TPIC: Shuts Iowa/Juarez Facilities – Withdraws 2020 Guidance

We thought we’d pass along a snippet from our recent note on TPIC (4/23) – highlighting both its 2020 guidance withdraw, as well as the shutdown of its Iowa & Juarez facilities – which, while disclosed in subsequent filings, were not highlighted in the guidance suspension press release. For access information email us at [email protected]

TPIC: Newton Iowa Facility Latest To Be Affected By COVID-19. Earlier today TPIC announced it would pause production at its manufacturing facility in Newton, Iowa after 28 associates tested positive for COVID-19 last week. The Newton facility is set to be shut for roughly 1 week for deep cleaning and development of more advanced testing procedures for associates. Additional Updates: Not included in the press release was a series of updates to its other manufacturing facilities:

• Juarez, Mexico: 1 facility (of 3) temporarily closed due to an order from a division of the Mexico Secretary of Labor. TPIC said it plans to administratively challenge the order but that if it’s not reversed, the facility would be closed through 5/31.
• Matamoros, Mexico: Reduced capacity timeline extended from 4/30 to 5/31 due to the extension of Mexico’s sanitary emergency order and demands from its labor union.
• Chennai, India: Resumed limited production with additional personnel on 4/21 (previously targeted 4/15). Other facilities operating at normal capacity, including its 2 facilities in Izmir, Turkey which had been operating at 50% capacity for the first half of April.
• Guidance Suspension Not Surprising: As a result of the additional facility closures and the general unpredictability of the magnitude and duration of the pandemic, TPIC also announced it was withdrawing its 2020 guidance (Figure 1). The majority of TPIC’s Wind OEM peers and customers have already suspended guidance – making TPIC’s announcement seem largely inevitable – particularly after it had already tempered EBITDA expectations earlier this month (below). TPIC said it would provide an update on its Q120 earnings call (5/7) but we don’t expect a confident reset 2 weeks from now.
• That said, we do expect the revised guidance to be substantially lower – as we’ve already been modeling 2020 EBITDA 21% lower than the mid-point of….continued

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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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W|EPC: Sempra’s Costa Azul – Is ECA Different? A Deep Dive Into SRE’s Mighty Mouse

Sempra LNG’s Costa Azul – Analysis & Risks As Larger Projects Falter

• Overview                                                                            Pages 1-3
• ECA Phase 1 & 2 Structures                                            Pages 3-4
• Supply Dynamics & Feedstock Analysis                       Pages 6-7
• Sempra LNG Commercial Arrangements                    Pages 8-9
• EPC Analysis
  • Project History & Dynamics                                    Pages 9-10
  • TechnipFMC – Historical Execution Details         Pages 10-12
  • Site Issues With Modularization                            Pages 12-13
  • Independent Site & Schedule Analysis                Pages 13-17
  • Project Cost Analysis & Major Risks                      Pages 18-26
• Shipping, Midstream                                                        Pages 27-28
• Management Questions                                                  Pages 29-30
• Conclusions                                                                        Pages 30-31

Mighty Mouse? Sempra’s (SRE) Costa Azul LNG (ECA, 2.4mtpa Phase-1) might be the only North American LNG project with a realistic chance at FID in 2020. As we saw last cycle, being small (and cheap) can be an advantage in difficult markets. As we note below, we’ve included our key takeaways around 1) Project viability in the current environment, 2) Site & Permitting Issues, 3) our independent project timeline & cost estimates, and 4) our Independent assessment of ECA’s project economics. 

Background: Energía Costa Azul (ECA) is a 1 BCF/d LNG import terminal located north of Ensenada, Baja California, Mexico, ~31 miles south of the U.S./Mexican border (San Diego-Tijuana). It’s owned by Infrastructura Energetic Nova (IEnova), one of the largest natural gas infrastructure developers in Mexico, and is listed on the Mexican Stock Exchange (BMV: IENOVA). Sempra Energy owns 66.43% of IEnova.
Existing Infrastructure: The current ECA import terminal (Figure 1) includes the following infrastructure: (1) a marine berth and breakwater; (2) two 160,000 m3 LNG tanks; and (3) LNG vaporizers, nitrogen injection systems, and pipeline interconnections. Similar to some existing U.S. exporters and brownfield projects, ECA will be turning their facilities around to export LNG.

Permitting: ECA has received most of the major Mexico and U.S. permits needed to begin construction, but still lacks a key Mexican land-use permit. ECA LNG is not subject to FERC review under the National Gas Act (NGA) or National Environmental Policy Agency (NEPA). However, ECA is subject to various Mexican state and federal regulatory agencies, such as the Secretaris de Medio Ambiente y Recursos Naturales/ Ministry of Environmental and Natural Resources (SEMARNAT) and the Agencia Nacional de Seguridad Industrial y de Proteccion al Medio Ambiente del Sector Hidrocarburos/ National Agency for Industrial Security and Environmental Protection for the Hydrocarbon Industry (ASEA), as well as the U.S. Department of Energy (DOE).…continued
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W|EPC Utilities & Energy – Sempra Deep Dive – Oncor, March 2020

 Sempra (SRE) Capital Project Analysis – Oncor March 2020.

As part of our W|EPC Utility & Energy Project coverage, we’ve put together a deep dive into a number of large public utilities, including SRE, SO, D, AEP, CNP, ENB, EPD, ET, KMI, XOM, TOT, RDS:A, and others. We’ve included more information about our W|EPC Utility & Energy project coverage in the back of this presentation.

Given its size, and the sheer volume of projects and jurisdictions, we’re breaking our Sempra (SRE) coverage down into underlying components, with our Oncor deep dive below. Oncor Electric Delivery Company, LLC, is headquartered in Dallas, TX and is a regulated electrical distribution and transmission business. It is owned by two investors, SRE (80.25%) and Texas Transmission Investment LLC (19.75%).

Our Key Takeaways On Oncor:

• Out-sized Role In Critical TX Projects
  • Oncor is involved with 5 out of the 10 most important projects to provide more efficient electricity dispatch, while supporting the increasing electrical demand in Texas. (Page 5)
• Oncor vs. Other Investor Owned Utilities
  • Oncor has 156 more projects scheduled to be completed in 2020 than AEP, ET (50% AEP/50% Berkshire Hathaway) and CNP combined. (Page 8)
• Final Estimates vs. Final Actual Costs
  • Over the last 15 months, Oncor’s reported final construction costs for 190 projects were 12% higher than their final estimated costs. (Pages 9-10)
• Lubbock Power and Light
  • Oncor’s May 2019 acquisition of InfraREIT included a variety of electricity transmission and distribution projects & assets, which included ~$3600MM joint project with Lubbock Power and Light (LP&L). (Pages 13, 17-20)
• Future Project Opportunities
  • The integration of LP&L to ERCOT should reduce congestion costs in the Panhandle of Texas and increase demand for new transmission projects in/and around Oncor’s coverage area. (Page 4)

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Tankers Reset As OPEC War Changes Economics

• Market Updates & Thoughts………………..Pages 1-3
• Tanker Trade Dynamics………………………Page 4
• Fuel Spreads, Economics……………………Page 5
• Crude/Product/LPG Rate Changes…………Pages 6-9
• LNG Arb, Freight Dynamics…………………Pages 10-11
• Container Fundamentals……………………Page 12
• Relative Valuations…………………………..Pages 13-19

Tanker Spot Rates Soften Off Of Peak Levels As Saudi Reign In Freight Rebates: Spot rates weakened on slow fixture activity, crude prices bounding from under $25/barrel to ~$30/barrel (Brent), and Saudi Arabia announced limiting freight compensation to 10% of crude’s official selling price. According to TradeWinds, at least 10 VLCC & Suezmax spot fixtures loading Saudi crude had failed last week. VLCC spot rates (TCEs) led the decline with rates falling to $135.3K/day (-52% w/w and +408% m/m), Suezmax TCEs at $70.0K/day (-42% w/w and +166% m/m), and Aframax TCEs firming to $59.5K/day (+39% w/w and +120% m/m). We note rates remain well above consensus.

Roughly Half Of Bahri’s VLCC On Subject Destined For USG: Last week, Saudi Arabia’s Bahri put 25 VLCCs on subject after their announcement to flood the oil market (by increasing its production and lowering its oil price) in response to OPEC+ disbandment (see our OPEC+ Fallout note). VLCC rates had spiked as Saudi Arabia was said to provide freight rebates to some customers for crude transports between Saudi Arabia and Egypt. Bahri owns 41 VLCCs and rarely enters the spot market to charter third party tonnage. In addition to the large number of subjects, the intended destination for these vessels are telling of Saudi’s intent: 10 of the 25 VLCCs are destinated for the U.S. Gulf, 4 are likely going to Europe, 10 are fixed to discharge at the entry point of the Sumed pipeline (Ain Sokhna) which transports crude oil through Egypt to the Mediterranean (likely to end up in Europe). None of the spot VLCCs are fixed to Eastern destinations.

Scrubber Payback Period Upended Following Crash In Crude Prices: The spread between HSFO and LSFO has narrowed to $87/mt in Singapore and $47/mt in Rotterdam (Figures 2 & 3), extending the payback period to ~4 years. A VLCC fitted with a scrubber is able to command a spot earnings premium of ~$4.5K/day, down from nearly $20K/day at the start of the year.

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LNG Canada Update: Shell, Fluor, JGC, & Force Majeure

• **March 18 Update………………………………….Page 2
• Executive Summary…………………………………Page 3
• COVID-19 Impact……………………………………Page 4
• EPC Schedule Analysis……………………………..Page 5
• Site Labor Analysis 6………………………………..Page 6
• Site Labor EPC Cost Impact……………………….Page 7
• Conclusions…………………………………………..Page 8

Update: In light of yesterday’s announcement that the Shell-led LNG Canada project was cutting its staffing levels in half over the coming days, we felt it worthwhile to pass along our LNG Canada Update from late February, along with a slide on our updated thoughts. (Page 2)

COVID-19 Impact Updates
1. The World Health Organization (WHO) officially declared COVID-19 a pandemic on 11-Mar-20.
a. JFJV may have a stronger FM claim now that WHO has declared the COVID-19 a pandemic, to the extent that JFJV specifically has “pandemic” or “epidemic” listed as an FM event in their contract.
b. FM Impact of Chinese module fabrication yards…….Page 4

2. On 17-Mar, LNG Canada and JFJV both announced that JFJV’s on-site workforce in Kitimat would be halved in order to increase social distancing and help prevent the spread of COVID-19. Given that the announcement was made jointly between JFJV and LNG Canada – impact on FM/schedule relief.…..Page 5

3.While JFJV did not announce when the site at Kitimat would resume a full workforce, it took “several” weeks for workers to return to JFJV’s Chinese fabrication yards…..Page 5

LNG Canada Planned Vs Foretasted Progress – Where Were We In February, and Where Are We Heading Now?…..Pages 5-8

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