Post close 8/16, BK Court Judge Montali maintained PCG’s exclusivity, allowing it to lead the bankruptcy exit process for the time being and allaying investor fears of other more dilutive proposals. This is a relief to PCG. But Judge Montali also ruled that Tubbs victims could pursue a trial, raising the risk that a jury awards plaintiffs many billions of dollars. PCG’s last disclosed offer for all 2017-18 fires (not just Tubbs) was $18B. Resolution of claims is key to PCG’s value. And the Tubbs ruling now puts PCG in a weaker bargaining position. But a jury trial that may last into spring could also impact timing of PCG’s exit – targeted for May 2020 – ahead of the 6/30/20 deadline to benefit fully from wildfire law (AB 1054). Given all the variables on PCG stock, we remain on the sidelines.
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Momentum has no valuation ceiling while risks and uncertainties have no valuation floor. This is the story within utilities and among the market overall. A choppy Q2 due to unfavorable weather and weaker core sales growth seemed to only exacerbate this trend. A few companies appear to be re-rating on lower risk perceptions – ETR, FE, EVRG, SO, EIX, SRE – but otherwise we continue to see more divergence between the pure play safe regulateds vs those with diversified businesses or project/regulatory risk. Given our value focus, we are resigned to keep focusing on the messy ones.
On 8/9, PCG disclosed a $17.9B liability related to claims from past wildfires, those include the latest settlement offers to subrogation holders ($8.5B offer), individual victims ($7.5B), a previously announced settlement with public entities ($1B) and suppression costs ($900M). The disclosure is important because resolution of claims is key to PCG’s equity value. With a ruling on exclusivity this week, the focus will soon be on the PCG’s plan of reorganization (POR) and possibly competing ones, all of which will address claims and financing. PCG has fallen over 20% since June on concerns over who will drive the BK exit, size of claims and risk from 2019 fires when only 40% of damages can be recovered by PCG. On our new 2021E, which incorporates $20B of claims, we see the stock worth $22.
EVRG made it two solid quarters in a row – edging Q2 consensus estimates, while reaffirming 2019 guidance and the long-term outlook. The big buyback program continues to chug along. The regulatory calendar also remains quiet, with an attractive 4+ year rate case stay-out while interest rates are low. EVRG is also looking at reallocating and/or increasing capex in Missouri, given PISA in MO and noise in KS. The Sibley complaint should also be resolved favorably in October. There’s still some work to be do, but this was another positive step.
PNW reported 2Q19 EPS of $1.28, missing consensus of $1.42 and our $1.38. The $0.20 YoY decline was largely driven by unfavorable weather. May was the coolest since 1980 and June was the coolest in the past 8 years. As a result, PNW is now expecting to come in at the low-end of its $4.75-4.95 guidance. Other items putting pressure on numbers include the ACC’s inaction on the 4 Corners step increase (worth $0.07) and the customer disconnection moratorium for which PNW expects to incur a $5-10M pre-tax hit. PNW is managing O&M to help offset some of these impacts, but absent significant weather in Q3, it’s unlikely PNW would be able to get back to the midpoint.
PPL reported 2Q19 of $0.58, slightly ahead of then-consensus of $0.56. PPL affirmed its 2019-21 EPS outlook. PPL also said Ofgem’s recent open letter consultation for RIIO-ED2 was generally in line with expectations. But the elephant in the room continues to be UK political uncertainty, tied to Brexit. The GBP has sunk to near post-Brexit-vote lows ($1.21 last week), and not coincidentally PPL stock fell to 52-week lows relative to peers in the past week. The stock gained 80bp over the UTY after reporting today but trails by ~1000bp YTD. We believe the market will revert to a more reasonable valuation of the stock when the UK uncertainty has abated. Meanwhile, investors are getting paid a juicy yield to wait – a premium in the current market environment.
This morning (08/06/19) DUK reported 2Q19E of $1.12, beating then-consensus of $0.98 in part due timing of O&M (+$0.07) and better weather than normal (+$0.08). But DUK reaffirmed its FY19 guidance of $4.80-5.20, despite a solid 1H19 because Q3 can be highly variable. Prior-consensus for FY19 was $4.92; our 2019E was $4.93 but is now $5.00 on the new disclosures. Our 2020-22E are unchanged and we still see EPS growth of 4.5% – in the bottom half of DUK’s 4-6% target. The Q2 beat helped DUK stock outperform the UTY by 100bp today, but it still lags by 1100bp YTD and trades at a 14% discount to peers. While steep, we see it trading at a 10%+ discount until there is certainty on NC legislation (this summer), ACP Phase 1 (possibly this year) and Phase 2 (potentially next summer). Plus, DUK is expected to have several material rate cases by yearend: IN (recently filed) and two in NC.
This past Thursday (8/1), a gas explosion leveled a Franklin County home in Pennsylvania and NI’s Columbia Gas was at fault. We saw little news coverage following and don’t believe many investors were aware last week. Thankfully there were no deaths / life-threatening injuries sustained as a result, but the incident is alarming given what transpired in the Merrimack Valley last year. At a high-level, the cause of the explosion appears to have closely mirrored that in MA. Columbia crews were replacing a low-pressure gas system and failed to recognize that the home was connected to the system. Thus, when re-activating the line, there was no regulator in place to moderate the pressure going into the home, leading to the explosion. This was the one thing NI could not let happen – Downgrade to Peer Perform.
WEC posted 2Q19 EPS of $0.74 – beating consensus’ $0.70 and our $0.72, while also topping $0.70-0.72 guidance. Q2 was up versus $0.73 last year on cost cutting and wind PTCs, offsetting mild weather. Mgmt. raised 2019 guidance to $3.50-3.53 (from $3.48-3.52) and still expects being at the top-end of the range – likely extending its streak of beating guidance every year since 2004. The stock outperformed the group by 200bps in a severe risk-off tape – the ideal scenario for a high-quality utility sector bellwether.
Quietly our Wolfe Yieldco Index has become the top income sector YTD and the only one beating the S&P 500 (see Ex 1). Yieldcos have overcome the huge uncertainty caused by PCG’s bankruptcy filing in January. Why have they done so well? 1) long-term contracts that are not subject to ROE resets like utilities so should benefit directly as interest rates fall; 2) the neighborhood improved meaningfully as parent companies changed from distressed owners to higher-quality parents (SunEdison to Brookfield, Abengoa to Algonquin, NRG to Global Infrastructure Partners); 3) Its Renewables stupid – the top growth space in energy with huge economic and tax subsidy momentum. While we are a bit wary of competition and financial discipline in renewables, we think the backdrop remains bullish. There is no better way to play all of this than NEP given their connection to industry leader NEE, huge growth backlog, cost-of-capital advantages and visibility on 15% dividend growth for at least the next 5 y
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