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Timely question as i have been asking myself the same thing.

 

Not sure if pipeline companies fall in here but i have been buying ENB and TC Energy. Cheap, high dividend yield, decent growth prospects (some risk here), decent long term track record (of growing earnings), decent management, reasonable amount of debt. Issues: energy is a hated sector with investors and this looks to be building momentum. Political risk is elevated although hard to quantify.

 

I am just getting started with these names and it usually takes me a couple of quarters to get a good picture.

 

PS: for ENB, Michael Fitzsimmons has a recent and pretty thorough write up on Seeking Alpha. The comment section is quite good if you have the patience to ignore the garbage posts.

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My favorite is Canadian Utilities - TSX:CU.

 

They are basically electricity transmission/distribution and gas transmission/distribution in Alberta. The electricity business is similar to the AltaLink business Berkshire bought. Alberta has high ROEs, and a commitment to private capital running the grid. Their 10 year average is >10%, and they have a nearly 50 year history of consecutive dividend raises. 5.4% yield with reasonable coverage, and capital allocation has been good over time. I own both the prefs and the common, but anyone who isn't a Canadian taxable investor wanting the dividend tax credit shouldn't buy the prefs, imo.

 

Biggest headwind is poor economic growth in Alberta going forward reducing their ability to grow their capital base with attractive economics. However, the "grid stability first" mandate of the AESO means that I think there will almost always be at least some growth projects. The transition from coal plants to a more renewable heavy grid probably means new transmission infrastructure will be required even without growth in power demand, which helps them quite a bit (new capital spending is very profitable). Their service area in East-Central Alberta is where the growth in wind power in the province is likely to be, so that catalyst probably helps them specifically. They also have the north where the oil sands are, so expansion of the grid there (seems unlikely at present) would be a potential catalyst.

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Pacific Gas & Electric. 

 

Some bullet points from July 15 PCG thread:

-Roughly half the valuation to utility peers

-Potential forced buying by index funds and ETFs

-Dividend should be re-instated by 2023

-May be some selling by the claimants fund once the 90 day lockup expires

 

There have been three big waves of electrification: lighting, refrigeration, and air conditioning.  The fourth will be electric vehicles, and expect California to lead the way.

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Pacific Gas & Electric. 

 

Some bullet points from July 15 PCG thread:

-Roughly half the valuation to utility peers

-Potential forced buying by index funds and ETFs

-Dividend should be re-instated by 2023

-May be some selling by the claimants fund once the 90 day lockup expires

 

There have been three big waves of electrification: lighting, refrigeration, and air conditioning.  The fourth will be electric vehicles, and expect California to lead the way.

 

I also like EIX, which trades cheap-ish. CA need to buff their power grid , which means more investment in transmission assets  and higher base Rates for utilities.

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Hasn't California been pretty much a basket case for utilities for the past 30 years? Is this the moment it turns around?

 

PCG has been a basked case much more so than EIX. The regulation in CA is actually utility friendly in terms of returns, but the series of wildfires has caused serious issues, even though EIX hasn’t been at fault to a significant amount.

 

I do think there is a decent chance that CA is going to fix their power grid issues and this could be very good for utilities operating there.

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Hasn't California been pretty much a basket case for utilities for the past 30 years? Is this the moment it turns around?

PCG has been a basked case much more so than EIX. The regulation in CA is actually utility friendly in terms of returns, but the series of wildfires has caused serious issues, even though EIX hasn’t been at fault to a significant amount.

I do think there is a decent chance that CA is going to fix their power grid issues and this could be very good for utilities operating there.

PCG came out very leveraged and continues to be exposed to unusual risks.

If things go well, PCG will deleverage and will re-rate.

If not, there is a risk for a third bankruptcy process in less than 20 years.

It seems to me the odds are unfavorable and this remains more a 'trading' candidate for now.

 

Rationale:

-Whatever combination of climate, poor forest management or development at the urban-wildland interface, there is a long term trend in place that is unlikely to improve for some time, giving rise to years where losses for wildfires will be very high.

-The 21B State wildfire fund may not be enough and then the question becomes who shoulders the cost. In the end, it's the rate payer but, in the interim, equity holders of IOUs will have to somehow share the pain.

-The inverse condemnation rule issue hasn't been resolved.

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SRE is my favorite in the US and incidentally, I bought some shares today. SRE has a good track record growing over the years.

 

Canadian Utilities (CU.TO) looks like good stock, probably best to own in an IRA for US investors where you get the CA withholding tax eliminated.

 

SRE is a great company - I agree.  Its discounted vs. pure-plays b/c of LNG exposure however.  BTW - no new news from Elliott here I believe?  they were trying to break the co' up on a SOTP valuation case about 18 months ago no? 

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Pacific Gas & Electric. 

 

Some bullet points from July 15 PCG thread:

-Roughly half the valuation to utility peers

-Potential forced buying by index funds and ETFs

-Dividend should be re-instated by 2023

-May be some selling by the claimants fund once the 90 day lockup expires

 

There have been three big waves of electrification: lighting, refrigeration, and air conditioning.  The fourth will be electric vehicles, and expect California to lead the way.

 

I agree abt PCG - however the market is going to apply a meaningful discount FOR SOMETIME to the business given the history here.  Unless someone can prove me otherwise - that is typically how these things play out.  Do you have a unique edge on the turnaround??

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Pacific Gas & Electric. 

 

Some bullet points from July 15 PCG thread:

-Roughly half the valuation to utility peers

-Potential forced buying by index funds and ETFs

-Dividend should be re-instated by 2023

-May be some selling by the claimants fund once the 90 day lockup expires

 

There have been three big waves of electrification: lighting, refrigeration, and air conditioning.  The fourth will be electric vehicles, and expect California to lead the way.

 

I agree abt PCG - however the market is going to apply a meaningful discount FOR SOMETIME to the business given the history here.  Unless someone can prove me otherwise - that is typically how these things play out.  Do you have a unique edge on the turnaround??

 

No I don't have any edge on the post-bankruptcy dynamics for this one.  Also impossible to predict future weather events and the impact on PG&E's facilities.  My thinking is the short term catalyst is the forced buying by funds, and the long term catalyst is increased electricity demand.  Not a big position for me.

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If Flatt is right utilities are a buy right now.

 

Low Interest Rates Mean Higher Valuations

 

There is almost no debate that a good portion of the last few months’ stock and bond market reflation has been due to the money pumped into the financial system by governments post-Covid, as well as the oil market collapse. What has been lost in this story is the fact that, contemporaneously, central banks around the globe reduced interest rates to zero. It also appears that interest rates will stay at zero for a good while—and barring a change in the macro environment, rates will stay in a low range for the next five to 10 years. Zero to low rates have great influence regarding the valuations of assets and businesses.

 

Streams of income that have durability to them will be even more valuable when markets recover, as low interest rates make cash flows from investments such as alternatives even more compelling. Even recently, institutional and retail savers were able to earn ±2% in government bonds, but with all government debt now paying a nil return. Thus, the alternatives of real estate, infrastructure, renewables, private equity and private credit have become even more compelling. It is very likely that long-let property, contracted or regulated infrastructure, long- leased renewables and private credit assets will have higher valuations a year from now than they did a year ago.

As an example, someone who owns an office building that is fully leased to good-quality tenants with rents locked in for the longer term, generating $50 million of cash flow pre-Covid, could take on and service about $700 million of 4% debt and have $22 million cash flow left over for the equity owners. With interest rates dropping, that mortgage is now at approximately 2.25%, meaning the cash flows to the equity have become ±$35 million. The value of the equity on this property was ±$600 million pre-Covid—and today it’s likely ±$1 billion.

 

A second example concerns the value of an operating business with stable cash flows. Westinghouse, a company we own, provides engineering and technology services to owners of nuclear power plants. It has had extremely stable revenues through the last six months, and we expect that to continue in the future. The EBITDA was $600 million pre-Covid (and still produces that), and at a 10 times multiple of cash flow, that business was valued at $6 billion last year. With approximately $3 billion of debt, the equity was approximately $3 billion. Now, with the world searching for returns and this business having proven its resilience, a multiple of 12 to 15 times is potentially more reasonable. If so, the equity of the business is now approximately $4 to $6 billion, suggesting an increase of upwards of $3 billion over its value at the start of this year.

 

Of course, the above does not apply for assets where the cash flows are uncertain. Although it is also very possible that many of these assets will also receive higher multiples, it may take time for investors to gain confidence in those income streams so that they can be awarded.

 

https://www.brookfield.com/sites/default/files/2020-08/BAM%20Q2%202020_Letter_to_Shareholders.pdf

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Anyone looked at Orsted (DNNGY)? I realize they are more of a renewable energy company than a utility but they are in the business of electricity (they divested their distribution assets and focus on energy worldwide). I may do a write-up on this if I get some time.

 

The play here is that they are very early to the green energy game. Wind is expected to get $1.4T in investment through 2040. Today, offshore wind is not really viable on cost per energy unit. It is substantially more expensive than nuclear, nat gas, oil, solar, or coal. Even if you take a management disaster of a Vogtle nuclear power plant which is 5 years behind schedule and $20B over budget, nuclear is still more cost-effective than offshore wind but unpopular (everywhere but china).

 

Some of the deals they have are pretty spectacular (for Orsted) and awful for the other side (e.g., Block Island Windfarm charging something like $200MWh where NE averages about $30MWh). NY Windfarms will hose the taxpayers (but not the ratepayers, as one brochure exclaims!). Their Index OREC pricing is a thing of beauty. Renewable energy is also getting heavy subsidies (12-30% credits for building, better financing, better depreciation rates) but these are being stepped down. I'd argue they are reasonably priced (maybe slightly to the richer side) there is definitely a runway to justify the valuations in the next few years (including entry into Japan).

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If Flatt is right utilities are a buy right now.

 

Low Interest Rates Mean Higher Valuations

 

There is almost no debate that a good portion of the last few months’ stock and bond market reflation has been due to the money pumped into the financial system by governments post-Covid, as well as the oil market collapse. What has been lost in this story is the fact that, contemporaneously, central banks around the globe reduced interest rates to zero. It also appears that interest rates will stay at zero for a good while—and barring a change in the macro environment, rates will stay in a low range for the next five to 10 years. Zero to low rates have great influence regarding the valuations of assets and businesses.

 

Streams of income that have durability to them will be even more valuable when markets recover, as low interest rates make cash flows from investments such as alternatives even more compelling. Even recently, institutional and retail savers were able to earn ±2% in government bonds, but with all government debt now paying a nil return. Thus, the alternatives of real estate, infrastructure, renewables, private equity and private credit have become even more compelling. It is very likely that long-let property, contracted or regulated infrastructure, long- leased renewables and private credit assets will have higher valuations a year from now than they did a year ago.

As an example, someone who owns an office building that is fully leased to good-quality tenants with rents locked in for the longer term, generating $50 million of cash flow pre-Covid, could take on and service about $700 million of 4% debt and have $22 million cash flow left over for the equity owners. With interest rates dropping, that mortgage is now at approximately 2.25%, meaning the cash flows to the equity have become ±$35 million. The value of the equity on this property was ±$600 million pre-Covid—and today it’s likely ±$1 billion.

 

A second example concerns the value of an operating business with stable cash flows. Westinghouse, a company we own, provides engineering and technology services to owners of nuclear power plants. It has had extremely stable revenues through the last six months, and we expect that to continue in the future. The EBITDA was $600 million pre-Covid (and still produces that), and at a 10 times multiple of cash flow, that business was valued at $6 billion last year. With approximately $3 billion of debt, the equity was approximately $3 billion. Now, with the world searching for returns and this business having proven its resilience, a multiple of 12 to 15 times is potentially more reasonable. If so, the equity of the business is now approximately $4 to $6 billion, suggesting an increase of upwards of $3 billion over its value at the start of this year.

 

Of course, the above does not apply for assets where the cash flows are uncertain. Although it is also very possible that many of these assets will also receive higher multiples, it may take time for investors to gain confidence in those income streams so that they can be awarded.

 

https://www.brookfield.com/sites/default/files/2020-08/BAM%20Q2%202020_Letter_to_Shareholders.pdf

 

From a long term perspective, it seems like low rates for a long time followed by high rates has the potential to be value destructive for utilities. Utility allowed returns on equity have been pretty sticky so far, but it seems that regulators are starting to follow interest rates down with lower allowable returns. If that becomes a full-blown trend and then rates reverse, I would expect allowed ROEs to be even more sticky to the upside, as I doubt regulators will want to raise prices for consumers if they can avoid it.

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Atco owns 52% of Canadian Utilities (CU-TSX). Meaningful purchase by CEO.

 

Atco Ltd. ( ACO-X-T -1.08%decrease)

 

Between Sept. 9 and Sept. 16, chair and chief executive officer Nancy Southern invested over $3.1-million in shares of Atco. Ms. Southern purchased a total of 78,050 shares at an average price per share of approximately $40.06 for an account in which she has indirect ownership.

 

The company pays its shareholders a quarterly dividend of 43.52 cents per share, or $1.74 per share yearly, equating to a current annualized yield of over 4 per cent. The company has increased its dividend annually for the past 27 years.

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My favorite is Canadian Utilities - TSX:CU.

 

They are basically electricity transmission/distribution and gas transmission/distribution in Alberta. The electricity business is similar to the AltaLink business Berkshire bought. Alberta has high ROEs, and a commitment to private capital running the grid. Their 10 year average is >10%, and they have a nearly 50 year history of consecutive dividend raises. 5.4% yield with reasonable coverage, and capital allocation has been good over time. I own both the prefs and the common, but anyone who isn't a Canadian taxable investor wanting the dividend tax credit shouldn't buy the prefs, imo.

 

Biggest headwind is poor economic growth in Alberta going forward reducing their ability to grow their capital base with attractive economics. However, the "grid stability first" mandate of the AESO means that I think there will almost always be at least some growth projects. The transition from coal plants to a more renewable heavy grid probably means new transmission infrastructure will be required even without growth in power demand, which helps them quite a bit (new capital spending is very profitable). Their service area in East-Central Alberta is where the growth in wind power in the province is likely to be, so that catalyst probably helps them specifically. They also have the north where the oil sands are, so expansion of the grid there (seems unlikely at present) would be a potential catalyst.

 

CU announced a nice tuck in acquisition of a natural gas pipeline today:

 

https://www.canadianutilities.com/en-ca/about-us/news/2020/122606-canadian-utilities-acquires-pioneer-pipeline-for-255-million.html

 

Great use of the money they raised on September 21th with their 2.609% 30 year debenture issue:

 

https://www.canadianutilities.com/en-ca/about-us/news/2020/122605-cu-inc-announces-debenture-issue.html

 

 

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Would others consider Brookfield Infrastructure Partners a Utility?? 

 

It is up HUGE from the March 23rd bottom.  I like BIPC (C-Corp) - but you need to buy this when there are real growth fears.  You are getting Utility, Infra, Nat Gas, and other 'toll-road' like businesses in a bit of a more leveraged format/structure.  The Wireless business/data-center assets are also held here.  I prefer BIPC over the Renewable business.

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