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Focus on Utility Preferreds and Baby Bonds

After spending a month or two (or 6) focused on purchasing the securities of insurance company’s I have turned my focus to utility issues where the most recent drop in prices have helped highlight some darned good values. Of course with some interest rate hikes ahead by the Fed we know that we may well get better prices in the months ahead.

We have our master list of utility issues here. I do not include the $50 and $100 issues on this list and we know there are some of long time comment contributors who dabble in this area–but they are relatively illiquid, but may present an opportunity for someone who is patient–or the master of illiquids–Gridbird.

I am looking at the Spire 5.90% preferred (SR-A), the Nisource 6.50% fixed to floating (NI-B) and the CMS Energy 4.20% perpetual (CMS-C). All of these are at least split investment grade and have current yields over 6%. I already have modest positions in these–but am looking to add more now (or soon).

Additionally we are getting a lot of baby bonds from utilities with current yields in the 5.75% area which are tempting.

NOTE–Pacific Gas and Electric (PCG) and Southern California Edison (SCE) Trust preferreds have special issues and investors should do heavy due diligence to make sure you fully understand those particular issues.

29 thoughts on “Focus on Utility Preferreds and Baby Bonds”

  1. Tim, thanks for this list and all you do, I have learned a lot from you and the contributors.
    A simple question, why do Utility preferreds have a “premium yield” (lower yield than other industries?) Because they are the ultimate safe haven?

    1. Windy, sorry nobody took a crack at this. Long story short they didnt name insolvency “utilityrupt”, they named it “bankrupt”, lol. Basically your assertion is correct. Utilities carry a lot of debt, but they also generally have a captive monopoly audience and guaranteed income stream with regulatory oversight which includes acceptable debt ratios and return on capital.
      And even the worse ones you cant kill off. PCG has went bankrupt twice in past 20 years or so, and yet the preferreds were made whole both times. Even in California they love cutting off the legs of the utilities only to reattach them later. But more than one almost went under from Nuke consruction back in the ‘70s.
      But nothing is guaranteed, and the holding companies which most view as the actual utility but isnt have more risk. Regulatory agencies protect the subsidiaries to a good degree, but not the holding company and they could get into trouble as that debt is basically subordinate to the subsidiary preferreds. Name reputations also help in pricing also I personally believe. But, I would be hesitate to call them the ultimate safe haven. That is reserved for govt debt and CDs. Also subsidiary companies have debt that sits above their preferreds. Still many have been timeless. The Wisconsin Electric and Versant Power preferreds for example are around 100 years old and are still paying quarterly today. But “safe” doesnt necessarily mean good if one overpays for that safety premium.

      1. I keep thinking about Charlie Munger saying that most people are lucky if they can find four good securities to invest in during their lifetime.

        So I keep buying more dribs and drabs of EPD. Its weight in my portfolio would frighten most people.

        JMO

        1. camroc, The sister thought is, “on those amounts over my core holding I will have a few sell limits in place to stage out or at least place a trailing stop on portions if and when it begins to run.”
          Sell discipline is HARD. I’ve been using call options to sell and gotten called out of a few commons. but there is no downside protection with them. Now my own advise reflects to me, esp to place stops with that EPD, XOM, FRHLF and ENB. None of the oilys really get good options bids anyway.

    2. wIndy, here is what someone once posted here:
      “… more specifically utilities who have prisoners as customers and legislatures that accept campaign contributions.”
      That poster was/is the black masked, red-breasted flying creature, aka the ute encyclopedia (actually, the pfd encyclopedia) I interpret his reply as a subtle message to be careful with west coast (Calif) utes.
      Best regards, Green-n-Gold

  2. focusing on “utes” myself. Bought a 18 year “solid” IG Indiana muni power yielding 4.28% tax free @ a discount today.

    1. Mike, we are in same state today. I bought a 2024 IPALCO bond (parent of Indianapolis Light and Power) with a 5.2% YTM.

      1. There are 461K$ more of those offered if anyone else is interested:

        CUSIP 462613AM2 IPALCO formerly AES Baa3/BBB-

        3.7% coupon, offered @ 97.045, matures 9/1/24, 5.2ish YTM

        I show 45 others rated Baa3 or better, >=5.0% YTM, maturing <=9/24
        Several Credit Suisse rated A2/A

        1. Tex, thanks for the number. I hadnt tracked, but there appeared to be a lot of options now in shorter duration 5% ish range low IG issues. Probably more coming tomorrow, ha. Its a hard world balancing duration risk, credit risk, sector concentration risk, etc, all while either trying to maximize income, or protect capital depending on ones goal.
          As far as IPALCO goes its hard to keep up with name changes. I think its still called IPALCO Enterprises but the actual operating subsidiary Indianapolis Power and Light is now called AES Indiana. AES owns the holding company IPALCO which in turn owns AES Indiana. Though the preferreds I think still go under their old name still. Odd, but IPALCO’s finances are included in hold co AES, SEC filing, but they also still file them separately with SEC under IPALCO.

          1. Grid:

            Loved your comment:

            “It’s a hard world balancing duration risk, credit risk, sector concentration risk, etc., all while either trying to maximize income, or protect capital depending on ones goal.”

            I’m literally printing that one out and displaying it next to the screen of my PC.

            So can I assume you are no longer in any of the IPALCO preferreds like IPWLP, IPWLK, IPWLN, or IPWLO? I think I remember you selling your IPWLK at $106 last November….if so, well done!

            1. Rob, I still have around a couple hundred shares of IPWLG. There isnt much left of this old float. I havent checked, but Im not positive if its even traded this year at all. Its one of those I can count on not to trade on a day when everything else went to hell that day, ha.

      1. sure AB didn’t see your post til this morning, cusip 454898XZA0 Indiana munis are hard to find

        1. Mike, thank you for your reply; CUSIP’s have 9 digits/letters and the one you are referencing has 10?? Have a great weekend, Azure

        2. Seconding Azure’s question. Is there a typo in that Cusip? Also, who in Indiana is the issuer?

  3. It shouldn’t impact the preferreds, but perhaps of interest to the common shareholders, there are rising numbers of past-due accounts at utilities. IMHO, where states have generous No-shut off policies (esp in winter), the risk may pass to the common shareholders. These debts do get bigger every month, making repayment progressively harder.

    My local ute’s past due accounts are up 30%,. It’s not winter yet and there has been zero publicity on the approved 20-30% gas hikes going into effect October 1. (FWIW – As of March, there were $660 million of past dues statewide left over from the Covid era.)

    A ‘Tsunami of Shutoffs’: 20 Million US Homes Are Behind on Energy Bills
    Surging electricity prices spur worst-ever crisis in late utility payments.
    https://www.bloomberg.com/news/articles/2022-08-23/can-t-pay-utility-bills-20-million-us-homes-behind-on-payments-facing-shutoffs

    Just my opinion.

    1. Good point BearNJ. I will bet $5 that the some states will do a consumer ‘bailout’ i.e. U.K.

      1. Some state regulatory agencies allow these deadbeats as a cost recovery when rate filing time comes.

        1. Grid–I am sure they do of course with the Covid overhang you can be certain you and I will pay the bill. Bet the debtors all have the latest iPhone though.

          1. You know it Tim. In good ol days it was cash the paycheck, then reserve monies for the rent check and utilities first. Now its iphone, internet, booze, cigs, entertainment, then rent and utilities if any money left over.
            I had a friend sell a multi million dollar apartment complex he had had for 10 plus years because he got tired of fighting deadbeats not paying their rent. And this was a couple years before covid hit.

  4. I don’t know if I missed this being mentioned already on your site, but speaking of Utility Co preferred shares, Alabama Power has called its ALP-Q to be redeemed October 14. It goes Ex on 9/16, pays on October 1. At redemption it pays $25 plus .045 accrued interest.

    1. I should have checked the Reader Initiated Alerts first. NewToThis2015 already mentioned the redemption of ALP-Q.
      My bad.

    2. Butch–I noticed that a few days ago. Where these preferreds may differ from some perpetuals is utilities may well call a low coupon issue–very unusual for instance with a REIT preferred.

      1. I’ve had this one off and on (mostly on) since its inception. I was surprised they called it. But it has been good to me.
        Butch

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