Today (5/16/19), Oncor (80% owned by SRE) closed its transaction to acquire InfraREIT. We therefore terminate our coverage of HIFR. We initially moved to No Rating from Peer Perform following the deal announcement. Investors should not rely on our previous ratings, price targets or estimates for HIFR.
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We hosted investor meetings today (5/13/19) with CFO Gustavo Pimenta. Despite recent stock weakness, the tone of the meeting was constructive with Gustavo highlighting AES focus on de-risking the business and expanding renewable, storage and LNG platforms. Mgmt sees their stock as very cheap on straight P/E, pointing to European peers (eg Ibedrola) which trade near 15x on 2020E whereas AES trades just above 11x. We remain Peer Perform with a $17 PT which is derived using a weighted-average of our three valuation methodologies (SOTP, target FCF, discount utility P/E); see pg 5.
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.
CNP reported 1Q19 EPS of $0.46 which missed consensus/us ($0.52/0.55) by a wide margin. The miss was driven by a -$0.07/sh decline at Energy Services. The decrease was largely anticipated internally, but results ended even a bit weaker than CNP had projected. 1Q18 at Energy Services was abnormally strong due to very favorable weather; CNP was able to monetize most of its gas reserves in 1Q18 rather than ratably throughout the year. As such, subsequent quarters in ‘19 will see YoY growth given that CNP expects to end the year flat vs ‘18 at Energy Services. CNP underperformed the UTY by 380bps today as the quarterly miss highlighted the volatility of its non-reg businesses. Despite the weak start, CNP reaffirmed its ‘19 guidance of $1.60-1.70 as well ‘20 guidance of $1.75-1.90.
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.
Sempra had messy Q1, significantly beating the street but mainly on one-time tax items. That said the tax gains are in 2019 guidance so it was not a surprise the stock was weak on the EPS quality. Despite this SRE continues to be set for significant growth from Cameron and the utility investment story, especially Oncor. Moreover, the next few months should be constructive with Cameron 1 entering service and some clarity on California. We still see the stock trading at a discount to regulated peers and remain Outperform.
AES underperformed the UTY by 140bps today despite announcing an incremental $100M cost cutting initiative. The cost savings are expected to be realized at the SBUs by utilizing technology (robotics, drones, etc.) to lower maintenance expense and increase plant availability. AES expects to realize the full run-rate by 2022, with the bulk of the savings coming in 2021 and 2022. Our sense is that the incremental costs cuts will be a positive driver within AES’ current guidance or act as an offset to unforeseen issues if needed. Overshadowing AES’ Q1 update was renewed concerns for emerging markets (i.e., Trump trade war rhetoric with China). Recent news stories concerning Argentina’s economy / presidential election have also been unsettling as a Macri loss in October could change the pro-market narrative in the country.
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.
OGE reported 1Q19 EPS of $0.24, in-line with consensus / us at $0.24 / 0.23. Results were down $0.03 from 1Q18 primarily due to drag associated with the the Sooner / Muskogee projects that have yet to be reflected in customer rates. Favorable weather and customer growth acted as partial offsets. Contribution from ENBL was down modestly YoY after a basis adjustment in OGE’s investment due to equity dilution (ENBL incentive comp). OGE is on track to deliver within its 2019 guidance and reaffirmed its $2.05-2.20 range (WRe $2.14). Expected guidance ranges for OG&E and ENBL remained the same as well.
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