A utility love thread......

[fenders53]

I've always loved utilities.  They've outperformed the rest of my port perhaps one out of three years going back over 25 years.  It's rare when they dip much over 10% off their 52 week high.  As I've mentioned before I caught XEL after an execution error and rode it for 500%.  But that isn't a realistic expectation going forward.  To me they are nearly as safe as cash if you have a minimum three year time horizon and a diversified mix of UTES.  I intend to make them a much larger part of my port as I approach retirement.  

The true intent of this thread is to encourage others to share their favorite utilities, why they like them, and if they recommend them at current prices.  I will certainly research them.

Generally speaking, I look for the following in a utility I am about to enter....

-Minimum 3% current yield, with a history of dividend increases.  I'll consider a high div from a UTE in peril if the forward story sounds reasonable.  
-A reasonable likelihood of increased revenue growth for the foreseeable future. If revenue growth is flat the current yield better compensate for it now.  It's mandatory for me.
-Fast growth rate UTEs with a very low dividend may be shunned in a rising interest rate environment so I have always avoided them.  I feel like they may be treated like a normal stock in a tough market when it's too easy to get 3% yield with zero risk.  I could be wrong.
-I prefer UTEs with the wisdom to think to the future.  More Natty gas, less coal, invest in wind and solar as it is part of the future.  It's expensive to convert so best to start now.  XEL is a good example of doing it right IMO.
-I like to spread my UTES around the country.  Hurricanes, forest fires and unseasonably warm winters happen. These all effect the BIZ outlook when it happens. 
-I don't like high PE UTEs but I may have to get over that or I'll possibly sit on the sidelines forever. 

-I am currently considering or attempting to build larger positions in AEP, XEL, D, SO , ED

Your recommendations are much appreciated.

[EricL]

I love my utilities as well, hard to beat the consistent growth and attractive yields.

Here are a few others to consider looking into.

NextEra Energy (NEE) - A lower yield, but high growth for a utility. The leader in renewable energy, and the largest utility I follow at a nearly $85B market cap. Should see several more years of double-digit dividend growth ahead.

WEC Energy (WEC) - Formerly Wisconsin Energy, this is a consistent ~7% grower with an A- credit rating and 15-year streak of increases. A bit expensive at a 21 PE, but still yields over 3%.

CenterPoint Energy (CNP) is on my watch list and looks attractively valued now. Yields just over 4%.

I also like the water utilities American Water Works (AWK) and Aqua America (WTR).  AWK is pretty expensive, but WTR is trading fairly close to its historical valuation level.

Long D, XEL, WEC, NEE, AWK.

[crimsonghost747]

Regarding NEE... I took a look a while ago and if I remember correctly: negative cash flows? For a utility? No thanks. I might be mistaken but that is what I remember.

I really like water utilities too, though as of right now they are too highly valued. I hold WTR (which is actually ok value but not a pure water utility anymore) but I might change that to AWK or AWR at some point.

[fenders53]

If it's OK with Eric I'll post a link to his SA utility article here. I believe he already did in another thread actually.....

I have taken a look at some of the fast growers Eric shared. I am interested at the right price. Most utilities that appear to be worth owning are lofty right now. They look like they could use a 10% haircut but who knows if that happens. They're bound to pull back some with a few FED rate hikes. I wouldn't advise anyone to go "all in" on utilities today, but I really do feel like they belong in most ports in the proper allocation.

I need to do some DD on water utilities. I've never owned one. It's no secret it's become a valuable commodity in some parts of the US.

[fenders53]

Bought some VPU today which is a Vanguard Utilities ETF with a 3 1/2% DIV. Top holding is NEE and also D-SO-AEP-XEL in the top ten. Also some water Utes. If my put sales fail to exercise at least I have some more utility exposure for now. I can trade this ETF commission free so Coulda woulda shoulda done this a month ago.

[Otter]

Love utilities heading into late cycle. Most recent purchases were BKH at 58.45 and BIP at 37.23 a few weeks back. I typically look for a utility trading below its 10yr average P/E, investment grade (BBB+ or better) credit rating, and a Chowder Number of 8 or more.

I also like to have diversified holdings within the space (presently holding AEP, BEP, BIP, BKH, CNP, D, DUK, NGG, PPL, and SO). Utilities, being mostly regional, tend to be susceptible to regional black swan events (like PCG with California fires, and PPL/NGG with Brexit).

[fenders53]

(11-26-2018, 12:32 AM)crimsonghost747 Wrote: Regarding NEE... I took a look a while ago and if I remember correctly: negative cash flows? For a utility? No thanks. I might be mistaken but that is what I remember.

I really like water utilities too, though as of right now they are too highly valued. I hold WTR (which is actually ok value but not a pure water utility anymore) but I might change that to AWK or AWR at some point.

Researching NEE now.  It is among the few fast growers that really have my attention.  It's a little tough (and probably inappropriate) to evaluate exactly like a stodgy old Ute that grows at 3%.  It's definitely more volatile, but the longterm chart is up and to the right for sure.  The 10% growth in EPS and DIVs, and low PE is causing that no doubt.  Their CAPEX expenditures are hard on the cash flow as you mentioned. Heavily owned by institutions and they trade it like baseball cards. I like their chances better with a different US political atmosphere but that day comes at some point.  We are fickle on this side of the big pond 

[Otter]

For essentially all of their history, Utilities have been the quintessential widows/orphans DGI stocks--regulated monopolies with reliable rate/dividend increases matching or slightly exceeding inflation. With the LCOE (Levelized Cost of Energy) cost of wind and (especially) solar dropping below that of gas generation, it seems this traditional business model that has worked for over a century is increasingly in doubt. Anecdotally, I have noticed a number of recent commercial developments using solar as a power generation source. That's certainly consistent with the rapidly decreasing price of the technology (it just makes good business sense):

https://www.businessinsider.com/solar-po...ase-2018-5

I am increasingly concerned that we are going to see major disruption in the traditional utility space in the coming decade. Sure, major industrial applications will continue to require large amounts of traditionally-generated grid power, but the trend in commercial (and I suspect soon for single-family residential) is going to follow the lowest LCOE. Developers who don't follow that trend will be at a competitive disadvantage.

What happens to the traditional utility model, with its huge capital costs and multi-year (or decade) planning, when a massive chunk of their customer base has its own grid that supplies all or part of its electricity requirements. Why bother with costly, wide-ranging power distribution networks that are a maintenance and liability hassle (just look at PCG's issues). Are utilities shaping up to be the electrical equivalent of CenturyLink, keeping a costly, inefficient network running for a shrinking customer base?

[EricL]

(03-01-2019, 11:21 AM)Otter Wrote: For essentially all of their history, Utilities have been the quintessential widows/orphans DGI stocks--regulated monopolies with reliable rate/dividend increases matching or slightly exceeding inflation. With the LCOE (Levelized Cost of Energy) cost of wind and (especially) solar dropping below that of gas generation, it seems this traditional business model that has worked for over a century is increasingly in doubt. Anecdotally, I have noticed a number of recent commercial developments using solar as a power generation source. That's certainly consistent with the rapidly decreasing price of the technology (it just makes good business sense):

https://www.businessinsider.com/solar-po...ase-2018-5

I am increasingly concerned that we are going to see major disruption in the traditional utility space in the coming decade. Sure, major industrial applications will continue to require large amounts of traditionally-generated grid power, but the trend in commercial (and I suspect soon for single-family residential) is going to follow the lowest LCOE. Developers who don't follow that trend will be at a competitive disadvantage.

What happens to the traditional utility model, with its huge capital costs and multi-year (or decade) planning, when a massive chunk of their customer base has its own grid that supplies all or part of its electricity requirements. Why bother with costly, wide-ranging power distribution networks that are a maintenance and liability hassle (just look at PCG's issues). Are utilities shaping up to be the electrical equivalent of CenturyLink, keeping a costly, inefficient network running for a shrinking customer base?

Unless power storage is figured out at a cost-effective scale, I'm not too worried yet about utilities. I think you need to look deeper into the actual costs of wind/solar rather than the nameplate costs as well, because the costs that are generally quoted are based on nameplate production rather than real-world variable costs.

Wind/solar don't generate power at night, cloudy days, calm days, etc., so they need backup power from either stored systems or from fossil fuel power generation. Also consider that many utility companies are in the wind/solar business as well, so they are adapting as times are changing.

California is also one of the worst states for regulation on utilities, so lumping other utilities into PCG's problems is kind of an apples/oranges comparison.

Some utilities are adapting better than others to the changes. XEL and NEE, which I own, seem to be at the forefront of the renewable push.

[Otter]

(03-01-2019, 11:54 AM)EricL Wrote:

(03-01-2019, 11:21 AM)Otter Wrote: For essentially all of their history, Utilities have been the quintessential widows/orphans DGI stocks--regulated monopolies with reliable rate/dividend increases matching or slightly exceeding inflation. With the LCOE (Levelized Cost of Energy) cost of wind and (especially) solar dropping below that of gas generation, it seems this traditional business model that has worked for over a century is increasingly in doubt. Anecdotally, I have noticed a number of recent commercial developments using solar as a power generation source. That's certainly consistent with the rapidly decreasing price of the technology (it just makes good business sense):

https://www.businessinsider.com/solar-po...ase-2018-5

I am increasingly concerned that we are going to see major disruption in the traditional utility space in the coming decade. Sure, major industrial applications will continue to require large amounts of traditionally-generated grid power, but the trend in commercial (and I suspect soon for single-family residential) is going to follow the lowest LCOE. Developers who don't follow that trend will be at a competitive disadvantage.

What happens to the traditional utility model, with its huge capital costs and multi-year (or decade) planning, when a massive chunk of their customer base has its own grid that supplies all or part of its electricity requirements. Why bother with costly, wide-ranging power distribution networks that are a maintenance and liability hassle (just look at PCG's issues). Are utilities shaping up to be the electrical equivalent of CenturyLink, keeping a costly, inefficient network running for a shrinking customer base?

Unless power storage is figured out at a cost-effective scale, I'm not too worried yet about utilities. I think you need to look deeper into the actual costs of wind/solar rather than the nameplate costs as well, because the costs that are generally quoted are based on nameplate production rather than real-world variable costs.

Wind/solar don't generate power at night, cloudy days, calm days, etc., so they need backup power from either stored systems or from fossil fuel power generation. Also consider that many utility companies are in the wind/solar business as well, so they are adapting as times are changing.

California is also one of the worst states for regulation on utilities, so lumping other utilities into PCG's problems is kind of an apples/oranges comparison.

Some utilities are adapting better than others to the changes. XEL and NEE, which I own, seem to be at the forefront of the renewable push.

Don't get me wrong, I'm not dumping all of my utility holdings overboard today, tomorrow, or even next year. Am looking at a potential systemic risk on the far horizon. 

Solar doesn't generate at night, when utilities typically experience the lightest loads and generation needs. Solar is most likely to be at peak production during times that traditional utilities have experienced peak loads and can charge the most. Wind production (especially for offshore generation) tends to peak later in the day than Solar, into the evening hours, so can work to complement solar generation. There's also a huge amount of R&D money being poured into the storage issue (fuel cells, flywheels, compressed air, molten salt, etc.), and into bringing the cost of stored energy down. 

I don't think the trend of LCOE decrease for wind and solar is going to reverse any time soon. It seems to be on a Moore's Law-ish trajectory, far outpacing estimates of even a decade ago. I'm sure some utilities will be nimble enough to pivot and follow along with the trend. At this time, I have no idea which utilities will pull that off on a way that increases shareholder value.

[fenders53]

(03-01-2019, 11:21 AM)Otter Wrote: For essentially all of their history, Utilities have been the quintessential widows/orphans DGI stocks--regulated monopolies with reliable rate/dividend increases matching or slightly exceeding inflation. With the LCOE (Levelized Cost of Energy) cost of wind and (especially) solar dropping below that of gas generation, it seems this traditional business model that has worked for over a century is increasingly in doubt. Anecdotally, I have noticed a number of recent commercial developments using solar as a power generation source. That's certainly consistent with the rapidly decreasing price of the technology (it just makes good business sense):

https://www.businessinsider.com/solar-po...ase-2018-5

I am increasingly concerned that we are going to see major disruption in the traditional utility space in the coming decade. Sure, major industrial applications will continue to require large amounts of traditionally-generated grid power, but the trend in commercial (and I suspect soon for single-family residential) is going to follow the lowest LCOE. Developers who don't follow that trend will be at a competitive disadvantage.

What happens to the traditional utility model, with its huge capital costs and multi-year (or decade) planning, when a massive chunk of their customer base has its own grid that supplies all or part of its electricity requirements. Why bother with costly, wide-ranging power distribution networks that are a maintenance and liability hassle (just look at PCG's issues). Are utilities shaping up to be the electrical equivalent of CenturyLink, keeping a costly, inefficient network running for a shrinking customer base?

Thanks for posting my favorite sector thread.  On the surface that article sounds very logical.  I agree with the premise in a macro national view.  I am all about green, and it's irresponsible to not pursue it.  Here are few comments for discussion.

-Ever spent any time in Minneapolis?  You won't see too much solar yet and there is a reason for that.  What happens when it's -30F for a few weeks and the sun hasn't been seen lately?  A fair amount of wind, which has to be distributed on the grid.  Solar dependence is still "pie in the sky" up north.  We need to develop solar that works when it's cloudy, cold and snowing.  AZ and MN are a whole different world that will never be addressed with the same solution.   

-Coal is gonna die, we don't disagree on that.  Natty gas is much, much cleaner and it has a role for the rest of my lifetime IMO.  It requires a distribution network.

-And BTW most of my utility holding are way up north, and they are investing heavily in clean energy or I wouldn't own them.   At the very least it's a good hedge.

-I don't rule out the possibility we'll pass a Green New Deal act, and they will force rich folks from Phoenix to subsidize my home heating during winter because it's the right thing to do. 

[Otter]

(03-01-2019, 12:15 PM)fenders53 Wrote:

(03-01-2019, 11:21 AM)Otter Wrote: For essentially all of their history, Utilities have been the quintessential widows/orphans DGI stocks--regulated monopolies with reliable rate/dividend increases matching or slightly exceeding inflation. With the LCOE (Levelized Cost of Energy) cost of wind and (especially) solar dropping below that of gas generation, it seems this traditional business model that has worked for over a century is increasingly in doubt. Anecdotally, I have noticed a number of recent commercial developments using solar as a power generation source. That's certainly consistent with the rapidly decreasing price of the technology (it just makes good business sense):

https://www.businessinsider.com/solar-po...ase-2018-5

I am increasingly concerned that we are going to see major disruption in the traditional utility space in the coming decade. Sure, major industrial applications will continue to require large amounts of traditionally-generated grid power, but the trend in commercial (and I suspect soon for single-family residential) is going to follow the lowest LCOE. Developers who don't follow that trend will be at a competitive disadvantage.

What happens to the traditional utility model, with its huge capital costs and multi-year (or decade) planning, when a massive chunk of their customer base has its own grid that supplies all or part of its electricity requirements. Why bother with costly, wide-ranging power distribution networks that are a maintenance and liability hassle (just look at PCG's issues). Are utilities shaping up to be the electrical equivalent of CenturyLink, keeping a costly, inefficient network running for a shrinking customer base?

Thanks for posting my favorite sector thread.  On the surface that article sounds very logical.  I agree with the premise in a macro national view.  I am all about green, and it's irresponsible to not pursue it.  Here are few comments for discussion.

-Ever spent any time in Minneapolis?  You won't see too much solar yet and there is a reason for that.  What happens when it's -30F for a few weeks and the sun hasn't been seen lately?  A fair amount of wind, which has to be distributed on the grid.  Solar dependence is still "pie in the sky" up north.  We need to develop solar that works when it's cloudy, cold and snowing.  AZ and MN are a whole different world that will never be addressed with the same solution.   

-Coal is gonna die, we don't disagree on that.  Natty gas is much, much cleaner and it has a role for the rest of my lifetime IMO.  It requires a distribution network.

-And BTW most of my utility holding are way up north, and they are investing heavily in clean energy or I wouldn't own them.   At the very least it's a good hedge.

-I don't rule out the possibility we'll pass a Green New Deal act, and they will force rich folks from Phoenix to subsidize my home heating during winter because it's the right thing to do. 

Germany is one of the world's top installers of PV, behind only China, sitting at 5+ degrees latitude further North than Minneapolis, and generating over 6.5% of the nation's energy from that source at an average of 4.33 Eurocents per kWh. Minnesota has the capability to generate more kWh per area than Germany: https://www.cleanenergywire.org/factshee...rspectives.

Certainly solar will perform better in the Desert Southwest, but it is by no means uneconomic in places like Minnesota.

Edited to add - there are all sorts of additional issues with the German solar model (past subsidies and withdrawal of those subsidies), as that article makes clear, but the overall point remains - rapidly decreasing cost of power generating technology for wind/solar, together with cheap natural gas, has already effectively put coal out of business. If the trend continues at current cost reduction rates, then natural gas as an electricity-generation source also becomes threatened. Before the fracking boom, hardly anyone thought we would be where we are right now in terms of the coal market. Change can happen incredibly fast, and leave a lot of expensive developments/infrastructure investments predicated on the more expensive technology high and dry in a hurry.