Morningstar | Initiating Coverage of Avangrid, Shares Modestly Undervalued
We are initiating coverage of Avangrid with a fair value estimate of $53 per share, narrow moat and stable moat trend.Avangrid investors must be comfortable with regulated operations across the Northeast and the outlook for the U.S. renewable energy growth. Avangrid's regulated utility segment, or Networks, operates eight regulated electric and natural gas utilities across New York, Maine, Connecticut, and Massachusetts. Roughly two thirds of Avangrid's $12 billion investment plan during the next five years will be directed to regulated investments, driving 9% rate base growth.
Avangrid's renewable energy development subsidiary, Renewables, is the third-largest developer of wind energy in the U.S. It owns approximately 7 gigawatts of wind and solar energy capacity across the U.S. The company has 2,200 MW of new renewable energy capacity in development and 10 GW of development opportunities during the next three years.
Considering Avangrid's full suite of businesses, we think it has a narrow moat. Avangrid's regulated utilities have constructive mechanisms that include forward-rate adjustments and automatic general-rate base adjustments. We also believe Avangrid's renewable energy business has an intangible asset. As one of the largest renewable energy developers in the United States, Avangrid has secured some of the country's most desirable locations for wind and solar generation, locking in 20-year-plus purchase power agreements with escalator clauses that protect returns.
Our valuation implies a 2019 price/earnings multiple of 21 times and an implied terminal multiple of 17.5 times. Our near-term profit outlook includes our outlook for rate increases at Networks, capital investment at the regulated utilities through 2022, renewable energy investments, normal weather, and marginal demand growth across Networks' service territories. We assume a 9.9% weighted average long-term allowed return on equity.
Avangrid is an energy services holding company engaged in the regulated energy distribution business through its subsidiary, Avangrid Networks, Inc. (Networks), and in the renewable energy generation business through its subsidiary, Avangrid Renewables Holding, Inc. (ARHI). ARHI in turn holds subsidiaries including Avangrid Renewables, LLC (Renewables). Networks owns and operates its regulated utility businesses through its subsidiaries, including electric transmission and distribution and natural gas distribution, transportation and sales. Renewables operates a portfolio of renewable energy generation facilities primarily using onshore wind power and also solar, biomass and thermal power.
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