On 2/13, DUK reported 2019 EPS of $5.06, beating consensus by $0.04, and gave FY20 guidance of $5.05-5.45, better than prior-consensus of $5.16 and our $5.18e. DUK extended its 4-6% EPS growth target through 2024 (off $5.00 in 2019), as its 5-yr capital plan rose to $56B from $50B. DUK stock beat the UTY by 210bp and lifted it off relative lows, as mgmt. struck a confident tone on its outlook, suggesting the growth is durable under a wide range of scenarios. Still, DUK trades at nearly a 3.5x discount to peers. While steep, we see it in a 2-3x discount range due to rate case and ACP overhangs in 1H20. Peer Perform.
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FTS reported 2019 adjusted EPS of $2.55 – beating consensus $2.53 and further ahead of our estimate. Relative to 2018 EPS of $2.51 this reflected only 1.6% growth. However, when excluding FERC transmission ROEs being marked lower (-0.04) and weather impacts in Arizona/Belize (-0.08), 2019 would’ve been up 6% versus 2018. Key drivers offsetting these headwinds were rate base growth at ITC and in Canada, lower O&M, and favorable FX.
Yesterday (2/11/20), the South Carolina Department of Administration issued its report on the go forward options for Santee Cooper. NEE was recommended in an outright purchase scenario. D was recommended in the mgmt. scenario, and there is the Santee “reform” scenario (standalone). NEE’s plan includes total proceeds to South Carolina of ~$1B, and elimination of $7.9B in debt and $3.6B of future interest payments. NEE would employ its playbook by investing $2.3B in renewable/clean generation, shutting coal, and cutting costs ($1.67B savings) – resulting in $941M in customer refunds and a 4-year rate freeze. The report didn’t specify a preferred option, but it’s an encouraging next step in the process, where we see better than even odds NEE ultimately prevails.
D provided initial 2020 guidance of $4.25-4.60 which was in-line with consensus $4.38 (WRe $4.41). Guidance was reported under D’s new reporting segments, which help highlight the progress the company has made in de-risking its overall business – 95% of earnings are regulated / regulated like, 70% of which coming from state regulated utilities and growing. D affirmed its post-2020 5%+ annual EPS growth target. D’s new ESG disclosures were notable – only 8% of total rate base is attributable to coal and a pledge to have net-zero emissions (carbon & methane) by 2050.
EXC’s FY19 of $3.22 beat consensus of $3.11; and its 2020 guidance of $3.00-3.30 topped consensus of $3.02. Both beats were largely driven by ExGen, which sees lower below-the-line costs like D&A, interest and taxes. EXC projects utility net parent EPS growth of 6-8% through 2023, as higher capex ultimately more than offsets lower earnings from ComEd (30yr UST yield). EXC stock beat the UTY by 175bp and is outperforming by 115bp YTD. But the key catalyst is potential IL legislation this year that could support EXC’s merchant nuclear fleet. And federal investigations related to IL lawmakers and lobbying activities, are unknown with EXC warning it could be subject to criminal or civil penalties. Still, we believe the risk/reward skew is positive, as the legislation is a free option. Moreover, with ESG increasingly in focus, we believe investors may appreciate EXC’s environmental story (12% of clean energy in US last year came from EXC’s fleet). Reiterate Outperform.
The recent outperformance of the Utilities sector when matched against the Energy sector has been dramatic to say the least. However, it’s even more apparent when looking at the respective sectors’ weightings within the S&P 500. Ten years ago, Energy was three times the size and one of the bigger components of the index (11%), while Utilities still sat right around 3.5%. Since then Energy has come in considerably. It’s now gotten to the point where Utilities may soon surpass Energy. Energy has fallen from close to 5.5% of the index just a year ago to nearly 3.5%, while Utilities have continued hovering within the 3.0-3.5% range.
FE had a solid, but relatively uneventful year-end update. 2019 EPS came in at $2.58 – beating consensus/our estimate and finishing at the top-half of guidance. Strong cost cutting and transmission margin were key offsets to the absence of OH DMR revenues and milder weather. 2020 EPS guidance was reaffirmed at $2.40-2.60. Mgmt. is committed to delivering on its L-T growth target of 5-7% through 2023 (6-8% through 2021), as it continues to build a track record of beating expectations. The FES bankruptcy overhang should be resolved soon and the regulatory calendar is quiet. We view this as a chance to own a low risk T&D stock, trading at a sizable discount. Remain Outperform.
DTE posted another solid year – operating EPS of $6.30 beat consensus/our expectations and finished in the top-half of guidance ($6.06-6.40) that was revised upward twice. Guidance for 2020 of $6.45-6.75 was reaffirmed, with no segment level changes. While the 5-7% long-term EPS growth target was reaffirmed, DTE has historically grown above 7% over the last decade, while continually beating original guidance. Mgmt. once again pointed to extensive long-term planning that is regularly reviewed, leading to consistent results
Near market close (02/05/20), ISO-NE released the results of the June 2023 – May 2024 capacity auction. The system cleared at $2.00/kW-month with no regional premiums. This was down vs. $3.80 last year and is the lowest in the 14-year history of the capacity auction in New England. The result was even below our relatively tepid expectations ($2.50-3.50). We expected a YoY decline given the big drop in demand – installed capacity requirement fell from 32.49 GW versus 33.75 GW last year. Continued additions of renewables under the RTR waiver (no MOPR) also likely contributed (317 MW) – some of which was offshore wind (AGR’s Vineyard). As a result, we see YoY declines in New England capacity revenues in 2023 for our entire coverage list. The impact is not really meaningful however – representing 2% of VST’s total EBITDA and much less so for everyone else. Focus remains on the state of the much more important PJM capacity market, which still hasn’t run its auction for the 2022-2023 time period.
PCG’s amended plan of reorg includes settlements with victims, insurers and noteholders that have now been approved by the Bankruptcy Court. The next steps include a disclosure statement, confirmation and CPUC approval, with CA Gov Newsom’s support a key unknown. He opposed PCG’s previous POR and has yet to address the amended plan. Still, PCG is up 54% YTD on the positive momentum. With changes to the POR likely, we consider three scenarios, resulting in $18-24/sh value. But there is an outlier risk the Gov requires adverse changes.
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