Wednesday, September 9, 2015

Recent Buy – Canadian Utilities Ltd

August generally tends to be a rough month in the markets and brings plenty of volatility. Coupled that with the ongoing jitteriness of interest rate hike fears in the US and recession fears in Canada – there are some interesting opportunities out there. Regardless, I continue to purchase looking for good opportunities trying to tune out the noise. Whenever I make a purchase, I like to share my buys to document and illustrate how I am building my income stream over the course of months/years. My main goal is simply to keep investing at regular intervals and build my passive income over the course of time. In staying true to tradition, here’s another purchase in my portfolio, this time adding a new company to my portfolio.

I initiated a position in Canadian Utilities Limited (CU.TO) with 50 shares @ C$36.50. The stock yields 3.24% adding C$59.00 to my forward annual passive income.

Company Overview

Canadian Utilities Limited engages in the utilities, energy, and structures and logistics businesses. The company’s Utilities segment owns and operates 27 diesel, natural gas turbine and hydro-generating plants, with an aggregate nameplate capacity of 62 megawatts in Alberta, the Yukon and Northwest Territories; and transmits and distributes electricity to approximately 252,000 customers in east-central and northern Alberta. This segment also distributes natural gas to 1.1 million municipal, residential, business, and industrial customers in Alberta and the Lloydminster area of Saskatchewan; and owns and operates approximately 8,500 kilometers of pipelines, 19 compressor sites, and a salt cavern storage peaking facility located near Fort Saskatchewan, Alberta in Canada, as well as 4,000 receipt and delivery points. Its Energy segment supplies regulated and non-regulated electricity and cogeneration steam; gathers, processes, stores, and transmits non-regulated natural gas; extracts natural gas liquids; transmits electricity; and provides industrial water services. This segment offers storage, natural gas procurement, and transportation services to financial institutions, marketing companies, pipelines operators, retail energy providers, and producers. The company’s ATCO Australia segment distributes natural gas through natural gas pipelines and associated infrastructure to 700,000 customers in 18 communities in Australia; and holds interests in 3 natural gas-fired generating plants. Its Corporate & Other segment holds investments in long-term contracted electricity transmission infrastructure in Alberta and Mexico; owns commercial real estate; develops, operates, and supports information systems and technologies; and provides billing services, payment processing, credit, collection, and call center services. Canadian Utilities Limited was incorporated in 1927 and is headquartered in Calgary, Canada. Canadian Utilities Limited operates as a subsidiary of ATCO Ltd.

Corporate Structure

Canadian Utilities Ltd (CU.TO) and Atco Ltd (ACO.X.TO) are intimately linked. In fact, when one looks at the overall corporate structure, the relationship becomes obvious – that they are essentially the same company except a higher exposure to Atco Structures & Logistics in Atco Ltd and a smaller exposure via Canadian Utilities Ltd.
CU - Corporate Structure
The Atco Group of Companies – Corporate Structure

Recent Buy Decision

  • I decided to sell my Utilities ETF in June 2015 and have been looking into buying individual companies that can give me dividend growth and better equity ownership. In July 2015, I initiated a small position in Algonquin Power & Utilities Corp (AQN.TO) which was my only utilities company. This purchase adds a second company to the utilities sector.
  • Canadian Utilities is a stable utilities company that has paid and grown dividends with a great track record. CU holds the top spot in the Canadian Dividend All-Star List with a dividend growth streak of 43 years.
  • CU has a good combination of yield and growth rates. The current yield is 3.24% and has 1-, 3-, 5-, and 10-year dividend growth rates of 10.3%, 10.0%, 8.7%, and 7.3%.
  • Not only do I get exposure to the traditional utilities infrastructure businesses – electricity generation and transmission, but also own business interests in pipeline operations (gas and water) and structure & logistics segments.
  • Geographical diversification includes operations in Canada, Mexico (a new venture in 2014) and Australia, with some minor operations/presence in US, UK, South Africa, Kosovo & Afghanistan.
  • A strong and secure cash flow year after year, the company holds more than $400M (according to 2015 AGM meeting) in liquid cash and more than $2B in readily accessible lines of credit. CU has a S&P credit rating of A.
  • In all, its a utilities company that has grown at a slow and steady pace – nothing spectacularly exciting about it – fitting well into mantra of – A Boring investment is a good investment.

Screen Shot 2015-08-05 at 8.01.50 PM

Risks

  • As with any investment, there are risks involved. Being in the utilities sector, the risks in the regulated industry is slightly lower. But the non-regulated industry, where most of the growth comes from – can see possible new regulations that could put future growth prospects in doubt.
  • Rise in interest rates can cause the stock prices to tumble in the utilities sector.
  • Most of the operations are based in Alberta, Canada where the newly elected NDP government has promised to raise taxes to balance their budget. This could affect the company’s bottom line.
  • With international operations, currency fluctuations can cause an unknown movement in revenue.

This article was written by Roadmap2Retire. If you enjoyed this article, please consider subscribing to my feed at Roadmap2Retire.com/feed

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