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We hosted our annual investor meeting with the Moody’s team to get their latest credit views on the utilities, power and midstream sectors.  For utilities, things have quieted down (ex California) as tax reform impacts have largely played out as expected.  FFO/D metrics have dropped 150-200bps on average due to lost deferred tax cash flows and currently sit in the 15-16% area and likely stay there.  Companies have taken actions to support their metrics (lot of equity) and have better visibility on regulatory treatment of tax reform.  So 2019 is about executing on plans, hitting metrics and sticking to balanced funding plans (ie more equity).  Moody’s still has a negative outlook on the sector but will likely go back to stable with good 2019 execution.                      

PCG’s impending bankruptcy will impact a wide swath of companies especially renewables suppliers.  These include large ones investors are aware of (CWEN, NEE/NEP, ED) and smaller ones not so obvious (NRG, DTE, likely others).  For the other CA utilities, EIX and SRE, investors will be focused on what this means for getting long-term fixes for wildfire risks.  Project risk continues to rear its ugly head as we have seen with ACP pipeline delays.  Key updates this quarter include D/DUK on ACP, SO on Vogtle, AGR on NECEC and Vineyard Wind, and SRE on Cameron.  Pension risk (and OPEBs and NDTs) due to the Q4 market swoon and drop in rates could hurt as D highlighted recently.  NI, ETR and others may face some headwind.

Our utility financial “checkup” examines projections for utility balance sheets and credit metrics. Tax reform was the overarching theme in 2018 for utility balance sheets and precipitated a large portion of the equity deals completed this year; in total, we saw +$19B completed across our coverage via blocks, forwards, or internally. Since our mid-year review, we now project slightly better FFO/debt in 2020 (+0.5%) due to equity issuances and asset sales. EV/EBITDA is now a half-turn higher given the run-up in equity valuations. Overall, we continue to see utility financial metrics stagnating with higher leverage at certain companies leading to wide P/E dispersion.

Last week, as the California utilities collapsed amidst the fire risks, we saw increasing investor focus on second derivative impacts. One of the obvious ones relates to renewables contracts with the CA utilities, especially PCG who drew down their bank lines last week. The primary concern is what will happen to these contracts in the event that PCG files for bankruptcy due to all the fire-related claims. This primarily impacted NEP and CWEN, given they have the most exposure, though there has been somewhat of a relief rally as investors realized the chance of a PCG bankruptcy in the near-term is low. Importantly, even if there was a surprise filing at some point, we believe these power contracts with the California utilities are likely to hold up. We are buyers on the recent weakness and view NEP as a top idea here.