It may have went under the radar, but last week FES reached a settlement with labor unions in its pending bankruptcy proceeding – resolving all issues and filing for approval at a hearing tomorrow (10/15). FES assumes all collective bargaining agreements in the settlement. We now expect the plan of reorganization to be confirmed by the judge. Once complete, the only remaining step before FES can emerge is the NRC licenses transfer for its nukes. FES filed for approval in late-April, with this typically taking 6-9 months. All appears to be on track to emerge by year-end – about one year after the last power generator came out of bankruptcy (GenOn).
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Wolfe Research's Senior Utilities & Midstream Analyst Steve Fleishman hosted a webcast to discuss PCG implications, CA outages, MO regulation post-Sibley, FTS initiation, EXC and IL, election trade, and DUK legislation in NC.
While 2Q19 was certainly a quarter to forget from a power pricing perspective, Q3 provided a sharp reversal that should support generators as we approach earnings season. Summer finally showed up in Texas during mid-August, with real-time price spikes causing a strong uplift in the forward curve. ERCOT 2019 was up 30%, followed by a ~15% increase in 2020, and more modest uplift further out on the curve. Pricing for 2019/2020 forwards is now fairly similar, before backwardation reemerges in 2021. PJM and New England pricing saw modest uplift (~5%) in 2020 as well. California was the primary region where forward prices fell – between 5-10% across 2019-2021. We expect IPP hedging programs to likely have benefited given open positions in 2020 headed into August. For all the quarter-over-quarter power price changes, please see our file.
Wolfe Research's Senior Utilities Analyst Steve Fleishman hosted a webcast to discuss post-conference takeaways.
The audience told the story at our conference this year. In the past, you used to hear crickets at our Yieldco and Regulated Utilities panels. This year, the Yieldcos were packed and even the smaller utilities were nearly full. Our Keynote lunch with NEE CEO Jim Robo was the most crowded meeting ever at the conference – SRO and we ran out of lunch. Power and diversified utilities used to garner the crowds – not as much this time. Many seem to be on the wrong end of the 80/20 rule – spending over 80% of their time talking on 20% of their business that is non-utility.
The long-awaited pullback in high quality utilities finally happened in September but it wasn’t enough to stop the overall utility rally. Utilities rose 4% for the month beating the market by 230bps. For the year, the sector is now up 22.3% beating the market by 360bps. High quality utilities collapsed from highs as the bond yield spiked from 1.5% to 1.9% early in the month. Top YTD performers WEC and AWK took the brunt of the pullback. Value names within utilities rallied strongly led by CNP, NRG, VST, AES, and PPL which were all top 10 performers during the month. As rates fell back down under 1.7% and the political and macro news worsened, utilities performed strongly into month end essentially brushing off the high-quality pullback.
Following up our discussion from last week on FAANG companies leading the way on renewables purchased power agreements, we’ve also noticed the growing trend of “virtual PPAs” by corporates. Most recently DUK announced a pair of virtual PPAs in September. The first with Sprint for a 182 MW wind project in ERCOT. The second with AT&T for 160 MW of Frontier Windpower II in Oklahoma. The wind farm totals 350 MW, with Ball Corp. previously committing to a 160 MW virtual PPA. Also this month, Honda Motor announced that it had signed two virtual PPAs – equivalent to 320 MW that would supply it with more than half the electricity it consumes in North America. The two renewables facilities would be located in Oklahoma and Texas.
We look forward to seeing you at our Wolfe Utilities & Energy conference next week. Participating utilities/power companies are on the right and there is still time this week to register. The conference provides a unique mix of company presentations via panel discussions and guest speakers that provide industry insights. This report is focused on the utilities and power companies with a list of questions to ask, model summaries and industry themes below.
Last week, we published our annual power supply-demand study (link), which saw a record level of forecasted renewables additions – coming in at over 63 GW in total and up over 20 GW versus last year. The headline of 50 GW in net capacity adds was a bit concerning, though we clarified that in key competitive markets of ERCOT and PJM the dynamic is quite different. ERCOT is seeing an abundance of renewables with shrinking baseload, while PJM is still seeing considerable CCGT new build move forward. The investor reaction was relatively muted, as we maintained bullish stances on both renewables and power stocks. There was some concern on ERCOT, but we think demand growth provides an offset and volatility should remain.
Wolfe Research Senior Analysts Steve Fleishman (Utilities & Midstream), Scott Group (Transports), Nigel Coe (Industrials), and Josh Silverstein (Oil & Gas Exploration & Production) hosted a webcast to go over their regional power outlook, gas additions vs. coal retirements, the renewables explosion and latest on nukes, implications for the rails, the impact on natural gas demand, the impact on industrials, and stock implications.
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