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More recently we’ve received questions on the difference between Vistra and NRG. To be clear, we like both given similar investment propositions – integrated low cost operations, backed by robust free cash flow generation and strong balance sheets. Both companies are anchored by premier Texas retail operations, with ~50% of total generation capacity also in ERCOT. That said, the companies also have differences in strategy and make-up, which may draw different investors.

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

This afternoon (7/25/19), FERC issued an order directing PJM not to run its annual capacity auction in August. PJM had requested that FERC either provide guidance or refrain from making any changes retroactively in the event the auction was run and then FERC decided to change the rules. We had been pointing to the PJM auction as a negative near-term catalyst and overhang for the generators, given what appeared highly likely to be a much lower pricing outcome driven by new build and more subsidized generation (ie: OH nukes). Now FERC will continue work to revise PJM capacity auction rules to address both state resource preferences and price suppression. While we don’t know the exact structure, we think there will be interest in supporting existing coal/nuclear assets.

We have seen big performance dispersion in the sector this year and widening valuation spreads.  What value names can finally wake up?   CA legislation should continue to benefit EIX/SRE and the associated Yieldco names NEP and CWEN (still on sidelines on PCG).  We think FE can finally get past FES and NI can hopefully move past Columbia MA.  SO will have a key update on the Vogtle plant from PSC staff (which tends to have a cautious bias); other project risk stocks DUK, D, AGR likely stay in limbo for now.  CNP and EVRG will be focus names on whether they can rebuild credibility in hitting numbers.   PNW and ED likely stay pressured by regulatory overhangs.  And then there’s Power, which we think stays under N-T pressure into the August PJM auction even as we expect the companies to reaffirm 2019 outlooks.