It’s now been over a month since PJM decided on its path forward to hold the annual capacity auction under existing rules in August, absent further guidance from FERC. Meanwhile, FERC has issued a number of orders on other energy related topics, even those specific to PJM like fast-start pricing and a recent IMM complaint on default market offer caps. Yet despite PJM’s (and its stakeholders’) plea for at least acknowledgement that if the auction is run under old rules FERC will refrain from requiring it to be re-run, FERC has remained silent. We’re now almost a year removed from PJM’s original order declaring the capacity auction unjust/unreasonable – surely there has been enough time to contemplate this issue. At this point, we believe it simply comes down to a deadlock along party lines, making it impossible to issue a majority-opinion order. To that end, it appears that we are waiting on a fifth commissioner or commissioner LaFleur to leave (whatever comes first).
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Today (5/16/19), Oncor (80% owned by SRE) closed its transaction to acquire InfraREIT. We therefore terminate our coverage of HIFR. We initially moved to No Rating from Peer Perform following the deal announcement. Investors should not rely on our previous ratings, price targets or estimates for HIFR.
Post close, CAL Fire issued a press release saying PCG’s transmission lines caused the Nov 2018 Camp Fire, which killed 85 and destroyed 18,804 structures. CAL Fire found a second ignition source, also involving PCG’s equipment. CAL Fire did not publicize the report, referring it to the Butte County DA. In some 2017 investigations, CAL Fire referred its reports to local DAs if there was evidence of violations; those reports were not made public, and many of the prosecutors did not bring charges. In those press releases, CAL Fire said that it found evidence of violations; it did not say that in today’s release. Still, the Butte DA and CA AG already are conducting criminal probes. PCG said last Feb that it was “probable” its equipment caused Camp. With PCG accepting CAL Fire’s determination, focus is on damages/fees from Camp and the 2017 fires on which CAL Fire has blamed PCG. Implied pretax damages/fees in the stock is $36B. Although the Camp headline is negative, we believe the stock
The sell-off in IPPs has continued – NRG and VST are both down over 10% in May. The situation has been exacerbated by last week’s ERCOT CDR report. At this point it’s beyond an overreaction and bordering on irrational. We think it’s helpful to provide better context on the CDR, namely that the threshold for capacity inclusion is relatively low. While the report saw 5.6 GW of renewables additions and reserve margins popped up 3%/year in 2021-2023, this merely indicates an interconnection agreement is in place. In reality, many of these projects fail to reach operation.
We hosted investor meetings today (5/13/19) with CFO Gustavo Pimenta. Despite recent stock weakness, the tone of the meeting was constructive with Gustavo highlighting AES focus on de-risking the business and expanding renewable, storage and LNG platforms. Mgmt sees their stock as very cheap on straight P/E, pointing to European peers (eg Ibedrola) which trade near 15x on 2020E whereas AES trades just above 11x. We remain Peer Perform with a $17 PT which is derived using a weighted-average of our three valuation methodologies (SOTP, target FCF, discount utility P/E); see pg 5.
Wolfe Research's Senior Utilities analyst, Steve Fleishman, hosted a webcast on topics including post-earnings takeaways; top ideas, themes, and catalysts; and MLPA preview.
The MLP and Energy Infrastructure Conference (MEIC), will be held May 14-16. Many MLP management teams will be in attendance with a larger number of C-corps this year as well, notably ENB, KMI, TRGP, and LNG. We’re looking forward to it. Four of us Wolves, running around the desert together in Las Vegas. This report is a helpful guide for investors attending and includes lots of questions to ask companies, as well as summary model information. Key industry topics are discussed below with company-specific topics in the body of the report.
Utility earnings rose 5.0% in Q1, slightly above our 4.9% estimate. No companies changed guidance for 2019 but the same companies that disappointed at year end had issues again such as AGR, CNP, and NI (not EVRG, phew). Earnings quality stuck out to us as weak with tax or other gains driving numbers at SRE, DUK, NRG among others. AEP may have been the most incrementally positive with increasing confidence in the upper half of their 5-7% growth rate. Mega project risk continued to overhang D and DUK (ACP) and SRE (more Cameron delays), though SO kept Vogtle on schedule (for now). Finally, weak renewables conditions hurt in Q1 causing misses at AGR, CWEN, and NEP, but the influence of renewables keeps accelerating overall.
AEE 1Q19 EPS of $0.78 beat then-consensus by $0.10, but AEE affirmed its 2019 guidance of $3.15-3.35, as the quarter benefited from some weather and timing items. AEE continues to target 6-8% EPS growth through 2023 off 2018A of $3.05, largely driven by its $13B capital plan. Excluded from that plan is potentially another $200M of wind investment at least. AEE is in talks with developers and could soon announce new projects to meet its “at least 700 MW” target by YE20 (two projects totaling 557 MW already in plan). We estimate growth in the top half of AEE’s 6-8% through 2022; our estimate assumes $250M more wind capex than the $1B planned. AEE beat the UTY by 85bp and is ahead by 200bp YTD. AEE is a low-risk, high-quality name, but it trades at a 1x premium to peers; we await a more attractive point to reenter.
DUK 1Q19 EPS of $1.24 was in line but included $0.06 from a tax gain. DUK affirmed 2019 guidance of $4.80-5.20 and its 4-6% EPS growth through 2023 off 2019. DUK trailed the UTY by 100bp and is among the worst performer YTD, as it faces several overhangs (below). NC legislation could improve sentiment. We see DUK trading at a 7-10% discount to peers, given overhangs, higher leverage and subpar div growth.
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