Conservative Income Feature

Steady expansion “consistent with financial guardrails:” That’s been the formula for Pembina Pipeline (TSX: PPL, NYSE: PBA) the past two decades, as it’s become the largest Canada-focused midstream energy company. Guidance announced mid-December affirms the strategy is alive and well. Management expects 2025 EBITDA between CAD4.2 and CAD4.5 billion—with volume growth across the Western Canadian Sedimentary Basin, new assets entering service and increased ownership of the Alliance Pipeline and Aux Sable system offsetting lower priced re-contracting of the Cochin Pipeline and likely “moderation of commodity margins.”

A year ago, Avista Corp (NYSE: AVA) and other Pacific Northwest utilities were called out for future exposure to increasingly catastrophic wildfires. Some analysts forecast a permanent wildfire discount for their stocks. Avista did experience severe conditions in late September, requiring a public safety power shutoff (PSPS) to 1,500 customers. But it also avoided meaningful liability, thanks in part to installing 9 artificial intelligence enabled fire detection cameras.

For most of 2024, long-time water utility favorite Essential Utilities (NYSE: WTRG) was unable to affirm previous long-term earnings growth guidance of 5 to 7 percent. This month, it did so again, thanks to amicable natural gas and water rate decisions in Pennsylvania. Home to its cornerstone water franchise and only gas utility—Peoples Natural Gas—the Keystone state is by far Essential’s most important regulatory jurisdiction. And in a 5-0 ruling the Public Utility Commission approved both a $93 million increase and a “weather normalization” mechanism for gas distribution, at a stroke limiting weather-related fluctuations in revenue.

This week, TC Energy (TSX: TRP, NYSE: TRP) closed the spin off of its liquids pipelines business as South Bow (TSX: SOBO, NYSE: SOBO). TC shareholders receive 0.2 shares of SOBO for every TRP currently held. And the new company will begin trading NYSE “on or about” October 8, with an initial dividend to be declared November 7. Profitable spinoffs unlock value because the new company is more valuable on its own. That should be the case here.

In 1996, US telecommunications deregulation broke up the Baby Bell monopoly. But contrary to the best efforts of regulators, politicians and especially competitors, market share consolidation has accelerated ever since. Now it’s the end game. AT&T Inc (NYSE: T), T-Mobile US (NSDQ: TMUS) and Verizon Communications (NYSE: VZ) increasingly dominate the still growing and rapidly evolving market. And the battle has shifted to convergence, as the Big 3 combine fiber broadband and 5G wireless networks to better hold onto customers, boost revenue and cut costs.

When leading Canadian telecom BCE Inc (TSX: BCE, NYSE: BCE) released initial 2024 guidance, many took it as evidence restrictive regulation and escalating competition were undermining growth and dividends. And the stock has generally underperformed since. Nonetheless last week, for the second consecutive quarter, management held firm on guidance in what it again referred to as a “transformational year.” Free cash flow improved by 8 percent to CAD1.1 billion, or CAD200 million after dividends. And the company posted its second best retail Internet net subscriber additions since 2007 and most wireless customer additions in "almost two years" (up 4.4 percent).

Conservative Holding Entergy Corp (NYSE: ETR) has been a fully regulated utility for more than two years—divesting its Palisades nuclear plant in Michigan in June 2022 to Holtec International. The result is reduced business risk, a stronger balance sheet and exclusive management focus on growing regulated rate base in the utility’s four-state territory. Annual industrial load growth is the strongest in America averaging 8-9 percent annually. And it’s likely to accelerate the next few years, spurred by “onshoring” to the US Gulf Coast, electrification, artificial intelligence-enhanced data centers (5-10 gigawatts demand projected) and rapid growth of LNG export infrastructure.

Conservative Holding Exelon Corp (NYSE: EXC) spun out its unregulated nuclear power operations to shareholders as Constellation Energy (NYSE: CEG) in early 2022. And it’s fair to say no one—including me—anticipated the stock would rise nearly 400 percent since. Neither did I think the remaining six-state regulated utility would return basically zero. And despite boosting dividends 13 percent since the spin, Exelon shares trade at just 14.6 times expected next 12 months earnings, versus 16.6 for the Dow Jones Utility Average.

In late April, Georgia Power’s unit 4 of the Vogtle nuclear plant entered full commercial service—joining Unit 3, which has been operating smoothly since last July. And with customer rates to pay for the facility fully in place, the book is now finally closed on a construction project that began in August 2008 and ultimately cost $30 billion, versus initial estimates of $14 billion. During Southern’s Q1 earnings and guidance call earlier this month, CEO Chris Womack stated unequivocally his view that the US “is going to need more nuclear.” But he also said “we’re going to celebrate what we’ve done at Vogtle for a very long time before we give any consideration” to launching another project.

Utility strong is what you get with Conservative Holding CMS Energy (NYSE: CMS). The stock’s 10-year compound annual return is a solid 10.5 percent. And it’s 15.4 percent for the last 21 years—which began with a management switch and refocus on boosting efficiency, cutting debt and staying on the same page with Michigan regulators. That’s been the formula for success ever since. In early February, CMS released 2023 results that topped the company’s recently raised targets. Management boosted the mid-point of the 2024 earnings guidance range to $3.32 per share, affirming expected annual growth of 6 to 8 percent through 2028 “with continued confidence toward the high end of the range. The company also raised dividends by 5.7 percent, the same rate of growth as in 2023 and an increase of 90.7 percent from ten years ago.