Auvila Quick Note (SRE; 6/28/2018): SRE Analyst Day: If SRE didn’t deliver KO blow to AI then it’s a TKO win

Elliott Management & Bluescape Energy Partners (together Activist Investors (AI)) proposed breakup of SRE into 4 parts: Utilities, LNG/Midstream, Mexico/Lat Am, and sale of renewable portfolio
We oppose this strategy, and management delivered measured but decisive rebuttal of AI proposal, in our opinion
Unlike AI’s understanding of SRE’s strategy, it is not about building a power market conglomerate but about taking advantage of the natural gas value chain, which, in our opinion, SRE is doing very well
Also, outside of the LNG business, none of the other businesses are dependent on Utilities funding its operations, and management had already decided to sell SRE’s renewable portfolio which necessitated a write-down of some $0.9B
SRE vigorously defended keeping LNG facilities and iEnova in Mexico, which we adamantly support
SRE noted that neither of its foreign businesses depend on external financing, another misunderstanding by the AI, and noted that Cameron LNG trains 1-3 would spinoff some $12B in future cash flow, after debt service
SRE also noted that Total (French major oil company) is looking to invest in Cameron 4&5 and others, including KoGas, may be interested in taking equity position in ECA liquefaction
With regards to CA wildfires, SRE is in-line with PCG and EIX in their view that inverse condemnation must go
SRE noted that over 2018-2020 period, it has some $15B of investments lined-up with upside potential that would deliver some 20% CAGR in earnings, 13% CAGR in EPS, 8% CAGR in dividends, and continued parent debt reduction; post 2020, SRE estimates potential investment opportunity of some $24B, much of it geared towards the development LNG projects
Conclusion: We strongly believe that AI are dead-wrong starting with their general understanding of SRE’s overall strategy. Therefore, … .

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Auvila Flash on SRE (06/11/2018): If reported correctly, Elliott Management and Bluescape Energy Partners proposed restructuring is off-target, in our opinion

Facts

Elliott Management and Bluescape Energy Partners (AI: Activist Investors) acquired some 4.9% of SRE or some $1.3B according to CNBC
In a letter sent to SRE’s management and board of directors, which the company confirmed, CNBC is reporting that the AI believe the reason for SRE’s underperformance despite the stable of valuable assets is because of the complex strategy and diffused focus
It is proposing to restructure the company by breaking it apart into at least three pieces:
Keeping the California utilities and its Texas Utility (formerly Oncor) together;
Packaging its LNG and Midstream businesses together as a second company; and
Divesting, the renewable energy business, iEnova (Mexican energy infrastructure company), and its South American utilities businesses
Revamping the compensation system to more align management incentive with shareholder value creation
By doing so, the AI believe they could push SRE’s stock price to between some $139-$158 per share
The AI supposedly describes SRE’s strategy as a failure to build a power market conglomerate
The AI successfully steered NRG towards a successful strategy and helped management better realize the potential of NRG’s assets, which we strongly supported
The AI also believe that SRE is cannibalizing Utility cash flow to fund other projects — implication is that this is a waste of shareholder capital

Analysis

If as CNBC states that the AI believe that SRE’s strategy is a failure to build a power market conglomerate then it tells us that the AI missed the main point of SRE’s strategy

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Auvila Flash PCG (06/11/2018): CalFire finds PG&E equipment involved in additional October 2017 fires; PG&E to take “significant” reserves

Facts and Figures

CalFire found that in 3 of the 13 fires that PG&E equipment was a direct cause of those fires; meaning, the direct failure (e.g., a pole collapsing, a line separating, etc.) of the utility’s equipment was the cause of the fire
In the remaining 10 of the 13 incidences, CalFire found that PG&E’s electrical equipment was an indirect cause of the those fires; meaning, the indirect failure (e.g., tree top breaking-off and falling on a power line, a branch falling on a power line, a whole tree falling on a power line, etc.)
Due to California law and precedence, and according to GAAP rules, PG&E has decided to take a “significant” reserve on 14 of the 21 fires, the amount which would be announced prior to the publication of the 2Q2018 10Q
Eight of the fire investigation results were also forwarded to appropriate county’s attorney general due to perceived violations of state laws

Analysis

We believe that the CPUC will find that PG&E may have been directly responsible for significant portion of the California wildfires and likely find PG&E directly liable for several wildfires

Conclusion

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Auvila Flash (05/30/2018): FERC/DOJ support IL nuclear subsidies; Favor EXC in overall long IPP strategy

Contrary to what we thought would happen, the FERC and the DOJ filed a (amicus) brief with the 7th Circuit of the US Court of Appeals in support of IL’s Zero Emissions Credits or ZECs
In the brief, attorneys for the FERC and DOJ argued that unlike the MD program that was struck down by courts, the ZECs do not require nuclear plants in IL to participate in MISO and PJM capacity markets
This is in contrast to the MD program …

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Auvila Flash PCG (05/29/2018): PCG looks to be on the hook for 2017 CA Wildfires

CalFire issued its report on 4 of the 21 fires that devastated California in October and November 2017
CalFire claims that in 3 of the 4 fires, PCG was negligent and in the 4th that PG&E’s equipment was involved

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Auvila Flash LNG (05/22/2018): Positive FID issued on CCL 3; next is SPL 6, which we expect within next 12-months

Cheniere Energy (LNG) issued a positive final investment decision (FID) on its Corpus Christi Liquefaction train 3 (CCL 3)
Under a limited notice to proceed, Bechtel Oil, Gas and Chemicals Inc. began construction work in late 2017

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Auvila Flash NRG (05/21/2018): NRG to issue $500MM of convertible senior notes due 2048 and conduct an accelerated share repurchase (ASR)

NRG announced that it intends to issue some $500MM of its senior notes due 2048 with a built-in option to convert to equity or cash or a combination of both at the option of NRG — underwriters would be granted a 15%, 30-day overallotment option
NRG has the option to redeem the notes in whole or in part starting June 1, 2025
Holders of the notes have the option to force NRG to repurchase the notes on September 1, 2025, June 1, 2033, or June 1, 2040
The proceeds of the offering is expected to go towards the repayment of other notes outstanding, and for various fees and expenses
In conjunction with this offering, NRG plans to use cash on hand to accelerate its previously announced $500MM share repurchase program. The ASR program is expected to be executed through:

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Auvila Flash on LNG (05/17/2018): LNG offers to buy remaining 7.8% of CQH that it doesn’t own for $28.24/share

As expected, Cheniere Energy Inc. (LNG) announced today that it is offering to buy the remaining 7.8% of the remaining public float in Cheniere Energy Partners L.P. Holdings LLC (CQH)
LNG is offering 0.45 of LNG for each share of CQH, which translates into an exchange price of some $28.2375/share based on LNG’s closing price on May 16, 2018 of $62.75/share
The transaction is expected to be a tax-free transaction for CQH and LNG shareholders

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DUK 1Q2018 Earnings (05/10/2018): DUK presents good buying opportunity but after $2.0B equity issue

Reported 1Q18 AEPS of $1.28 vs. our $1.08 and consensus’ $1.14. But, adjusting for good weather DUK would have reported $1.12
DUK completed some $1.65B in new equity for 2018 and expects complete $350MM by yearend, which we’ve modeled
Macro-economic indicators are turning up and demographics gaining; we look for these trends to continue
Investments in renewables and gas-fired generation helps DUK move away from coal and is right move
We believe DUK is on track to meet its 4%-6% AEPS CAGR through 2022 thru development of both organic natural gas projects and acquired natural gas businesses, as well as electric infrastructure projects
We believe another transformative gas-based acquisition is in the making by yearend 2020
We believe DUK presents buying opportunity driven by strong capital investment program, strengthening performance and yield

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AES 1Q2018 Earnings (05/08/2018): Strategy & tactics are clear but vision’s cloudy; regardless undervalued

We understand what AES is doing, but we don’t know where it’s going. We can’t answer what AES wants to be when it’s done restructuring?It used to be that AES wanted to be global IPP player.
AES reached agreement to complete troubled Alto Maipo hydro-plant in Panama
We believe improving global economy will provide strong tailwind
AES means to focus on renewables and gas plants in US, so we look for sale of DPL&IPL to fund 10GW of utility-scale solar
We continue to feel AEPS guidance through 2021 is conservative: We feel it’s closer to 13%
AES is trading as if growth is negative
Gas-to-power could be major LT growth source, particularly in Asia – reentry into China?
AES trusts its MCAC LNG strategy and energy storage projects may boost MT-to-LT growth
Achieving investment-grade-credit may be a good strategy
Issues surrounding AES, include, but aren’t limited to: 1) paying more than nominal dividend, 2) hasn’t disavowed share buybacks, 3) growth trajectory isn’t at potential, and 4) we can’t say what AES is anymore, in our view

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