CWEN stock has fallen 11% this week and 28% since November as key customer PCG spirals toward a likely bankruptcy filing this month. We estimate PCG contracts account for 23% of CWEN parent-level cash flow before corporate interest. As CWEN pays out 85% of free cash (CAFD) as a dividend, the PCG risk is real. When PCG files for bankruptcy, we expect PCG-tied projects to enter technical default where PCG likely keeps paying, but dividend payments to the CWEN parent become restricted at the project level. We update our valuation based on 3 scenarios – 1) Contracts are upheld ($20/sh); 2) Extreme downside case ($11); and 3) a reasonable downside case ($14). We cut our target to $17 from $22 using a wtg avg of these scenarios – implying a positive risk/reward skew. We also see downside support from sponsor GIP potentially taking strategic action.
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What does PCG need from CA to avoid a bankruptcy filing? We think they need line of sight to recovery for 2017/2018 fires and structural changes on a much quicker time frame than currently set. They also need to know someone in CA leadership is willing to negotiate a deal with them – either the Gov office or PUC.
Wolfe Research's Senior Utilities & Midstream Analyst, Steve Fleishman, hosted a webcast to discuss PCG stock views, bankruptcy ins and outs, renewables PPA implications, and EIX and SRE implications.
Dominion points to lower half of 6%-8% EPS CAGR even with SCANA. During the trading day on Thursday (01/10/19) Dominion released an updated investor slide deck. In the slides the company indicated that recent headwinds have pushed EPS growth to the lower half of their 6%-8% range through 2020 off a $3.65/sh 2017 base. This would imply 2020 EPS of about $4.40 assuming a CAGR of 6.5%, below consensus of $4.48; our current 2020E is $4.39. This was disappointing relative to expectations that were biased higher given the accretion from the recently closed SCG acquisition and the stock underperformed the UTY by 1.8% on the day.
We’re remaining bullish on the IPPs into 2019, particularly VST as our best idea for the year (note). We believe both companies are robust generators of free cash that provide attractive opportunities for shareholder-friendly capital allocation. VST is set to generate $4.4B in free cash over the next two years – allocated towards share repurchases (10% of market cap), a growing dividend, and debt paydown towards 2.5x Net Debt / EBITDA. NRG has over $2.5B of capital available to allocate in 2019, with the majority likely going towards buybacks, as the company has already hit its 3x Net Debt / EBITDA target. NRG’s free cash generation through 2020 would account for roughly 50% of its market cap. We believe the two companies can keep the two-year bull-run going in 2019 – share repurchases provide technical support and financial results should prove out the stability of the new IPP model.
Wolfe Research's Senior Utilities & Midstream Analyst, Steve Fleishman, and Midstream Analysts, Alex Kania and Keith Stanley, hosted a webcast to discuss stock ideas and themes for 2019 utilities, midstream, power, and renewables.
We view VST as our most compelling Outperform-rated stock in 2019. The company is attractively valued at only ~6x EV/EBITDA, mid-teens Free Cash Flow Yield, and sub-three Net Debt / EBITDA. Following the DYN merger the company is diversified across competitive markets and has a premier retail business that acts as a balance to wholesale power. We see strong EBITDA generation ($3B+/year) and conversion to Free Cash Flow (60%+) that drives capital allocation opportunities. In total, VST is projected to generate $4.4B of Free Cash Flow in 2019/2020 – allocated towards a mix of share repurchases, dividends, and debt paydown – see Exhibit 5. The share repurchases account for 10% of VST’s market cap and help support the stock. Our $31 Price Target is based on a mix of EBITDA and FCF, implying over 30% upside. Outperform.
Can utilities keep the defensive rally going? We’re skeptical. Utilities beat the market by 1500bps in Q4 2018 and outperformed 670bps for the year. This may continue near term given a host of negative macro signals, but these big defensive utility moves have historically been good times to take profits in the group.
Press reports late Friday (01/04/19) unnerve investors but aren’t that surprising. PCG is considering filing bankruptcy in weeks and selling its gas business, said the reports. The stock fell nearly 30% after-hours. We believe it is logical for PCG to explore all options given the fire liability risk. But we are skeptical of a N-T filing as there is no imminent trigger event. Leadership changes appear a foregone conclusion, as alluded to in PCG’s 1/4 release. Key is whether this helps to get state support, to which PCG’s value is tied.
On 1/2, Dominion closed the transaction to acquire SCANA. We therefore terminate coverage of SCG. We moved to No Rating from Outperform following regulatory approval of the merger last month. Investors should not rely on our previous ratings, price targets or estimates for SCG.
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