Fate of ENBL decided, CNP looks forward to utility strength || Raising ST-Target to $36 from $35 and NIV/share to $55 from $51 on 2Q2017 results which reaffirms our belief CNP will perform at higher end of 2017E AEPS guidance, if not above it, and our concurrence with management that CNP will perform at higher end or even above its targeted 4%-6% CAGR in AEPS thru 2018. We agree with divestiture of Enable Midstream Partners (ENBL) and chosen disposition method seems to be for stock, although we’d prefer cash. We continue to believe CNP is best owner of Oncor but no movement from CNP. Transaction for stock on ENBL indicates to us continued steady investment in CNP and buyer’s stock would be used as equity financing for internal expansion. We note this is a conservative strategy but doesn’t preclude major strategic initiatives, just that there’s none on the plate in the foreseeable future. Wouldn’t surprise us if CNP delved back into pipeline business at a later date, but strictly pipelines only. We continue to support CNP’s commitment to natural gas retail services. We’re pleasantly surprised to see CNP continue to guide higher in 2017 and 2018. We believe demographics continue to provide tailwind and new Washington policies are likely to provide additional uplift. Dividend yield likely to stay strong too. We like new tranny project into Freeport, TX.
We overhauled the model to more intricately incorporate Piedmont, which had the benefit of increasing our NIV/Share to $159/share from $148/share. We are increasing our ST-Target to $110/share from $105/share. We still believe DUK will meet or beat the high end of its 2017 AEPS guidance. Target 8%-10% total shareholder return with 4%-6% coming from AEPS growth through 2021 seems conservative. Demographics picking-up momentum and now usage/customer is climbing too; we look for this to continue moving up. Investments in renewables and gas-fired generation helps DUK move away from coal and is right move. We expect DUK to surpass high-end of its 4%-6% AEPS CAGR through 2021 thru development of both organic natural gas projects and acquired natural gas businesses. DUK continues to use regulatory filings to drive growth. We believe another transformative gas-based acquisition is in the making within 12-18 months or by yearend 2018 that would have multiple benefits. Organic growth target for gas business is to increase its contribution in AEPS to 15% from 8% estimated for 2017. We believe this is meaningless. We believe DUK will achieve $850MM cost savings over next 10 years.
Completed major overhaul of model to eliminate GenOn, GenOn debt, incorporate Retail gas business, and flattened out our commodity price curve. Net result is that estimates flattened but our NIV/share remains at some $40/share. Also, raising our ST-Target to $30/share from $22/share. NRG has done a great job of realigning its strategy starting with GenOn and moving-on to its B/S management, and now its strategic overhaul. We believe these are all the right moves, and we expect that these will translate into further upside for NRG. With new strategy, we’d also expect that NRG can reduce its hedging exposure but NRG has yet to disavow share buybacks. We’d still like NRG to officially and separately reestablish customer-based marketing and trading business through bankruptcy-remote sub with strong, consistent and vigorously enforced risk-management policies. We believe that NRG will sell NYLD with the rest of its renewable portfolio and believe that NRG would be successful without both. We look for NRG to aggressively expand its Retail business, which would also allow it to reduce hedging. We look for continued modest recovery in commodity fundamentals and macro-economic tail wind to pick-up.
Regulatory filings continue; strong execution; valuation compelling || 2Q2017 results and earnings call did not add any to or take away from our thesis that EXC’s endgame is to create optionality for ExGen. To do so, we believe that EXC plans to use ExGen cash flow to propel Utilities’ CAGR in AEPS at some 6%-8% through 2020, while lagging dividend CAGR at 2.5%. allowing Utilities dividend payout to go from almost 100% to about 77%, making it possible for Utilities to self-fund equity needs beyond 2020. This then creates ExGen optionality for EXC, in our opinion. Key to this strategy is to ensure ExGen cash flow, which drives need for very high hedging levels far in advance. However, given liquidity issues in hedging market, we look for EXC to expand its Retail business, curtail its hedging program commensurately, and potentially take a more open position, taking advantage of its strong financial position. The plan also requires EXC to continually make timely regulatory filings to ensure returns consistent with authorized ROEs. We believe that EXC’s next major acquisition would continue in the utility space. Despite court results in NY and IL, we are still of the opinion that legal challenges to zero emissions credits (ZEC) in NY and IL will prevail, because ZECs do distort pricing in wholesale markets by increasing supply that otherwise would not be economic.
We believe CPN is all but privatized; sticking point would be SB100 || We feel CPN already has a deal or is close. Key sticking point is likely SB100 in CA that mandates 100% renewable for retail sales. If passed, SB100 would relegate CPN’s CA CCGTs relatively useless or would have to run as peakers, which diminishes CPN’s value. Our preliminary valuation suggests that CPN’s equity value would be about $0/share if all of its CCGTs were shut-down in CA, $15-$20/share, if run as SCGTs, and over $30/share with normal operations. Therefore, we believe that CPN will be privatized between $17-$18/share, in-line with our ST-Target. If the deal fails then we agree CPN should focus on debt repayment – $1 debt repay is at least $1 accretion to equity value – and Retail. But as we previously noted, it seems macro-economic situation is improving, and we feel it would accelerate into 2018. Target debt repayment of $2.7B translates into at least some $7.60/share. Operationally, we believe that expansion of Retail through organic means is correct given that major pieces of the business is in place. We agree accelerated closure of coal plants is coming, industry is moving more towards reliance on renewable energy, and even the slow improving natural gas prices are all tailwinds for ST-to-MT gain for CPN. Strategically there’s little to criticize, and it seems CPN has disavowed share buybacks. But, in improving fundamental market and aggressive debt repayment, we believe CPN’s hedging program is too aggressive. In MT-to-LT, we believe importance of heat rate will likely dominate IPP valuations.
PNM performed as expected; now it’s up to regulatory matters || Management has negotiated well through a maze of complications, but now PNM’s future depends regulatory matters, in our opinion. 2018 GRC settlement agreement was reached and waiting NMPRC final decision (FD); we’d estimate by March 2018. PNM 2018 RPS plan with FD by YE2017. Final IRP looks to close coal plants, which is most cost effective and renewable plan; decision expected 4Q2017. PNM AMI installation supplemental hearings in Oct. 2017, and TNMP GRC to be filed no later than May 2018. NMPRC rulemaking on utility ratemaking policy has public workshop scheduled September 14, 2017 – this is NOT about rate structure but more procedural matters and developing framework for consistent rulemaking in such matters as cost of capital and limiting litigation in certain ratemaking processes. No changes to demographic assumptions. Regardless, we raise our outlook for CAGR in AEPS through 2019 to about 10.3% from 8.6% based on strong 2Q17 and pending regulatory matters. Total capital spending estimate is some $1.76B (some $960MM of depreciation) through 2020. PNM maintaining 2017 AEPS guidance of $1.77-$1.87, which we view as conservative given 1H2017 results.
Quarter was disappointing but raising guidance in show of confidence || Strong 1Q17 results were partially offset by weaker than expected 2Q17, but management is showing confidence by raising 2017FY AEPS guidance by about $0.09. Entered into settlement discussions for 2018 GRC, but dual-tracking litigation process. Strong execution, strategic evolution and focus on core strengths makes for attractive investment. Strategically, we like focus on utility projects with minimal distractions. Final decision on cost of capital proceedings were reasonable with ROE of 10.30% down 0.15%. Renewable integration’s challenging but no big surprises, yet. DC tax plan should be favorable: Likely both direct and indirect benefits. High growth likely to continue beyond 2020. Dividend payout ratio has caught up to earnings power of SCE logging-in at some 51%. We look for continued high capex spending on transmission, distributed generation, electric vehicle (EV) infrastructure, select renewable generation, energy storage, energy efficiency and grid modernization. LT investments should drive LT AEPS CAGR above 7%-9% forecast range, in our opinion. We’d support decision to sell SoCore Energy, and like expansion of energy advisory and service business at Edison Energy.
Brilliantly boring quarter and strong operational execution bodes well || Although 2Q2017 was marked by stronger than expected June weather, the Utility performed well meeting over 50% of its power needs through renewables. Other than minor updates, small shifts in capex, update on its cost of capital and 2017 GRC – both of which did not surprise – PG&E marked an uneventful quarter. Despite strong start to 2017, keeping guidance same. Like all businesses, it seems like PCG is not including upside from regulatory, economic, and tax policy changes, which we feel may lead to higher earnings. However, PCG is talking up MT-LT AEPS CAGR, which we agree with. PCG expects to issue some $400MM-$500MM in new equity in 2017, $100MM lower on the top range and no need for new equity starting 2018. Capex plan for 2017-2019 is not materially changed. We continue to be intrigued with PCG’s pursuit of independent transmission projects with TransCanyon but no update was provided. We continue to expect PCG will grow dividend through 2019 and expect dividend payout ratio to increase closer towards 60%-65% by 2019. PG&E’s NT investment program should drive shareholder value. Diablo Canyon issues close to resolution but stranded costs isn’t expected to be material, if any. We feel starting in 2018 PG&E is set to join its CA peers as a strong, growth-oriented utility investment with strong prospects through the LT-horizon.
The US District Court of the Southern District of New York (Fed District Court) yesterday ruled through New York Southern District Judge Valerie Caproni dismissed all challenges to New York’s Zero Emissions Credit (ZEC) program
The decision by Judge Caproni, though seemingly logical, is actually spurious, in our opinion. The decision was based on the following logic and comparison:
While we do appreciate Judge Caproni’s position and interpretation of the law, we note several inconsistencies in the Judge’s arguments
By acknowledging that financial subsidies do allow otherwise uncompetitive sources of generation to be built, Judge Caproni is acknowledging that financial subsidies do distort market pricing because it increase supply into the market relative to demand, which by definition, ALWAYS NEGATIVELY affects pricing
Conclusion: Therefore, we continue to believe that as the case is appealed to higher judicial authority, we maintain that the most rational outcome is the reversal of both NY and IL subsidies for nuclear power. However,
Soft winter weather (warmer than normal) has not helped natural gas prices currently, nor the prospect for strong natural gas prices in 2H2017
However, due to declining production, storage levels have continued to remain below record levels seen last year
LNG IN KOREA
There was an article in the Central Daily News Agency (CDNA) of South Korea that predicted a large shortage of global LNG supply by some 2024 that would have a strong impact on pricing
In a related article, the CDNA is contending that India is set to renegotiate its contract with Cheniere Energy (LNG), also due to high pricing
Given our natural gas outlook, it is natural that investors may think that our view on the power sector is negative; however, it is not, particularly given the developments at NRG Energy
We believe that the power sector is at the cusp of another paradigm shift in which unprofitable assets finally exit stage left (or right, we don’t care which as long as they do)
UTILITY AND INFRASTRUCTURE SECTORS
We believe that the flight to safety is over and a general migration towards a “risk-on” portfolio started in 1Q2017, which we expect to continue into 2018
Also, we expect interest rates to continue rising, which isn’t going to do any favors for the utility and infrastructure sectors in terms funding costs and comparative investment profile relative to fixed income instruments