Earlier today (11/15/2017) PJM published its much anticipated proposal on price formation enhancements (link). The primary change would allow inflexible generation to set prices when serving demand, which was previously only permitted for flexible units. PJM back-tested the change (based on 2016) and sees a $3.50/MWh uplift to energy prices. This was at the upper-half of the $2-4/MWh range companies had been suggesting. However, this is ultimately expected to be somewhat offset by lower capacity revenues (all else equal), assuming differing bidding behavior and fewer plants that would have otherwise retired due to economics. Net-net PJM predicts a 2-5% increase in total revenues. Importantly, capacity prices are locked in through 2020/2021 (auction year), such that near-term (2018-2021) there could be an energy price benefit without the potential capacity price downside.
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Last week news sources reported that current FERC Chairman Neil Chatterjee was working on a short-term plan to provide financial support to baseload coal/nuclear plants that are at risk of shutting. Consistent with the DoE’s NOPR, Chatterjee is seeking to implement an interim solution by December 11, rather than simply punting to PJM and before undertaking a longer-term analysis. Chatterjee is reported to have been in discussions with FE CEO Chuck Jones and aims to provide monthly payments to “resilient” resources to offset costs of operations. This now sets up an interesting dynamic at FERC. Chatterjee clearly wants to provide support and incoming Chair McIntyre may join him. Meanwhile, Commissioner LaFleur has expressed reservations about potential market impacts and we expect fellow Democrat Glick likely joins her. This leaves Commissioner Powelson as the potential swing vote. While a Republican nominated by Trump, he has been a pro-market advocate while at the PA PUC. On baseload power subsidies, we see EXC and FE (and less so PEG) as having the most to gain.
We are upgrading DUK to Peer Perform based on our belief that reasonable outcomes for both NC rate cases are more likely, given the testimony to date in the DEP case and a history of settling in NC. Hearings in the DEP case begin 11/20, and deals have typically been announced before hearings. Last month, a key intervenor expressed a willingness to settle. If a settlement is not reached, DUK still has high conviction on good outcomes. There is no strong negative thesis on DUK’s stock if a deal is reached, particularly as DUK sees hitting to top half of its 4-6% EPS growth target as its investments grow and accumulate. Despite performing in line with the UTY, DUK still trades at a 4% discount to peers, with only PCG/PPL/SCG/SO trading worse. We raise our PT to $91 based our using an avg group P/E of 17x 2020 EPS.
Wolfe Research's Senior Utilities analyst, Steve Fleishman, hosted a Webcast on this year's EEI conference and 3Q earnings takeaways.
Once again, the tone at the EEI utility conference was constructive without the election buzzkill from last year. Utilities keep adding new capital investment to their plans and receiving constructive rate treatment. Last year renewables were the main theme, this year it was clearly grid investment - modernization, hardening, smart grid, etc. Utilities were very happy with the House tax reform plan – the carve-out from the bonus depreciation and interest deduction changes was a huge political win. Everyone was very confident the wind PTC changes would not pass the Senate – a relief for the renewables players. Finally, there was optimism on the power side for the first time in years given likely PJM market reforms, nuclear ZECs and the ERCOT recovery. A handful of situations remain in limbo – SCG and PCG and to a lesser extent PPL and FE - but most companies have very visible growth and regulatory outlooks.
Yesterday (11/06/17), ERCOT issued a notice of determination that Big Brown Units 1/2 (1,150 MW) and Sandow 4/5 (1,150 MW) are not needed for transmission reliability. This will allow VST to shut these two plants as planned in February and January 2018 respectively, without being subject to a reliability must run agreement. This follows a determination last month that VST’s announced shutdown of Monticello (1,800 MW) would not impact reliability. In addition, ERCOT approved the retirement of TLN’s Barney Davis (300 MW) and City of Garland’s Spencer 4/5 (118 MW) plants. In aggregate, this represents roughly 6% (4,500 MW) of total peak load in the ERCOT system. The initial announcement was a big deal from a market supply/demand perspective and our sense was that at least one plant was at risk of being subject to an RMR. We would characterize yesterday’s announcement as a positive and slight surprise. Adjusting for these coal retirements and using ERCOT’s Capacity Demand and Reserves (CDR) report, we now see reserve margins dipping below the 13.75% threshold and toward the low double-digits by the end of the decade. This is the tightest the market has been in some time. Summer 2018 is clearly setting up to be a big catalyst event for the ERCOT, particularly given the significant exposure that both remaining power entities have to the market. If weather shows up and scarcity conditions prevail, VST and NRG fleets are positioned to benefit.
PNW reported 3Q17 EPS of $2.46 that beat consensus of $2.32. The recent rate increase and weather-normal sales growth drove the increase vs. $2.35 last year. Earnings of $4.16 YTD is already within the 2017 guidance range of $4.15-4.30 (which was reaffirmed), but a meaningful headwind awaits in Q4 related to the timing of O&M. PNW also initiated 2018 guidance of $4.25-4.45, which missed our below-consensus expectations.
LNT reported 3Q17 EPS of $0.75 that missed our below-consensus estimate of $0.83. Mild weather was the primary driver and also caused LNT to cut its 2017 guidance to $1.89-1.97 (from $1.92-2.06 previously). Going forward the company sees a continued weather-normal earnings growth rate of 5-7%; and issued 2018 guidance of $2.04-2.18 that was just below us/consensus, reflecting 6% growth off the original 2017 guidance midpoint.
HIFR reported 3Q17 non-GAAP EPS of $0.36 missing our/consensus estimate of $0.44. Lease revenue growth was more than mitigated by lower lease pricing, increased depreciation and interest expenses. HIFR surprised and gave 2017-18 guidance. For 2017, HIFR sees $1.20-1.24, slightly below our current estimate and further off from consensus. For 2018, HIFR sees $1.25-1.35, missing our $1.36e. Although light, we anticipate additional information on future dividends and possibly LT EPS growth, by or on HIFR’s Q4 earnings call in February. We view the call as a catalyst for the stock given it will be a pure-play transmission company. We maintain our $24 PT.
CenterPoint has become a premium utility growth story by improving earned returns and capitalizing on its service territories’ above average core growth rates. Even though the midstream strategic review continues, the stabilization of Enable and emerging growth potential has also helped CNP’s overall story. That said we believe that the positive utility outlook plus Enable are appropriately priced in the stock. Peer Perform.
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