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.
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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.
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.
We hosted a virtual meeting with PCG’s CEO/President Bill Johnson and CFO Jason Wells (see replay). They talked about recent milestones both at the bankruptcy court and CPUC, internal restructuring efforts, and financial plans. We see meaningful upside to PCG stock value if markets continue to improve, but less so if markets do not. We remain on the sidelines.
We hosted a fireside chat with DTE Energy CEO Jerry Norcia today, where he highlighted the company’s long track record of execution and manageable exposure to the current macro headwinds. We’ve refreshed our Sum of Parts valuation and moved our Price Target to $104 to reflect current multiples. The stock is currently trading at just above utility net-parent value, with little credit for the non-utilities. We highlighted this disconnect, but remain Peer Perform until the energy backdrop settles down. Below we summarize the key talking points from our chat and new slides.
We hosted a virtual meeting with EIX’s CEO/President Pedro Pizarro, CFO Maria Rigatti and utility EVP of Operations Steve Powell. Management discussed a variety of issues, but top of mind were the impacts of Covid-19, financial flexibility, and wildfire-related prevention and cost recovery. They also touched on other items, such as clean energy efforts, regulatory proceedings and potential 2017-18 fire liability. We think EIX’s roughly 30% discount to peers is extreme, as equity needs are modest and CA’s wildfire framework generally caps financial liability to EIX. We reiterate our Outperform.
We thought the messaging of the virtual investor meeting was generally in line with our expectations: strong utility growth with the cash flow boost of the LNG business. The absence of new equity to fund growth while still hitting debt targets was also a plus but we’d like to see the rating agencies’ reactions. We see the stock as highly attractive here – buy the utilities at a reasonable price and get the contracted LNG and Mexico operations for free - Outperform.
Last week, the corporate bond market largely shut down and even a couple investment grade utility deals did not get done (ETR, AEP). Commercial paper markets have also been under stress and utilities are an active user. These events combined with existing worries over weaker sales and higher bad debts started raising more investor questions on utilities’ liquidity positions. This report provides a detailed rundown of company specific liquidity information. The overall takeaway is that utilities have ample liquidity to get through a temporary crisis period in capital markets, but it will be more difficult if it sustains for an extended period.
We hosted a fireside chat with Vistra Energy CEO Curt Morgan today, where conviction in the financial outlook and resilience of the integrated business model (low cost/leverage) was reaffirmed, even amidst the challenging macro backdrop. We continue to see compelling valuation upside. We summarize the key talking points below.
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