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.
Search Coverage List, Models & Reports
Search Results1-10 out of 152
CWEN reported 2Q19 EBITDA in line with consensus, but cut 2019 CAFD guidance by 7% as weak renewable conditions continued through Q2, and CWEN had a previously disclosed outage at the CVSR facility. We didn’t find the guidance cut surprising after renewable peers AGR and NEP reported. However, CWEN’s stock had a decent rebound this summer alongside declining interest rates, and a guidance cut is still a cut. Overall, we thought the Q2 update was somewhat constructive with progress on growth, new ROFO additions, and the PG&E situation still appearing to head toward a favorable resolution. Outperform.
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
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.
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.
The revival of the US/China trade war stopped the 2019 bull market in its tracks with the S&P 500 falling 6.6% and bond yields declining 36bps in May. Utilities were a place to hide and only fell 1.3% beating the market by 530bps. For the year, utilities are still slightly trailing the S&P 500 (9.4% vs 9.8%) though it feels like they are way ahead. Utilities are back to a 21% P/E premium to the market vs a historic average of 3%. They have hit this level a few times before – including this past December – and its proven to be great selling opportunities since this premium never lasted. So while we worry about the economy and trade wars and bonds going toward zero yields, we still think buying utilities here is buying near a peak and stay Underweight. With rates this low, we are more wary of utility rate cases and ROEs – last month we saw NY PSC staff recommend an 8.3% ROE for ED.
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.
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.
CWEN reported 1Q19 EBITDA of $191M, which was above our $180M estimate but below $206M consensus. The wind resource was only at 87% of expectations and solar was at 85%. Overall, the Q1 result was better than we feared after poor reports from NEP and AGR, although CWEN was helped by some O&M / timing benefits during the quarter.
- 1 of 16
- next →