PCG did not come with a pitch or agenda but simply to update large holders on the bankruptcy. They see two potential paths: the expedited path and the long dated one. PCG should know in 90 days whether the expedited path can work – thus June madness. If expedited, a plan of reorganization could come summer 2019 and bankruptcy exit by Q3 2020. If not, dates could move out a year. Our Outperform essentially counts on the expedited path since it’s premised on a timely resolution ahead of the next fire season.
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We recently hosted meetings with management in Australia. We came away with more confidence that AEE can execute on its 6-8% EPS growth target through 2023 off 2018A of $3.05, as cost reductions create headroom for $13B of investment, over half of which is slated for MO. And we believe there is potential to add another roughly $500M of renewables. We estimate growth in the top half of AEE’s 6-8% through 2022 – above that of its peers. And AEE is a low-risk, high-quality name, given its operations are in constructive jurisdictions with timely cost recovery. But AEE trades at a 1x premium to peers; we are looking for a more attractive point to reenter.
Several companies rebased their growth rates that effectively lowered long-term numbers - AGR, EVRG, CNP, DUK and NI. While these were all for different reasons, we see more strain in utilities to keep growing 5% or more. We also saw several companies talk to slower dividend growth for the first time in several years – DUK, PPL, EIX, NI, and D. Mega project risks and event risks seem to be spreading in the sector. Risk-averse investors tell us they are seeing their investable universe shrink as they try to avoid project risk, big equity needs, poor management, higher-risk businesses, and of course, CA. The problem is the “clean” companies keep trading at higher and higher multiples which in and of itself becomes a risk.
In the last earnings call of the YE18 utility reporting season, EIX disclosed a $2.5B ($1.8B after-tax) charge related to wildfire claims. The amount/timing are somewhat surprising, but EIX warned last fall about potential involvement of its equipment in the 2017 Thomas Fire, which caused over $2B of insured losses when including subsequent mudslides. Then, the Woolsey Fire caused damage in Nov 2018, with over $3B of insured losses. CAL Fire has yet to determine the cause of either fire. EIX has underperformed the UTY by around 300bp YTD. We believe any legislation that limits or eliminates wildfire liability risk to utilities would benefit EIX, but the upside to EIX stock is much less than that to PCG (see note).
PCG said it is probable that its equipment will be determined to be an ignition point of the 2018 Camp Fire; PCG took a $10.5B pre-tax charge in 4Q18. To date, PCG has charged $14B related to Camp and the 2017 North Bay Fires. PCG said fire liabilities could exceed $30B. We believe the stock reflects over $35B. PCG shares trailed the UTY by 470bp. But we believe the decline was tied more to a WSJ article implying PCG deferred maintenance on a suspected line in the Camp Fire and concern over potentially negative headlines related to pending CPUC investigations and critical rulings from Judge Alsup (federal judge overseeing PCG post San Bruno conviction). We remain optimistic a deal can be worked out with key stakeholders ahead of fire season this fall.
AGR held an investor update today (2/26/19) – re-basing off a lower 2018 ($2.21), but still targeting 8-10% EPS growth through 2022. The bar was relatively low after pointing to ongoing headwinds on its year-end call last week, but the update fell short in our view. The implied 2021E assuming linear 9% growth ($2.86) was still light versus consensus/us after downward earnings revisions last week. We can appreciate the shift to several more conservative assumptions across the utilities / renewables business that pressured the long-term outlook. However, 2022 guidance was effectively lowered by $0.35 at the midpoint relative to last year’s Analyst Day, even with the inclusion of the positive earnings impact from NECEC and Vineyard Wind. The stock fell by 100bps on the disappointing update, but given AGR’s history of missing forecasts (see Exhibit 5) and the mega-project risk, we remain Underperform-rated.
EVRG issued 2019 guidance and updated its long-term plan on Friday (2/22/2019), both of which missed expectations and the stock fell over 700bps. Guidance for the year of $2.80-3.00 missed our estimate and the midpoint of the long-term growth rate by a dime, half because of a major ice storm in January. Longer-term, EVRG re-based the growth rate off the 2019 midpoint and extended the outlook to 2023 at 5-7%. This was down from 6-8% over 2016-2021 previously, with mgmt. now pointing to the lower-half of this range. The implied earnings miss in 2021 of $0.08 was disappointing, but communication around the financial outlook was weak – likely exacerbating the stock move. While frustrating, the stock reaction seems overdone relative to the outlook changes
On Friday (2/22/2019), LNT reported 2018 EPS at $2.17 – just edging us/consensus and finishing in the top-half of upwardly revised guidance. Relative to $1.93 last year, drivers included favorable weather, rate relief and higher AFUDC. Weather was a $0.12/sh swing factor year-over-year, and on a normalized basis 2018 reflected 6% growth. Additionally, guidance for 2019 of $2.17-2.31 was reaffirmed. Going forward, LNT expects continued 5-7% EPS growth off a temperature-normalized base of $2.11 in 2018.
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