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.
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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.
Both VST and NRG have seen their stock prices cut nearly in half this year, with a lot of pain experienced during the March market volatility (much worse than S&P 500). IPPs have seen their share of tough times and even though we’ve been highlighting the businesses are much better this time around, we’re now sitting in uncharted territory from a valuation perspective. The average MTM EV/EBITDA multiple is sub-6x (4.8x!) for the first time since we started tracking it in 2010 (see Exhibit 12).
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. Within our tables, we’ve now switched to a weekly approach, where we will be tracking demand relative to the prior week on a rolling-basis and the same week one year ago. On those metrics, U.S. power demand actually increased by 1% WoW and is down only 1% YoY for the week-ended 3/21. Additionally, demand is only down 3% relative to the 4-year average. This is despite the continued mild weather, which according to NOAA is down 8% relative to last year and 7% relative to normal when looking across the U.S. in aggregate. So thus far, we’re not sure there has been a meaningful impact from the coronavirus just yet…but we’ll continue to monitor it closely. See more detail within our report that features various charts and tables, as well as the slides that we will continue to update regularly.
Sempra will be holding its annual investor meeting virtually on Tuesday (3/24/20) after the close. As usual we expect detailed segment outlooks on the 2020/2021 guidance of $6.70-$7.50/$7.50-$8.10. We believe the emphasis of the meeting will be mainly on the high-growth utility story and on the financial options of the company in the current uncertain market environment. 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.
On Thursday (3/19/20), in lieu of its cancelled open meeting, FERC issued a press release and commissioner commentary on its proposal to reform its ROE policy for transmission – link (full order here). On balance, we view the notice of proposed rulemaking (NOPR) as positive, given it could double RTO adders to 100bps, use a consistent 250bps cap on incentives, and provide other opportunities for ROE enhancements based on economic benefits. Most positively impacted would be utilities with large transmission businesses in ISOs – FTS, PEG, FE, and ES. However, the rule is not yet finalized and base ROEs remain in flux. This is just the latest in a process that has spanned many years, with various twists and turns to both the positive and negative.
Post close Friday (3/20/20), PCG reached a deal with CA Gov Newsom on the company’s BK exit plan after PCG agreed to further governance items; only modest revisions were made to its previously disclosed financing plan. The deal puts PCG on course to exit by the 6/30 legal deadline. BK court approval is required, but that appears likely, as does CPUC approval. The primary uncertainty now is the issuance of $9B of new equity and $11B of new debt potentially at market this summer. Given the turmoil in capital markets, there is a scenario under which PCG relies on its backstop commitment parties. This guarantees liquidity; however, PCG stock value highly depends on the price of this new capital. With equity backstop parties committed to purchasing shares at no higher than 10x, we see both decent upside to last close price if markets improve but additional downside if they fall further. We remain on the sidelines.
With the coronavirus spread continuing to dictate markets, one of the most frequently asked questions from investors is the potential impact on power demand. This could also be a real-time signal of the virus impact on broader economic growth. We’ve aggregated this data from EIA for the U.S. as a whole, as well as key regions. There is a 1-2 day lag on the data, but we plan to publish updated thoughts on a weekly-basis during this time and will also regularly update the charts as new data is available. Importantly, there are a number of other factors at play in determining power demand, but one of the obvious ones that must be looked at in context is weather. We include this data in Exhibit 3, which we’re able to update weekly from NOAA.