This morning (6/19/2019), the OH Supreme Court issued a 4-3 ruling ordering the removal of FE’s distribution modernization rider (DMR) from customer rates. The majority found that in authorizing the DMR, the Public Utilities Commission of OH (PUCO) “failed to place any conditions on the additional funds that would allow the rider to act as an incentive”. Our understanding is that the order is effective immediately, with the DMR benefit ended only on a prospective basis. FE’s $132.5M/yr (post-tax) DMR was originally put into place to help keep its balance sheet healthy while enabling grid mod investment. AES $83M/yr (post-tax) DMR was specifically put in place to de-lever DPL in order to allow for a financially stable utility (prev junk rated). Both have extension requests pending, but only AES embeds approval within its forward guidance.
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CAL Watch – Sen Dodd hints at a wildfire fund of $25-50B
CAL Watch – Bill states property losses from fires; costs for 2018 fires appear higher than last update
PCG – Settles with 14 public entities for $1B related to past wildfires; good step
PCG – CPUC seeks comments on proposals to improve safety culture
EIX – Debt issuance pricing reflects wildfire, downgrade risk
SO – GA Court of Appeals hears arguments from advocacy groups against Vogtle
ES – Settlement on temporary rate increase in NH rate case
PEG – Gas explosion at Ridgefield New Jersey home causes 1 fatality; under investigation
POR – OR bill to boost EV adoption heads to Gov; Cap-and-trade bill passes House, heads to the Senate
AWK – AWK in Europe…like selling water in a desert
ENB – Minnesota agencies slow Line 3 Replacement permit review process; not a big surprise
Midstream – Canadian Prime Minister Trudeau approves Trans Mountain pipe expansion; expected
We hosted AWK senior management in Europe last week. In a region very focused on ESG investing and long-term sustainability, the AWK story was well received. The unique aspects of AWK shine clearer in these meetings, especially the scarcity benefit of being the only large cap water utility in the US. And AWK continues to execute well on its 7-10% EPS growth (targeting upper half) and dividend growth (upper end) targets with no prominent risk issues. Valuation remains the one pushback.
Today (6/17/2019) during market hours, Bloomberg reported that NI has received bids and is considering a sale of its MA subsidiary. The report indicated that a sale of Columbia MA could fetch up to $2B (~2x total rate base). In our view, a sale of MA makes sense and was the primary reason we stuck with our Outperform rating following the gas explosions last fall. A sale would remove the MA overhang on an otherwise solid investment story. We believe a natural suitor to be ES who could buy the property at a decent price, making it a win-win for both parties. NI outperformed the UTY by 180bps on the day following the news.
Last week, the four FERC commissioners (one vacancy) – Republicans Chatterjee (chair) and McNamee; Democrats LaFleur and Glick – testified at a House Committee Oversight hearing. Chair Chatterjee said PJM capacity market reform is “a vexing challenge,” while Comm LaFleur was “deeply, deeply troubled by the delay” in issuing a decision on PJM. We also met last week with industry reps who follow utility issues in DC. Our takeaway: a FERC decision on the contentious case depends on 1) when LaFleur departs, 2) who replaces her, and 3) when the nominee is confirmed. LaFleur, whose term expires this month, reiterated her “time is coming to an end later this year.” Some think that can be next month. President Trump can appoint someone to replace her, fill the vacancy, or both. Three commissioners can be of the president’s party; the Senate must confirm any appointment.
We had DUK management in Canada last week for investor meetings. Our takeaway from the meetings is DUK generally feels good about ultimately lifting some stock overhangs, including ACP, NC legislation, coal ash, SC rulings and levered B/S. Still, DUK set a new relative low last week and is the worst performing utility stock YTD not named PCG. DUK trades at a 3x discount to peers. While steep, we see it trading at 2-3x turns until NC legislation passes (maybe this summer), clarity on ACP Phase 1 (late summer) and certainty on Phase 2 (possibly as late as next summer).
We expect NEE to follow what has been a successful playbook from the last few meetings. This will likely include an extension of the 6%-8% growth rate another year, to 2022, and a deep dive into the factors driving that growth. NEE is verging on being the first US utility to hit a $100B market cap and we doubt there are few companies that size with 8% growth visibility for the next 3-5 years. We also view NEP as an under the radar way to be exposed to record renewables growth alongside the best renewables developer. We reiterate Outperform on NEE/NEP and raise our NEE PT to $210 from $200.
We recently hosted meetings with DTE CEO Gerry Anderson, who maintained an upbeat tone on the company's financial execution thus far in 2019. After a strong Q1, DTE seems well on its way to meeting or beating guidance – which would make it 11 straight years. DTE has one of the best track records in the industry, which has been built through years of careful budgeting and contingency planning. Our Price Target goes up to $129 on group multiples, but we stay Peer Perform given caution on elevated sector valuations.
Coal’s share of the U.S. energy mix continues to shrink given the challenging economics and the push for a low/no-carbon future. One recent development that may accelerate this trend is the use of securitization to pull forward the retirement of coal plants, while limiting the impact on ratepayers from stranded assets. In many instances, utilities own coal plants that still have meaningful book values related to maintenance and environmental upgrades, but are uneconomic, particularly when compared to natural gas or renewables. These coal plant costs are embedded in rate base though and are being recovered from customers. Groups like the Sierra Club, have been pushing for the use of securitization to lessen this burden. Securitization effectively allows utilities to issue low-cost bonds for financing – given they are backed by ratepayers, and thus reduces customer rate pressures.
Our annual utilities pension review – still underfunded, not much progress
Our utilities pension review, with help from Wolfe’s Accounting/Tax team and their comprehensive report, takes a look at the state of pensions in the sector using year-end 2018 data. Utilities remain underfunded for their pensions/OPEB – with most companies in the same place amid weak equity markets and higher rates. This dynamic has reversed in 2019, with yields sharply falling. There remains wide disparity in funding levels and accounting assumptions within our coverage.