Dominion reported Q1 EPS that was short of expectations mainly on weather, but it remains on track to meet 2019 guidance of $4.05-$4.40. The stock underperformed by 80bp on the day which we believe was due to a lack of anything new on Atlantic Coast Pipeline. The call was fairly low key with few new updates given the recent analyst day that presented a full refresh of the business profile and financial outlook. D has transitioned to a more heavily regulated/contracted operation and at this point continuing to execute on numbers is key. Near term though we believe the stock could still face headwinds until there is clarity on ACP’s path to completion. We remain Peer Perform.
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Our Q1 investor poll shows investors remain underweight utilities even after the sector has already underperformed by 700bps YTD. The poll has eerily similar results compared to our year ahead poll. Only 22% expect utilities to outperform for the rest of 2019 (down from 29%) and 54% expect them to underperform (up from 51%). There is roughly the same preference of midstream vs utilities (60%/40% vs 62%/38%). Power remains the preferred sector within the space (52% overweight vs 53% last poll) followed by Regulateds (43% overweight vs 52%) and then Yieldcos at the bottom (25% overweight vs 33%). Most investors (59%) expect interest rates to stay in the 2.5%-3.0% area though a lot less see rates rising back over 3% (only 5% vs 22% at last poll).
D’s analyst day focused on the big picture, not the nitty-gritty. In fact the slides came at the end so that investors focused on the strategic message that D is now a 95% regulated and regulated-like company. D also announced a re-segmentation of its businesses effective in 2020 (all internal) that should provide better transparency into the company. Post the investor day, management hosted the first ESG-specific analyst presentation we are aware of. Overall, D seemed very focused on showing investors that it should be viewed as a high-quality company.
On Friday (03/15/19), Dominion and Connecticut governor Lamont announced a settlement on a contract that would allow Millstone to stay open. The contract is for ten years and 9 TWh per year (over half of the plant’s output). Pricing was not disclosed but according to the company it is above the current forward curve (recall that CT’s first proposal was approximately market pricing for the first 3 years). The outcome means modestly higher earnings but still within D’s current guidance. More importantly it de-risks over half of Millstone’s output.
On Monday (2/25/2019) the Fourth Circuit Court of Appeals denied an en banc hearing for the court's previous rejection of Atlantic Coast Pipeline's Forest Service permit. The court did not give a rationale for the denial. Dominion will now need to pursue other avenues to resolve the legality of crossing the Appalachian Trail, and this will almost certainly delay the schedule further. Moreover, the denial remains a specter for Mountain Valley Pipeline and ETRN/NEE, which will ultimately need clarity on this matter as well for its completion.
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.
After market close, ISO-NE released the results of the June 2022 – May 2023 capacity auction. The system cleared at $3.80/kW-month with no regional premiums. This was down vs. $4.63 last year and represented the fourth consecutive decline in year-over-year capacity prices. The result was at the lower-end of our range of expectations ($3.75-4.75). We expected a YoY decline given the FERC fuel security order allowing EXC’s Mystic units to bid as price-takers and the lower dynamic de-list bid threshold ($4.30 from $5.50). The continued additions of renewables and EE/DR also likely contributed. As a result, we see YoY declines in New England capacity revenues in 2022 for our entire coverage list. The impact is not really meaningful however – representing at most 1% of each company’s total EBITDA. Attention now shifts to the much more important PJM auction that is still awaiting FERC action on subsidized resources and now seems at risk of even further delays beyond August.
On its YE2018 earnings call Dominion introduced 2019 EPS guidance of $4.05-$4.40, the midpoint about in line with consensus, ahead of our $4.16E and better than many investors feared. There were a couple hitches on the call – another cost increase and delay at Atlantic Coast Pipeline and the disclosure of planned convertibles in 2019 (though we are OK with this). Overall we see the stock trading at a discount to the group, and while it looks a little cheap this is understandable given the ACP project overhang. Peer Perform.
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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