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Roger Conrad

2:01

Hello everyone and thanks for joining today’s Conrad’s Utility Investor online chat.

As a reminder, this forum is entirely text based. There is no audio. Type in your questions and I’ll get to them as soon as humanly possible to give a concise and comprehensive answer. There will be a complete transcript of all questions and answers shortly following the conclusion of the chat. And as always, I will remain online as long as there are questions in the queue, or still to be answered from emails we received prior to the chat.

Per usual, I’m going to start first with some answers to questions received previously.

Q. I would like to know what to do about China Gas Holdings (Hong Kong: 384, OTC: CGHLY). I bought both China Gas and China Mobile Ltd (Hong Kong: 941, NYSE: CHL) when they were recommended earlier in year. China Gas is up 35 percent now in my portfolio while China Mobile is down 20 percent. Would like some advice on what to do and current thinking. Best regards--Henry H.

A. I think you’re in good shape holding both of these. China Gas has been up and down but we’ve continued to track the stock as a buy on dips. The company continues to grow its customer base at a low to mid teens annual rate with strong regulatory support. The Chinese government has a key goal of switching homes and businesses from coal to natural gas heat. The only real impediment to this rapid transition is supply, which is being secured by new pipelines from Russia, as well as LNG imports. The government is keeping a lid on China Gas’ rates and fees. But the customer growth alone is enough to keep fueling low double digit increases yearly in the dividend, which is a powerful driver of returns long term.

In the Aggressive Holdings, China Mobile has the same reliable long-term dynamic of customer growth, with 5-G now joining 4-G and fiber broadband as services reaching more people. The cost of 5-G and Chinese government attempts to hold down rates and fees have slowed the growth of revenue and earnings the past year. China is racing with the US to deploy 5-G first and set the global standard for service. And they’re leaning heavily on CHL as the country’s largest telecom—in fact larger than all of its rivals combined. But the outcome will be a more powerful company with the country’s best network, and the history has been that when the CAPEX is done investors will reap the benefit.

2:02

Both of these stocks’ home market is Hong Kong—where the dollar is pegged to the USD. I suspect some of the softness in both may be due to concern about the peg holding up amid the unrest. I think it will as the city has immense reserves and China will support. But whatever the case, these companies’ growth stems from growth as essential services providers in the world’s second largest economy. I believe both will rally off these prices. Thanks for your question

Q. I noticed that Roger is not covering EQM Midstream (NYSE: EQM) in the Utility Report Card. Do you know if that's intentional? I am hopeful for his opinion on it. Thank you!--Wendy L.

A. Hi Wendy. I’ve covered the EQT Resources (NYSE: EQT) family for decades, literally dating back to the time when it was a single company that combined energy production, midstream and regulated natural gas distribution. That ended early this decade with the spinoff of the utility and midstream pieces, the latter as EQM Midstream Partners (NYSE: EQM).

We now track EQM Midstream and EQT Resources in our energy stock advisory, Energy and Income Advisor. We’ve had a sell on EQM since early this year for two reasons. First, EQT has had a change of control and the ruling Rice brothers as principal owners and managers are intent (as they should be) on cost control, which means curtailing output and attempting to renegotiate prices for midstream services. Both of those actions promise to reduce EQM’s cash flow going forward.

Second, EQM is the lead developer for the Mountain Valley Pipeline, which though roughly 90 percent complete has seen permits for the remaining work suspended in the courts. The US Supreme Court is currently hearing a challenge from developers of the Atlantic Coast Pipeline, which has been stalled for the same reason. If the Court overturns the lower court order blocking the permits, work will be able to resume for both the MVP and ACP. If not, there will be further delays and higher costs, which while not wholly undermining pipeline

economics will still come out of EQM’s cash flows. Consolidated Edison has already elected to cap its investment, which means EQM will have to pony up more and will take its stake to 47 percent.

Our fear in recommending the sell with shares in the upper 30s was that these factors could push EQM’s price to the low 20s. That’s happened in part because of the very weak MLP environment but also because management decided to stop increasing dividends until MVP enters service, which has heightened fear of a dividend cut.

2:03

In my view, that payout cut risk is now well priced in, just as it is for companies like Antero Midstream (NYSE: AM). And EQM is one we’ll be taking a look at in Energy and Income Advisor as we enter 2020.

While we will continue to cover EQM regardless in EIA, I don’t anticipate picking it up for Conrad’s Utility Investor. But in any case, you can feel free to ask me about it. The utility piece of the former EQT, by the way, is now being acquired by Conservative Holding Aqua America (NYSE: WTR).

Q. Dear Roger. I am holding Southern California Edison’s J Series Preferred stock, purchased some time ago below par with a current yield about 5.5%. Call date is 2025. Given the fire situation in southern California, do you believe the dividend is safe? Many thanks--Jeffrey H

A. Not only do I believe the preferred dividend to be safe, but I think Southern California Edison’s parent Edison International (NYSE: EIX) will be able to step up growth of its quarterly common share dividend as well going forward.

As I pointed out in the post Edison Electric Institute conference report that all of you should have received, California’s Wildfire Fund is very well constructed. It should prevent another PG&E Corp (NYSE: PCG) type utility bankruptcy in the state, provided companies make the needed investments to harden their power grids against disasters over the next few years.

That’s going to be rough for PG&E as it navigates its way out of bankruptcy. Edison, however, just really needed some assurance from the state that it wouldn’t be hung out to dry in a future fire. And the better than expected terms of this month’s $800 million bond sale as well as the settlement of 2017-18 wildfire damage cases with local governments are giant steps in that direction.

Like everyone else in California, Edison needs PG&E to come out of Chapter 11 by June 2020 to the wildfire fund to be fully formed. But once that’s done, what you have is a company that can grow rate base up to 9 percent a year just by investing in its grid to harden it against storms and accommodate decarbonization efforts in the state—renewable energy, electric vehicles etc. And that’s a prescription for growth, as well as continued timely payments and ultimately payoff at par value for the preferred stocks.

2:04

Q. Just a quick thank you for an excellent report on the Edison Electric meetings. I find these to be quite helpful. I do have a quick follow-up. I think the November newsletter says AES is a buy at 18 or less, but the slideshow says 20 or less. You made a point in the slide show to talk about this sort of difference when discussing another company (Algonquin I believe, from 13 to 14), so I wonder if I am missing something. Thanks.--John

A. John, I changed the advice for 8 companies following EEI and have made the changes on the CUI website. The November issue went to press before the conference so the Portfolio tables there will not reflect the changes. The changes are all listed together in the executive summary, which is included in the PDF of the slide deck.

The bottom line is what I found out there eased concerns about valuation. By the way, I really do like the deal Algonquin Power & Utilities (TSX: AQN, NYSE: AQN) made to buy the New York water assets of American Water Works (NYSE: AWK) today.

It boosts their stable cash flow sources and creates more opportunity to grow the renewable energy business—including in New York state.

John K

2:05

Roger,

Roger Conrad

2:05

John, I'm not seeing a question for you. Please type in again.

killeyj111

2:06

Roger,

Roger Conrad

2:06

Same is true here.

Roger Conrad

2:06

Please try again everyone.

bleon4647

2:07

Test

Roger Conrad

2:07

I've got you

killeyj111

2:11

Roger, you have recently commented on LNG export facility growth -- Gulf States region, Elba Island GA, Cove Point MD. What does that portend for LNG ocean carriers such as Teekay LNG Partners (TGP) (which I still own from the day)? Thank you.

Roger Conrad

2:11

I think all else equal it's a positive for the tankers to have these new facilities on line and sending out cargo. There' a more immediate benefit for their owners and operators--Dominion Energy in the case of Cove Point, Kinder Morgan for Elba Island etc--as they start receiving cash flow as soon as facilities are operational. But LNG cargoes are definitely expanding on a global scale.

There's also some emerging evidence that the long glut of tanker capacity is at last starting to contract as companies at last retire older vessels rather than upgrade them for emissions controls.

Roger Conrad

2:12

It's causing us to take a second look at the tanker sector in Energy and Income Advisor. By the way, Elliott and I are hosting an EIA chat on Tuesday, starting at 2 pm.

JimmyMac

2:19

Hello Roger,

My question is on CNP. What is going on with this stock? Multiple downgrades and big price drop with high volume….and potentially significant tax loss selling to come. Is Centerpoint something to be avoided or a potential opportunity? Thanks for your consideration and the valued advice you provide to me and other subscribers.

Roger Conrad

2:19

My view for a while has been that Centerpoint Energy was pricing in a potential takeover that was not likely to happen--at least not at the valuation where it traded in the 30s. I think there are two main catalysts for the recent decline. One is concern about 2020 cash flows from the 50% general partner and 53.74% limited partner interest in Enable Midstream. The other is the growing possibility of a big cut in Texas rates from a rate decision expected November 25. At a November 14 hearing, regulators directed staff to look into a cut in ROE to 9.25% and in equity layer to 40% of capitalization. If that is the decision, the company will likely have to issue equity to back up its BBB+ credit rating.

Roger Conrad

2:24

We'll see if they follow through on that in a few days. But I think CNP is actually more attractive than it's been for a while. I see three potential catalysts for a higher price going forward. First, they can get a less harsh decision in Texas, where regulators had reportedly been considering previously an ROE closer to 9.5%. Second, Enable can continue to show it's weathering what have been reported elsewhere as weakening drilling conditions in Oklahoma. They did have solid Q3 results and with 1.4X coverage it sure looks like there won't be a cut, though the lower share price at least for now makes the ownership interest more difficult to sell. Finally, they can sell the infrastructure business they bought with the Vectren merger.

2:26

They are also still a nice candidate for a merger at least at some point. I'm not ready right now to change my recommendation on Centerpoint. But I will certainly be considering making a move by the time the December issue goes to post--by which time we should know what happened in Texas. I do think, though, that the Wall Street firms are certainly modeling in the probability of a rate cut at this point, which should limit downside whatever the decision is.

Gary

2:35

Please summarize what is going on with ET. The price of the stock has been falling over the past several weeks.

Roger Conrad

2:35

Energy Transfer shares have basically faced two big headwinds this month. First, like every other North American midstream, investors are wondering about the impact on system volumes from the slowdown in oil and gas drilling. Second, the FBI is apparently investigating the Pennsylvania state government's granting of permits for ET's Mariner East natural gas pipeline, which raises uncertainty about the ET's ability to expand the system to meet robust demand.

I don't think either is likely to derail the business momentum we saw once again in ET's very solid Q3 results. That's why I don't have the company on the Endangered Dividends List, despite a 10% plus yield that would suggest some risk. The company is still putting contracted projects into service, which should actually increase the 1.9X coverage ratio in Q3 going forward. It should get a further kick from completing the Semgroup acquisition next month.

Roger Conrad

2:39

As for the investigation, though a lot of people hate this company for building Dakota Access out of the Bakken, I see a lot of reasons why this will go nowhere, at least as far as ET is concerned. The main one is simply the demand for Mariner East's capacity--it's very hard to charge the only reason for approval was bribery. Also the main target here is clearly the Democrat who's governor of Pennsylvania.

2:43

ET shares have stabilized the past couple weeks, so it's possible the selling pressure has subsided for now. The worries about midstream in general are likely to be with us until the stronger firms in the industry prove they're more resilient than they were in 2014-16. But I think ET has at least two big potential upside catalysts the next 12 months. One is a return to dividend growth, the other is a possible going private that several big Street firms have posited--Warren now has 9.6% of the company's shares, which should allay fears of a corporate conversion. A buy in price, meanwhile, could be very profitable at a price as high as 18. I think those are good reasons to stick with ET.

Rob

2:48

Thanks again for your timely advice. Two questions in two different spaces. NTTYY has a split coming up in January. Does this affect our approach to this holding? Second, I know ENBL is not in your coverage universe any longer, but I've been holding for a couple of years. It's taken it on the chin recently. How do you attribute this change in sentiment?

Roger Conrad

2:48

The news NTT will split 2-1 on January 13 was certainly taken positively by investors in Japan--and I would assume that the ADR would also split 2-for-1, rather than go to 2 shares and stay the same price. I don't anticipate this really having much impact on how I look at NTTYY, for which I have a long-standing maximum entry point of 52. Rather, what I'm looking for is evidence the company is offsetting the temporarily loss of revenue at DoCoMo (wireless) as that company has reset rates and is moving to 5-G. Doing so will enable NTT to keep boosting the dividend in line with guidance while waiting on DoCoMo to return to growth, which it should in the next 2-3 years. I think they did come through in the results announced earlier this month and I continue to recommend it in the Aggressive Holdings.

Roger Conrad

2:54

I made a couple of points about Enable above in answering the question about Centerpoint. We do track this one in Energy and Income Advisor and just to remind everyone we will have that chat next week. But I think the recovery Enable put in place in 2016 is still very much on track. The 1.4x coverage ratio, the steady revenue from the regulated pipeline business and the Williston Basin operations growth are at least to date offsetting whatever weakness there's been in the company's SCOOP/STACK gathering service territory--which it should be said is occupying 44% of all active rigs in that area. The fact that so much of the float is owned by CNP and OGE (25.5%) very likely adds to the volatility of the price when there's selling. But we just haven't seen the operating weakness to justify the drop in Enable's share price. And again, such a high coverage ratio means they're self funding CAPEX--so they and their primary owners CNP and OGE can afford to ride this out and keep paying dividends.

bleon4647

3:02

Roger, what is the best value among the water utilitiies for combined capital appreciation, valuation and dividend growth going forward.

Roger Conrad

3:02

That's a very tough call, given where valuations are right now. As a long term bet, Aqua America is still my favorite. It trades well above my highest recommended entry point at this time. But I will be reassessing that level when the gas utility acquisition closes. Of the smaller ones, Artesian Resources (NSDQ: ARTNA) is the most attractive, though again it trades well above my target of 30. Even Consolidated Water (NSDQ: CWCO), which provides regulated and wholesale water but also carries the risk of a major desalination project in Mexico, has shot up well above my target of 14.

Roger Conrad

3:06

At this point, I actually think the best way to get water utilities in your portfolio is with Algonquin Power & Utilities (TSX: AQN, NYSE: AQN), a stock I featured most recently in my post EEI conference report. The company's Liberty Utilities' water operations just got a lot bigger today with the announcement of the acquisition of American Water Works' (NYSE: AWK) New York utility operations in a deal expected to close in late 2020. I obviously like this company for a lot of other reasons. But this is a good source of rate base growth that the company can leverage for higher growth businesses in infrastructure and contract renewable energy. This deal is more fuel for 10% annual dividend growth and another reason to buy up to my target of 14.

3:09

As for other water utilities, I think we just have to be patient. They are rare, so it's questionable whether they'll ever trade at say 15 to 20X earnings. But 30-40 times is historically high, and would not take a lot to puncture. The exceptions are of course the UK water companies we track in CUI, Severn Trend and United Utilities. But given the risks of possible (though not yet likely) nationalization and downside in the British pound from Brexit--as well as what are still relatively high valuations for that risk--I think we should be patient and wait for some of the uncertainty to pass before jumping in.

mkay74

3:15

I know you wrote that your indicators do not show any warning signs. Can you see utility stock prices go much higher? Thank you for your insight

Roger Conrad

3:15

In the October issue of CUI, I highlighted relative valuation as an important tool in deciding what to buy and sell in the up to now very popular and pricey utility sector. When I went to EEI, I found that was pretty much what other analysts are up to as well. in other words, while there are obvious reasons why NextEra has greatly outperformed Centerpoint for example this year, there may be even more compelling reasons why CNP might close that valuation gap over the next 12 months. And if we can pick up those underperformers now, we can win even if it's a down year for the DJUA and other sector averages.

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