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8/23/21 Conrad's Utility Investor Live Chat
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AvatarRoger Conrad
1:52
Hello everyone and welcome to the August live chat for Conrad’s Utility Investor members. I hope everyone has had a great summer and I look forward to fielding your questions, comments and concerns today.
 
As always, there is no audio. Just type in your questions and I’ll get to them in the order received as concisely and comprehensively as I can. I will be alone on this end, so please be patient if you don’t see your answer immediately. We will be sending you a link to a complete transcript of all the Q&A shortly after I sign off, which will be after there are no more questions remaining in the queue or from emails I received prior to the chat. The transcript will also be posted on the Conrad’s Utility Investor website and can be accessed by clicking on the “Live Chat” tab.
1:53
Per usual, I’m going to start by posting answers to emailed questions. This will take a couple minutes, after which I’ll turn my attention to live queries.
 
Thanks so much for participating today, and above all for being a CUI member.
1:54
Here we go.
 
 
Q. Hello Roger. I do hope you and yours are safe and well during these difficult times. While I still have power up here in Westchester County, NY watching the approach of Henri, I would like to ask you a couple of questions in case I am not able to attend your chat tomorrow.
 
I continue to be amazed at American Water Works (NYSE: AWK). I have owned it for a long time. In fact, I have already taken my investment off the table, but I just can’t seem to find any reasonable explanation for its surge in price. I also own Essential Utilities (NYSE: WTRG) and York Water (NSDQ: YORK), which have both done well, but nothing like AWK. What is going on here? Is it a momentum play? I’m confused.
 
Also, can you give us your updated opinion on AT&T (NYSE: T), another one I have owned for a long time. What a disappointment this stock has been. Is it really worth holding longer? I also have Verizon Communications (NYSE: VZ), which has done considerably better.
And can you please give me your thoughts on Southern Company (NYSE: SO). Is it ever going to get going as a stock? It seems to just hover in a narrow trading range without ever really breaking out. Again, is it worth holding?
 
And one last thing: Could you please keep your Dream Price recommendations updated and perhaps a little more visible? I don’t seem to be able to find anything more recent than July 2020. Thank you once again for everything you do. I have learned a lot from you.--Hillary
 
A. Thank you Hillary. I’m very happy to have you as a reader, and I hope the power stays on today, as well as for all of our members in New York and New England. Let’s hope the grid hardening efforts of local utilities at least results in reduced outage times in the wake of Henri.
 
American Water Works and somewhat smaller Essential Utilities (formerly Aqua America) are recommendations of mine that go back more than three decades. I’ve tracked York Water nearly as long, along with the rest of this rather small group
American States Water (NYSE: AWR), Artesian Water (NSDQ: ARTNA), California Water (NYSE: CWT), Middlesex Water (NSDQ: MSEX) and SJW Group (NYSE: SJW).
 
They’ve all become quite popular the past several years basically for three reasons. First, their underlying businesses are extremely reliable in terms of generating earnings to pay dividends. That’s even true now in California, a state that before Governor Schwarzeneggar in the ‘00s was routinely at war with its utilities but now works pretty much hand in glove with them to promote infrastructure spending and efficiency—critical to a state prone to droughts.
 
Second, the group has a clear path to growth in a very dispersed industry through acquisitions. In fact, the companies themselves are attractive as takeover targets given the low business risk and low market capitalizations. And third, interest rates have been very low, which in turn makes even a 1.3% yield like American Water’s somewhat attractive to institutions given its high rate of growth.
 
1:55
 
As you know from my comments in CUI, my main problem recommending most of them as buys over the past year is valuation. American trades at 42 plus times expected next 12 months earnings, which really is pricing in perfection. And to me that smacks of momentum—investors buying more (especially institutions) just because it’s going up. I don’t see that as being as much of a problem for Essential Utilities, which I think has been held back a bit because it now owns a natural gas distribution utility in Pennsylvania—despite being a very good one with low risk. But it does make it very hard to see real upside for long-term investors in many of these stocks.
 
The good news is the lack of real business risks means there’s basically no danger to dividends and also limited downside from a real economic/market catastrophe. But I think the best bet is just to hold these stocks—and be very patient to buy more on dips. Essential is actually trading below my highest recommended entry point of 50 at this time.
Artesian is still below 42 for those looking for a company with takeover appeal.
 
Moving onto AT&T, I agree wholeheartedly that this is a disappointing recommendation of mine, though I’ve certainly had some perform a lot worse. As I noted in the August issue, my view is the current rock bottom valuation of less than 9 times expected next 12 months earnings is mainly due to management not clarifying how much it’s going to cut dividends next year, once the Discovery deal is complete.
 
I think Q2 results give us a lot of reason to think the company has seen its nadir as a business and is positioned to benefit greatly from adoption of 5G applications the next several years. And I’m willing to stay with it on that basis, as well as the probability that the shares will rebound once they do give us a firm dividend figure. But I think Verizon is likely to give us a faster lift, since they’re probably even better positioned in 5G longer-term with their millimeter wave technology and are likely to increase dividends
 
Lastly, regarding Southern Company, the big issue with the stock the past several years and particularly now is getting the Vogtle nuclear reactor units 3 and 4 into service. The numerous delays with the project, most recently from the pandemic’s impact on the workforce, have held back the share price and up until recently prevented me from raising my highest recommended entry point above 60. But I have finally increased that to 65, now that hot functional testing has proven successful at Unit 3. That was a critical milestone in my view, basically proof of concept.
 
I’m obviously not the only one who thinks that, as the stock has moved above that point since the August issue posted. And I likely won’t go higher until there’s more progress, meaning successful fuel loading and startup of Unit 3 early next year. But Southern does appear to be succeeding with Vogtle and as that continues to be the case, its share price and where I’ll be willing to recommend it should increase.
 
 
Q. Crude oil has really come
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down recently. Are you still positive on the Energy sector? What are your favorites?--Dennis H.
 
In a word yes. Since oil prices first came down decisively under $100 a barrel in 2014, we’ve seen oil rally strongly, only to fall to even lower lows as producers ramped up their output and supply overwhelmed demand. But our view at CUI’s sister advisor Energy and Income Advisor is the turmoil of the past few years has triggered a fundamental change in energy market dynamics. Mainly, the longer-term cycle has again shifted higher. So while volatility remains high and vicious selloffs are still the rule, the overall direction for prices should be up.
 
The price action we’ve seen for oil since April 2020—when benchmarks actually went negative—has been impressive. But unlike in 2017-18, producers’ response has been to harvest resulting free cash flow rather than to increase CAPEX. That in turn has induced midstream, downstream and services companies to rein in their spending. And we think the recent downturn in oi
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oil prices will only enforce that conservatism.
 
Real fundamental changes in markets this large occur only over a period of years. This has always been the case for oil and gas and we see no reason to expect it won’t be for this cycle as well. In fact, with the unprecedented government actions to curb CO2 emissions by restricting drilling and infrastructure construction, investment is likely to remain depressed for longer than in a typical cycle. And while the push for electric vehicles is very real with billions upon billions of investment, it’s going to be many years even in a most bullish case before adoption has a meaningful impact on demand even for gasoline, let alone oil and gas use for heating, industry etc.
 
It’s also true that the industry itself is looking well down the road now at a future of development of low CO2 and even no-CO2 fuels, like mass production of so-called green hydrogen. But the real appeal in our view of conventional energy stocks now is the unfolding of the cycle in the next 5 to 10 years, as a lack of real affordable alternatives keeps demand rising and that collides with factors restricting new supply, both from companies’ conservatism and government action.
 
As for favorites, we track a number of conservative midstream companies and well as super oils in the Utility Report Card. Kinder Morgan Inc (NYSE: KMI) is an Aggressive Holding, Chevron (NYSE: CVX) and ONEOK (NYSE: OKE) are Top 10 DRIPs, Pembina Pipeline (TSX: PPL, NYSE: PBA) and TC Energy (TSX: TRP, NYSE: TRP) are Conservative Holdings and TC is also a Top 10 DRIP.
 
Those would be a good starting list of recommendations for investors not currently holding energy stocks. They all proved resilience by increasing dividends in the 2019-2021 period when energy prices hit negative levels. And they all have plans in place for steady growth for the next several years.
 
If you want to go deeper on oil and gas, my best recommendation is to check out Energy and Income Advisor. Go to the website for more or give Sherry a call at 1-877-302-0749 anytime Monday through Friday, 9 am to 5 pm Eastern Time.
 
 
 
 
Q. Hi Roger. Thanks for hosting this event. With respect to AT&T (NYSE: T), when the Warner Media spin out occurs and is combined with the Discovery Channel (NSDQ: DISCA), will existing AT&T shareholders receive shares of the new Warner/ Discovery entity? If so, it seems to me the market is overlooking this potential increase in value. Thanks for your insight.—Dan E.
A. Thanks Dan. I agree with you that investors seem to be pricing in pretty close to zero value for the shares of the new combined company that AT&T’s current owners are expected to receive. I think there are two likely reasons.
 
First, as I noted in my answer to the previous question, investors appear to be focused on the fact that AT&T management hasn’t clarified what its new dividend will be after this deal closes. That’s made it impossible for income investors to do more than guess what the yield will be after the spinoff. I understand why management would want to be circumspect on this issue, since there are a lot of factors in play including how fast customers adopt 5G. But until they do, people aren’t going to pay a lot of attention to much else. The collective yawn in the face of what were pretty good Q2 results makes that clear.
 
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Second, there appears to be a lot of skepticism about how well Warner assets will mesh with Discovery’s, as well as the latter’s management style. That’s fair, as there has been no shortage of failed media mergers in the past. And its likely until the new combination addresses those questions that investors will continue to value the package poorly.
 
The opportunity here is the market’s heavy pessimism about both pieces of the company leaves a lot of room for beating expectations. That’s pretty evident in AT&T’s current valuation of less than 9 times expected next 12 months earnings, which compares to 54 times for T-Mobile US (NSDQ: TMUS). And if the post-spinoff pieces of the current AT&T can prove themselves to be viable competitors in their industries, I think we could see a total value of as much as $50 per current AT&T share.
That’s the reason for holding on despite the disappointing performance in recent years. And I think at this point and given the good signs in Q2 numbers, it’s worth sticking around for, though I also think it’s reasonable to expect we’re going to have to be patient a while longer for a payoff.
 
 
Q. Dear Folks. I have two questions. First, is there any particular reason that the share price of Williams Companies (NYSE: WMB) is slumping? It seems to be a kind of boring stock, but it also seems to be doing all the right things in terms of solid business operation, steady prospects, intelligent CAPEX, good dividend coverage, etc. It is currently about 15% below your buy-under price of $28. You give it a "B" grade in your Utility Report Card. Why not an "A"? 
 
My second question concerns the Canadian power producer Innergex Renewable Energy (TSX: INE, OTC: INGXF). Your buy-under price is $25, which is about 50% higher than the stock's present price. That would seem to imply that this is a good position to enter at the present time. Your rating here is a "B" also.  
  
I guess I am confused how the buy-under price relates to report grading. Is there something about risk that I am not appreciating? Thank you--Jeffrey H.
 
A. Hi Jeffrey
 
Thanks for writing. Regarding Williams, I think the retreat over the past couple months pretty much reflects selling in the energy sector overall, which has followed the spike in coronavirus cases globally and its impact on oil prices.
As my comments on Williams' Q2 earnings in the August Utility Report Card comments reflect, I also believe the company is doing the right things in terms of operating its assets, maintaining a strong balance sheet/access to low cost capital and ensuring long-term sustainability of the enterprise. The distribution is generous, well-covered and likely to grow at a modest low-to-mid single digit percentage rate the next few years as well.
 
Williams hasn't earned an "A" in Quality Grade not because of any one failing but because it faces more regulatory challenges (pipeline approvals, potential gas bans) and revenue reliability challenges (gas gathering depends on production and is exposed to commodity prices) than companies in the coverage universe that typically rate "A." But so far as midstream companies go, it's one of the highest quality and I do rate the stock a buy up to 28.
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As for Innergex, I continue to see the stock as quite cheap in the USD15-16 range. The concern I've seen in the analyst community following the company (3 buys, 3 holds, 1 sell from Bloomberg Intelligence) has been that they've "gotten a little over their skis" recently in terms of pace of growth. The stock has also come under pressure on "noise" around its Texas assets, which management is reportedly trying to exit. And the company issued CAD175 mil in equity financing about a week ago--backed by its chief financial partner Hydro Quebec--to buy the Curtis Palmer facility from now privately owned Atlantic Power.
 
That facility operates under a long-term sales contract with Niagara Mohawk Power and is expected to be immediately accretive to free cash flow with a "greater than 10% reduction in payout ratio" for 2022 according to management.
As my Q2 earnings comments on the company in Utility Report Card note, I believe Innergex is still executing its growth plan and operating its existing assets well. The 19.9% ownership by Hydro Quebec and other arrangements would likely discourage a takeover offer from someone else, a fact that's likely kept away some potential buyers.
 
Also, the payout is not currently covered by free cash flow, which in large part accounts for the "B" Quality Grade. But based on my assessment of the long-term growth of the company and its value as a wholly non-CO2 emitting power producer, the stock would still represent value at a price of USD25, a level it actually exceeded earlier this year.
 
 
Q. Any thoughts on Orange SA (Paris: ORA, NYSE: ORAN) the French Telecom? The company appears to have refocused. It’s cheap and has a nice yield for those of us looking for a bit of international exposure. I hope you and your family are well and safe in this difficult time.  Sincerely—Ben F.
 
A. Thank you Ben. We’re doing well and I hope you and yours are also. Though it’s not currently a Portfolio holding, Orange has been a recommendation for a while in our Utility Report Card coverage universe, with a highest recommended entry point for the NYSE-listed ADRs of 16.
 
Like many European telecoms that have tried to expand across the continent, the company has had trouble in Spain. And as my Report Card comment indicate, it took a EUR3.7 billion goodwill writeoff in Q2 as the latest result. That said, however, overall company revenue was up 2.6% as its convergence strategy of combining broadband fiber-to-the-home and businesses with 4G and now 5G wireless networks continues to gain it market share, especially in its home country of France.
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Debt reduction is on track as well and the company continues to have great success expanding in former French-held countries in Africa and the Middle East as well.
 
Management has clearly indicated it wants to increase the semi-annual dividend over time. That’s off a yield now in the upper single digits at the stock’s current price. I think it’s an attractive combination and this is a stock that’s always on my short list for adding to the Portfolio—should other holdings fail to measure up.
 
 
Q. The article in the attached link seems to indicate utilities are at risk to climate lawsuits. Can you comment? Thanks—James C.
 
https://finance.yahoo.com/news/u-utilities-could-face-slew-090000914.h...
 
A. Thanks for sending this link James. I hope you don’t mind my including it in this chat as it is an interesting topic of discussion, as well as something always on my mind regarding individual company risk.
The short answer is pollution lawsuits have been a part of doing business in the electric and natural gas utility sector since their inception. But there are a couple reasons why I don't view the risk cited in this article as particularly meaningful at this time.
 
First, none of the multiple climate lawsuits ongoing against big oil companies for years have gotten any traction. That’s mainly because a ruling against big oil would require not just proving CO2 emissions are causing climate change, but also that the companies willingly violated the law by continuing to produce oil and gas that was obviously in high demand and critical for a functioning economy.
That's a much more difficult case to make. And the bottom line is until there's a successful suit against big oil--which is after all a much bigger and deeper pocketed target--there's unlikely to be much effort made against utilities, much less a successful one.
 
Second, the utility industry is moving full bore to convert systems to low and no CO2 fuels, and with full support of regulators across the country. Under current plans, we'll see an almost total phase out of coal usage by the end of this decade, and sooner in many parts of the country. There are also massive ongoing construction programs for wind, solar and battery storage. And utilities are uniquely well positioned to be the leaders, given their scale and regulatory support.
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At the very least, this will make it increasingly difficult to make the case that utilities are obstructing efforts to curb climate change. In fact, the largest wind and solar power producers in the US by far are now utilities, with NextEra Energy (NYSE: NEE) by far the biggest. 
 
The courts can always render surprising verdicts, sometimes with results that up-end entire industries. But there are always appeals. And at this point, I believe electric utilities' far greater concern is maintaining "affordability," that is keeping the cost of this energy transition low enough where the average person can pay their utility bills.
Mainly, the first stage of this was converting from coal to largely natural gas and it actually cut customer rates. But replacing gas with renewables if not done carefully will result in higher costs. And the verdict on what the public is prepared to pay for that is going to be fought out on a state-by-state basis. That's another reason why our analysis of regulation is so critical and why not every utility stock is a great investment. Thanks again for your question.
 
Q. Your Utility Report Card for Enel Chile (NYSE: ENIC) shows a quality grade of “C” but the comments section shows a “B” grade. Which one is more accurate?—John M.
 
A. Hi John. First off, I apologize for the confusion in Quality Ratings. In the case of Enel Chile (NYSE: ENIC), the correct rating should be "C." Shares are quite cheap after the recent decline, mainly because no one really knows what's going to happen with Chile's new constitution and the country’s political swing to the left.
. I think the asset base is strong and that parent Enel SpA (Italy: ENEL, OTC: ENLAY) is in it for the long haul. Those factors should limit downside for Enel Chile from here, barring anything short of outright nationalization/expropriation. But from a risk/reward standpoint, my view is the parent offers a much better bet. Thanks again for pointing out the error.
 
2:02
Ok, that's all we have in the pre-chat queue. Please type in your questions and I'll get to them. Thanks!
Daniel N
2:14
Hi Roger- I have a question about international stock ENLAY. After purchasing 1000 shares in February, the first semi-annual dividend paid out in August, $214.98 before deductions. But there were two sizable deductions: $55.89 in taxes withheld (expected), and $40.21 for an ADR management fee (surprise).

I have seen ADR management fees before, but this one (nearly 19%!) seems exorbitant. Between the foreign taxes and fee, almost half of the dividend is gone.

Does this fee also strike you as unusually high?
Do ADR fees and foreign taxes tend to factor lightly or heavily in your recommendations?

Thanks
AvatarRoger Conrad
2:14
Thanks Daniel. Good question. I guess I would say that there are other positive factors about Enel SpA that in my mind outweigh the foreign withholding tax and ADR fee, as well--as the fact that the Euro has weakened against the US dollar since the start of the summer and thereby decreased the US dollar value of the dividend. Two would be the fact that it's a leading renewable energy player globally and a relatively lower risk way to play the rapid electricity demand growth of the developing world (as well as a pandemic recovery at this point). My view is our return in the stock is actually going to come much more from appreciation than the dividend. That's not to say I'm not mindful of the fees. They're an anachronism of 20th century markets and if you can buy Enel shares in Italy you can avoid them. But in my view, the ADRs are still a worthy investment. And you can recover the tax withholding when you file your US taxes.
AvatarRoger Conrad
2:16
As postscript to that question, I would add I think we will see a return of buying power to renewable energy stocks like Enel and others we have in the portfolio, probably later this year if the S&P 500 can avoid a meaningful correction. We've already seen a real recovery in some like Clearway Energy (NYSE: CWEN).
Dick B
2:23
Hi Roger

I am a long-time subscriber to Energy & Income Adviser and Conrad Utility Investor and am looking for income with moderate growth. I am 84, so I have a shorter Long Term time horizon than many subscribers.

Currently I have unneeded investment cash flow income I want to reinvest. I’m very overweight in Pipelines (C-corps & MLPS) and REITS and underweight in Utilities. So, I am considering buying either EIX or D. I would appreciate your thoughts on those two utilities or any others you would consider for my situation.
AvatarRoger Conrad
2:23
Thank you for your questions Dick and for being a long-term subscriber of Energy and Income Advisor as well as CUI. We have had a very good ride with REITs since last year, and while there are values there are a few we've been advising lightening up on more recently. The pipeline stocks on the other hand remain pretty cheap, particularly after correcting a bit this summer--and I think as this energy price cycle continues the strongest especially are going to head quite a bit higher, for example those we have in the Portfolio that I discussed answering a questions earlier.

With that preamble, I do think both Dominion Energy (NYSE: D) and Edison International (NYSE: EIX) are attractive at current levels. Dominion below 85 is the premier renewable energy regulated rate base growth stock in the US--with some $72 bil in targeted spending through 2035 alone. That includes 2.6 GW of offshore wind project, the cost of which will go into rate base in Virginia as spent. I earlier mentioned affordability as a key
AvatarRoger Conrad
2:25
challenge for utilities, and Dominion will face that in Virginia as well as South Carolina in coming years. But it also has strong relations with state officials in both states who share its goals, with the recent deal in South Carolina supportive of a massive new ramping up of solar there. I think the stock at less than 20 times expected next 12 earnings and a yield of 3% plus growing 6% plus a year is very attractive for conservative investors.
2:30
As for Edison International, it's at less than 13 times expected next 12 months earnings and yields just shy of 5% because of investor fears of its potential liability to this horrific wildfire season. The stock received a small lift earlier this month when California regulators approved a long-delayed but in the end amicable rate increase that supports its massive CAPEX plans on grid hardening, renewable energy adoption and EV charging stations. And the California criminal investigation into the 2018 Woolsey fire has been closed with no charges to be filed against the company.
2:33
In my view, if the grid hardening Edison has done to date combined with fire management prevents a major new liability in this fire season, this stock will rebound well past my highest recommended entry point of 75, as it achieves a valuation more commensurate with other utilities. And the stock's low valuation does price in more than a little liability risk, which should help limit downside if it's less successful. But the real reason to own this stock is 7.6% annual regulator supported rate base growth, with returns rising as grid hardening efforts are completed and spending shifts to EVs and other initiatives.
2:34
Bottom line is both of these are good stocks and fine portfolio additions.
Paul
2:40
Roger could you please give your opinion of interest rates, inflation, where taxes are headed  and the value of the dollar.
AvatarRoger Conrad
2:40
Great question. I will preface my answer by saying there's little or no real correlation between annual returns on dividend paying stock sectors and changes in benchmark interest rates--there have been just as many up years for utility stocks when rates rise as when they drop. And all the worst selloffs have been in years where rates fell sharply, which means it usually pays to buy stocks like utilities into selloffs that are sparked by investor worries about rising interest rates. Also, the important thing is how a utility's borrowing costs and cost of new equity measure up against prospective returns, and so long as regulators are supportive the impact of rising benchmark rates isn't going to be particularly negative for earnings and dividends. In fact, in Illinois utilities' allowed returns automatically rise when benchmark rates do.

That said, I think the key for interest rates, inflation, the value of the dollar and very likely taxes depends on what happens to the level of growth of the US economy.
AvatarRoger Conrad
2:46
Our view right now is that the ongoing global resurgence in coronavirus cases isn't likely to have anything close to the impact the initial onslaught of the pandemic did in 2020. We don't claim to be medical experts. But it does appear the delta variant is clearly spreading to the vaccinated, and many businesses, governments and individuals are again implementing mask wearing and social distancing measures on a mass scale. This is having a noticeable impact on some measures of growth. And the impact is being magnified by Chinese government statements about wealth redistribution, which are raising questions about that country's growth.
2:48
But while we are watching indicators carefully, what we're seeing now looks a lot more like a temporary bump in the road than a return to last year's recessionary environment. And with record US stimulus coming, the probability of continued recovery still appears to be far more likely to us.
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