The headline disclosure at VST’s Analyst Day this morning (06/12/18) was the authorization of a $500M share repurchase plan, as the company has $1B in excess cash available after hitting its 2.5x Net Debt / EBITDA target by year-end 2019. This is only just the beginning of management’s focus on returning capital to shareholders. Over the long-term, VST is confident in its ability to generate at least $3B/year in EBITDA and convert that into $1.8B in Free Cash Flow. This should allow for the initiation of a dividend policy (~3% yield) likely sometime next year with still ample room for further share repurchases. In total, VST is projecting over $6B of cash available for allocation by 2022. Relative to a market cap of $12.6B, this is an attractive proposition. This is particularly important as a means to combat shareholder rotation given legacy distressed debt ownership positions. We’ve now added the initial buyback to our model, which boosts our Price Target to $29 (from $28). Every $500M in additional repurchases is worth $0.60/sh. Outperform.
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Several weeks ago (5/23), our Transports team held its annual conference that once again featured a Coal Outlook panel. Participants included executives from SO and VST. The key takeaway is that coal usage in the sector continues to trend downward, as companies transition their fleets towards natural gas and renewables. That said, this is now progressing at a relatively more modest pace than in recent years. At Southern, the company’s primarily regulated fleet is now only 27% coal-fired, down from about 70% a decade ago. At Vistra, the company is now about one-third coal-fired following the merger with Dynegy and the retirement of 4.2 GW of capacity in ERCOT. Previously, almost half of Vistra’s fleet was coal. Further, VST is currently evaluating the legacy DYN fleet (particularly in Illinois) where there may eventually be more coal shutdowns to come. This is consistent with the broader industry, with coal accounting for roughly 30% of total U.S. generation right now. By the same token, the electric power sector is expected to see a 4% drop in coal consumption in 2018 (25M tons). While in recent weeks the chatter around Trump/DoE support for coal/nuclear has started to heat up, both our panel participants appeared to think the shrinking of these fuel sources was inevitable.
Post their success with NRG and FE, Elliott and Bluescape (John Wilder) took a 5% stake in SRE and sent a letter proposing board changes and a strategic review. The news was ironic since SRE just finished buying Oncor from Elliott. SRE was up 15.5% following the announcement, reflecting the activists’ past success and maybe a short squeeze. In our view, a strategic review of SRE makes sense, as there is a lot of value in Sempra’s underlying assets. We stay Outperform.
Wolfe Research's Senior Utilities Analyst, Steve Fleishman, hosted a webcast to discuss continuing developments in the Utilities Sector
Our utilities pension review, with help from the Wolfe Research Accounting and Tax Policy team and their comprehensive report, takes a look at the state of pensions and other post-retirement plans in the sector using year-end 2017 data. Utilities remain underfunded for their pensions/OPEB, though the gap narrowed when compared to last year. There is still wide disparity in funding levels and accounting assumptions within the sector.
The merger of equals between Great Plains Energy (GXP) and Westar Energy (WR) closed today. Given that WR will be deemed the surviving entity, we are dropping coverage of GXP. We are officially covering the merged entity – Evergy (EVRG) per our note – link.
We are officially launching coverage on Evergy (EVRG) with an Outperform rating and $60 Price Target, as the GXP / WR merger of equals closed today. Effective tomorrow, GXP and WR will be delisted from the NYSE and EVRG will begin trading. We previously had Outperform ratings on both GXP and WR on the attractiveness of the merged entity.
Late last week, the press began to report on a draft Department of Energy memo that provided some detail on the latest attempt to subsidize troubled coal and nuclear. The plan is to exercise power under the previously referenced Section 202 and Defense Production Act. The government would direct RTOs to purchase power or capacity for 2 years from a designated list of facilities to stunt plant shutdowns. The DoE would also establish a “Strategic Electric Generation Reserve” to promote national defense and maximize domestic energy supplies. During the 2-year program, the DoE will conduct a study on the vulnerabilities of the grid. Trump / DoE have not yet taken official action and we expect challenges from generators and RTOs. PJM reiterated that it is not facing a reliability crisis and is pursuing its own study on resilience. Ultimately, it will come down to what plants are bailed out and if it holds up in courts. Further, two years from now we will be in another presidential election and the political dynamic could be very different. There are still a lot of uncertainties. FES creditors would appear to be beneficiaries, while retailers may be most at risk.
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