Wolfe Research's Senior Utilities & Midstream Analyst Steve Fleishman and Midstream Analysts Alex Kania & Keith Stanley hosted a Fireside Chat with Duke Energy CEO Lynn Good.
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We hosted virtual meetings with management and Australian investors. Like its peers, AEE is focused on providing safe and reliable service during the pandemic. AEE said it is too early to gauge the financial impact but touched on sales and regulatory frameworks. Half of revenue is decoupled (FERC, IL). In MO, AEE has exposure to weaker sales, but electric margins are roughly 50% residential, 40% commercial and 10% industrial. In Feb, AEE extended its overall 6-8% EPS growth to 2024 (off 2020 guidance), driven by 9% rate base growth. AEE stock has beaten the UTY by around 600bp and trades at nearly a 1x turn premium to the average regulated. But AEE is still at a 1.5-2.0x discount to other low risk, high quality utilities. Outperform.
Utilities fell 10.2% in March just slightly ahead of the S&P 500 decline of 12.5%. At the March lows in the market, utilities were actually trailing the S&P but they rallied strongly off the bottom. Investors keep asking the same three questions: 1) Why aren’t utilities doing better in the downturn?; 2) Why aren’t utilities doing better in such a low rate environment?; and 3) Why are utilities so volatile right now? We think the answer to all of these can be seen in credit markets. While 10-year T-bond yields fell over 50bps in March (to 0.61% from 1.15%), utility IG corporate bond yields jumped over 100bps (to 4.36% from 3.27%). Utilities are very reliant on accessing capital markets and are also viewed as corporate bond substitutes so we think the jump and volatility spikes in these corporate bond yields answer all the questions above. The good news is we started seeing a loosening of the IG credit markets at month end which we think bodes well for utility performance from here.
We hosted a fireside chat with FirstEnergy CEO Chuck Jones today, where he pointed to a number of examples as to why the stock’s valuation discount should narrow, as investors better appreciate the low-risk operations and capital plan, supported by constructive regulatory conditions with no major rate cases, and backed by a track record of delivering on financial targets. We’re moving our Price Target to $46 to reflect current multiples. FE is our best idea amongst regulated utilities. Below we summarize the key talking points from our chat and new slides.
Wolfe Research's Senior Utilities & Midstream Analyst Steve Fleishman and Midstream Analysts Alex Kania & Keith Stanley hosted a fireside Chat with FirstEnergy CEO Charles Jones
We’re upgrading our rating on PEG to Outperform from Peer Perform. The stock has de-rated in recent months on two main concerns: transmission ROEs and PJM capacity market uncertainty. These are valid, however, the stock is currently trading at a big discount to the regulated average multiple. PEG’ utility business is well-run with a track record of incremental capex opportunities and constructive regulatory outcomes. Long-term, PSE&G is well-positioned for New Jersey’s clean energy agenda. Further, we view PEG as an ESG winner with a T&D utility and nuclear/gas power fleet. We move our Price Target to $58 – implying 30% upside.
We’re updating our commentary on U.S. power demand in accordance with updated EIA data, as well as the latest weekly weather data from NOAA. Power demand decreased by 3% WoW and is down only 2% YoY for the week-ended 3/28. Additionally, demand was only down 3% relative to the 4-year average. This is similar to last week’s update, where demand was only down modestly when looking at similar time frames. Additionally, weather remains mild throughout the majority of the country. Heating degree days were down 5% relative to last year and 6% relative to normal when looking across the U.S. in aggregate. While much of Europe has already seen meaningful demand destruction from the coronavirus, the U.S. is holding in particularly well thus far. We’ll continue to monitor the situation here with weekly updates at 4:30pm EST on Mondays. See more detail within our report that features various charts and tables, as well as the slides that we will continue to update intra-week.
While the equities have been dramatically impacted, the bonds of the IPPs have been relative winners within the broader market volatility. For example, looking at recently issued medium-term debt – both NRG and VST are seeing bonds trading back at par value and yields at 5-6%. NRG’s 9-year unsecured debt bottomed around 90 (from 105-110) with a yield to maturity that is up 150bps to mid-5%s. Similarly, VST’s 7-year unsecured debt also bottomed around 90 and is back at par (~105 originally) with a YTM up less than 100bps to 5%. The S&P High Yield Corporate Bond Index has seen average yields jump 340bps to 6.88% on Friday from 3.43% on March 4.
The Wolfe Utilities & Midstream team hosts a webcast on Fridays at 11:00AM ET to discuss utilities & power news and themes for the week. Presenting analysts include Steve Fleishman (Utilities & Power), Keith Stanley (Midstream), and Alex Kania (Midstream).
We’re publishing our utilities pension review a bit earlier this year, as this has come into sharp focus amid the market volatility. We now have the data available from Wolfe’s Accounting/Tax team, who published a comprehensive report earlier this week. We look at the state of pensions in the sector using year-end 2019 data. Overall funding levels improved and accounting assumptions became more conservative. However, weak equity market returns could be a pressure in 2020.
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