After close on 11/25, a CPUC ALJ issued a proposed decision in the Cost of Capital applications, which will set allowed returns and capital structures for each CA utility’s respective state-regulated rate base in 2020-22. The ROEs would be unchanged for EIX (10.30%) and PCG (10.25%). SRE’s SDG&E electric would get 10.20% vs 10.15% currently. EIX’s SCE would get a 52% equity ratio (vs 48%) – in line with the other two utilities. Balancing fire and inverse risk against a lower interest environment, we see the PD as in line with expectations. The ROEs would be close to the midpoint between the utilities’ requests and intervenors’ recommendations: 115-220bp increases due largely to wildfire risk vs 150-185bp decreases. And the political backlash from recent shutoffs does not appear to have significantly impacted the PD.
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This morning, it was announced that Dutch energy company Eneco would be purchased by Mitsubishi (80%) and Chubu Electric Power (20%) for $4.1B Euros. This followed a sale process that kicked off almost a year ago, which garnered interest from the likes of Shell, KKR, Macquarie, and EDF as well (Total and Enel dropped out earlier). This got us thinking. Asian investors have already shown a keen interest in U.S. power plant investments, as seen by the readily available financing in CCGT new build. Why couldn’t one of these foreign power companies buy a U.S. IPP? Granted, Eneco is a bit different, in that it has a quasi-regulated gas and electric retail business, as well as growing investments in renewable energy that includes offshore wind. But clearly there is an interest here to diversify out of Asia. When we published our annual power supply update back in September, the number of Japanese and Korean utilities investing in U.S. gas plants was endless.
We’ve now been waiting 17 months for FERC to decide on new PJM capacity auction rules since determining its tariff was unjust/unreasonable. There have been a few false starts, but with Commissioner Glick’s recusal on the issue set to end on 11/29 and James Danly’s nomination as commissioner moving one step closer this week, we feel as though an actual order is finally upon us. In this note, we’re simply reviewing exposures to hypothetical scenarios. At the end of the day, it’s probably fair to say that EXC and VST have the most at stake here. However, it’s important to note that the PJM capacity auction is simply not as important as it used to be. EXC has the most capacity in PJM and addressing its subsidized (and non-subsidized) nuclear plants is critical in how this plays out. VST has the second most capacity in PJM, with about 25% of its EBITDA coming from energy/capacity revenues combined in the region.
FERC issued an order today in two MISO transmission ROE complaints, setting a methodology that differed from its last proposal, establishing a 9.88% base ROE and dismissing the last of the two complaints. That 9.88% base is lower than the 10.3% that FERC set a few years ago under a methodology that has since been vacated. FERC did not rule on the four New England ISO ROE complaints, as Comm. Glick – one of the three seated FERC commissioners (two vacancies) – cannot vote on those. But that base ROE also likely would decline under today’s order. Transmission makes up less than half of earnings for the impacted utilities (FTS and ES almost 40%, AEE 20%). To the negative, the base ROEs are now under 10%, which optically looks bad, given they were around 12% earlier this decade and are now in line with the 9.7% average awarded at the state level. But the MISO names will still earn about 10.4% – when including the 50bp RTO/ISO adder.
EEI the last few years has been overshadowed by shock events such as the CA fires and the Trump election win. This year was more blocking and tackling with a focus on refreshed utility capital plans that never seem to hit a ceiling. AEP, ETR, LNT, DTE, WEC, and XEL all gave new and slightly larger capital plans chock full of grid investment, renewables etc. That said, we are no longer seeing EPS growth rates go up as the law of large numbers and equity needs limit growth upside.
The annual EEI conference will be held November 10-12. Management from most of our covered companies will be there. This report is a helpful guide for investors attending and includes questions to ask each company and summary model information.
Now that we had a few days to reflect without an imminent new fire threat, our take is that it was a severe over-reaction by everyone (including us). The fire damage is likely to be largely covered by PCG and fully covered by EIX insurance with no meaningful impact on the wildfire fund. SRE said Friday (11/1/19) they do not see the other utilities’ damages impacting the fund. The Governor has re-doubled his commitment to making sure the PCG BK gets done by the June 2020 deadline, which is helpful for the fund and for the PPA suppliers. The success in limiting damages should be viewed as a good sign of the wildfire fund durability. Conditions the last two weeks were among the worst ever in CA and the framework held up. But the political and investor reaction may take time to resolve.
Stock overreacts to recent fire news; need to get past fire season. EIX has lost over $3B of market cap over the last two weeks on two fires that the company didn’t cause (Tick/Getty); one fire that has damage well below its $1B insurance (Saddleridge); and blame for the 2018 Woolsey Fire that everyone already assumed was EIX’s fault. The stock hit is more than EIX’s $2.6B liability cap in the AB 1054 Wildfire Fund, even though EIX won’t even access it. Even after market, the stock briefly fell 19% when EIX said it likely caused Woolsey. EIX previously took a $2.5B charge for Woolsey and Thomas (2017) Fires. Tick Fire was not caused by EIX, and tonight it was confirmed that Getty was caused by a LADWP pole. Granted, the fires in PCG’s territory, and any new SoCal fires, could impact the durability of the Fund in the extreme, but we believe the liability caps and new prudency standards provide downside protection for EIX. Bottom line is the stock hit is overdone, but it is much easier to own when fire season ends in Dec.
Wolfe Research's Senior Utilities & Midstream Analyst Steve Fleishman hosted a webcast to discuss the Kincade fire, PCG implications, operational and political rissk, Wildfire Fund impacts, EIX value, and renewables PPAs.
The Kincade fire exploded over the weekend amidst record high winds meaningfully increasing damages. PCG’s T-line tripped around the time the fire started. If they are found to be the cause, PCG could be responsible for billions of post-petition claims that come ahead of all current claimants in the PCG BK. Equity value, which was already under pressure from rising claims, could be wiped out. The current Creditor-led BK exit plan will also likely need to be re-worked. Logistically, the targeted June 2020 BK exit deadline for PCG to participate in the wildfire fund now looks very difficult to meet. All this has implications for PCG’s PPA suppliers and the other CA utilities as well. This is the worst case event for CA we hoped would not happen and it raises a lot of questions on how the state will handle this crisis from here. We lower our PT to $3 reflecting a higher likelihood of $0 value.
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