These calls were in place of a long-planned Sydney investor trip that was understandably cancelled due to the Camp Fire.
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Last week, the PA Nuclear Energy Caucus released a report (link), detailing the impact of losing in-state nuclear plants and providing options to save them. Ultimately, the report favors modifying the state Alternative Energy Portfolio Standards (or implementing ZECs) with a “safety valve” that (depending on FERC’s PJM capacity outcome) would allow PA to adopt FERC’s proposed capacity construct designed to accommodate state’s preferred generation programs (Fixed Resource Requirement). The report strongly made the case against “doing nothing” and suggested moving to a carbon pricing program longer-term. The caucus has bipartisan backing heading into the 2019 legislative session. However, opposition is expected to come from the utilities, consumer groups, and strong oil & gas lobby. The IPPs are likely split, as FES and TLN could benefit given nuclear ownership.
Market volatility in October caught many off-guard and the hope was things would settle down post earnings. Well they got much worse spurred by the disruption of the CA fires. PCG and EIX ended November down 44% and 20%, respectively, on the heels of the destructive fires. These were popular value names in the utility space and their sharp stock collapses clearly caused investor pain. However, the second derivative impact was just as meaningful. The “Anything but California” trade took over amidst utilities, lifting already expensive low-risk utilities to higher levels. Many investors got just as hurt by being short or underweight these names as being long CA. With investors suffering and year end approaching, the last two weeks have showed signs of portfolios shrinking and extreme risk-aversion which has only exacerbated the problem. Everyone needs a holiday.
We saw two new power plant sales announced in the last week – first FES’ West Lorain peaker to Starwood Energy and then a trio of Emera plants in ISO-NE to Carlyle Power. West Lorain went for $264/kW, which seems consistent with recent history in PJM for peaking assets. The Emera plants, three CCGTs totaling 1,123 MWs, went for $525/kW. Notably, Emera acquired these same plants back in 2013 for $482/kW. Ironically, NEPOOL forward pricing was hovering around $50/MWh back then – similarly to where it currently sits. So this price point seems relatively fair.
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.
EEI was held in San Fran this week with the Camp Fire still burning and the host utility PCG unable to attend. EIX attended but there was not much they could really say. The CA situation cast a pall over many investors and it made every other utility story sound pretty darn good relative. The other big event was the FE coming out party as a fully regulated utility with an earlier than expected dividend growth resumption. As the CEO said, after 40 years of digging out of holes, FE is finally out and plans to never dig a new one. Higher capital plans, renewables growth, rising equity ratios, and portfolio restructuring were other key themes at the conference.
The annual EEI conference will be held November 11-13. Management from most of our covered companies will be there. This report is a helpful guide for investors attending and includes questions to ask each company and summary model information. Some of the industry topics we will be focusing on include:
After close on 11/13, PCG announced the draw down of its revolving credit facilities, both at the utility ($3.0B) and the parent ($300M). PCG made the borrowings for greater financial flexibility and said the borrowings would be used for general corporate purposes, including upcoming debt maturities. PCG has about $800M of upcoming debt maturities, with about $500M of floating rate notes due in Nov 2018, $45M tax exempt debt due in Dec 2018 and $250M term loan due in Feb 2019.
PJM submitted reply testimony last week in the FERC docket addressing changes to its capacity auction as it relates to subsidized resources. PJM largely reiterated its original position – keeping an expanded MOPR and resource carve-out option as is, and rebuking concerns that the extended RCO repricing mechanism would lead to unreasonably high clearing prices. Interestingly, PJM ran scenarios that assumed the three ZEC plants are carved out and load is left in – resulting in only a $11/MW-day higher RTO price, but an over $80/MW-day higher EMAAC/PS price. PJM also came out against EXC’s proposals to allow partial resource carve-outs and for subsidized resources to toggle in/out of the market (during the subsidy). Lastly, PJM is committed to maintain the auction as scheduled for August 2019 – noting resources must only determine whether they are subsidized and subject to the MOPR by then, followed by three years to work with states to set capacity payment arrangements for carved-out resources. For now a final FERC decision is expected in early 2019.
Late last week, devastating fires broke out in NorCal and SoCal, with reports that power lines tripped around the time the fires began, sending EIX/PCG shares down 12-18%. As of midday 11/11, 200,000 acres had burned and thousands have evacuated the impacted areas. In PCG’s territory, the Camp Fire killed 23 people, destroyed 6,500 structures, and threatens 15,000 more. The fire decimated Paradise (pop. 27k); and it is only 25% contained. In EIX’s territory, the Hill and Woolsey Fires killed 2 people, destroyed 179 structures and threaten over 57,000 structures. The fires have forced evacuations in some of the wealthiest parts of SoCal. The Hill Fire is 70% contained; Woolsey is only 10%. We remain on the sidelines on EIX/PCG, as fire damages could worsen and fire season is not over. While it may take a while, we think there are good arguments that utility financial health will be protected down the road, as discussed in the note.
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