Wolfe Research's Senior Utilities Analyst, Steve Fleishman, hosted a webcast to discuss continuing developments in the Utilities Sector
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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.
In last month’s Utility Trader, we highlighted that bond yields had jumped 52bps YTD but utilities had only underperformed by 120bps. Short interest had collapsed and a lot of equity issuance was coming. Utilities were either signaling a market problem or the utility rally would prove to be a head fake. We leaned head fake and so far that has been correct. Utilities underperformed the market by 390bps in May and now trail by over 500bps YTD. They lost another 250bps on the first day of June on Friday. Bond yields actually ended the month down a little so we think the big problem was really equity issuance. The large PPL and NI deals seemed to suck the life out of the entire sector. There are still a few more large deals to come – ETR, CNP and ED – but we are starting to get line of sight to the end of mega equity issuance.
On Friday (5/25/18), CAL Fire, the lead state agency that determines causes of fires, said PCG equipment caused four small fires in the North Bay last October, and in three of those CAL Fire said PCG was negligent. The four fires in total destroyed over 130 structures. However, there were over 20 fires that comprise the North Bay Fires, which collectively destroyed or damaged over nine thousand structures. CAL Fire has yet to release the findings of the largest North Bay Fires: Tubbs (5,643 structures destroyed), Nuns (1,355) and Atlas (781). CAL Fire's findings of those, particularly the Tubbs, is critical for PCG stock, which currently reflects around $12B of damages/fees. With those releases still to come, and with uncertainty on the legal and legislative fronts, we remain on the sidelines.
Today (5/24/2018), the Kansas Corporation Commission and Missouri Public Service Commission both voted unanimously (3-0 and 5-0 respectively) to approve the merger settlement agreements as filed. The Kansas order (link) is effective immediately. The Missouri order (link) will become effective on June 3. We expect GXP/WR to close the merger shortly thereafter, at which point the big share repurchase plan will begin. It’s been a long two years since this merger saga began, but it ultimately turned out for the better. The MoE simply makes sense and should create the opportunity for robust synergies for years to come.
We attended the American Gas Association (AGA) conference in Arizona this week. The AGA has started to turn into a spring version of EEI as more of the electrics have bought gas utilities. The main growth avenues for these companies are renewables and grid monetization, not gas. There’s not much to talk about in gas these days…new pipeline announcements have largely come to a halt, construction projects like Nexus and ACP are finally moving forward, and gas LDCs keep chugging along quietly. Credit ratings and tax reform were in focus since a lot of the electrics levered up to buy gas utilities and face credit pressure. Most of them have already issued equity this year – D, DUK, NI, etc. And then there’s SO who cancelled on AGA for an “unexpected emerging conflict” which turned out to be the sale of Gulf Power in place of equity needs.
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