We are expecting a positive tone at Sempra’s analyst day next week. While we do not believe that there will be a lot of major new announcements at the meeting, management will likely reinforce both the solid underlying growth prospects on the current platform and outline growth opportunities particularly in LNG. The stock continues to trade at a significant discount to the regulated group despite an improving EPS mix and above-average growth potential. We are boosting our TP to $128 from $124 reflecting higher group multiples; Outperform.
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On Friday (03/15/19), Dominion and Connecticut governor Lamont announced a settlement on a contract that would allow Millstone to stay open. The contract is for ten years and 9 TWh per year (over half of the plant’s output). Pricing was not disclosed but according to the company it is above the current forward curve (recall that CT’s first proposal was approximately market pricing for the first 3 years). The outcome means modestly higher earnings but still within D’s current guidance. More importantly it de-risks over half of Millstone’s output.
We believe the company’s recent track record of solid execution and signs of a more stable regulatory environment in Oklahoma have spurred the stock’s strong relative run over the last several months. In addition, OGE has one of the best balance sheets in the sector which was top of mind for investors following tax reform last year. ENBL volatility presents risk, but is also potential upside – Peer Perform.
This week NEP put the question of California risk to the sidelines following the 600 MW asset drop and attractive portfolio financing announced on Monday (see details in note). The cash flow from these transactions will more than offset the ~$100M of CAFD at risk from PCG-exposed projects and drive the 15% distribution growth in 2019. We continue to see NEP as highly attractive, especially with the increased certainty from the asset dropdown. We are not aware of another income vehicle with the distribution growth potential and duration – 12-15% through at least 2023 – with such a strong parent. Outperform.
We thought results in Q4 were solid with an average EBITDA beat of 3%. DCF/share growth of 8% YoY in Q4 was down from the breakneck double digit growth seen in Q2 (13%) and Q3 (18%), but is clearly still attractive total return when combined with safe 7% yields. Our updated forecasts still call for 5% DCF/share growth in 2019, preserving a low double digit total return investment proposition. That said, the group now seems more dependent on a valuation call near-term given more uncertainty over the pace of production growth and concerns over high levels of competition and a cyclical shift toward potential overbuild.
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.
CNP gave initial 2019 guidance of $1.60-1.70, missing consensus and our previous estimate of $1.69 (now $1.66). More importantly, CNP lowered its 2020 guidance range at the top-end to $1.75-1.90 from $1.76-1.98, reducing the midpoint by $0.05. The company maintained its 5-7% EPS CAGR and extended the outlook through 2023. Assuming 6% growth off the new midpoint, this implied a lower 2021E by $0.07 as compared to expectations from the prior guidance. We have updated our estimates and our new 2021E of $1.94 assumes growth of 6.6% through the period. The update today was particularly disappointing given that some had anticipated that numbers could be raised post-merger. CNP underperformed the UTY by 362bps today following the update.
AES reported FY18 EPS of $1.24 beating consensus at $1.21 (WRe $1.23). This marks the second consecutive year that AES has finished near the top-end of its guidance range. The recent track record provides more credibility for the company going forward as it has been mired in the past for missing its financial targets. AES issued initial 2019 guidance of $1.28-1.40, beating consensus at $1.31 but in-line with our $1.34 estimate.
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