shake here so I doubt anyone is going to give up anytime soon. But when Hawaii rejected NextEra Energy's bid for HE in 2016, it surprised a lot of people including me because we didn't fully understand--as Navy friends of mine later pointed out--Hawaii's unique brand of politics and the difficulty for "outsiders" to navigate it. Outside trial lawyers pursuing one-third of damages from a court ruling or settlement are vulnerable I think. Anyway, a lot left to be written here. But the stock rising close to 50 percent today to the mid-teens is a pretty clear sign the mainstream (lamestream) media has gotten this one wrong. Hardly a surprise there.
 
By the way, I have been pretty active on “X”—formerly Twitter—discussing the situation and trying to combat the appalling amount of bad information. My handle is @Roger_Conrad for those of you who use X.
I also have a weekly column “Dividends with Roger Conrad” on Substack.com.
 
 
Q. Hi Roger: One visible financial advisor has claimed that “over the past five years, NextEra Energy (NYSE: NEE) has significantly outperformed NextEra Energy Partners (NYSE: NEP).” When you factor in all of the great dividends from NEP, is that claim accurate? What do you think?
Thanks.--Barry J.
 
A.Hi Barry. NextEra Energy Partners has been under pressure because (1) renewable energy stocks in general have fallen from favor, (2) dividend stocks in general are out of favor with money funds yields 5% plus and momentum running against them and (3) some people may be betting against the company’s ability to sell their Texas intrastate pipeline assets at a price high enough to reduce the target amount of debt.
 
I think the latter concern is unlikely, as NextEra Energy has repeatedly
1:52
demonstrated its support for the yieldco since the 2014 IPO--and while it hasn't been a good funding vehicle in more adverse market environments, it certainly has been in normal ones. And NextEra needs the financial flexibility to execute its fully contracted renewable energy capacity backlog. So long as NEE is supportive (and I believe the pipeline deal will happen on favorable terms), NEP will continue raising its dividend 12-15% annually, which is a pretty compelling value proposition off a yield of 7.6%. I'm not a fan of really loading up on any stock. But I do like the price of NEP at this level.
 
You had an earlier question regarding the Algonquin Power & Utilities Preferred stock (AQNU). The yield on the preferred is that high because the price is tracking the conversion value of the AQN shares to be received when they mature June 15, 2024. There's no risk to the dividend until that time. But at conversion, the effective dividend will drop to what the received AQN shares are paying.
 
 
 
My view is Algonquin's recovery will be much further along at that time and the share price will be at a higher level to reflect it. My intent is to take the common shares at conversion, which will be a tax free transaction. But anyone can sell AQNU before the conversion--and if my view AQN will be trading at a higher price then proves correct, it will be at a profit from current prices.
 
Q. Hi Guys. I've been a subscriber for about 30 years. Keep up the good work. What are your thoughts on Petrobras (NYSE: PBR). You have it listed as sell in the E&P portfolio, yet seekingalpha.com has it ranked as #3 in the integrated oil and gas stocks sector. Also, these services stocks that are not included in your E&P and Services portfolio: Independence Contract Drilling (NYSE: ICD), TransOcean (NYSE: RIG) and Valaris (NYSE: VAL). And these mid-streams that are not listed in your mid-stream portfolio: Nordic American Tankers (NYSE: NAT) and New Fortress Energy (NSDQ: NFE). 
 
Finally, consider Equitrans Midstream
1:53
Is the Mountain Valley Pipeline completion now priced in? If so, is there justification to continue holding, or is it better to sell and deploy cash extra cash to... What? What are your favorite stocks for new funds? Thanks—Cliff W.
 
Thanks for your live chat questions Cliff. First, we've been wary of Petrobras primarily because the Brazilian government appears likely to push policies to hold down energy costs that will hurt investors by reducing dividends. The company did appear to catch a break this month with the country's attorney general ruling no impact study is needed for a major Amazon region drilling project. That's led some to conclude political risk has been overestimated. But the year-over-year payout according to Bloomberg Intelligence is now running -67% below the year ago rate--which is why the "gross" yield of 10% is so far above the new indicated rate of 2.4%. The integrated majors we've recommended have had a nice run but we still prefer them, as they don't have this kind of political risk.
Thank you for the suggestions for coverage--service companies TransOcean, Valaris, land driller ICD, North American Tankers and midstream company New Fortress Energy, which we do track in the MLPs and Midstream coverage universe. In general, we still prefer larger and stronger companies in all of these businesses, as we're still early innings in this energy upcycle and a recession later this year could still expose a lot of weakness. NAT, for example, appears headed for a fairly sharp dividend cut, as there's a heavy amount of variable rate debt maturing next year. We will consider at least some of these for coverage. And later in the cycle, those that survive the near term are going to be on much higher ground.
 
Lastly, I don't think Equitrans Midstream will fully price in completion of the Mountain Valley Pipeline until it's fully in service.
And at this point--while construction appears to be ongoing--project costs and the time table for completion are at elevated risk to increases, as a federal agency has ordered 300 miles of pipeline be inspected after charging segments left exposed or buried underground could pose a safety risk. Finishing this thing is going to make Equitrans instantly a lot more valuable. And I think a takeover is a strong possibility, with former parent EQT a strong candidate to make a bid. But in the meantime, a dividend cut is a growing risk, so it’s not a conservative play. Hope this answers your questions. If not, feel free to pose them again on the chat next week. Thanks for reading.
 
 
Q. With the merger of ONEOK Inc (NYSE: OKE) and Magellan Midstream Partners (NYSE: MMP), my research indicates OKE debt
1:54
will be four times EBITDA. Is this correct, and do you feel it is excessive?--George T.
 
A. Hi George. Net debt in a range of 4X EBITDA is actually pretty healthy for a midstream company. These are long-term assets operated under long-term contracts. And with the added scale and operational/regional diversification this merger offers, cash flow reliability should improve, and an expected 3 to 7 percent free cash flow growth rate will offer opportunity to reduce debt to EBITDA towards a longer-term target of 3.5X. In the meantime, credit rater Fitch considers 4.7X as the downgrade threshold--so the combination will have a lot of leeway to get there.
 
Bottom line: I would have preferred it if Magellan was combining with an MLP--as Crestwood is with Energy Transfer--
because there would be no tax liability for longer-term investors. But this combination has strong industrial logic in my view--and scale is increasingly critical in this capital intensive business.
 
 
Q. Hi Roger: Thanks for the most recent issue yesterday of Energy and Income Advisor Part 2. Question: MPLX is listed with a max buy of 33 on the “Target List” but in the “Portfolio Strategy” it is listed at 35. Have you moved the buy up to 35 as you previously had been telling me was a likely event?
Also, I have 2 more questions:
1.   Do we receive 4 more or 3 more AQNU dividend payments? September 15, 2023, December 15, 2023; March 15, 2024, and June 15, 2024? 
2.   When the preferred converts to common on June 15 of next year, do we still get our preferred dividend on June 15, 2024?
Thanks.—Barry J.
 
A. Hi Barry, Yes, sorry the highest recommended entry point for MLPX is 35 now, following strong Q2 results as highlighted in the EIA issue.
1:55
As for the other questions, there are four more payments for AQNU and we get one at roughly the time of conversion. The value of AQNU as conversion approaches will closely track the value of the AQN shares it will convert to. If AQN rises or falls, AQNU will do so by a like amount.
 
My view is the prices of both AQN and AQNU will be meaningfully higher by then—provided management can successfully execute the sale of the unregulated contract renewable energy assets. I think there’s a lot of investor trepidation at this point that they won’t, which explains the dip in shares following this announcement. But it also means there’s a very low bar of expectations. My intent right now is to hold AQNU and then AQN after the conversion—at least until this recovery has time to take shape.
 
 
Q. In a recent newspaper article, an official of a Texas town was quoted as saying Aqua Texas’ “business model does not benefit from conservation.”
It’s a subsidiary of Essential Utilities (NYSE: WTRG) an investor-owned utility with a $10.4 billion market capitalization." What are your thoughts, given the region is seeing a drought and there are questions over who owns what aquifer supplies?--Joe W.

A. This is maybe one example where Texas could learn from California. Revenue and therefore earnings for regulated water utilities in that state are decoupled from actual water demand. And the primary driver of earnings and dividends are multi year rate and system investment plans. I suspect there will be lobbying in Texas for something of that nature as the population grows and water resources are strained, as they have been for years in California.
 
As for Aqua Texas, it’s a relatively small piece of Essential Utilities. So even if there is no state relief it would not be catastrophic for the overall company. Something undermining them in Pennsylvania would be a different story.
But that seems highly unlikely at this point.
 
 
Q. Hi Roger. Am I missing something about AES Corp’s (NYSE: AES) convertible preferred stock AESC? Should I be alarmed at the price decline, or be delighted with the chance to pick up more shares at a nice discount? Assuming AES remains viable, doesn't AESC present a very nice risk/reward opportunity? Thanks—Arthur H.
 
A. Hi Arthur. AESC is the same type of play as AQNU—higher yield until maturity and price will move with the common—as the price of AES common stock is at this point low enough for the conversion rate to be the max number of shares.
 
The key differences are AES common is a lot closer to the point where the preferred would be valued at $50 at conversion. Also we have slightly more time before conversion with the Algonquin preferred. And the main issue weighing on AES shares is the health of the stock market. All it should take to bring back buyers is an improved macro picture—Algonquin is going to need to execute its recovery plan.
1:56
AES on the other hand is fresh off solid Q2 results and reaffirming 2023 guidance. S&P just revised the DPL utility unit’s credit outlook to stable from negative, reflecting greatly reduced risk to that unit. And I expect another mid-single digit percentage dividend increase later this year.
 
AES shares have been under pressure this year nonetheless for several reasons, one being the fact that it operates in developing countries. Also. There was selling pressure in the wake of Hawaii’s Maui fire, as AES has facilities that sell power to the utility Hawaiian Electric (NYSE: HE). But both risks in my view are very overblown, including the Hawaii risk: PG&E, for example, continued to pay its power suppliers throughout its bankruptcy. And it now appears likely the utility’s power lines did not in fact ignite the Maui fire.
 
Bottom line: AES looks very cheap at less than 10 times earnings.
And AESC is a high yielding way to hold the stock until it converts next year.
 
 
Q. Roger. Good morning. The selling in NextEra Energy Partners (NYSE: NEP) continues. Thoughts? I do not see any news? Sincerely--Ben F.- a grateful subscriber
 
A. Hi Ben. There hasn’t been much to report on NEP since earnings last month. But stocks of a number of renewable energy companies have weakened this summer, following Duke Energy’s (NYSE: DUK) sale of its commercial renewables unit to Brookfield Renewable (TSX: BEP-U, NYSE: BEP) at a lower than expected multiple—what some have called a revaluation of contracted renewable energy assets. The other factor weighing on the stock is likely concern about the announced sale of the Texas pipeline assets—proceeds from which are intended to retire debt. 
My view is still that so long as NextEra Energy supports NEP, there’s no risk to the dividend or the expected growth rate. But I also think the stock’s current low multiple is pricing in too much risk to the pipeline sale and the value of the renewables assets—which are all NextEra facilities. I’m not happy about the price action but intending to stay with it.
 
 
Q. Guys. Do you cover Kodiak Gas Services (NYSE: KGS)? It is a new issue (which has its own issues) but it is in an interesting space. If you know them, I would be interested in your thoughts. Thanks--Alan R.
 
A. Hi Alan. We have not yet picked it up. The company is still 76.23% owned by its parent Kodiak Holdings.
1:57
So it should be viewed at this point as a financing vehicle. Q2 results were solid, with revenue up 14.8% and EBITDA up 11.3% from a year ago. And we would expect continuing growth for its compression services as the energy upcycle unfolds. There’s no dividend yet. But there is precedent for sector companies paying one, mainly USA Compression (NYSE: USAC). We may cover it at some point. Meantime, thanks for the suggestion.
 
 
Q. I see that Essential Utilities (NYSE: WTRG) is down about 25% relative to its 5-year high and -22% YTD, which looks like a persistent down-trend. Do you have any thoughts on why that is? Thanks--Bur D.
 
A. Hi Bur. The bear case against Essential is basically that they’ll have trouble closing the acquisitions of municipal water and wastewater utilities that they currently have pending—
and that management will therefore have to reduce long term earnings and dividend growth guidance from the current 5-7% rate. Also, though WTRG has consistently traded at a lower earnings multiple than other water utilities, the sector itself has seen valuation compression this year from what were extreme levels.
 
At this point, there’s no sign WTRG won’t meet guidance—Q2 results were again very solid. And the dividend was boosted 7%, the top of the guidance range. So my view is we’ll see a solid recovery in the stock, though momentum may keep running against it for a while. But I think it’s the best buy in water utilities at this point. ARTNA is another at a good price now.
 
 
Q. American Tower (AMT) is rated B in the box but A in the text. Which one should it be? Thank you.—Teresa P.
 
A. Sorry for the confusion Teresa.
1:58
I’ve been going back and forth on this one, which I now trade in The REIT Sheet as well as Conrad’s Utility Investor. The two major risks to its rating are currency exposure due to a growing share of cash flow from operations in countries with weakening currency exchange rates, and the acquisition of data centers—which is a much more competitive business than wireless towers. The company had great Q2 results, so I raised it to A—unfortunately I did not change the rating in the column.
 
 
Q. We’ve received a request to vote on Magellan Midstream Partners (NYSE: MMP)/Oneok (NYSE: OKE) merger. I’ve read your write up saying to continue to hold Magellan and perhaps another offer will materialize. Are you allowed to recommend whether we should approve this merger? If so, do you?—Donna R.
 
A. Hi Donna. Since no rival offer has yet emerged, I think it’s increasingly unlikely one will, at least until this deal gets an up or down vote from investors.
The tax implications for MMP shareholders are the same whether you hold on through the merger close or sell now. I think the deal is a good one for MMP, both short term with the merger premium and long term as a combined business—with faster dividend growth. I also think they’ll get the votes, though I wouldn’t mind continuing to hold on deal failure either. So my advice is still to hold on to your MMP. 
 
 
Q. I understood the recommendation to hold. Just didn’t know if, as a shareholder, I should vote for the merger. But, with you saying it is a good deal for MMP, then I interpret that to mean to approve.—Donna R.
 
A. Sorry, yes I think it’s worth voting for.
 
 
Q. Roger. I found your article on the telecoms very informative.
1:59
As usual. What do you think about TLK? Thanks--Quint D.
 
A. Hi Quint. I don’t currently cover Telkom Indonesia (NYSE: TLK) but could pick it up in the future for Utility Report Card. The company pays a generous dividend annually and the yield and earnings multiple are moderate. It’s still 52.09% government owned, which is a financial backstop and the primary reason for the solid Baa1 credit rating from Moody’s. And there’s upside in wireless and fiber broadband, as the country upgrades communications networks. I would rate the stock a hold.
 
 
Q. Dear Roger, Thank you for your recent comments regarding "Income Insights." Although you mentioned that Algonquin Power & Utilities
(NYSE: AQN) is planning on selling its stake in Atlantica Yield (NSDQ: AY), you did not say how you feel about AY's prospects. The stock is way below your "Dream Price."
 
Do you think AY is still a hold for income investors, or is its future too uncertain and speculative? I am not planning on adding to my position, but I do have a position below your buy-in price. Thank you.—Jeffrey H.
 
A. Hi Jeffery. Yes, I think the best approach right now is to stick with Atlantica and see what happens with its strategic review, and later 42.15% owner Algonquin’s response. I still think the most likely outcome is AQN sells its AY shares to a single buyer who then becomes Atlantica’s sponsor and source of drop downs. A deal could include an offer for the entire
company as well. But in the meantime, given solid Q2 results the nearly 8% yield looks safe. I would expect to hear something more definitive by November, which is when both AQN and AY will announce Q3 results. But for now, I think we just need to be patient with both stocks.
 
 
Q. Roger:
1.   When will the MMP and OKE merger be consummated? 
2.   Did the shareholders approve it last week at their meeting?
3.   Will we shareholders be given adequate notice to decide if we want to sell our shares or donate them before the transaction becomes a “taxable event”?—Thanks--Barry
 
A. Hi Barry. The special meeting date for both companies’ shareholders to vote on the merger is September 21. Those votes will determine whether the deal closes or not. At this point, there is some opposition from at least one
2:00
large shareholder. But odds still favor a close in early Q4. In fact a lawsuit filed by opponents this week would seem to indicate the votes are lining up for approval.
 
The companies will announce the outcome of the vote after the September meetings. Anyone contemplating selling or donating before the close should be ready to act then.
 
 
Q. Roger. The market is reacting strongly to Hannon Armstrong’s (NYSE: HASI) announcement of offering unsecured notes and entering into capped call transactions. Is this action warranted or is it another one of those times where the market overreacts to an offering? If it weren’t for the capped call transactions, I would suspect that to be the case, but I will admit, I am not familiar with capped calls and I don’t know if they change the dynamic here. Comments would be appreciated.--Dennis Z.
 
A. Hi Dennis. This was actually pretty normal finance. It gives Hannon a number of options and most importantly management
Load More Messages
Connecting…