W|EPC: AEP Capital Project Analysis – Q220

Digging Into AEP’s Capital Project Backlog

• AEP Company Overview                                                       Page 2
• Key Takeaways                                                                         Page 3
• ERCOT Overview                                                                     Page 4
• AEP’s Activity Level vs Guided Capex                                 Pages 5-8
• Cost Overrun Analysis: Who Stays On Budget?
  • AEPT                                                                                    Page 9
  • SWEPCO                                                                            Page 10
  • ETT                                                                                       Page 11
• Ongoing Capital Projects – Current Status                          Pages 12 -15
• ETT’s CREZ Project Problem – Warranty Status?                Pages 16-17
• Project Profile: Solstice To Bakersfield, 345-kV T-Line      Pages 18-20
• Additional Management Questions                                     Page 21

American Electric Power (AEP, Market Cap ~$42B) has been in business for 114 years, with 5.5 MM customers across 11 states, including Texas. General Project EPC Background (AEP Subsidiaries):
American Electric Power Texas (AEPT) is a subsidiary of AEP, and provides transmission and distribution of electric power to ~1MM customers through Retail Electric Provider’s (REPs) in west, central, and south Texas, with an ROE sitting at at ~9.4%.

Southwestern Electric Power Company’s (SWEPCO), also an AEP sub, has 4K miles of transmission lines and 5K MW’s of generation capacity, supporting 536K customers primarily in Western Louisiana, North East Texas, the Panhandle of Texas, and Western Arkansas. SWEPCO’s ROE sit at ~9.6%.

Electric Transmission Texas, LLC, (ETT) is 50/50 JV between AEP and Berkshire Hathaway Energy Company, and owns/operates transmission facilities within Electric Reliability Council of Texas (ERCOT), primarily around the AEPT service territory.  ETT’s ROE sits at ~9.6%, and it’s capital budget is not broken out within AEP’s forecasted numbers. AEPT and SEPC 2020-2024 capital forecast (~$8.4B) comprises ~25% of AEP’s total expected spend (~$33B) over that period.

Key Takeaways:
• Why Utility Project Tracking Is Increasingly Important In This Environment…
• Estimated vs. Actual Project Costs – Who comes in well under budget…and who doesn’t? (Pages 9-11)
• AEPT & SWEPCO Capex Trending Materially Below Forecast (Pages 5-8)
• The Jury Is Still Out On $1.6B Of Project Costs (Pages 12-15)
• ETT – Ongoing Problems With CREZ Projects, But No Warranty Cost Recovery Claims? (Pages 16-17)
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The Golar Clean Up Trade – Let’s Get Schwifty

Golar Q4 Earnings Preview – Reorg Pressure Ramps

GLNG/GMLP Equity Thesis, SOTP Valuation:                Pages 1-2, 6
Our Expected Golar Reorg Solution:                              Pages 2-4
GMLP: Risk around Eskimo/Jordan Contract?              Pages 2, 7
DCF-Based LNG Carrier Asset Curve:                             Page 5
Asset Level Leverage, Est. Market Values:                     Page 7
Golar Power Updates:                                                        Pages 4, 8

Expectations For Golar Q4 Earnings: Heading into GLNG & GMLP’s Q4 earnings report on Tuesday (2/25), our primary focus is on (1) the timing, scope, and structure of a potential reorganization of Golar’s corporate structure – with our detailed expectations below. This includes a spin of its downstream business (Golar Power), the ultimate placement of its LNG carrier fleet, and what to do with GMLP (34% yield), (2) we expect GLNG metrics (adjusted EBITDA) to be roughly inline for Q4, and (3) the ramping risk profile of GMLP – particularly around its role in a reorg, its credibility as a currency, and (potentially) the quietly rising risk around the Eskimo FSRU contract (page 3).

*It’s worth noting that the GLNG/GMLP Q4 earnings call is endearingly scheduled to overlap with Cheniere’s (LNG, CQP), so street bandwidth may be a bit stretched, at least to the extent that if the reported numbers are a mess, the impact of clarifying (or pacifying) comments from a 10AM earnings call may be bit dampened. To be fair, we guess the reverse is also true. Should be fun.

Getting Constructive On GLNG. The pressure on Golar to reorganize its complex structure has only grown – punctuated by Luxor filing as an activist stakeholder in late January (8% holders). We think Golar likely moves to clean up its structure in the next 6 months, particularly as some of its earlier options (spinning off its LNG carrier fleet with 3rd party involvement) are likely off the table, and more controlled, in-house solutions seem more viable. We run through our expectations on pages 2-4, but here’s the punchline: We’d be long GLNG, and short GMLP in a reorg.

GMLP: Ramping Risk Around The Eskimo FSRU? The Eskimo is one of GMLP’s core assets (~$40MM of EBITDA), and is about to hit the 5-year mark on its 10-year contract with Jordan in May 2020. While it’s typically highlighted as a fixed 10-year contract, there’s actually an out in the Eskimo contract…(Page 2, 8)

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