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 …

Continue Reading →

EXC 1Q2018 Earnings (05/02/2018): EXC on pace to beat guidance and benefit from accelerating economy

We feel EXC is well positioned to benefit from accelerating economy. We feel accelerating economy would boost power and natural gas demand, boosting margins through both heat rates and commodity prices.
EXC valuation implies NT growth rate at about negative-1.34% (at midpoint of 2018E AEPS guidance), which we feel is obviously wrong and in gawky contrast to CAGR in utility AEPS expected at 6%-8% and rate base growth at some 7.4% thru 2020.
1Q2018 results didn’t change our thesis that EXC’s endgame is to create optionality for ExGen
Key to this strategy is to ensure ExGen cash flow, which drives need for very high hedging levels far in advance.
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
We still believe 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
EXC reported $0.96 in AEPS vs. our $0.94 and $0.91 consensus

Continue Reading →

EXC 4Q2017 Earnings (02/07/2018): We agree with management’s valuation frustration

We feel EXC is well positioned to benefit from accelerating economy. We feel accelerating economy would boost power and natural gas demand, boosting margins through both heat rates and commodity prices.
EXC also set 2018 AEPS guidance at $2.90-$3.20, about 17% over 2017A AEPS.
Yet, EXC valuation implies NT growth rate at about negative-2.24% (at midpoint of 2018E AEPS guidance), which we feel is obviously wrong and in gawky contrast to CAGR in utility AEPS expected at 6%-8% and rate base growth at some 7.4% (increased from 6.5%) thru 2020.
EXC intends to boost CAGR in dividends to 5% from 2.5%.
4Q2017 results didn’t change our thesis that EXC’s endgame is to create optionality for ExGen.
We’re puzzled why higher rate base CAGR guidance didn’t translate into higher AEPS CAGR guidance.
ST-Target remains at $55/share; NIV/share goes up to $102 from $90 mostly due to Tax Cut and Jobs Act

Continue Reading →

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 … .

Continue Reading →

EXC 3Q2017: Upside from FERC redesign of power pricing may boost EXC by 36%

3Q2017 results and earnings call didn’t change 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
Key to this strategy is to ensure ExGen cash flow, which drives need for very high hedging levels far in advance
We look for EXC to expand its Retail business, curtail its hedging program commensurately, and potentially take a more open 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
EXC has upside from resiliency pricing, if FERC gets there.

Continue Reading →