Utility fund as a replacement of portion of fixed income

[atmsmshr]

I live in this sandbox.

The electric utility industry is not as stable as 20 years ago for investment.

Low price natural gas undercuts older base load plants of nuclear and coal. For deregulated regions (merchant plants) the older base load is having trouble competing and the most unprofitable are closing. $2-4 natural gas price is here to stay. (Operating costs)

Rising interest rates mean that cost of raising capital for replacement of older baseload is an offset to building new natural gas plants. (Temporary reprieve)

The lack of natural gas pipelines limits competition in New England, but the NIMBY will eventually wake up and succumb to demands of lower prices. (Regulatory uncertainty and Capital costs)

Additionally, rising rates will cause investors to leave the bond like return stock dividends of utilities to get into similar return but lower risk safety of bonds. (Selling pressure)

Nuclear. Ten years ago some people bet wrong for a nuclear renaissance. Tens of billions of dollars later, Westinghouse is bankrupt, Toshiba is staggering, SCANA and Sandy Cooper are nearly underwater and plant construction stopped at VC Sumner. (End of evolutionary PWR design)

Disruptive technologies. Utility scale battery storage is about 5 years out. This solves a couple of problems for wind and solar, like when the wind don't blow and the sun don't shine. Also solves the costly construction of interstate transmission lines. Recognition of carbon costs is being recognized by some states, and will become prevalent. Not widely realized yet, wind and solar now beat coal cost production. (Competition for sunk capital costs).

It is not possible to get a basket of utilities to diversify in this environment. (risk management)

With all that said, I own a boatload of NextEra which averaged 15% return over past 10 years. Duke is also a well run and positioned utility.

 

[omni550]

Recent article on energy, title says it all.

"After rising for 100 years, electricity demand is flat. Utilities are freaking out."

https://www.vox.com/energy-and-environment/2018/2/27/17052488/electricity-demand-utilities

omni

 

[ESRwannabe]

What is your thoughts on replacing part of fixed income allocation with a utility fund? Historically it has had a better return the bonds with some degree of safety. I realize they have more risk, but in long term would they offer a better risk return than bonds?

The same question for Reits as an option for the portion of fixed income.

I have a lot of my taxable account money in the John Hancock Tax-Advantaged Closed End Fund, ticker HTD. It is 50% utility stocks and 50% preferred stocks (mostly banks). This CEF pays monthly and the distributions are tax-managed, usually 100% qualified dividends.

I like this CEF because it has a history of NAV growth and very good money management. They almost always have a positive UNII. Currently the CEF is on sale with almost a 7% discount. Its a good time to buy shares in it if it fits your needs.

I look at this CEF as a good way to set a reliable monthly income floor that will keep up with inflation over time. Then I build off this base and add other things like common stocks, REITs, mortgage REITs, BDCs, MLPs, private equity, muni bonds, junk bonds, convertible bonds, floating rate, crowd funding, etc.

http://www.morningstar.com/cefs/XNYS/HTD/quote.html

 

[ESRwannabe]

When I made my first post I had only read the OP and didn't realize this thread had become mostly a debate about renewable energy.

I will simply state that utility companies are not going away in the next 15 years, which is my time horizon. My investments need to get me from age 45 to 60 at which point my pension and social security will give me all the money I will need for the rest of my life.

 

[NW-Bound]

Recent article on energy, title says it all.

"After rising for 100 years, electricity demand is flat. Utilities are freaking out."

https://www.vox.com/energy-and-environment/2018/2/27/17052488/electricity-demand-utilities

omni

Thanks for sharing. Higher efficiency of modern household appliances, electronics, and lighting finally pays off. Outsourcing of some heavy industrial manufacturing is also a major factor. No matter where that energy comes from, using less of any resource to get the same job done is always a winner.

 

[NC 57]

Renewables (solar, wind) are not “free”. In addition to the capital cost for the equipment, and ongoing maintenance costs, they require a significant amount of land which is costly to acquire and can be taxed heavily. Utilities that have a significant legacy investment in nuclear and coal are experiencing significant shutdown and cleanup costs. Plus the nation has not yet solved the long term problem of safely storing nuclear waste.

Duke, one of the best run electric companies, has been requesting significant rate hikes.
From the regulators to deal with these issues. This month, the day after being granted a 7% rate increase Duke filed for a 14% increase in NC. Duke is trying to recover from the rate payers the cost of coal ash cleanup as well as nuclear discontinuation costs.

Rate payers are beginning to wake up to electricity costs escalating at a rate several times the inflation rate. It is only a matter of time before rate payers and the press are demanding the stockholders pay for utility management failing to create adequate reserves. I’m a Duke customer and I have a sizable position in Duke stock in my portfolio which I accumulated over 30 years of investing in the DRIP. From my perspective management and the stockholders, not the ratepayers, should be bearing the shutdown and cleanup costs of old technology. They enjoyed the rewards of excessive dividends and bonuses during the 50 years they were failing to accumulate reserves. They should now accept lower dividends and bonus payouts to executives for their mistakes.

 

[Telly]

...However, my view is that if you want an allocation of something, buy the something, because it is the only thing which will act as it does. If you go and choose something else which you believe will provide better yield/return, well there is a reason for the higher yield or return - its called risk.....

Yes!

We had a discussion here many years ago (IIRC, a few years after the start of E-R.org), where a poster was seriously thinking of boosting their returns on the fixed income side, via vehicles such as Hi-Yield bond funds, etc. His thinking was that the returns on the fixed side were "so low", why not tweak them up a bit?
The discussion centered on the purpose of asset allocation, and in particular, the role of the fixed side.

I thought that REIT are an asset class to themselves, not really bonds nor stock, and the purpose of owning some REIT, not a lot, was its lower correlation with the above. At least that's why I bought an REIT index years ago. And TIPS might be viewed as not exactly bonds, but not as a risk-upper. I have a small holding of I-Bonds. Kick myself for not stocking up on TIPS themselves when the fixed component of the return was 3.5% (and then add on the inflation-index component). When TIPS started out, it was a new concept, there weren't many takers, so the fixed component was set high to get sales. Oh well...

 

[OldShooter]

Renewables (solar, wind) are not “free”. In addition to the capital cost for the equipment, and ongoing maintenance costs, they require a significant amount of land which is costly to acquire and can be taxed heavily. ...

OK, I'll try once more and then give up:

The incremental KWH from a wind farm or solar array is very close to free. If I am managing one of these sources it is in my economic interest to sell my KWH at any price that is above my VARIABLE cost. Review your Econ 101 textbook. Variable cost may include some relatively tiny fraction of maintenance cost, but it does not include amortization of any fixed costs like capital investment, property taxes, power line maintenance, etc. So VARIABLE cost is close to zero. For solar it probably IS zero.

On a variable cost basis the renewables hammer traditional generation methods. As a result, viewed purely from an economic perspective, conventional generators will be able to sell power ONLY if wind and solar sources are maxed out. (Max may be zero if no wind or no sun.) The effect of this long term will be that the large costs of operating conventional generation sources will have to be recovered over a shrinking number of KWH sold. This is not theory; it has been discussed extensively in the world of renewable energy and AFIK no one has proposed a solution that is palatable to all parties.

Of course none of the real world of utilities is based solely on economic principles, but in the end the cost numbers will drive decisions that probably will not benefit electric company shareholders' dividends.

 

[NW-Bound]

Some time ago, perhaps last year, I shared a link to an article talking about how Merkel had to sign a contract to some German utility companies for them to maintain their equipment ready. The reason is that there are days when both wind and solar generation are zero.

In California, last year around March-April time frame, there was an article about how they had to pay Arizona to use some of their excess power. It was not hot enough for people to use air conditioning, hence the surplus power. Yes, they pay for people to off-load their production. I brought this up here too.

All this stuff is complicated, and it's not just technical but there's a lot of politics involved. I don't know how it will work out.

 

[sengsational]

From my perspective management and the stockholders, not the ratepayers, should be bearing the shutdown and cleanup costs of old technology. They enjoyed the rewards of excessive dividends and bonuses during the 50 years they were failing to accumulate reserves. They should now accept lower dividends and bonus payouts to executives for their mistakes.

We both profited from holding Duke, as well did (does) my mom. But the process of setting rates is what it is, and I don't want to have the company cut off at the knees, for my mom's sake. My BIL b*tches about Duke and the rate hikes to decommission and all of that, but I wave him off, saying "pretend you're paying my mom"

 

[ncbill]

OK, I'll try once more and then give up:

The incremental KWH from a wind farm or solar array is very close to free. If I am managing one of these sources it is in my economic interest to sell my KWH at any price that is above my VARIABLE cost. Review your Econ 101 textbook. Variable cost may include some relatively tiny fraction of maintenance cost, but it does not include amortization of any fixed costs like capital investment, property taxes, power line maintenance, etc. So VARIABLE cost is close to zero. For solar it probably IS zero.

On a variable cost basis the renewables hammer traditional generation methods. As a result, viewed purely from an economic perspective, conventional generators will be able to sell power ONLY if wind and solar sources are maxed out. (Max may be zero if no wind or no sun.) The effect of this long term will be that the large costs of operating conventional generation sources will have to be recovered over a shrinking number of KWH sold. This is not theory; it has been discussed extensively in the world of renewable energy and AFIK no one has proposed a solution that is palatable to all parties.

Of course none of the real world of utilities is based solely on economic principles, but in the end the cost numbers will drive decisions that probably will not benefit electric company shareholders' dividends.

the low capacity factor, not cost, is most of the problem with renewable energy.

until utility-scale battery storage gets a lot cheaper your local grid will still be wheeling in electricity from a natural gas-fired power plant hundreds or thousands of miles away to meet demand when the sun isn't shining and the wind isn't blowing.

 

[OldShooter]

... until utility-scale battery storage gets a lot cheaper your local grid will still be wheeling in electricity from a natural gas-fired power plant hundreds or thousands of miles away to meet demand when the sun isn't shining and the wind isn't blowing.

Absolutely. The issue is that the conventional power plant will have the same amount of capital cost to recover from the rate payers but will be selling KWH only as a last resort when the renewables can't produce or can't meet demand. So the numerator (recovery) remains the same while the denominator (KWH) gets much smaller. See also the first paragraph of @NW-Bound's post just above.

 

[lwp2017]

Renewables (solar, wind) are not “free”. In addition to the capital cost for the equipment, and ongoing maintenance costs, they require a significant amount of land which is costly to acquire and can be taxed heavily. Utilities that have a significant legacy investment in nuclear and coal are experiencing significant shutdown and cleanup costs. Plus the nation has not yet solved the long term problem of safely storing nuclear

Duke is still an excellent stock. Two items to reconsider:

- federal law requires utilities to fully fund decommissioning of nuclear sites to a greenfield status. Decommissioning funds are already set aside in a trust. No risk to share price.

- spent fuel storage was solved years ago privately when the federal government stalled out. All sites are using passive, air cooled, dry cask storage containers. Stored onsite on a concrete pad, good for hundreds of years.
Thus no risk to share price.