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.
Search Coverage List, Models & Reports
Search Results1-10 out of 213
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
After a herculean effort by all parties, EIX updated investors of the financial impact from the wildfire legislation (AB 1054 et al.) on its 2Q19 call. EIX opted into the law’s insurance fund option, which requires among other things EIX to contribute $2.4B upfront by 9/10 (and $100M/yr for 10 years). EIX said it was still “evaluating” how it would finance the contribution, but for modeling purposes to assume half equity and half utility debt. EIX lowered its 2019 guidance to $4.61-4.81 from $4.72-4.92 to account for the incremental equity (on top of $1.5B announced in May). Even after factoring in $2.7B of new equity, EIX shares trade at a 22% discount to regulated peers – a deep value given fire officials have not found that EIX violated any laws in past fires, implying possible cost recovery. We encourage EIX to remove the equity overhang quickly and reiterate our Outperform rating.
Wolfe Research's Senior Utilities analyst, Steve Fleishman, hosted a webcast to discuss changes in the wildfire bill, why EIX and SRE are investable, why there's more concern on PCG, and the path to bill passage.
On Friday (7/5/19), several revisions were made to Gov Newsom’s wildfire reform bill (AB 1054) to hopefully get it passed this week. We believe the initial constructive framework is largely intact, except for provisions related to PCG, which add some new uncertainties as we discuss below. We believe AB 1054 would make CA utilities investable and investment grade again, as it addresses key issues in our CA Manifesto (see report/webinar). Assuming the bill passes, we see EIX and to a lesser extent SRE as reacting positively to less downside risk from future fires. PCG should benefit long-term as well but value risks in the BK have escalated.
Wolfe Research's Senior Utilities analyst, Steve Fleishman, hosted a webcast to discuss their PCG downgrade, CA wildfire legislation, risks to utility ROEs, and power market concerns.
CA Utilities – Believe in the resolute urgency of now
The Utility Trader – Cali trade turns golden; Power has an outage; Midyear recap
FES – Ohio legislators fail to pass nuclear support bill by June 30 deadline
SO – Files GA Power rate case, seeks 10.9% ROE with 10-12% band and 56% equity ratio; expected
KMI – Binding joint tariff open season with TGE for crude transport from the Bakken to Cushing
MMP/PAA – Announces 100 mbd expansion of Saddlehorn pipeline
Permian – Cactus II to begin line fill as soon as this week
Midstream of Consciousness – June stock performance – winners, losers, and balance sheets; Responses from FERC’s ROE NOI
Last Friday, Gov Newsom’s “Wildfire Safety Reform” was put into AB 1054. We believe it would make CA utilities investable and investment grade again, as it includes workable solutions and addresses key issues in our CA Manifesto (see our report and webinar). The bill has some holes, namely for PCG, and additional costs in the form of lost earnings power on mandated safety spend and contributions to a wildfire fund. But a fair liability cap makes the costs acceptable.
Utilities rose 3% in June on the back of continued declines in L-T rates. But the market left utilities in the dust rising 7% for the month. The S&P 500 is now up 17.3% for the first half of 2019, the best performance since 1997. Utilities have held their own up 12.8%, but still trail by 450bps. At least so far, it appears that lower interest rates are helping the broader market more than utilities. Lower rates are a double-edged sword for utilities (see our recent report), as they can lead to lower allowed ROEs in rate cases. Several of the more near-term exposed companies – PNW, CNP, AGR, ED and AEE – were among the worst performers last month.
AB 1054 was updated with Governor Newsom’s proposed legislative language and released very late last night (6/27/19).
- 1 of 22
- next →