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.
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1-10 out of 121 Posted on March 4, 2019
Filed under: Steve Fleishman, Utilities & Power, Gas/Power Infrastructure, NEE, NEP, SRE, Independent Power Producers, NRG, VST, Integrated Utilities, EXC, FE, PEG, Regulated Utilities, AEP, ES, EVRG, NI, PCG, PPL
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Posted on February 21, 2019
Filed under: Steve Fleishman, Utilities & Power, Regulated Utilities, NI
NI provided initial 2019 guidance of $1.27-1.33, missing consensus at $1.33 (WRe $1.31). As we had expected, NI’s dividend announcement earlier this month was a sign for muted earnings growth off 2018A ($1.30). What we hadn’t expected was a re-basing of the company’s 5-7% annual growth rate off of a weak 2019 – we previously assumed that NI would get back on track by 2021 as the drag associated with MA would largely be offset / removed. To reflect NI’s new growth expectations, we are cutting our 2020E and 2021E to $1.39/$1.48 from $1.45/$1.55. Our PT is unchanged at $28.
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Posted on February 11, 2019
Filed under: Steve Fleishman, Utilities & Power, Gas/Power Infrastructure, AES, CNP, CWEN, D, NEE, NEP, SRE, Independent Power Producers, CPN, DYN, NRG, VST, Integrated Utilities, ETR, EXC, FE, PEG, Regulated Utilities, AEE, AGR, AWK, CMS, DTE, DUK, ED, EIX, ES, EVRG, LNT, NI, PCG, PNW, POR, PPL, SO, WEC, XEL
We hosted our annual investor meeting with the Moody’s team to get their latest credit views on the utilities, power and midstream sectors. For utilities, things have quieted down (ex California) as tax reform impacts have largely played out as expected. FFO/D metrics have dropped 150-200bps on average due to lost deferred tax cash flows and currently sit in the 15-16% area and likely stay there. Companies have taken actions to support their metrics (lot of equity) and have better visibility on regulatory treatment of tax reform. So 2019 is about executing on plans, hitting metrics and sticking to balanced funding plans (ie more equity). Moody’s still has a negative outlook on the sector but will likely go back to stable with good 2019 execution.
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Posted on February 4, 2019
Filed under: Steve Fleishman, Utilities & Power, Regulated Utilities, NI
On Friday (2/1/19), NI raised its annual dividend to $0.80 from $0.78, representing 2.5% growth – well below the company’s targeted 5-7%. Following up with the company, we sense this as a signal that the drag associated with MA gas explosion fixes are worse than we originally thought likely leading to weak initial ’19 guidance. Issues include higher recovery and carrying costs. As such, we are cutting our 2019E to $1.31 from $1.35. Our updated estimate represents 2.5% growth off our 2018E of $1.28. We feel this is a more prudent growth rate and keeps the company within its 60-70% targeted payout ratio. We are also reducing are 2020E by $0.02 to $1.43 as we feel it may take a bit longer for NI to fully offset / eliminate the drag associated with MA.
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Posted on February 4, 2019
Filed under: Steve Fleishman, Utilities & Power, Gas/Power Infrastructure, AES, CNP, CWEN, D, HIFR, NEP, SRE, Independent Power Producers, VST, Regulated Utilities, AGR, DTE, EIX, EVRG, NI, PCG, PPL, SO
PCG’s threat and subsequent filing of bankruptcy kept utility investors very occupied in January. Even if investors did not own PCG itself they had to deal with knock-on effects on other CA utilities like EIX and on the renewables suppliers NEE, NEP, CWEN, ED, etc. These names dominated the worst performers of the month and were part of the reason why utilities only rose 3.4% in January trailing the market rally by 450bps.
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Posted on January 22, 2019
Filed under: Steve Fleishman, Utilities & Power, Gas/Power Infrastructure, AES, CNP, Integrated Utilities, ETR, EXC, PEG, Regulated Utilities, AEE, AGR, DUK, ED, ES, EVRG, NI, POR, PPL, SO
PCG’s impending bankruptcy will impact a wide swath of companies especially renewables suppliers. These include large ones investors are aware of (CWEN, NEE/NEP, ED) and smaller ones not so obvious (NRG, DTE, likely others). For the other CA utilities, EIX and SRE, investors will be focused on what this means for getting long-term fixes for wildfire risks. Project risk continues to rear its ugly head as we have seen with ACP pipeline delays. Key updates this quarter include D/DUK on ACP, SO on Vogtle, AGR on NECEC and Vineyard Wind, and SRE on Cameron. Pension risk (and OPEBs and NDTs) due to the Q4 market swoon and drop in rates could hurt as D highlighted recently. NI, ETR and others may face some headwind.
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Posted on January 7, 2019
Filed under: Steve Fleishman, Utilities & Power, Gas/Power Infrastructure, AES, CNP, CPGX, CPPL, CQH, CQP, CWEN, D, HIFR, NEE, NEP, SRE, Independent Power Producers, CPN, DYN, NRG, TLN, VST, Integrated Utilities, ETR, EXC, FE, PEG, Regulated Utilities, AEE, AEP, AGR, AWK, CMS, DTE, DUK, ED, EIX, ES, EVRG, GXP, HE, ITC, LNT, NI, PCG, PNW, POR, PPL, SCG, SO, TE, UIL, WEC, WR, XEL
Can utilities keep the defensive rally going? We’re skeptical. Utilities beat the market by 1500bps in Q4 2018 and outperformed 670bps for the year. This may continue near term given a host of negative macro signals, but these big defensive utility moves have historically been good times to take profits in the group.
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Posted on December 19, 2018
Filed under: Steve Fleishman, Utilities & Power, Gas/Power Infrastructure, AES, CNP, D, NEE, SRE, Integrated Utilities, ETR, EXC, FE, PEG, Regulated Utilities, AEE, AEP, AGR, CMS, DTE, DUK, ED, EIX, ES, EVRG, LNT, NI, PCG, PNW, POR, PPL, SO, WEC, XEL
Our utility financial “checkup” examines projections for utility balance sheets and credit metrics. Tax reform was the overarching theme in 2018 for utility balance sheets and precipitated a large portion of the equity deals completed this year; in total, we saw +$19B completed across our coverage via blocks, forwards, or internally. Since our mid-year review, we now project slightly better FFO/debt in 2020 (+0.5%) due to equity issuances and asset sales. EV/EBITDA is now a half-turn higher given the run-up in equity valuations. Overall, we continue to see utility financial metrics stagnating with higher leverage at certain companies leading to wide P/E dispersion.
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Posted on December 3, 2018
Filed under: Steve Fleishman, Utilities & Power, Gas/Power Infrastructure, AES, CNP, CPGX, CPPL, CQH, CQP, CWEN, D, HIFR, NEE, NEP, SRE, Independent Power Producers, CPN, DYN, NRG, TLN, VST, Integrated Utilities, ETR, EXC, FE, PEG, Regulated Utilities, AEE, AEP, AGR, AWK, CMS, DTE, DUK, ED, EIX, ES, EVRG, GXP, HE, ITC, LNT, NI, PCG, PNW, POR, PPL, SCG, SO, TE, UIL, WEC, WR, XEL
Market volatility in October caught many off-guard and the hope was things would settle down post earnings. Well they got much worse spurred by the disruption of the CA fires. PCG and EIX ended November down 44% and 20%, respectively, on the heels of the destructive fires. These were popular value names in the utility space and their sharp stock collapses clearly caused investor pain. However, the second derivative impact was just as meaningful. The “Anything but California” trade took over amidst utilities, lifting already expensive low-risk utilities to higher levels. Many investors got just as hurt by being short or underweight these names as being long CA. With investors suffering and year end approaching, the last two weeks have showed signs of portfolios shrinking and extreme risk-aversion which has only exacerbated the problem. Everyone needs a holiday.
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Posted on November 21, 2018
Filed under: Steve Fleishman, Utilities & Power, Gas/Power Infrastructure, AES, CNP, CPGX, CPPL, CQH, CQP, CWEN, D, HIFR, NEE, NEP, SRE, Independent Power Producers, CPN, DYN, NRG, TLN, VST, Integrated Utilities, ETR, EXC, FE, PEG, Regulated Utilities, AEE, AEP, AGR, AWK, CMS, DTE, DUK, ED, EIX, ES, EVRG, GXP, HE, ITC, LNT, NI, PCG, PNW, POR, PPL, SCG, SO, TE, UIL, WEC, WR, XEL
Last week, as the California utilities collapsed amidst the fire risks, we saw increasing investor focus on second derivative impacts. One of the obvious ones relates to renewables contracts with the CA utilities, especially PCG who drew down their bank lines last week. The primary concern is what will happen to these contracts in the event that PCG files for bankruptcy due to all the fire-related claims. This primarily impacted NEP and CWEN, given they have the most exposure, though there has been somewhat of a relief rally as investors realized the chance of a PCG bankruptcy in the near-term is low. Importantly, even if there was a surprise filing at some point, we believe these power contracts with the California utilities are likely to hold up. We are buyers on the recent weakness and view NEP as a top idea here.
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