Last week was the first time that power prices trended in the right direction in quite a while. In ERCOT, the forward curve was up a few percentage points in 2019/2020 and little changed further out (though it has held up relatively well), while real-time/day-ahead markets showed some signs of life. As temperatures pushed higher and load got within 3 GWs of last year’s record (73.3 GWs), there were several brief periods where pricing got well into the triple digits (peaking at ~$600-700/MWh). This week, temperatures are forecast to rise towards seasonal norms in the upper 90s. The Mid-Atlantic also finally heated up and perhaps saw a moderation in forward hedging activity, driving higher gas prices, and seeing the PJM forward curve rise over 5% across 2020-2022 (2019 was up modestly). There’s still a long ways to go to reverse weeks of power price pressure, but for once our mark-to-market estimates are going up and not down.
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We met with SO mgmt and toured its Vogtle nuclear project in GA. Mgmt said Vogtle is progressing on track and the site was bustling with activity, workers welding, cranes lifting and a lot of equipment in place. From the untrained eye, much has been done but there appears to be much work left. SO sees peak construction from Aug to Mar, with 75 new people added weekly to the 4600 already on site. SO has several different paths to achieve in-service by the regulatory-approved schedule of Nov 2021/22 for Units 3/4. And its “chase” date is May 2021/22, though that appears unlikely. Given its progress and confidence, further overruns may be limited. But we think that is reflected in the stock’s 1250bp of outperformance YTD. With the likely adversarial Staff report imminent, we take a wait-and-see approach on the stock.
While not quite as bad as the last few weeks, power prices still fell on balance last week. PJM was again the worst – down 3-4% in 2020/2021. ERCOT also slipped by about 1% across the curve. The recent power market meltdown has become much more of a PJM issue than ERCOT. In addition, we see ERCOT as having the better chance of bouncing. First, there is greater chance of spot market volatility – reserve margins are tight (not the case in PJM). Second, ERCOT has strong load growth, there is no conventional new build, and the market is headed towards becoming overly-reliant on intermittent renewables. PJM on the other hand, is still seeing gas plant new build move forward, which we are particularly concerned about heading into the capacity auction.
Wolfe Research's Senior Utilities analyst, Steve Fleishman, hosted a webcast to discuss changes in the wildfire bill, why EIX and SRE are investable, why there's more concern on PCG, and the path to bill passage.
On Friday (7/5/19), several revisions were made to Gov Newsom’s wildfire reform bill (AB 1054) to hopefully get it passed this week. We believe the initial constructive framework is largely intact, except for provisions related to PCG, which add some new uncertainties as we discuss below. We believe AB 1054 would make CA utilities investable and investment grade again, as it addresses key issues in our CA Manifesto (see report/webinar). Assuming the bill passes, we see EIX and to a lesser extent SRE as reacting positively to less downside risk from future fires. PCG should benefit long-term as well but value risks in the BK have escalated.
We highlighted this last week in our “Uh oh” report, but pricing continued to deteriorate further since then. Now that the second quarter has officially come to a close, we know where companies stand if outlooks are marked as of Q2-end. Clearly, 2019 prices were crushed across the country given the mild start to summer – led by 13% and 24% drops in PJM and ERCOT ATC pricing respectively. Further out on the curve, PJM West forwards fell 13-14% in 2020/2021, New England was down 10% in 2020 and 6% in 2021, while ERCOT fell 8-9% in 2020 and 4% in 2021. You can see all the quarter-over-quarter changes in our file
Wolfe Research's Senior Utilities analyst, Steve Fleishman, hosted a webcast to discuss their PCG downgrade, CA wildfire legislation, risks to utility ROEs, and power market concerns.
CA Utilities – Believe in the resolute urgency of now
The Utility Trader – Cali trade turns golden; Power has an outage; Midyear recap
FES – Ohio legislators fail to pass nuclear support bill by June 30 deadline
SO – Files GA Power rate case, seeks 10.9% ROE with 10-12% band and 56% equity ratio; expected
KMI – Binding joint tariff open season with TGE for crude transport from the Bakken to Cushing
MMP/PAA – Announces 100 mbd expansion of Saddlehorn pipeline
Permian – Cactus II to begin line fill as soon as this week
Midstream of Consciousness – June stock performance – winners, losers, and balance sheets; Responses from FERC’s ROE NOI
Last Friday, Gov Newsom’s “Wildfire Safety Reform” was put into AB 1054. We believe it would make CA utilities investable and investment grade again, as it includes workable solutions and addresses key issues in our CA Manifesto (see our report and webinar). The bill has some holes, namely for PCG, and additional costs in the form of lost earnings power on mandated safety spend and contributions to a wildfire fund. But a fair liability cap makes the costs acceptable.
Utilities rose 3% in June on the back of continued declines in L-T rates. But the market left utilities in the dust rising 7% for the month. The S&P 500 is now up 17.3% for the first half of 2019, the best performance since 1997. Utilities have held their own up 12.8%, but still trail by 450bps. At least so far, it appears that lower interest rates are helping the broader market more than utilities. Lower rates are a double-edged sword for utilities (see our recent report), as they can lead to lower allowed ROEs in rate cases. Several of the more near-term exposed companies – PNW, CNP, AGR, ED and AEE – were among the worst performers last month.
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