JotCast | May 2025 Capitalist Times Live Chat

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May 2025 Capitalist Times Live Chat

Roger Conrad

1:52

Hello all. And welcome to our Capitalist Times live webchat for May. As always, there is no audio. Just type in your questions and we'll get to them as soon as we can comprehensively and concisely.

1:53

Per usual, we will be sending you a complete transcript of all the Q&A tomorrow morning, should you have to ask your question and step away before it's answered. We will hang in there this afternoon so long as there are questions left in the queue, just as we always do.

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Thanks again for your business and for joining us today. We're going to start again with some answers to questions we received via email prior to the chat.

Q. Roger, what is the pessimism predicated on AES? It seems their business plan is being implemented, but the market is more negative now than in my memory.

On another subject, why would OPEC choose to increase production now? I understand some members are guilty of exceeding their quota, but what is the likely outcome? Thanks, Willy W.

A. Hi Willy

The reasons for the bearishness around AES Corp in my view are pretty much the same as they've been the last year or so. That is the company has exposure to two broad themes that are decidedly unpopular with investors right now: Emerging markets and renewable energy, particularly tax credits currently targeted for rollback in the budget bill that passed the House of Representatives and is now being debated in the US Senate.

The bear bet is AES will have to cut back current guidance, which is for 7-9% annual earnings growth through 2029 fueled by investment in the company's regulated utilities and contracted renewable energy facilities. The company for its part has not backed off guidance and continues to report new orders, including a 650 megawatt solar power sales deal with Meta announced last week. But I think the sentiment is going to remain gloomy until there's more clarity on what happens to the tax credits and the global economy this year.

This is not the AES of 20 years or even 10 years ago. The company's revenue is secured by contracts and regulated utilities, as are its capital spending plans. The rating is investment grade. And it's effectively self funding its CAPEX now with operating cash flow and the proceeds of asset sales, as it continues to streamline its portfolio. I still like it--though I will say I never recommend averaging down in a beaten down stock.

I don't claim to read minds. OPEC's motivation may

1:55

be to appease the new US president or it may be what it was in the previous decade--an attempt to win back market share from US shale. The key for us is US shale is not what it was a decade ago, when OPEC flooded the market and dropped the oil price. Companies operate within their means. with investment going to efficiency and surplus free cash flow returned to shareholders or used to pay down debt. They can hang at a much lower oil and gas price, and I think better than many OPEC members. We're also impressed by the strength in oil prices despite everything that's been thrown at it. And we think stronger prices could be a big surprise to the energy bears this summer.

Q. In Roger's most recent "RIT Sheet", he covered MAA and ARE quite extensively. He gave the advice not to average down on these two. My question is, "What if I don't own either one?" I'd be inclined to take a starter position with the idea to add if there are positive financial results at the next report. Comment on this strategy?--Tom L.

A. Hi Tom

If you don't own either Alexandria REIT or Mid America Apartment Communities then it's certainly appropriate to establish positions at this time. Just make sure what you invest is in balance with the rest of your overall portfolio.

You might try to buy them both incrementally. That means take one half to a third of your position now, then spread the rest out in equal dollar increments over the next few months. I like both companies. I think their Q1 results were quite solid. And I think investors are too focused on headwinds that are unlikely to threaten dividend growth or balance sheet strength--and are likely close to running their course.

Q. Roger,

I own EIX bonds. If you could address the chance of EIX defaulting due to the Eaton Fire in the upcoming chat I would appreciate it. I hope to be home before the chant ends. Fitch has put the bonds on Negative Watch.

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Below is there reasoning as well as other comments on utilities with similar exposure.

Regards,
Jeff B.

A. Hi Jeff

I think this is pretty anti-climatic actually. The situation around Edison has been very well known for several months. The latest news is strong Q1 results and guidance issued in late April were accompanied by management's announcement that it expected to incur "material losses" as a result of potential liability related to the cause of the Eaton Fire in Southern California. The reason given was not that there was material evidence company equipment was at fault for ignition. Rather, it was that no other "plausible" theory for ignition had emerged yet. And that meant officials would probably determine Edison equipment did play a role.

As I've pointed out before, Edison's total potential liability for the Eaton Fire is capped at around $4 billion under California law. Otherwise, costs are covered by the California Wildfire Insurance Fund. And Edison is only liable for that amount if the

company is found to have been negligent--which would be litigated with the utility on strong ground: Moody's prior to the fire said it had reduced its wildfire liability risk by 88% over five years.
I expect to see some sort of deal worked out with Edison bearing some financial burden--most likely with refunding of the Wildfire Insurance Fund. And that potential outlay may be what prompted Fitch to finally join the other credit rater to put the company on credit watch. But I think it's very hard to argue that risk is not already in Edison's share price. And my advice is still what it's been all year: Stick with it.

Q. Why does AES continue to hemorrhage? It is down 21% (or $2.70) in the last five days (today is 5/22/25). I cannot find any specific events affecting AES?
1. Same question for ARE recommended in your REIT Sheet. Are its fundamentals unchanged? (even though it is now $68.42 and still dropping way below your dream price)
Thanks!
Barry J.

A. There's no change in my advice for either company

I wrote pretty extensively in the REIT Sheet about the reasons for Alexandria REIT (NYSE: ARE) dropping. The biotech sector that populates a large slice of its "campus' life science properties has been battered by shifting federal government policies, including pulling contracts for research that are critical to some tenants. And with several new properties coming on line, management has reduced guidance for the pace of filling them, which in turn led to a couple percentage points cut in the mid-point of FFO per share guidance for 2025. But as I pointed out in TRS, the dividend is covered by nearly 2X, the balance sheet is strongly investment grade and the company continues to execute on new development on time and on budget. It's also the best in class in its business. So to the extent current headwinds punish rivals, it stands to gain market share. I'm not recommending anyone double down on any falling stock. But it is a good buy for aggressive investors seeking a place for fresh money.

Same is true for

AES Corp. For the reasons I gave answering a question slightly earlier in the chat.

Q. Roger, did someone hack your site a week or so ago? I am not able to get on it. It jumps to something else. I was wondering you opinion about NEE. I see its getting hit hard. Thanks—Jeff B.

A. Hi Jeff

Yes the Conrad’s Utility Investor site was hacked just after it was up and running with several major changes. It should be working well now and I hope everyone likes finds the new look easier to navigate. Please let us know.

NextEra is one of many renewable energy associated stocks getting hit recently—following the House’s passage by one vote of the omnibus budget/immigration bill. The version addressing energy included a much faster phase out of the tech neutral tax credits, and much faster elimination of EV credits.

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It’s uncertain what the Senate will do. And there’s pretty good reason to expect the credits will be rolled back more slowly in the version that goes to reconciliation. But from what I see, even the current House version will not affect anything in the project pipeline for NEE, or really any utility scale project in any stage of development right now. Wind/solar/storage take 12-18 months to plan, site, permit, procure for, fund, build and connect. That’s at least 5x faster than nat gas and 10x faster than nuclear.

Ironically, nuclear looks like a big loser here. Doing away with these credits means even restarts are going to need much bigger contracts to be economic. And ending credits starting in 2031 for anything not in actual construction doesn’t really give developers much time. I think it could also lead to more closures—unless the additional costs go into contracts. Like I said, the Senate still has a say here. So this may not be the final bill. But I’d say the winner is energy scarcity—new supply

is going to be a lot more expensive and less is likely to be built—unless there’s a very lucrative contract behind it.

Good time for those light on NEE to add a few shares in my view. They seem ready for anything with the largest natural gas power plant fleet and seventh largest nuclear fleet, in addition to its massive $120 billion renewables focused CAPEX budget through 2027—which would still be safe harbored for tax credits even under the current House version of the bill.

Q. Hi Everyone. I have several questions for Roger:
Are you worried about South Bow (NYSE: SOBO) given their lackluster quarterly report?
Given Trump's stated intent to do away with tax incentives for renewable energy, do you still feel a 100% price increase is possible in the next 12 months for BEP/BEPC? I know you indicated that such a tax move should have little impact on the company but would like your updated thoughts.

Finally, what are your thoughts on Black Stone Minerals after their 1st quarter numbers? I've been a subscriber of both you and Elliott for over 15 years. You guys are the best!
Thanks--Michael L.

A. Hi Michael

I didn’t see anything in the South Bow report to be concerned about. Regarding the dividend—which is primary value proposition—they maintained distributable cash flow guidance for 2025. So no threat there at this time. The shortfall in EBITDA appears temporary as well. There may be an impact from the pipeline segment. But that should be a one off as well. I think we’ll see a low single digit percentage dividend boost later this year as was pre spin guidance. The business model is very straightforward—cash flow from long term capacity based contracts. There’s modest expansion to grow cash flow. And ultimately I think a takeover.

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The House Republican budget bill phases out the energy tax cuts by 2028 except for nuclear (2031). But there appears to be considerable support in the Senate to restore at least a good portion of them. And if you look at Brookfield, they’ve been showing us the past several years they can pass on cost increases into contracts—including tariffs and taxes. I think Trump fear has been a headwind for the stock. But as it becomes less so, I think the stock will respond favorably.

I think Black Stone is in good shape—the coverage shortfall in Q1 looks like a one off. And we’re bullish on gas.

Q. Roger,

Any opinion on Americold Reality (COLD)? Thanks--Dennis H.

A .Hey Dennis

It's not one we currently track. But Americold does look like a good candidate for inclusion in the REIT Sheet. The core business has a long history of steady revenue and reliable dividends. The yield is also solid for an industrial REIT. We'll do some work on it for a future addition. Thanks for bringing it to my attention.