The MLP and Energy Infrastructure Conference (MEIC), will be held May 14-16. Many MLP management teams will be in attendance with a larger number of C-corps this year as well, notably ENB, KMI, TRGP, and LNG. We’re looking forward to it. Four of us Wolves, running around the desert together in Las Vegas. This report is a helpful guide for investors attending and includes lots of questions to ask companies, as well as summary model information. Key industry topics are discussed below with company-specific topics in the body of the report.
Search Coverage List, Models & Reports
Search Results1-10 out of 328
Utility earnings rose 5.0% in Q1, slightly above our 4.9% estimate. No companies changed guidance for 2019 but the same companies that disappointed at year end had issues again such as AGR, CNP, and NI (not EVRG, phew). Earnings quality stuck out to us as weak with tax or other gains driving numbers at SRE, DUK, NRG among others. AEP may have been the most incrementally positive with increasing confidence in the upper half of their 5-7% growth rate. Mega project risk continued to overhang D and DUK (ACP) and SRE (more Cameron delays), though SO kept Vogtle on schedule (for now). Finally, weak renewables conditions hurt in Q1 causing misses at AGR, CWEN, and NEP, but the influence of renewables keeps accelerating overall.
We reiterate our Outperform rating on NextEra. The company continues to demonstrate the ability to grow above the sector average with a lot of visibility that this can continue well into the next decade. Moreover, NEE has a premium utility franchise in a constructive regulatory environment (bolstered by the addition of Gulf Power) and remains the dominant renewable developer in the country. While the stock trades at a premium to the regulated group we believe it could expand as the utility story appears to be getting even better.
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).
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.
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.
NEE reported yearend earnings about in line with our expectations but the stock underperformed the UTY by 180 bp. As one of the highest multiple names in the space there wasn't much margin for error and the "just" in-line report plus the focus on exposure to PG&E didn’t help. However, we believe NEE and NEP should recover on Monday (1/28/19) following FERC's opinion late Friday that it must consent for any wholesale contracts to be rejected or altered in a bankruptcy court. Apart from that we still believe NEE has one of the highest quality profiles in the sector - high growth utility in a constructive regulatory environment and the dominant renewable development operation in the US. Reiterate Outperform.
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.
- 1 of 33
- next →