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.
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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
SO confident on Vogtle despite Staff finding Nov 21/22 “a challenge.” SO 2Q19 of $0.80 beat consensus of $0.73 due to weather. SO was confident in achieving in-service by the regulatory-approved schedule of Nov 2021/22 for Vogtle Units 3/4, if not earlier; its “chase” dates are May 2021/22. This despite a day earlier the GaPSC Staff concluding that “at this time [Nov 2021/22] will be a challenge to achieve.” But after a one-day hit on the Staff report, investor confidence resumed as SO beat the UTY by 215bp; it has outperformed by over 1300bp YTD. We are reluctant to discount Staff’s caution, however, given they have generally been more accurate on the schedule. Still, execution risk should decline over time, making the next 6-12 months key.
We met with SO mgmt and toured its Vogtle nuclear project in GA. Mgmt said Vogtle is progressing on track and the site was bustling with activity, workers welding, cranes lifting and a lot of equipment in place. From the untrained eye, much has been done but there appears to be much work left. SO sees peak construction from Aug to Mar, with 75 new people added weekly to the 4600 already on site. SO has several different paths to achieve in-service by the regulatory-approved schedule of Nov 2021/22 for Units 3/4. And its “chase” date is May 2021/22, though that appears unlikely. Given its progress and confidence, further overruns may be limited. But we think that is reflected in the stock’s 1250bp of outperformance YTD. With the likely adversarial Staff report imminent, we take a wait-and-see approach on the stock.
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
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.
Utilities have rallied on the large drop in interest rates in recent weeks. For the year, 10-year Treasury yields have dropped to 2.01% from 2.69%. While underperforming the market, utility stocks are up 12% YTD and valuations are at or near all-time highs. This has been great news for investors, but lower interest rates are a double-edged sword for utilities. They increase the risk of lower allowed ROEs in rate cases which have otherwise held pretty stable over the past year. In this report, we identify those most and least at risk to ROE cuts and highlight pending cases with ROE sensitivity.
CAL Watch – Sen Dodd hints at a wildfire fund of $25-50B
CAL Watch – Bill states property losses from fires; costs for 2018 fires appear higher than last update
PCG – Settles with 14 public entities for $1B related to past wildfires; good step
PCG – CPUC seeks comments on proposals to improve safety culture
EIX – Debt issuance pricing reflects wildfire, downgrade risk
SO – GA Court of Appeals hears arguments from advocacy groups against Vogtle
ES – Settlement on temporary rate increase in NH rate case
PEG – Gas explosion at Ridgefield New Jersey home causes 1 fatality; under investigation
POR – OR bill to boost EV adoption heads to Gov; Cap-and-trade bill passes House, heads to the Senate
AWK – AWK in Europe…like selling water in a desert
ENB – Minnesota agencies slow Line 3 Replacement permit review process; not a big surprise
Midstream – Canadian Prime Minister Trudeau approves Trans Mountain pipe expansion; expected
Our annual utilities pension review – still underfunded, not much progress
Our utilities pension review, with help from Wolfe’s Accounting/Tax team and their comprehensive report, takes a look at the state of pensions in the sector using year-end 2018 data. Utilities remain underfunded for their pensions/OPEB – with most companies in the same place amid weak equity markets and higher rates. This dynamic has reversed in 2019, with yields sharply falling. There remains wide disparity in funding levels and accounting assumptions within our coverage.
This report looks at the numbers – CEO pay, stock ownership, change of control info and much more. Overall CEO pay was up 8% vs 2017 and CEOs averaged 143% of their target ST incentive comp. We review the key drivers of executive compensation for each company. For the most part, utility CEO pay is tied to the things investors care most about – EPS and shareholder return. Several companies also include operational, safety and customer service metrics which we think are important for L-T value in the utility sector. A new wrinkle is carbon reduction which has been a big focus for XEL and recently added by SO for 2019.
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