Keeping guidance implies 4Q17 would be no more than $0.20, which we feel is too low
PNM accounts for low 4Q17 guidance due to higher donations to PNM’s Foundation and higher costs
New guidance for CAGR in AEPS to 2021 of 6%, but dividend CAGR likely higher. We estimate CAGR in AEPS thru 2021 at some 7.7%.
Lowering our 2018E AEPS due to 2016 rate case
We see upside driven mostly by better economic performance
PNM’s future depends on regulatory matters, in our opinion
Total capex estimate is some $3,254MM (some $1,557MM of depreciation) for 2017-2021
PNM may need to issue equity to fund its capex program using the at-the-market structure beyond 2019
Guidance meeting December 8, 2017 at New York Stock Exchange
Keeping guidance implies 4Q17 would be no more than $0.20, which we feel is too low
DOE report titled “Staff Report to the Secretary on Electricity Markets and Reliability” dated August 2017, and
Summary of the 6 page PJM report titled “Energy Price Formation and Valuing Flexibility” dated June 15, 2017
Following are some of the highlights:
Changing circumstances are challenging current reliability:
Energy efficiency is done:
Retired plants were mostly baseload-type plants:
Grid operators must place and are placing increasing premium on flexible resources
More focus on resiliency is needed:
Current wholesale pricing inadequate for modern grid:
Cooperation between power and pipeline sectors is becoming crucial to reliability and resiliency, especially in winter,
Four issues that threaten grid reliability due to forced early retirements:
Our conclusion: While we believe that the DOE Report is critical to understanding the evolving electricity market, we believe that there are a number of issues that may be challenged:
Natural gas isn’t the main culprit for plant closures, in our opinion
Market forces are enough:
While DOE is concerned about natural gas price spikes, we’re not:
Decoupling of economic output and power demand is not solely a function of efficiency, in our opinion:
We were disappointed by the fact that the DOE did not incorporate analysis from potential accelerated economic activity, which we expect that we believe will accelerate demand
CPP repealed: As expected, the Administrator of the US Environmental Protection Agency (EPA), Mr. Scott Pruitt, repealed the Obama-era CPP regulation aimed at forcing generators to reduce CO2 emissions by 32% from 2005 levels by 2030
CPP was like forcing car manufacturers to pay Tesla: The only way to achieve the CPP objective would have been for coal-fired generators to buy Renewable Energy Credits (REC) to offset CO2 emissions from its own plants, which is tantamount to subsidizing competitors’ generation
This would be equivalent to car manufacturers paying Tesla $X/car for every non-electric car that they sell to the consumers
EPA asks the industry for help in writing new regulations but what could be recommended? This was not expected. Regardless, we would expect that any proposed recommendations would involve inside-the-fence solutions
Conclusion: We are not surprised at the repeal of CPP; however, we are somewhat puzzled by the EPA’s request of the power industry to help it write new regulations regarding CO2.
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.
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.
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:
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.
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.
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.
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
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.