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Roger Conrad

1:58

Hello everyone and thank you for participating in today's chat. First a couple of housekeeping items. There is no audio. There will be a complete written transcript available shortly after the close of this chat, which will be when all questions received during and prior to the chat have been answered.

1:59

As a word of warning, I will be ducking out for about 30 minutes around 4 pm ET but I will return!

2:04

First a couple of answers to questions received prior to the chat

2:07

Q. Roger. Your thoughts please on re entering Altagas!—Lee B.

A. They don’t announce earnings until February 28, which will be the first full progress report since their change in direction and dividend cut. But I see a couple of hopeful signs that have led us to upgrade our rating to buy again, though at this point only up to a price of about USD12. One is the progress with the asset sales, which are providing funds I think faster than expected for debt reduction. That’s the biggest priority for management at this time. It also appears the propane export terminal is progressing to startup in the near future and that utility WGL is having a good winter quarter so far with the extreme weather we’ve had around the nation’s capital. Again, I think this is a long-term recovery story. I made an initial mistake overestimating their ability to raise capital to finance the WGL merger. But the collection of assets is solid and management is experienced.

Tom

2:08

Can you please shed some light on the hit CWEN has taken due to their relationship with PG&E?

Roger Conrad

2:13

We're sending out an Alert today to CUI subscribers addressing the situation in a bit more detail. But basically, Clearway today is taking a proactive step of cutting its dividend by about one-third to insulate itself from the potential cash flow impact should PG&E default on its power sales contracts as well as the need to access capital markets while its stock price is this depressed. I think investors have taken it well today because management has basically said it will hold the cash at the project level so long as it's still coming in and will look to restore the dividend to its old level as well as possibly make back payment depending on when the PG&E issue is resolved. My belief is that's still likely to happen as California has to resolve the bankruptcy without cutting itself off from the capital that will develop the needed renewable energy resource to meet its decarbonization goals. We intend to keep holding onto Clearway as an Aggressive Holding on that basis, as it otherwise has a very compelling

2:14

growth profile.

Bill

2:14

Hope you're feeling better. When looking for conservative, (mostly), income how many stocks of each type should we buy. ie pipelines, reg. utes, Propane, gas, telephone, etc. ? Thanks

Roger Conrad

2:18

We've obviously had quite a shakeout in pipelines, telephones and to a lesser extent propane distributors, while (other than PG&E) it's been pretty clear sailing for regulated electric, water and natural gas. I've always been a proponent of roughly balancing sectors, as you can see from our model Portfolios. Sometimes that's held back performance but usually it's kept us ahead of benchmarks and so I continue to advocate the strategy of diversifying among high quality companies from a range of sectors. I don't have a fixed percentage for you but take a look at the Conservative Holdings, which has representatives of all except propane distribution. My pick there is still Amerigas up to 30, but it's in the Aggressive Holdings.

Paul

2:18

I have been a longtime holder of Buckeye (bpl) I added a good bit between 60 and 70. Then followed your advice and got rid of almost all of it around 40 above and below. I did not add in the 20s. do you see it making it into the high 30s in the near or not so near future? I would like to buy before it is higher than I sold.

Roger Conrad

2:25

My confidence level in Buckeye would be a lot higher if they didn't have the same management team that bought into VTTI and then sold it for a huge loss less than two years later, to the company they bought it from. At least several analysts are viewing it more favorably after the distribution cut, which has given them a little more breathing room along with the asset sales to cut debt. But Q4 also revealed a lot of weakness in some of the core parts of the business and distribution coverage is really not all that reassuring at 1.24 times, considering the magnitude of the cut. BPL could certainly make it into the high 30s if we get a good rally in MLPs as I expect. On the other hand, a -19% decline in EBITDA is not really a sign of recovery. And I could see this one going into the high or even mid 20s as well. Bottom line is there's a lot of other pipelines and the like I'd rather own. And again, the management team that took us to this point is still in charge.

DougB

2:25

Any current thoughts about ARLP? I know you are not a fan of coal but I have seen some positive articles about ARLP. Thanks

Roger Conrad

2:31

I think they have a good case to hold their distribution and very likely to continue increasing it at least through this year. The problem they have is they're having to replace business lost to coal power plant shutdowns in the US with exports, where pricing and demand are far less reliable. We've already seen other coal-focused MLPs have to cut back distributions because of those changing economics (Foresight Energy LP for one). I think ARLP is well managed and has good reserves and strong finances, particularly after merging in their general partner. But I don't see investors' perception changing of it as the best of a breed now in irreversible decline. Again, it's not that the world is burning less coal. It's that the best market for US coal producers is US utilities, and their coal plants aren't economic anymore against natural gas--and in a growing number of places wind and even solar. That's why they're shutting them down even with federal regulations eased dramatically.

gunnar

2:32

Hi Roger- thanks for all your analysis work. Wondering about emerging market utilities like Millicom? I know you have some emerging market Utils already covered, but any ideas to add others in the universe?

Roger Conrad

2:39

To date I've basically just looked at emerging market telecoms and utilities that I thought had investment characteristics that made them similar to US utilities I like. One I think is getting interesting now is AMX (Americas Movil), which I thought had decent Q4 results but nonetheless has sold off to less than 14X expected 2019 earnings. I think it still suffers from misplaced worries about what exactly the new Mexican president is going to do, just as IENOVA the Sempra Energy arm that's building power plants and pipelines in Mexico has. But I think it's a good value proposition right now. I don't have an opinion for you on Millicom at this point, but we have seen a number of mergers that have taken the Utility Report Card universe under 200 names, so I will consider that one. Overall our firm views this as a good year to look at EMs and other "risk on" assets. That strategy has had mixed results so far but TIGO looks interesting. I'd appreciate other suggestions as well.

Fred

2:39

Hi Roger,

Having held onto the new post BK shares of Linn, I would like to know if you are covering the follow on companies Riviera and Roan?

Your thoughts and comments, please?

Thank you for all the great work you all do!

Roger Conrad

2:48

Thank you for subscribing! It's much appreciated. I've followed both somewhat tangentially and perhaps it's time for an update. Like many developers, ROAN really took a hit late last year when oil prices headed lower. The good news is it should be able to ride them back up. There's no real immediate financial pressure with $371 mil undrawn on the $400 mil credit line, and drilling appears to be proceeding well. We'll know more later this month when results for Q4 are released but the properties are good in central Oklahoma and the company is also a takeover candidate. the other piece Riviera (RVRA) is basically still in restructuring mode, selling assets to pay down debt. It will also benefit from higher oil prices, if our forecast pans out. I think the real calculus for former bondholders though is whether you need something paying a dividend. I wouldn't count on much here so if so, the play would be to wait for the next move higher and then make a swap to a super oil for example.

Andy

2:48

Hi Roger,
Capital Product's Pipeline. (CPLP) I was a bit surprised they lowered their payout pre-merger/spinoff. I thought that was going to be the result AFTER they spun off their tankers. That makes me question what the payout is going to be post spin out. Is it going to be .045 per quarter cents on the post spinout, post reverse split - in effect an 80% cut from current levels, or is going to be .045 cents per share aggregated to .225 cents on the post 5 for 1 reverse split?

I wrote to CPLP and they refused to answer the question. All they did was cut and paste the press release. Do you have any thoughts on this? I'd be happy getting .045 cents on the post spin off shares IF they aggregate it 5 for 1 along with the share. I'm not at all happy if I'm going to get .045 cents per quarter on the new shares if I have 80% fewer shares and 80% less income. I'm not sure if you have any insight give

Roger Conrad

2:58

The bottom line with CPLP is both of its core businesses--bulk tankers and liquids tankers--are going through tough times now, with an oversupply of capacity even with oil exports starting to flow from the US in large volumes. My understanding is you'll be getting 5 times the current dividend, which would be 22.5 cents per post-reverse split share. The dividend cut from 8 cent to 4.5 cents announced in January reflects the post-spinoff company--i.e. less the assets that go to Diamond S. And we have yet to see what that company intends to pay as a dividend. Management is still guiding toward an equity value per CPLP share of $1.82 per unit in the new company, which would seem to indicate some value here. Unfortunately, we're not going to know how much until the transaction closes, which is still expected at the end of Q1. Again, the real story here is this is a very weak industry and CPLP has put its component parts in position to weather the cycle. But our view is it's going to take a while to recoup.

Andy

2:58

Hi Roger,

Last one from me:

I have to say I was a bit disappointed with Brookfield Renewable's (BEP) Distribution increase. It was at the bottom of their long term goal of 5-9% growth. Given their growth and plans for growth, I was expecting something in the middle to high end of their range. Is this a reflection of their desire to get their payout level lower - i.e. the Enterprise model of lowering the payout ratio to increase the cash available for capital expenses, or is it an indication they don't expect growth to be as robust as they keep saying? I get that 5% isn't anything to sneeze at, but if you promise 5-9% and consistently deliver 5% you're better off saying - like Enlink has - that you're goal is at least 5% not teasing us with 5-9%.

Tying into this, because Brookfield Asset Management owns a controlling stake (through a combination of BAM and BEP) in TERP does this mean we should expect TERP to deliver at the bottom of their range as well?

It strikes me that given the CWEN reduced payout, a

Roger Conrad

3:00

Andy, I didn't get the bottom of your question concerning CWEN. We're updating that position in detail in an Alert today. But as I answered a previous question in this chat, we're staying with the position.

3:05

As for Brookfield (BEP), I think the desire to do more self financing is exactly why they raised at the low end of their target range of 5-8%. I think it's reasonable to expect the same action at TerraForm Power, which they now own 65.34% of and effectively control. Like you I prefer a bigger increase and from what I see in the numbers at both companies, they could certainly afford it. But this is clearly a reaction to the kind of capital market these infrastructure companies face--mainly an effective demand from big investors at least that they fund 40 to 50 year assets with at least a majority of current internally generated cash flow. It's pretty much as if banks suddenly decided to only issue mortgages for 20% or so of the cost of homes, requiring buyers to come up with the rest in cash from asset sales or annual income. I don't think you'd see a lot of homes purchased under those terms and I think the current financing environment is limiting what's being built now in a wide number of areas.

3:08

But the bright side is companies like BEP, TERP etc like Enterprise and others on the pipeline side are now getting very conservative while the overall economy is still pretty strong. That certainly makes me a lot more comfortable holding them going forward. And I also believe if you look at the yield and the reduced rates of growth, you still have a very attractive value proposition for investors looking for high and growing income, and ultimately capital gains. The more money these companies hold in, the less they need to raise in hostile capital markets, which makes them safer as well.

3:12

I agree it's not a good sign for Landmark--it's basically rolling downward guidance and it's caused simply by not being able to raise equity capital for less than 10%. I don't think it necessarily means a dividend cut--that would be a capital management decision as the assets are still very sound and cash flow is still rising. But I don't like it when management teams retreat from previous guidance, and in this case I heard it in a face to face discussion at last year's MLPA conference. So, yeah it's on my Endangered Dividends List and I'm anxious to hear what management says on the 20th.

3:21

Regarding Dominion, my strong advice is to plan to hold it long term. In fact, I think it's the best value in the electric utility space right now, though it was better those few days when it traded under $70. The Atlantic Coast Pipeline is not a large enough project to affect Dominion's current dividend. Management has indicated further delays will likely reduce growth but that earnings will still grow in 2019. And most importantly, demand for the ACP is still strong among its investor/customer utilities, notably Duke Energy, which is the largest. This stock has been trapped in a relatively narrow range for more than five years. My view is successfully buying SCANA on the cheap should have been enough to break it out of the range into the low 90s. I think getting ACP up and running will be another potential catalyst, but it's far from the only one--solar investment, a resolution of the Millstone nuclear issues in Connecticut, offshore wind, Virginia growth are others.

T. Shaik

3:21

I own UTG and like the fact that it pays dividends monthly, but what is a reasonable discount to buy UTG at?

Roger Conrad

3:26

One thing I've learned about closed end funds from being on the board of one is they hate selling at a discount--basically it means they can't issue new equity capital without diluting shares, and it's a magnet for activist investors to come in and order a breakup. I'm not saying Reaves is in any danger of that. But I'm sure they're not happy trading at a discount just the same. Really the only reason I'm not advising buy on this very well run fund now is that several of the biggest holdings trade at what i consider ultimately unsustainable valuations. I would look at it in the high 20s again--will be interested to see if there's another dividend increase.

Charles

3:26

First, thanks for NEP. Great return but trending down over the last 6 months and no bounce this year (actually down YTD). Why is it trending against the overall market this year?

Roger Conrad

3:31

In a word, PG&E. NextEra Energy and its yieldco NextEra Energy Partners have power sales contracts with PG&E and therefore have cash flows at risk, should the bankrupt utility attempt to default on them. Both stocks have avoided the declines we've seen in other companies because they have the scale and financial power to weather the interrupted revenues. Yesterday, for example, NEP announced a significant growth opportunity in its regulated natural gas pipeline business that will boost throughput of the system with minimum additional capital investment. Meanwhile, NEE remains supportive of NEP as a drop down vehicle for its growing renewable energy fleet, for which in management's words California is no longer the most important market. Q4 results were strong at NEP and management affirmed target annual dividend growth of 12-15%. Those are reasons I expect the recent weakness on PG&E fears to be ephemeral and we're maintaining the buy target.

3:31

Roger -- what are your thoughts on the "New Green Deal" proposal? Is this a fatal blow for many utility companies should it ever be implemented? Thanks!

Roger Conrad

3:36

No, I think actually if this thing does come to life it will be in a form that's bullish for the industry, though probably more so for some like NextEra Energy than others like NRG Energy--which still have a lot of coal exposure. The electricity industry is way ahead of anything now going on in Congress.

jack

3:36

I also was a long time holder of Buckeye. On 10/9/18 you gave a strong sell, which I followed. Soon after Buckeye became a HOLD. What happened so quickly to make it a hold.

Roger Conrad

3:36

Basically, they cut their dividend and the bottom dropped out again to a point where I didn't see a lot of downside. That's about how I see them now.

3:38

Hey folks, as I noted at the beginning of the chat, I need to take a break. Please continue typing in your questions and I will resume answering, hopefully around 4:30 or so, until they're all answered. Feel free also to hop off and then back on when I do.

Again I apologize for this but rest assured if you ask I will answer before I knock off after I return.

4:54

OK I'm back. Sorry for the delay.

jeff

4:54

Hi Roger, what is your opinion on CTL bonds? I am holding some 6.875 2018 issues. Do you think the rating will go up with the dividend cut?

Roger Conrad

5:00

I think those are going to be paid off at par value in September, as will the 9% bonds that mature in October. As for a ratings increase, S&P did raise the outlook to stable from negative today. Fitch said it was positive for credit quality, though the analyst expressed some skepticism the debt reduction targeted will be achieved. We have recommended the 5.8% bonds of March 2022 and they did respond very favorably to the news today--they're now at 102 and change and the yield to maturity is under 5%, so in this case I think the bond market is ahead of the credit raters yet again--pricing in better credit before there's actually any rating change. I think if you hold CTL bonds you stay with them to maturity, until they're called which with all of this spare cash appears increasingly likely for the higher cost debt.

Ray

5:00

For all the years Ive been a subscriber you have stressed to us not to chase yield. Here we sit in two different publications with holdings like APU, CTL and EQM and in last few months two others that recently had to cut their dividends. One i sold one i am holding. This is concerning to me after yesterdays CTL move. I have read recent comments from you on APU and am still very worried about that one but your thoughts on the other 2 ?

Roger Conrad

5:07

I think if you chase yield for its own sake you wind up taking on a lot of risk. But even at a time where companies are trying to self-finance and are willing to cut dividends to do that, it's ok to hold some above average yielding companies as part of a diversified portfolio. That means not overweighting anything so it can blow a hole in your portfolio. But we've seen again and again how investors can overprice risk. And when companies prove otherwise, the stocks rally hard. I've addressed CenturyLink already in this chat, so I'll focus on Amerigas and EQM Midstream. APU I think once again showed it's a solid operation by the way it raised margins in propane distribution during a quarter where its smaller rivals slumped. The risk here is what comes out of the strategic review in April. But this one looks to me like a pretty good candidate to extend the 30% or so upswing we've seen since late December. EQM actually announced earnings today with revenue and EBITDA topping projections.

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