Somewhat surprise BRXIT vote has little long-term consequences

Somewhat surprise BRXIT vote has little long-term consequences || Having lived in England for over six years during my early years, it’s not surprising that UK voted to exit the European Union (EU)
However, this has little consequences for the US utility, power, energy infrastructure, and LNG in the long-term
If the US and UK come to a quick free trade agreement (impossible with current administration) in 2017 under a new administration, there may not even be short-term negativity

Continue Reading →

CPN 4Q2016 Earnings Note

ST Value Creation through Debt Repay, but Economy may Surprise ||
We feel CPN is focused on debt repayment to create value – $1 debt repay is at least $1 accretion to equity value – which we agree is correct in unexciting market/economy. But, we feel macro-economic situation may change fairly quickly for better in 2017, accelerating into 2018. Target debt repayment of $2.7B translates into at least some $7.6/share, which leads to our ST-Target. Operationally, acquisition of Noble Americas Energy Solutions (NAES) introduced CPN Retail to customers in 8 states in which CPN has no-to-low generation, but we believe this isn’t an issue. Decision on Guadalupe construction expected in 2H2017, but likely to be renegotiated. Rejection by Nevada PUC for acquisition of South Point doesn’t mean CPN shuts it down. In our opinion, we continue to believe CPN’s story is about LT future of power. We agree accelerated closure of coal-fired generation is coming, industry is moving more towards reliance on renewable energy, and improving natural gas prices are all tailwinds for ST-to-MT gain for CPN and credit metrics likely to improve rapidly. Strategically there’s little to criticize, but we’d like CPN to disavow share buybacks, and in improving fundamental market, we believe CPN’s hedging program is too aggressive. Improving commodity prices should continue, at least through 2017, but beyond depends on economy, which we believe may surprise. Also, over MT-to-LT, we believe importance of heat rate will likely start to dominate IPP valuations.

Continue Reading →

CPN 3Q2016 Earnings Note

Cyclical upside around the corner ||
Lowered our capacity price expectations, which lowered our NIV/share to $41 from $56. Even as recent fundamentals seem weak, we believe that 2017 is turnaround year. CPN reduced top end of guidance by another $50MM to $1,850MM, but, market fundamentals are clearly improving and weather continues to be cooperative. So, we continue to believe that CPN’s still well-poised to deliver strong returns for shareholders over NT-to-MT. Also, in our opinion, in LT CPN’s story is about future of power and well beyond just macro effect of economy and commodity prices. We agree accelerated closure of coal-fired generation is coming, industry is moving more towards reliance on renewable energy, and improving natural gas prices are all tailwinds for ST-to-MT gain for CPN and credit metrics are solid. Strategically there’s little to criticize, but we’d like CPN to disavow share buybacks, and in improving fundamental market, we believe CPN’s hedging program is too aggressive. Improving commodity prices should largely continue, in our view. However, over ST-to-MT, we believe importance of heat rate will likely start to dominate IPP valuations. Environmental issues that continue to plague others present opportunities for CPN. We’d like to see CPN develop Glass Mountain Geothermal. Noble acquisition feels right, but separate management from Champion makes little sense to us. We like CPN’s balance sheet management.

Continue Reading →

CPN Buys Noble Americas Energy Solutions, a Retail Operation

• CPN announced that it purchased Noble Americas Energy Solutions (NAES) for $900MM:
o NAES is a provider of retail electricity services for commercial and industrial customers
o Synergy savings and run-off from old legacy hedges (together Synergy Savings) is expected to be some $200MM, primarily in the first year
o Run-rate AEBITDA is estimated to be some $140MM, resulting in a purchase price that is about 6.4x the expected run-rate AEBITDA, net of synergy savings about 5.0x
o The NAES acquisition is expected to double the volume of retail load that CPN could service

Continue Reading →

CPN 2Q2016 Earnings Note

Puzzlingly lowers top end of guidance amidst strengthening market || CPN didn’t beat our AEBITDA estimate of $408MM and reduced top end of guidance by $50MM. But, market fundamentals are clearly improving and weather has been generally cooperative. So, we continue to believe that CPN’s still well-poised to deliver strong returns for shareholders over MT. Also, in our opinion, in LT CPN’s story is about future of power and well beyond just macro effect of economy and commodity prices. We agree accelerated closure of coal-fired generation is coming, industry is moving more towards reliance on renewable energy, and improving natural gas prices are all tailwinds for ST-to-MT gain for CPN and credit metrics are solid. Strategically there’s little to criticize, but we’d like CPN to disavow share buybacks, and in improving fundamental market, we believe CPN’s hedging program is too aggressive. NT commodity prices appear to be strengthening, which we believe will largely continue. However, over ST-to-MT, we believe importance of heat rate will likely start to dominate IPP valuations. Environmental issues that continue to plague others present opportunities for CPN. We’d like to see CPN develop Glass Mountain Geothermal. We look for expansion of CPN’s retail business. We agree with CPN on its decision to close Clear Lake in TX.

Continue Reading →

CPN 1Q2016 Earnings Note

A Story Beyond Rising Tides Lift All Boats, whose time is here ||
CPN’s story is beyond macro effect of commodity prices and economy. It’s also about future of energy, which CPN represents. We agree accelerated closure of coal-fired generation is coming, industry is moving more towards reliance on renewable energy, and improving natural gas prices are all tailwinds for ST-to-MT gain for CPN. Credit metrics are solid with bonds trading at par. Strategically there’s little to criticize, but we’d like CPN to disavow share buybacks. NT commodity prices are starting to show some upward momentum, which we believe will largely continue. However, over ST-to-MT, we believe importance of heat rate will likely start to dominate IPP valuations. Environmental issues that continue to plague others present opportunities for CPN. We’d like to see CPN develop Glass Mountain Geothermal. We look for expansion of CPN’s retail business. Sale of South Point Power is said to be accretive; we expect several more similar divestitures to come.

Continue Reading →

CPN 4Q2015 Earnings Note

Positioned well for the future || If investors are worried about CPN’s leverage, doesn’t surprise us, but we’re very comfortable, given current low commodity price environment. This is as it should be. CPN is well positioned to achieve strong upside, but would likely have to go through a trough. We continue to believe CPN is model for all future IPPs in US. CPN’s trading levels reflect backward-looking metrics and near-term natural gas price expectations, but upside potential is demonstrable. Strategically there is little to criticize, but we’d like CPN to redirect capital for share buybacks to debt reduction or investments. In NT commodity prices are likely to present challenges, but over ST-to-MT, we believe importance of heat rate will likely start to dominate IPP valuations. Environmental issues for other companies present opportunities for CPN. We’d like to see CPN develop Glass Mountain Geothermal. Venture into retail energy supply was interesting choice and given Champions business mix we look to it as a hedging vehicle.

Continue Reading →

AES 4Q2016 Earnings Note

At precipice of demonstrating its LT potential || Our previous AEPS CAGR estimate thru 2021 was 9%; guidance thru 2020 is 8%-10%. But, 2017E AEPS guidance of $1.00-$1.10 seems light. Regardless of forward expectations, AES is trading as if its growth prospects are next to none. As expected, 2016 appears to be bottom and forward prospects for AES look better; AES: 1) is out of many riskier or no-growth-prospect countries, 2) has sold or reduced its interests in non-performing plants, riskier businesses, or assets that have no growth potential, 3) has begun accelerating its investment program, 4) significantly and continues to reduced parent debt, 5) has businesses in stable countries/regulatory-regimes, 6) even troubled assets like Maritza in Bulgaria and Argentina seem to have turned corner, and 8) it’s seriously going green in US. This isn’t to say there aren’t issues, AES: 1) continues to pay more than a nominal dividend, 2) hasn’t disavowed share buybacks, and 3) stubbornly clings to an inexplicably high investment hurdle rate. Regardless, given its investment program we look for it to overshadow our reduced $19/share ST-Target and march towards our reduced NIV of $36/share in the MT-to-LT. We like acquisition of sPower for some $1.6B, which appears to be accretive by over $1/share to our NIV; no meaningful earnings accretion in ST.

Continue Reading →

AES 3Q2016 Earnings Note

At precipice of demonstrating its LT potential || Despite promise of 12%-16% CAGR in AEPS thru 2018, AES is trading as if its growth prospects are next to none. But, based on existing construction projects, CAGR in net MW through 2021 is about 4%, plus 5% organic growth thru contract escalations would deliver CAGR of 9% through 2021. Add to this, cost cuts, and debt repayments, and 12% CAGR in AEPS through 2021 is achievable. From our view, 2016 is bottom and forward prospects look far better than before, AES: 1) is out of many of the riskier or no-growth-prospect countries, 2) has sold or vastly reduced its interests in non-performing plants, riskier businesses, or assets that have no growth potential, 3) has begun accelerating its investment program, 4) significantly reduced parent debt and continues to do so, 5) has businesses in stable countries or in stable regulatory regimes, and 6) even troubled assets such as Maritza in Bulgaria seem to have turned the corner. This isn’t to say there aren’t issues, AES: 1) continues to pay more than a nominal dividend, 2) hasn’t disavowed share buybacks, and 3) stubbornly clings to an inexplicably high investment hurdle rate. Regardless, given its investment program we look for it to overshadow our reduced $19/share ST-Target and march towards our reduced NIV of $39/share in the MT-to-LT.

Continue Reading →