瑞信-美股-电力公用事业行业-电力与燃气公用事业：2019年AGA金融会议要点-2019.5.24-44页 (2).pdf

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES,ANALYST CERTIFICATIONS,LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS.US Disclosure:Credit Suisse does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as only a single factor in making their investment decision.24 May 2019Americas/United StatesEquity ResearchElectric Utilities Electric and Gas Utilities COMMENTResearch AnalystsMichael Weinstein,ERP212 325 0897w.weinsteincredit-Maheep Mandloi212 325 2345maheep.mandloicredit-2019 AGA Financial Conference TakeawaysWe include our takeaways from meetings with covered companies attending the 2019 AGA Conference in Ft Lauderdale this year,including:DUK,SO,SR,CNP,WEC,D,ED,NI,CMS,BKH,DTE,ES,NWE.Please dont hesitate to call with any questions or follow-up.Some of the highlights and thematic takeaways emerging from this years conference include:DUK and D are unlikely to aggressively pursue any legal or administrative options that could cause even further appeals and delays for the Atlantic Coast Pipeline while a Supreme Court appeal appears increasingly likely after the Solicitor General requested an extension to file.Also,DUK indicated that even with cost increases to date,the pipeline remains deeply economic for Piedmont customers.On solar investment tax credits,DUK indicated that they book GAAP earnings for them entirely in year one,while WEC indicated that were they ever to develop unregulated solar projects,they would avoid tax equity and amortize the credits over 40 years.At NI,the NIPSCO ratecase may be the first in the country to propose the use of tax equity inside a ratebase solar project.It probably wont be the last.Expect a Staff report today(May 24)on the CECONY rate filing for TY 2020.Separately,while ED believes PG&E and California will choose to assume(honor)their renewable contracts,we remain more skeptical given the divergent interests between PG&E Corporation and the states electric customers.Nevertheless,our impression is that ED is considering the possibility of rejection and its possible balance sheet impact given$600M of parent term loans that support the acquisition of Sempra portfolio assets contracted to PG&E.While no action is imminent,SO indicated that no one should be surprised if the Vogtle project ultimately uses its$700M contingency fund($400M from Georgia Power).Expect to see an adversarial Staff report in July on the new construction schedule too.We heard from multiple companies SR,CNP,and NJR to expect lower(more normalized)non-regulated gas marketing earnings in 2019 vs a very strong 1Q18 for all of them.The presence of more pipelines and more supply across the US is reducing both volatility and geographic/seasonal basis differentials.Hearing some discussion among both investors and companies that this years 1%increase in long-term earnings guidance to an average 6%-8%after tax reform may have been too aggressive for some companies,with some signs of weakness emerging during the 1Q earnings season.We continue to see the recent accelerated underperformance of CNP as 24 May 2019Electric and Gas Utilities2well overdone management believes they will simply have to prove that their post-merger 2H seasonality of earnings is dependable.Given the increased backlog at Infrastructure Services and the lack of anything unusual at Energy Services,we think this one deserves a second look.Continue to see a move in many states toward a preference for a more modular and renewable approach to long-term resource planning.Indianas recent rejection of a large CCGT matches up with similar portfolio approaches in Michigan,Wisconsin,and Georgia.We continue to emphasize that renewables(even at 50%/50%PPA/ratebase)create more opportunity for ratebase growth than traditional fossil fueled investment.NI expects clarity on remaining liabilities and insurance recoveries by 3Q19,as well as a report from the NTSB.Any change to financing plans would not be dilutive to 2020 as any possible increased equity need in 2019 would be a pull forward from 2020(no change to expectations of$200-$300M annual equity across the two years).CMS highlights multiple pathways to earn above their authorized 10%ROE.DTE noted that their recent acquisition of another 30%of LINK for$275M was priced at 10 x 2020 EBITDA.BKH indicated that the Wygen I ratebase option is likely to be dilutive which is not a surprise given a strong PPA in place now,although the dilution may be a bit heavier than the$0.01-$0.02 we had been assuming and more likely in the$0.05-$0.09 EPS range.ES sees grid modernization opportunities as long-dated into the next decade,while CT advanced a bill for 2 GW of offshore wind and Mass launched its next tranche RFP this week too.NWE noted several positive aspects of their recent partial settlement in Montana,but given the timing of the IRP there,management thinks its unlikely that the company will be in a position to provide 2019 guidance this year or 2020 drivers at the EEI conference in Nov,as has been their custom.24 May 2019Electric and Gas Utilities3Table of contentsDuke Energy(DUK;Neutral;TP$91).4Southern Company(SO;Underperform;TP$51).7Spire Inc.(SR;Underperform;TP$75).9Centerpoint Energy(CNP;Outperform;TP$32).11WEC Energy(WEC;Neutral;TP$77).13Dominion Energy(D;Neutral;TP$77).16Consolidated Edison(ED;Underperform;TP$80).19Nisource Inc.(NI;Outperform;TP$30).25CMS Energy(CMS;Outperform;TP$59).28Black Hills Corp.(BKH;Neutral;TP$72).31DTE Energy(DTE;Underperform;TP$118).34Eversource Energy(ES;Outperform;TP$76).36Northwestern Energy(NWE;Underperform;TP$64).3924 May 2019Electric and Gas Utilities4Duke Energy(DUK;Neutral;TP$91)Atlantic Coast Pipeline(ACP)-Supreme Court is the best path to resolution.Essentially,this is seen as the quickest path to a resolution that is also final without the possibility of further appeals.For example,any attempt at this stage to launch a corrective legislative or administrative fix could backfire in the sense that these actions could provoke new,separate appeals that could end up extending the current delay of construction even further.While both DUK and D management teams have been relatively silent on administrative options,we could imagine scenarios that might include executive branch changes to the administration of the Appalachian Trail(e.g.,delegating these responsibilities away from the National Park Service,for instance)as a possibility,although this is probably the kind of action likely to provoke further appeals and delays(and perhaps legally dubious anyway without Congressional action).And the case is inching closer to the Supreme Court.Importantly,on May 15 the US Department of Justice Solicitor General(SG)and ACP each filed requests for a 30-day extension to file appeals to the US Supreme Court of the 4th Circuit decision that rejected the US Forest Services authority to allow the pipeline to cross under the Appalachian Trail(see our 2/26 note“Court to Pipelines:Take a Hike”).In particular,the SGs involvement could be a strong indicator of whether the case might be heard by the Court.Our understanding is that out of nearly 7,000 cases considered annually,the Supreme Court only hears about 1%of them,but of the cases heard,nearly 75%are recommended by the SG.On timing,expect the SG and ACP appeals to be filed in the next 30-60 days(if request an additional 30 days)with a decision from the Supreme Court as to whether they will hear the case sometime in the Oct/Nov timeframe.If taken,expect oral arguments in Spring 2020 followed by a ruling perhaps around June 2020,which would be in-line with the latest guidance for a mid-to-late 2021 full in-service date at a cost between$7.25B and$7.75B.Duke has already taken out$0.05/sh of AFUDC from the project for 2019 guidance,based on ACP construction commencing in 3Q19.Our TP for DUK assumes a 75%probability for successful completion of ACP that results in$3/sh credit out of$5/sh potential.We continue to assume 50%cost sharing with shippers above$6.25B.Even with the higher price,ACP rates remain attractive to Piedmont customers.We see no indication that the pipeline is in danger of cancellation despite delays and cost increases.Duke notes that the partnership with Dominion brought substantial incremental load along the route that brought down rates for Duke customers in North Carolina.Furthermore,it is estimated that ACP allows Piedmont to avoid as much as$500M in potentially prohibitively expensive infrastructure upgrades that would be needed to bring gas from alternative sources(e.g.,Transco pipeline)to achieve even a portion of the expected load and economic growth coming east of Fayetteville once ACP is online(i.e.,alternative sources would likely be inadequate to the task).As a comparison,interconnection to ACP costs about 10%of what interconnection and laterals further west would cost.oPiedmont ratecase filing.As long-anticipated(the last case was in 2013)a case was filed in North Carolina on April 1 for an$83M rate increase for infrastructure investment based on 10.6%ROE and 52%equity on$3.3B ratebase with rates effective yearend 2019.Biological Opinion arguments progressing.We continue to expect work away from the Appalachian Trail to resume in 3Q19 as this issue approaches resolution one way or another.Arguments were heard at the 4th Circuit in Richmond two weeks ago and we expect a decision in late-July or early-August.As a reminder,construction on the pipeline remains voluntarily halted since an earlier 4th Circuit ruling(Dec 7)that stayed the projects US Fish&Wildlife Service Biological Opinion(BO),including its Incidental Take Statement(ITS)for the entire 600-mile route.Despite this latest setback for the 24 May 2019Electric and Gas Utilities5AT crossing,ACP continues to work on resolving the BO issues,with hearings at the 4th Circuit just completed May 9,and still expects to resume“at least partial construction”in 3Q19.D and DUK have noted previously that despite the stay of the entire BO,none of the species cited in the complaint are actually located in the 200-mile segment within North Carolina and the four species at issue only inhabit about 100 miles of the total route inside Virginia and West Virginia.Furthermore,of the four species at issue,only one(the Rusty Patch Bumblebee)requires additional survey work to be completed by the US Fish and Wildlife Service,with the survey“window”open in July(prep work is underway).Regardless,a decision from the court on the stay this summer could restore validity to the permit from US Fish&Wildlife and allow construction to resume immediately.However,even if the court rejects the permit,we would expect US Fish and Wildlife to immediately work on producing a new permit cured of flaws with additional survey work as required,still allowing work to resume in 3Q.Recall that this is not the first time the 4th Circuit has invalidated the BO,with a prior remand on Aug 6,2018 followed by an updated permit from US Fish and Wildlife only a few weeks later on Sept 11,2018.South Carolina on their minds.Dominion management does not view Dukes disappointing May 21 rate orders for Duke Energy Progress(DEP)and Duke Energy Carolinas(DEC)from the South Carolina Public Service Commission(PSCSC)to be applicable to them as a read-through.The orders include a disappointing 9.5%ROE and disallowed$147.6M of recovery for some coal ash basin remediation costs that the commission appeared to separate as associated with North Carolinas Coal Ash Management Act and thereby deserving of separate treatment(management disagrees and will file a motion for rehearing).We see some of the more disappointing aspects of the order as possibly related to new commissioners getting their footing and D sees the issues as limited in scope to DUKs circumstances,particularly the allocation of coal ash remediation expense,which is a non-issue for Dominion.Ultimately,DUK management believes that South Carolina will be a positive jurisdiction for them and notes that the PSCSC also approved a 53%equity ratio and a 20-year flow back for unprotected excess deferred income taxes,which helps with cash flow.Furthermore,Dominions(formerly South Carolina Electric&Gas)last ratecase was 2011 and the next rate filing planned for 2021 is not expected to be controversial,focused mostly on customer growth in the intervening 10 years.Furthermore,while Dominion South Carolina will also try to improve the currently earned 9.7%ROE vs 10.25%allowed,a 50 bps move is only worth about$0.02 EPS to Dominion.DUK still interested in Santee Cooper.The state legislature is still considering bids,and note that Santee Cooper management is allowed to bid in as well.With 60%of Santee Coopers assets under FERC regulation,this mitigates any perceived risk from the PSCSC,which mostly regulates distribution assets in the Myrtle Beach area.DUK solar booking the tax credits upfront.Recall that in February,Duke guided to$230M income in 2019 for Commercial Renewable(CR)from only$97M in 2018,driven heavily by investment tax credits.DUK is also not a significant cash taxpayer until 2027 and hence is taking advantage of the tax equity market in most circumstances.Management confirms that on a GAAP basis,the ITC from virtually all non-regulated solar projects is booked fully in year one under the Hypothetical Liquidation Book Value(HLBV)method.As weve noted previously,we assign less value to EPS in our TP from temporary 1-year tax credits than contracted revenue streams.oCash is always upfront.We also note that cash is always taken for the ITC immediately under all circumstances,regardless of how the GAAP earnings are treated.oAny use of tax equity requires the use of Hypothetical Liquidation Book Value(HLBV)accounting.In the case of non-regulated 24 May 2019Electric and Gas Utilities6companies that choose to use tax equity partnerships to monetize the ITC,the partnership flip structure typically leads the project developer to book GAAP earnings from the ITC in year one under the Hypothetical Liquidation Book Value(HLBV)method even though the cash benefits pass to the tax equity partner.However,in the case of tax equity lease pass through structures,GAAP earnings from the ITC are more conservatively amortized over the five-year IRS recapture period under HLBV.oNo tax equity case.Our understanding is that non-regulated companies with a tax appetite may choose to keep the ITC and amortize the GAAP earnings over the life of the contracts(or perhaps life of assets,depending on interpretation of the tax rules).WEC has said that in the case where they might develop non-regulated contracted solar projects in the future,they would prefer to amortize the credits over a long period of time,e.g.,40 years.oRegulated utilities normalize GAAP earnings from the ITC.As a