In our view, both NRG and VST made compelling cases on Q3 calls when discussing future EBITDA and Free Cash Flow growth based on real capital allocation flexibility.
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Today, the PUCT adjudicated most of the contested issues in Houston Electric’s rate case. Most notably, the PUCT looks poised to award a 40% equity ratio and 9.25% ROE – both below the ALJ’s PFD, which suggested a 45% equity ratio and 9.42% ROE. The PUCT agreed with ALJ’s recommendation for enhanced ring-fencing provisions, meaning that CEHE will have restrictions on the amount of dividends it can send up to CNP. To the positive, the PUCT overturned half of the capital disallowances from the PFD and is opting to include a prepaid pension asset in rate base. CNP underperformed the utility average by over 500bps today.
We’re downgrading our rating on PEG to Peer Perform from Outperform. The earnings power of its high-quality utilities business feels reasonably well-reflected with little potential for incremental upsides, while the power business remains in decline with several risks. Looking to valuation, our sum of the parts analysis implies only modest price appreciation and on our 2022E PEG is almost trading at an average utility multiple. We view upward earnings revisions or meaningful multiple expansion as unlikely from here.
EEI the last few years has been overshadowed by shock events such as the CA fires and the Trump election win. This year was more blocking and tackling with a focus on refreshed utility capital plans that never seem to hit a ceiling. AEP, ETR, LNT, DTE, WEC, and XEL all gave new and slightly larger capital plans chock full of grid investment, renewables etc. That said, we are no longer seeing EPS growth rates go up as the law of large numbers and equity needs limit growth upside.
NRG and VST both had strong Q3 earnings updates this week – mostly meeting or beating consensus expectations on financial metrics across the board. VST posted in-line Q3 EBITDA, 2019 guidance narrowed higher (ahead of consensus), 2020 guidance above consensus (slightly below us), and talked about a flattish 2021 on its own fundamental view. NRG’s Q3 EBITDA was also in-line, 2019 guidance was narrowed at the midpoint, and 2020 guidance slightly beat consensus. These were solid numbers across the board. Additionally, VST talked to only 5-8% of EBITDA being “at-risk” long-term, with only modest reinvestments (as a percentage of cash flow) needed to more than replace this. NRG surprised with a fresh dividend policy of 3% yield plus 7-9% growth, while targeting a high-level capital allocation framework of 50% growth and 50% shareholder return over time with growth still subject to very high return thresholds (12-15% unlevered returns).
On 11/8, DUK reported 3Q19E of $1.79, beating consensus by $0.11 due to weather (+$0.15 vs normal). DUK raised FY19 guidance to $4.95-5.15 from $4.80-5.20 vs $4.96 prior-consensus and our $5.00e (now $5.05). The new equity lowers our 2020-22E, and we see EPS growth of 4% – the low end of DUK’s 4-6% target. DUK stock lags the UTY by 1,300bp YTD and trades at a 2.5x discount to peers. While steep, we see it trading at a 2-3x discount in the near-term and could be closer to 3x, as the new equity adds to the existing overhangs of ACP (uncertainty till mid-2020) and several material rate cases, including two in NC and one in IN. But DUK’s 4.2% yield (the second highest among peers) should limit downside from current levels. We cut our PT by $6 to $92 on a lower 2021E and contraction in the utility group avg P/E to 19.5x from 20x.
AEE’s 3Q19 EPS of $1.47 beat consensus by $0.02. AEE also raised its FY19 guidance to $3.23-3.33 from $3.15-3.35, beating then-consensus of $3.26. There was some weather benefit and EE incentives that helped. AEE gave 2020 earnings drivers; some items suggest our then-estimate was $0.05 high, including increased Callaway outage costs and lower EE incentives. The stock lagged the UTY by 70bp and trails by 400bp YTD. We view 2020 as a minor issue in the overall 6-8% EPS growth story, which is driven by 8% rate base growth under constructive regulated frameworks.
LNT laid out a mostly positive Q3 update on Thursday (11/7/19) – in-line EPS, 2019 guidance tightened higher, 2020 guidance at 7% growth, and capex/equity expectations now laid out for the next several years. Furthermore, LNT just received regulatory certainty in Iowa with constructive electric/gas rate case settlements. Execution under CEO John Larsen is off to a solid start.
The annual EEI conference will be held November 10-12. Management from most of our covered companies will be there. This report is a helpful guide for investors attending and includes questions to ask each company and summary model information.
OGE reported 3Q19 EPS of $1.25, handily beating consensus $1.11 (WRe $1.13). Driving the beat was favorable weather and continued sales growth. OGE raised its FY19 consolidated guidance to $2.24-2.30 from $2.05-2.20 largely due to rider true ups (+$0.07) and favorable weather (+$0.04). For LTM ending 9/30, weather normal sales growth was just north of 2%. Management is now expecting OG&E’s LT sales growth forecast to be higher than the previously anticipated level of ~1%; every 1% of growth translates to ~$0.05 of EPS
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