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1、Restricted - InternalNorth America Power & UtilitiesCalifornia: Value of the Century or Utilities in Name Only?Historic wildfires and a unique application of inverse condemnation led to a rapid deterioration in CA utilities equity value; however much of the legacy liabilities for EIX and PCG have be
2、en resolved and AB 1054 fundamentally restructured risk sharing in the state. Yet valuations remain disconnected from the broader US utility group: In this report, we examine the outlook for customer bills in the state and attempt to tie growth drivers impacting financial outlooks for PCG, EIX, and
3、SRE to valuations. We believe utility investors have been content to exclude the CA IOUs from their investable universe for the past few years; however, we believe improvements to the regulatory compact and an acute focus on the mitigation of catastrophic wildfires will ultimately force the market t
4、o view CA IOUs as real utilities. The question of when is still open, and there is a perception that 2021 wildfire conditions are not favorable, but we believe successful execution over the summer and the issuance of financing for legacy liabilities could serve as a catalyst for CA IOUs to trend bac
5、k toward average US utility valuations. Ultimately, we reiterate our Overweight ratings for PCG and SRE as they continue to offer the best barbell approach to realize CA upside. We also view EIX as attractive, but ultimately reiterate our Equal Weight rating as we believe PCG presents a better relat
6、ive value as we await final resolution of legacy liabilities and related financing.Customer bills are the constraint for CA rate base growth, not capital opportunities: The growth investment opportunity for CA utilities is obvious. The state is in the midst of one of the more aggressive clean energy
7、 transitions in the country and the IOUs will play a pivotal role in facilitating the transition from retiring generation sources to new renewable sites and out-of-state imports. This renewable-driven growth capital alone is sufficient to maintain rate base growth in line with most US utilities, how
8、ever it says nothing about the rate base growth to be derived from a critical focus on wildfire mitigation and grid hardening efforts, which also represent material growth drivers. In this report, we summarize and explore key points from a California Public Utilities Commission (CPUC) en banc on aff
9、ordability in the state.The CPUC is showing signs of constructive improvements: AB 1054 remains untested, for (much) better and worse, as there have been no material catastrophic wildfires that would lead to CPUC cost recovery review or eventual tapping of the fund. We believe investor confidence in
10、 the fund will remain cautious; however we note signs of relative CPUC improvement. The approval of securitization is the most material positive in 2021, in our view, however the CA regulatory compact remains strong on a number of fronts (de-coupling shined during COVID-19 volume risk).Barclays Capi
11、tal Inc. and/or one of its affiliates 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 s
12、ingle factor in making their investment decision.COREEquity Research17 May 2021INDUSTRY UPDATENorth America Power & UtilitiesPOSITIVEUnchangedNorth America Power & UtilitiesEric Beaumont, CFA+1 212 526 8334 eric.beaumont BCI, USIan Rapp+1 212 526 3492Ian.RappBCI, USEvan Friedman+1 212 526 4824Evan.F
13、riedmanBCI, USPLEASE SEE ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 17.Barclays | North America Power & UtilitiesHigh Level OverviewCA Utility Growth ProfilesFIGURE 1CA Electric and Gas Utility Rate Base Projections ($mn)60,000PCG: 8.2% Rate Base CAGR 20-23EIX: 6.6% Rate Ba
14、se CAGR 20-2350,000SRE: 13.3% Rate Base CAGR 20-2340,00030,00020,00010,00002020202120222023Source: Company filings, Barclays Research* SRE includes only SDG&E and SoCalGas rate baseThe principal components of rate base growth over the coming decade are similar for all three CA electric utilities. We
15、 believe the lions share of CA electric utility investment for the next 10 years will come from three main buckets; 1) wildfire mitigation and hardening,2) electrification of transportation and buildings, and 3) transmission expansion to connect new renewable assets and bolster peaking capacity (mos
16、t likely from out of state imports).1)Wildfire Mitigation and Grid HardeningWildfire mitigation spending is expected to drive a material amount of capital investment for all CA IOUs over the coming decade. According to the most recent Wildfire Mitigation Plans (WMP) filed in February 2021, PCG plans
17、 to make wildfire-specific investments of $5bn in 2021 and $5.2bn in 2022. EIXs WMP calls for $1.7bn in 2021 and $1.8bn in 2022. SDG&Es plan calls for $646mn in 2021 and $670mn in 2022.We view these spending proposals as marking the mid/low end of the actual capex in the period given actual spending
18、 for the past couple years has come in above WMP estimates. Using 2019 as an example, PG&E spent $3bn on wildfire capex versus its WMP projection of $2.5bn, EIX realized $1.6bn for wildfire capex versus only $671mn projected in its plan, SDG&E spent $307mn versus $220mn projected. The CPUC has recog
19、nized the risk for wildfire expenditures to exceed forecasts and authorized PCG in its GRC to establish balancing accounts that provide for cost recovery of up to 115% of budgeted costs for its wildfire mitigation balancing account, 120% of its vegetation management balancing account, and 115% of it
20、s covered conductor replacement program. EIX has a similar balancing approval for recovery up to 115% of its approved covered conductor budget.The CPUC, in its February 2021 utility cost white paper, projected a 2020-2030 baseline scenario for wildfire costs recovered from customers for each IOU. Th
21、e total associated revenue requirements under the baseline wildfire spending estimates (includes O&M, capital, insurance, WEMA) are $20.2bn for PCG, $14.8bn for EIX, and $3.9bn for SDG&E. The CPUC also estimated a high cost scenario that includes a 20% adder to all cost and capital estimates relativ
22、e to the baseline, where PCG recovers $23.7bn, EIX recovers $17.2bn, and SDG&E receives $3.9bn.17 May 20212Barclays | North America Power & Utilities2)Transmission to Secure Imports and New Renewable GenerationTransmission has been and will continue to be a growth driver for CA utilities. The table
23、below shows CPUC data on transmission-specific rate base growth since 2016 and how the associated rate base increase has translated to customer rates. In CA, the transmission system is administered by the California Independent System Operator (CAISO). CAISO undertakes an annual transmission plannin
24、g process (TPP) that reviews the costs and benefits of proposed transmission projects that expand the capacity of the system. IOU transmission revenue requirements (TRR) are set at FERC through transmission owner (TO) rate cases. FERC determines ROEs for transmission investment in its formulaic TO c
25、ases. Current FERC ROEs for CA transmission owners include a 50bp RTO membership adder (all three IOUs are active participants in CAISO). The CPUC and other parties have appealed FERCs decision re-authorizing the 50bp adder (re-authorized after ninth circuit remanded the adder already) for PCGs TO16
26、 and TO17 cases. Oral arguments were held April 16 2021 at the Ninth Circuit.Transmission planning is delegated to regional system operators and FERC does not conduct its own cost prudency review of investments in the way state commission rate cases do. FERC has previously determined that Order 890
27、(requires transparent transmission planning) does not apply to projects that do not expand transmission capacity. In effect, CAISO provides prudency oversight and approval for capacity-expanding capex, while system upgrade capex that does not expand capacity is not subject to a cost prudency review.
28、 According to CPUC data, 40% of total IOU transmission capex from 2016-2019 was CAISO approved and 60% was self-approved by the IOUs. Of note, 80% of capital forecast in PCGs TO20 formula rate (through 2023) is self-approved. PG&Es TO20 settlement establishes a stakeholder transmission asset review
29、process for projects not subject to review in CAISOs TPP. FERC is also considering, via its own NOPR process, transmission incentive adders. The proceeding has garnered heavy attention from a number of stakeholders and is currently in the comment period. It remains to be seen how each commissioner s
30、ees the issue, however we anticipate the robust comment period will lead to many changes and a thoughtful final order.FIGURE 2Realized Transmission Growth ($mn)Xmission Rate Base20162021CAGRSDG&E289643428.44%EIX517164284.45%PCG584684767.71%Xmission G&A20162021CAGRSDG&E79.970-2.61%EIX49.781.810.48%PC
31、G73.6111.18.58%Xmission O&M20162021CAGRSDG&E62.585.66.49%EIX93.5110.93.47%PCG219.5478.116.85%Xmission Rev Req20162021CAGRSDG&E71610367.67%EIX10921087-0.09%PCG1331221410.71%Source: California Public Utilities Commission, Barclays Research17 May 20213Barclays | North America Power & Utilities3) Electr
32、ification of transportation and buildingsElectrification of the CA economy is expected to provide numerous layers of growth for state utilities. Investment in system infrastructure and building upgrades will drive rate base growth, while increased consumption as vehicles use electricity as a fuel so
33、urce will increase total customer electric bills, offset by the elimination of consumer gas costs. CA already leads the US in installed EV charging stations, with approximately 25% of the entire US charging stations. However, grid investment will have to ramp rapidly if the state wants to meet aggre
34、ssive emission reduction targets, particularly in the wake of Executive Order N-79-20, which requires all new passenger vehicle sales to be zero-emission by 2035.The CPUC has traditionally allowed investment in EV charging infrastructure via one-off EV programs, as proposed by the individual IOUs. H
35、owever, following the passage of AB 841 (September 2020), the commission will authorize EV infrastructure in an individual utility general rate case (GRC). We view the shift from one-off programs to consideration in the core general rate case as being reflective of electrification investment becomin
36、g a core (if not the core) base of rate base growth moving forward in CA. We see the electrification-related spending as providing the core backbone of investment opportunities moving forward, similar to the way grid modernization has provided a core spending opportunity across the country for the p
37、ast decade.According to a CPUC report, the commission had authorized $1.6bn of capital specifically for the purposes of transportation electrification, as of year-end 2020. Of that $1.6bn authorized, $238mn had been spent as of year-end 2020, according to the same CPUC report. With $1.3bn of authori
38、zed capital, effectively representing dry powder for the IOUs, we feel confident that EV infrastructure will continue to provide a core rate base growth opportunity, and shows the depth of capital opportunities in CA again pointing to the notion that the state is affordability constrained, rather th
39、an capital constrained. The authorized investment and capital opportunity discussed is limited to EV infrastructure, to say nothing about the general building electrification and related investment, which is expected to be another core driver of utility rate base growth.17 May 20214Barclays | North
40、America Power & UtilitiesFIGURE 3PG&E Electric (PCG) Rate Base (2019 CPUC basis)Generation19%Transmission31%Distribution50%GenerationDistributionTransmissionSource: California Public Utilities Commission, Barclays ResearchFIGURE 5SCE (EIX) Electric Rate Base (2019 CPUC basis)Generation8%Transmission
41、19%Distribution73%Source: California Public Utilities Commission, Barclays ResearchFIGURE 7SDG&E (SRE) Electric Rate Base (2019 CPUC basis)Generation7%Transmission47%Distribution46%Source: California Public Utilities Commission, Barclays ResearchFIGURE 4PCG: Authorized Return on CPUC Rate Base Trend
42、sAuthorized through 2021:12.00%10.4% ROE on 52% Equity Layer10.00%8.00%6.00%4.00%2.00%ROEROR0.00%201020112012201320142015201620172018201920202021Source: California Public Utilities Commission, Barclays ResearchFIGURE 6SCE (EIX): Authorized Return on CPUC Rate Base Trends14.00%Authorized through 2021
43、:10.3% ROE on 48% Equity Layer12.00%10.00%8.00%6.00%4.00%2.00%0.00%201020112012201320142015201620172018201920202021ROERORSource: California Public Utilities Commission, Barclays ResearchFIGURE 8SDG&E (SRE): Authorized Return on CPUC Rate Base TrendsAuthorized through 2021:10.2% ROE on 52% Equity Layer12.00%10.00%8.00%6.00%4.00%2.00%ROEROR