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PCG did not come with a pitch or agenda but simply to update large holders on the bankruptcy. They see two potential paths: the expedited path and the long dated one. PCG should know in 90 days whether the expedited path can work – thus June madness. If expedited, a plan of reorganization could come summer 2019 and bankruptcy exit by Q3 2020. If not, dates could move out a year. Our Outperform essentially counts on the expedited path since it’s premised on a timely resolution ahead of the next fire season.
We recently hosted meetings with management in Australia. We came away with more confidence that AEE can execute on its 6-8% EPS growth target through 2023 off 2018A of $3.05, as cost reductions create headroom for $13B of investment, over half of which is slated for MO. And we believe there is potential to add another roughly $500M of renewables. We estimate growth in the top half of AEE’s 6-8% through 2022 – above that of its peers. And AEE is a low-risk, high-quality name, given its operations are in constructive jurisdictions with timely cost recovery. But AEE trades at a 1x premium to peers; we are looking for a more attractive point to reenter.
We are expecting a positive tone at Sempra’s analyst day next week. While we do not believe that there will be a lot of major new announcements at the meeting, management will likely reinforce both the solid underlying growth prospects on the current platform and outline growth opportunities particularly in LNG. The stock continues to trade at a significant discount to the regulated group despite an improving EPS mix and above-average growth potential. We are boosting our TP to $128 from $124 reflecting higher group multiples; Outperform.
We’ve discussed this on numerous occasions, but we continue to find the balanced business mix in the new power sector to be attractive. Both NRG and VST are built to withstand the cyclical nature of power markets, as retail provides a natural hedge to wholesale power. In the table below we put numbers around how much retail contributes from an EBITDA and load perspective by company, then talk valuation.
On Friday (03/15/19), Dominion and Connecticut governor Lamont announced a settlement on a contract that would allow Millstone to stay open. The contract is for ten years and 9 TWh per year (over half of the plant’s output). Pricing was not disclosed but according to the company it is above the current forward curve (recall that CT’s first proposal was approximately market pricing for the first 3 years). The outcome means modestly higher earnings but still within D’s current guidance. More importantly it de-risks over half of Millstone’s output.
We believe the company’s recent track record of solid execution and signs of a more stable regulatory environment in Oklahoma have spurred the stock’s strong relative run over the last several months. In addition, OGE has one of the best balance sheets in the sector which was top of mind for investors following tax reform last year. ENBL volatility presents risk, but is also potential upside – Peer Perform.
We are reiterating our Overweight rating on the IPP sector, as we continue to see attractive value at both VST and NRG – relative to our sector coverage and the broader market. We’ve refreshed our screen in the table below – searching across the S&P 1500 for stocks that exhibit strong free cash flow generation supported by a solid balance sheet – setting parameters at Free Cash Flow yield > 15%, Net Debt / EBITDA < 3x, and EV/EBITDA under 8x. Only 15 companies (1%) in the S&P 1500 fit.
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