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 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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NRG 1Q2018 Earnings (05/03/2018): NRG poised to take off but we’d wait for end of $1B share buyback

1Q18 AEPS was $0.52 vs. our ($0.04) and consensus $0.21 estimates, while EBITDA came in at $485MM vs. our estimate of $346MM. Upside was due to strong Retail performance, partially offset by higher interest expense.
Regardless of fundamentals, we would wait until SBP is over before buying NRG. Otherwise, NRG’s strategy, financial planning (other than SBP), debt repayment plans, and business profile are all optimized, in our opinion.
It seems SBP may be inhibiting NRG from making good investment choices
Raising ST-Target/share to $42 from $39 due to strengthening economy, asset sales, and TCJA benefit, but when SBP ends NRG is likely to lose some 10% before advancing again
NRG has done great job of realigning its strategy starting with GenOn and then its B/S management, and its strategic overhaul. We believe these are all the right moves, and we expect that these will translate into further upside.
We like that NRG is lowering its hedging levels in view of strengthening economy and commodity fundamentals
Asset sales look to close by yearend (100% of NYLD, renewables and South Central portfolio). We look for NRG to expand Retail, especially in PJM where it has excess generation relative to retail load. Sold Canal 3 for net of some $130MM.

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NRG 4Q2017 Earnings (03/01/2018): NRG decides to waste some $100MM in shareholder capital

NRG declared $1B share buyback program, which means it is wasting some $100MM in shareholder capital
Reported 4Q17 AEPS of $0.22 vs. our $0.12 and consensus of $0.31
Raising ST-Target/share to $39 from $35 on strength of rising economy, asset sales, and TCJA benefit
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
With new strategy, we’d also expect that NRG can reduce its hedging exposure
Closure of asset sales looks to close by yearend (100% of NYLD, renewables and South Central portfolio)
We look for NRG to expand its Retail business, especially in PJM where it has excess generation relative to retail load, 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

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NRG (02/07/2018): ~$9.8B asset sales cements NRG’s future; we like what NRG is doing

NRG announced that it sold $2,782MM in assets and removed almost $6,970MM in consolidated debt from its balance sheet:

o Sale of integrated renewable assets and NRG’s interest in NRG Yield (NYLD) to GIP for $1.375B in cash and the transfer of some $6,474MM in debt

o Raised $407MM in cash proceeds and transferred $496MM in debt through the drop down of Carlsbad Energy Center (527MW) and Buckthorn Solar development project (154MW) to NYLD

o NRG’s South Central businesses consisting of 3,555MW and associated PPAs were sold to Cleco Corporate Holdings (Cleco) for $1,000MM in cash proceeds

· Sales proceeds translate into a value of about 8.6x EV/EBITDA

· NRG expects to sell additional renewable and conventional assets worth some $275MM in cash and, with the sale, transfer of an additional $995MM in debt for total asset sales proceeds of some $3,207MM and removal of some $7,965MM in debt for total realized value of about $11,172MM

OUR ANALYSIS

· Given current valuations for NRG is about 9.0x 2018E EV/EBITDA, the current sale is reasonable

· We like that NRG is taking a stance on recovery of conventional power generation, which we agree with, and looking towards its Retail business for growth – we’d estimate particularly in the PJM states
Conclusion: Overall, these were good transactions, in our opinion

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2018 Industry Update: Economic growth should favor commodities-driven businesses in 2018

Warmer than normal winter:
Weak gas prices:
However, 4Q2017 and 1Q2018 power gross profit could be better than expectations:
Similarly, we’d expect natural gas infrastructure businesses to perform well for 4Q2017 and 1Q2018:
We expect economic growth to surpass 4% for 2018:
Strong economic performance should lead to strong power sector performance:
Commensurately, we expect natural gas infrastructure businesses to perform well:
Adjusted for seasonality, we expect natural gas prices to creep up throughout 2018 and, given normal weather, we’d expect natural gas prices to average at or just below $3.50 for 2018 with an exit price of some $3.65-$3.75:
Conclusion: Going into 2018, we believe that natural gas prices will stage a moderate recovery, but power margins should do better benefiting from accelerating economic activity. Individually, we continue to like… . However, the real star may be … . Among the utility names, we like … due to their growth prospects. We also look for … to outperform as … .

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GOP Tax Bill is win for utilities, power, infrastructure, and customers

GOP Tax Bill (GOPTB) looks to be positive for industries and companies in our coverage universe
Key aspects of GOPTB that affect our coverage industries and companies include, but not limited to:
21% corporate tax rate would be expected to reduce deferred income tax liability by some 40%
Interest expense deductibility capped at 30% of EBITDA for 2018-2021 and to 30% of EBIT after
100% investment deduction, except for utilities that would continue to deduct 100% interest
Preservation of existing investment tax credits (ITC) and production tax credits (PTC)
Repatriation of profits tax at 15.5% for cash and equivalent and 8% for non-liquid assets
Base-erosion & Anti-abuse Tax (BEAT) not impactful: If payments to foreign affiliates are 3% or more of a large company’s tax deductions then BEAT is imposed. We do not view this as relevant to companies that we cover, given 100% of PTC would be allowed to offset up to 80% of BEAT
AES Corp. faces large disqualification of interest expense deductibility but given its $3.7B in NOLs, we do not believe this to be an immediate issue; AES has time to remedy the situation:
NRG Energy shouldn’t have any issues with interest expense deductibility:
Exelon Corp. isn’t expected to have any problems with interest expense deductibility:
Cheniere Energy, oddly enough, shouldn’t have any problems with interest expense deductibility:
BKH, CNP, DUK, EIX, PCG, PNM, SRE should not have any issues with interest expense deductibility but may be able to use 100% investment deductibility to create win-win:
We note that the inability to deduct interest expense is limited to $0.21/$1 of lost deductibility
Loss of interest expense deduction could lead to some unexpected corporate behavior

Conclusion: Net effect of GOPTB looks to be positive, more so if utility holding companies are permitted to use non-utility subs to take advantage of the 100% capital investment deduction

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NRG 3Q2017: As economy rises-up from ashes, feels like NRG’s poised to take flight

Reported 3Q17 AEPS of $0.78 vs. our $0.74 and consensus of $1.01
Revised commodity price curve, which resulted in higher NIV but slightly lower estimates
Raising ST-Target/share to $35 from $30 on strength of rising economy
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’re intrigued and titillated by potential of Boston Energy Trading and Marketing (BETM like “bet ‘em”)
As expected, it appears NRG will sell 100% of NYLD with rest of its renewable portfolio and believe that NRG would be successful without both
We look for NRG to aggressively expand its Retail business, especially in the PJM where it has excess generation relative to retail load, 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
We like aggressive debt repay and cost cutting efforts. Successful asset sales would be ST driver.
ST we expect proceeds to be applied to debt repay, but MT it is likely to be redeployed to acquisitions and other growth projects

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NRG 2Q2017 Earnings: Decks are cleared, execution at forefront; waiting for results to rise-up

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.

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The Logic NY Fed Court Decision to Uphold ZECs is Spurious

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,

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