Investors are even more cautious utilities with only 20% expecting outperformance and 49% underperformance over the next year. This compares to 26% outperform and 45% underperform in the July poll and bullish views early in the year. Expectations for higher rates and tax reform might be a reason but investor views don’t support this. A majority (57%) see rates staying flat and most see a delay in tax reform to 2018 vs 2017 but 22% now see nothing getting done vs 9% last poll. Within utilities, Power has caught up to Regulateds for the first time since we have done these polls with both showing 40% overweight and 60% underweight. Power was only 5% OW and Regulateds 76% just back in April. Utilities have underperformed the market YTD after a recent pullback – we think this may be setting up for a contrarian buy opportunity but would be patient.
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SCG has been lambasted by the press in SC, as state lawmakers investigate what led SCG/Santee Cooper to abandon the Summer new nuclear project and how to protect ratepayers. The investigations continue; this week the US Attorney’s Office announced one. Despite the political mess, SCG hopes to work with lawmakers and intervenors, including consumer groups, to reach a settlement on how much of the $4.9B cost to date will be recovered. SCG recently said its goal is for no further rate increases related to the project even though the state’s Baseload Review Act allows for prudent spend to be rate based if abandoned. Shares have trailed the UTY by 3100bp YTD. But we find SCG situation still uninvestable given a wide variety of outcomes, which have negative skew. We cut our PT by $7 to $59.
NEP shares have performed very well this year but we still view it as a top idea at these levels. NEP has a 3.6% yield (going to 4% around year-end) with 15% dividend growth likely through at least 2022. The runway for 15% growth beyond 2022 keeps getting longer with recent attractive financings we discuss below and parent NEE’s continued backlog growth. We view NEP as an attractive total return play, highest quality partnership vehicle with low IDRs, a diversification option for MLP funds, and one of the best ways to play the growth in renewables behind industry leader NEE. Bottom line, this remains one of our best ideas in the utility, power, and midstream spaces.
As we wrote last week, the summer was a dud for power markets and fundamentals continue to look challenged. That said, interest in the sector remains hot and heavy, with the main focus areas being M&A / consolidation, asset sales, and potential market structure reforms. Vistra and Dynegy have had strong stock runs and a potential combination remains top of mind in the aftermath of the latest competitor conference. On the other hand, NRG stock has underwhelmed in September (though still massively outperforming year-to-date). We point to profit-taking, near-term skittishness on asset sales, and the anticipated impacts from Hurricane Harvey. Below we dive into more detail with the latest investor feedback on each stock.
Wolfe Research's Senior Utilities analyst, Steve Fleishman, hosted a Fireside Chat with Debra Reed the Chairman, President, and CEO of Sempra Energy.
In virtually every major competitive power market, peak load disappointed this summer and fell well-short of initial forecasts. California broke load records on its recent heat wave, but the market can be considered semi-competitive at best. Meanwhile, PJM and ERCOT fell over 6 GW and 3 GW short of peak summer load forecasts respectively. Further, both markets saw peak load fall relative to last year – PJM down close to 7 GW, while ERCOT was down 1.5 GW. This was underwhelming, particularly in ERCOT where demand growth has been resilient in recent years. New England and MISO weren’t much better – with both falling short of forecasts and last years’ numbers as well. That said, summer weather was relatively mild so it’s hard to judge how much of the peak disappointment was attributable to this versus ongoing demand pressures. In the table below we summarize our demand data in key markets over the last several years.
Last month, SO and its partners announced they will proceed with the Vogtle nuclear project, subject to conditions. We viewed Vogtle as a “damned if you do, and damned if you don’t” decision, as “no go” would have hit the stock upfront but removed construction risk; whereas “go” makes stakeholders, including politicians and regulators, happy but leaves at least 5 years of project risk. SO trails the UTY by around 1000bp YTD; but that is around 400bp better since the “go” decision was made. The stock trades at a 12% discount to peers and has the highest yield among peers (4.6%). Still, we are cautious long-term on Vogtle risk.
We recently visited the NCUC and Public Staff. We talked trends in utility regulation at a high level. We believe NC regulation has been fair, namely on approving settlements in rate cases. But past is not necessarily prelude, especially when politically sensitive items (coal ash) and new riders are expected to be addressed in DUK’s active rate cases. Speaking of, we still see the two NC cases as overhangs, given the typical unknowns, such as the allowed ROE and equity ratio, and the new unknowns on coal ash and riders. The next data point is 10/20, when intervenors file testimony in the DEP case. We summarize our thoughts below and elaborate in the report.
We continue to wish our Gulf region-based investors the best in the aftermath of Hurricane Harvey. We recently covered the impacts to our midstream coverage in our Sunday weekly (link). Within our utility coverage we have not heard of any significant structural damage – power plants and transmission lines appear largely intact and still operational. Last week, CPN confirmed that there has been no material damage to its power plants and that a “vast majority” of its 9 GW ERCOT fleet was available to be dispatched. NRG is not anticipating a material impact on its generation business given no damage and that it’s nearly fully hedged. While there will be some lost retail margin, loads have since returned to near-normal conditions and an ongoing impact is unlikely. CNP is seeing only minor associated costs and after losing 100k customers initially, remaining lost load is down to just a few thousand customers.
Our annual utility and power conference is fast approaching. This year we have added an oil/gas day led by the Wolfe energy teams. Participating companies are on the right and there is still time to register (here). The conference provides a unique mix of company presentations via panel discussions and 1x1s that feature management/industry leaders. This report provides a list of questions to ask companies and includes model summaries. Below are industry themes expected to be addressed.
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