BKH Future Bright; Capex Spending Accelerating; E&P Decision Coming

BKH’s main message is that it is now virtually a pure play (95%+) customer-focused growth utility
BKH is focused on LT decision-making and annual total shareholder return vs. LT growth targets
Forward-looking strategic execution:
Deliver top-quartile LT shareholder return:
Currently in the midst of transition earnings and growth drivers:
LT: Near-term priorities transitioning to strong customer-focused investment program
Capital spending likely to be more than double DD&A (1st D is for depletion)
Additional upside from large projects such as gas pipelines and generation
Targeting LT EPS CAGR in the top quartile of utility industry, which was estimated at 7%
Accelerating capital spending moving forward with significant upside opportunities from generation and pipeline investment

Our conclusion: We believe that BKH is on solid footing and has established a base from which to launch the next acquisition (preference is for electric utility that needs generation investments, but opportunistic), but unlikely for next 12-18 months while focused on repaying debt, continued investment in SG and capital spending program. We look for BKH to sell its remaining oil and gas assets (mostly Mancos Shale play) to fund next acquisition. Utility-focus is laudable. Upside to our ST-Target is visible but meaningless depending on oil & gas decision and outcome, in our opinion.

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SRE: Details on financing given; Oncor deal looks to remain on track for 1H18 close

Expected 2018E AEPS accretion of $0.15-$0.25/share, which is in line with our expectations (please see the first Table 1 below)
SRE intends to own 100% of Energy Future Holdings (If realized SRE would own approximately 80% of Oncor and TTI would own the balance of 20%) after $3.0B debt at the holding company is paid-off, which we expect to occur within 7 years
Equity issue of some 50%-65% of SRE’s equity commitment, which is about $3.87B (60% of $6.45B)

Balance of the equity commitment is going to come from a combination of cash and debt, likely more debt in our opinion, given the plethora of projects that SRE needs to fund
Still searching for 40% equity commitment for transaction or about $2.58B of third-party equity investment: Looking for long-term strategic partner with about a 7 year investment horizon
Based on $7.5B five-year investment program at Oncor, SRE expects CAGR in net income to be some 6%-7% through 2022
SRE states 100% valuation for Oncor based on $18.8B EV
Deal expected to close in 1H2018

Conclusion: The more we study and hear about this deal, the more we like it.

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EIX: Edison Energy Services (EES): Molehill trying to become an anthill with potential to become a hillock; we like approach but endgame’s murky

At present, EES is inconsequential to EIX and its shareholders and looks to remain that way:
By 2019 yearend, EIX expects EES to be breakeven:
The strategy behind EES for EIX is simple to explain:
Proof of concept by yearend 2019:
Absolutely, no additional capital investments in the next 18-months:
Conclusions: We believe that EIX will be successful …
Risk, like most things, is in the execution:

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SRE: Oncor acquisition is strategically astute and appears financially sound

Conference call reveals little additional information other than multiple paid and that SRE would issue some equity to fund the transaction: It was revealed by management that it estimates having valued Oncor at some 9.9x 2018E AEBITDA and some 23x 2018E adjusted net income. This includes SRE’s estimate of the impact of Oncor’s recently settled 2017 rate case. The financial data is expected to be updated just before or after closing the transaction in 1H18.

· Oncor’s 2018E AEBITDA and Net Income based on offering price for EFHC: Based on the multiple that SRE believes it would pay, if successful, Oncor’s implied 2018E AEBITDA and Net Income would be about $1,900MM and $513MM, respectively

· The deal looks to be accretive based on 2018E. The following is based on 0% equity financing, 50%/50% equity/debt financing, and 100% equity financing scenarios assuming a uniform 5.25% interest rate on the debt financing regardless of financed amounts, and $3,870MM in SRE’s financing obligations. We assume new equity would be issued at $117/share and use 35% tax rate:
Under all scenarios, assuming our estimate of SRE’s 2018 numbers and SRE’s estimates of Oncor’s 2018E numbers are reasonably accurate, the deal looks to be accretive: We believe our estimate of the interest rate is on the high side based on recently closed financing deals in the utility sector.

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SRE: We like strategic direction of Oncor acquisition; not sure of financing

Strategically, we believe this is a good deal for SRE’s investors: The five year $7.5B investment program at Oncor should be accretive to SRE’s earnings and help raise the value of SRE. More than anything else, we believe that SRE paid just the right amount to win the bid, but not be strapped with the infamous “Winner’s Curse,” in our opinion. However, SRE’s choice to finance part of the deal with debt may be something that needs some explanation, in our opinion, based on some basic math.
Deal terms: Although details were scant, it seems SRE would buy 100% of Oncor’s ultimate parent, Energy Future Holdings Corp. (EFHC), for $9.45B in cash, resulting in an EV for Oncor of about $18.8B.
Third-party investor(s) for risk mitigation:
Based on some simple calculations, we believe that SRE paid just about the right amount for the deal:
SRE’s ultimate ownership: Sale to a 3rd-party investor(s) would leave SRE with total equity interest in EFHC of some 60% and, therefore, a 48% non-controlling interest in Oncor (EFHC currently indirectly owns an 80.03% equity interest in Oncor).
Depending on the tax rate at EFHC, debt financing may or may not be accretive to ROE:
Oncor’s CAGR in net income from 2016-to-2018 must be above 7.06% for SRE’s 2018 AEPS to be breakeven or higher:
Conclusion: We always believed that this transaction could be good for SRE, but circumstances had not prevailed on management to allow for SRE to submit a winning bid. However, given the price and the way it was structured, we believe that this transaction is good for SRE’s shareholder value, and strongly support management’s decision to make the acquisition.

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As predicted CPN is going private, but at a disappointing price

Terms of the Deal:

CPN announced that it agreed to be acquired by Energy Capital Partners (ECP), and a consortium of investors led by Access Industries and Canada Pension Plan Investment Board (together the “Buyers”) for $15.25/share in cash leading to an equity valuation of some $5.6B
The transaction has a 105 day “go-shop” period that ends 1 minutes past midnight of Friday, December 1, 2017
If CPN receives a superior bid then it may disband the current deal for a break-up fee of some $65MM, otherwise, should CPN choose to cancel the transaction, for whatever reason, then the break-up fee is $142MM.
The deal is expected to be consummated in 1Q2018.
The current management team is expected to remain in place.

Conclusion:

Disappointing selling price:
Potential alternate industry buyers:
Could another PE buyer offer more? Absolutely, in our opinion:
We believe a new bidder would emerge before December 1, 2017: Therefore, we must conclude that there ought to be another PE buyer looking at buying CPN, and we look for a competing bid to emerge before December 1, 2017, possibly in the range of some

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LNG 2Q2017 Earnings: On the verge of breakout; guidance raised; raising ST-Target to $65/sh

LNG 2Q2017 Earnings: On the verge of breakout; guidance raised; raising ST-Target to $65/sh || In our opinion, Cheniere needs to buy back all CCH HoldCo II Convertible Senior Notes (CCH Holdco 2 Convertibles), but conversion unlikely before March 1, 2020. So, we feel investors won’t be concerned until 2019. So, we’re upgrading our ST-Target to $65/share from $44. Regardless, we believe 10% automatic discount on conversion price is a mistake. Cheniere continues to show marketing and trading (M&T) power, accounting for more than half of revenue. We like it. We like that Cheniere’s looking at ways to deploy future FCF, but not thrilled about foreign and liquids-based ventures; we believe there are many US opportunities involving E&P, pipelines or M&T. We’re surprised and disappointed Cheniere could not roll-up CQH but we believe roll-up of CQH and CQP will happen in due time. We believe new Midship pipeline feels right but mid-scale LNG plant feels wrong. We feel there are better ways to finance expansion program, but, LT, company faces under-leverage problem. We’d like Cheniere to take excess cash flow to pay dividend after rolling up CQH and CQP and after its third act. Though loose now, we expect global LNG markets to tighten quicker than current expectations and believe Europe would continue to migrate towards hub pricing/trading, and Asia is likely to start hub pricing/trading.

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AES 2Q2017 Earnings: We feel the upside coming, but now we have to see it

AES 2Q2017 Earnings: We feel the upside coming, but now we have to see it || Except Alto Maipo, things seem to be turning, and AES sees economies finally improving. We continue to think AEPS guidance through 2020 is conservative: We feel it’s closer to 11.6%, given organic growth should be some 4% and with 1% inflation, AES is already at 5% CAGR. Then new projects totaling some 4.6GW on base of some 27.0 net GW, about a 17.0% increase, should boost growth above 8%-10% guidance. But, AES is trading as if growth prospects are negative. We continue to look for Alto Maipo to be completed. Gas-to-power could be major LT growth source, particularly in Asia – reentry into China? AES seems close to reducing its risk profile to target levels, but look for more exits in Europe. And, to us, Asia/Europe combo signals exit from Europe. AES pointing towards its MCAC LNG strategy and energy storage projects to boost MT-to-LT growth. Focus on getting investment-grade-credit-equivalent is a telling and good strategy. Issues surrounding AES, include, but are not limited to: 1) continues to pay more than a nominal dividend, 2) hasn’t disavowed share buybacks, and 3) growth trajectory isn’t at potential, in our view. But, it appears that AES’s hurdle rates are moving towards a more rational level, which we believe should drive growth. Thus, we look for AES to reach our $19/share ST-Target.

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SRE 2Q2017 Earnings: Cameron delay: Big Whoop; IEnova continues to impress; more upside

Cameron delay: Big Whoop; IEnova continues to impress; more upside || SRE raised AEPS guidance to $5-$5.30/share from $4.85-$5.25/share on strong 2Q17 results. 2020 AEPS guidance of $7.20-$7.80 seems low – only some 12% CAGR from 2016A AEPS. SRE is expected to grow dividends 8%-9% to match. Cameron delay was not only forewarned but also immaterial to valuation, investment thesis and stock performance. We look for outperformance with regards to SRE’s guidance in ST, MT and LT. Within next 12-months we look for Cameron 4&5 to get FID and begin construction. We believe SRE will use excess $2B in capital for Cameron 4&5. Even Port Arthur seems likely, given MOU with KoGas. We feel global supply/demand picture is tipping towards favoring supply again. We support projects in Mexico; IEnova’s has billions in potential opportunities in energy infrastructure, renewable generation, transmission and more. We feel SRE growth beyond 2020 would be equally strong as MT-growth. We support SDG&E’s move towards energy storage and more renewables, and SCG’s continuing emphasis on pipeline safety and reliability. SCG also is returning Aliso Canyon to full operations. Potential for LNG-to-power projects in oil- and coal-fired dominant regions like Central and South America and even Hawaii could be another future growth source. Chile seems most likely in the MT. ST-Target raised to $165/share, up $5, while NIV/share moves up to $210/share from $207/share.

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BKH 2Q2017 Earnings: Plans for cost of service gas falls thru but there’s a silver lining

Plans for cost of service gas falls thru but there’s a silver lining || It seems that the cost of service gas program (COSGP) will not move forward for the wrong reason, but it may be a blessing in disguise. We look for BKH to sell its oil and gas business and redeploy proceeds to buy another utility. BKH is lowering 2017 AEPS guidance to $3.45-$3.60 from $3.45-$3.65, largely due to 2Q2017 results. Focus on efficiency and cost reductions to continue. We look for BKH to pull trigger on large acquisition within 12-18 months continuing its focus on Utilities. We look for BKH to pivot more towards utility projects including transmission, renewables, but also generation in general, gas pipelines and other utility projects in the ST-to-MT. Also, work on reducing regulatory lag. CO Electric issued 60MW renewable RFP. Capital spending budget for 2017E-2020F was raised. BKH renewed its At-the-Market equity offering program, more as a contingency rather than for an imminent event. Mancos shale could be worth between $20/share-to-$61/share to BKH if fully-developed but far less if sold. 2Q17 results were below expectations. SD Electric entered agreement with staff to stabilize rates for customers through a 6-year base rate moratorium effective 7/1/2017. Lowering our ST-Target to $81/share and our NIV/share was lowered to some $95. BKH to hold Analyst Day in New York on October 5, 2017.

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