Post 10/15 close, EXC announced Anne Pramaggiore, CEO of Exelon Utilities, would retire effective immediately. Her successor is CEO of EXC’s BGE utility, Calvin Butler. Ms. Pramaggiore, 61, was appointed CEO in May 2018, after serving 6 years as head of EXC’s largest utility, ComEd, serving Northern IL. Earlier this month EXC disclosed it had received a second subpoena from the US Attorney’s Office for the N. District of IL. And last week, a warrant for IL Sen. Sandoval’s offices included items related to four unnamed EXC officials. The warrant sought items related to many other individuals / entities unrelated to EXC. We think the investigation will be an indefinite overhang on EXC stock; but it is trading at utility value ($47), giving no credit to EXC’s nuclear fleet, in an increasingly carbon focused political landscape at the state and potentially federal level. We still see reasons to hold on through the uncertainty.
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It may have went under the radar, but last week FES reached a settlement with labor unions in its pending bankruptcy proceeding – resolving all issues and filing for approval at a hearing tomorrow (10/15). FES assumes all collective bargaining agreements in the settlement. We now expect the plan of reorganization to be confirmed by the judge. Once complete, the only remaining step before FES can emerge is the NRC licenses transfer for its nukes. FES filed for approval in late-April, with this typically taking 6-9 months. All appears to be on track to emerge by year-end – about one year after the last power generator came out of bankruptcy (GenOn).
EIX stock hit but should be covered by insurance. Several fires broke out in SoCal late last week, the largest of which was the Saddleridge Fire, reportedly started late Thursday (10/10) in Sylmar (northern LA County). As of midday 10/13, CAL Fire reports Saddleridge is 41% contained, with 8k acres burned, at least 25 buildings destroyed, and one fatality. Mandatory evacuations, which peaked at nearly 100k people, have been called off. The ignition site and cause remain under investigation. With reports that the fire was first spotted near an EIX transmission tower, we expect investors will be on edge. But we see limited downside to the stock—which trailed the UTY by 340bp Friday—from this event because (i) progress has been made to contain the fire, (ii) limited destruction relative to the Woolsey/Thomas Fires, and (iii) EIX’s $1B of net wildfire insurance.
Wolfe Research's Senior Utilities & Midstream Analyst Steve Fleishman hosted a webcast to discuss PCG implications, CA outages, MO regulation post-Sibley, FTS initiation, EXC and IL, election trade, and DUK legislation in NC.
We are initiating coverage of Fortis (FTS-US) at Peer Perform with a $45 Price Target. FTS is nearly 100% regulated with T&D focused operations – qualities investors covet in today’s market. Two-thirds of earnings are derived from U.S. utilities following a series of acquisitions from 2012-2016. Regulatory exposure spans from constructive jurisdictions (transmission) to challenging (Canada, Arizona). Rate base growth of 7% is average but low-risk, and should drive average earnings growth at 5.5%. The balance sheet is far weaker than U.S. peers. With a balanced risk/reward skew and trading at just below an average multiple (~19x), the stock looks close to fairly valued.
After market 10/9, BK Judge Montali terminated exclusivity for PCG, dealing a blow to the its exit plan. But he said only the Ad Hoc Creditors (led by Elliott/PIMCo) with the Torts Committee (fire victims), can proceed with the proposed plan they announced last month. Judge Montali wrote: “A dualtrack plan course going forward may facilitate negotiations for a global resolution and narrow the issues...” Under CA’s recent wildfire law, PCG must exit BK by 6/30/20 to benefit in the states’ Wildfire Fund. PCG ended after-hour trading (8pm EDT) at $8.00/sh; 27% below the previous close. We now expect PCG’s bargaining position with victims to be weakened, claims likely around our previously assumed $25B, and the stock value boiling down to how the exit will be financed – a key unknown. Our estimates and PT assume PCG pays $25B in claims. But the cost of financing plays a critical role. And if Creditors’ prevail, then existing PCG shareholders will effectively be wiped out. All of this uncertainty on top of the risk of another major fire this fall keeps us on the sidelines.
Today (10/09/19) during its agenda meeting, the Missouri PSC held a case discussion regarding the accounting complaint related to Evergy’s retirement of the Sibley coal plant. At the end, the commission indicated a 3-2 vote in favor of the complainants (MECG/OPC), and against EVRG, as well as MO PSC Staff. A formal order is yet to be issued, but this is a disappointing outcome – both from a financial and regulatory perspective. Complainants had estimated O&M cost savings of $27M and Missouri’s regulation had been trending positively.
While 2Q19 was certainly a quarter to forget from a power pricing perspective, Q3 provided a sharp reversal that should support generators as we approach earnings season. Summer finally showed up in Texas during mid-August, with real-time price spikes causing a strong uplift in the forward curve. ERCOT 2019 was up 30%, followed by a ~15% increase in 2020, and more modest uplift further out on the curve. Pricing for 2019/2020 forwards is now fairly similar, before backwardation reemerges in 2021. PJM and New England pricing saw modest uplift (~5%) in 2020 as well. California was the primary region where forward prices fell – between 5-10% across 2019-2021. We expect IPP hedging programs to likely have benefited given open positions in 2020 headed into August. For all the quarter-over-quarter power price changes, please see our file.
Wolfe Research's Senior Utilities Analyst Steve Fleishman hosted a webcast to discuss post-conference takeaways.
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