This morning, EVRG officially announced its enhanced standalone plan, after the strategic review committee and Board unanimously chose not to pursue M&A. The stock followed yesterday’s 11.5% plunge when Bloomberg leaked the details intraday with another 3.4% fall today. The standalone plan features superior earnings growth of 6-8% predicated on higher rate base growth of 5-6% and O&M savings of 25%. But it also comes with execution risk on the regulatory front in Kansas and navigating sizable coal in rate base to renewables transition. Valuation implies some upside on our revised numbers, but we remain on the sidelines. Peer Perform.
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SRE outperformed the XLU by about 300 basis points after reporting a solid Q2 (even excluding some tax benefits) and announcing a $2.5B share buyback. All of SRE’s CA and TX utility franchises are performing well despite the COVID disruptions and Cameron LNG is on the verge of full commercial operation. We see the stock as attractive at current levels and reiterate our Outperform rating.
ST’s Q2 result crushed expectations and 2020 is tracking higher within the guidance range. Important ERCOT summer months are ahead, but this is more about what happens to 2021 forwards given the hedging profile and current pricing reflects low expectations. Importantly, VST has an actionable catalyst in September with its update on capital allocation and ESG positioning. We think this should be a positive event in re-highlighting the company’s value proposition – mid-20%s FCF yields allow for robust shareholder return optionality and manageable coal exposure with renewables transition potential. The stocked open up ~3%, but finished down ~3%. We make modest estimate changes on hedging and retail (+$20M in 2021-2022), and still see attractive value here. Remain Outperform with $32 Price Target.
NI initiated 2021 guidance of $1.28-1.36 which missed prior consensus of $1.36 (prev. WRe $1.34), but nonetheless removed a key overhang for the stock. The range includes dilution from the CMA sale/dis-synergies which are largely expected to be offset by NI’s cost restructuring program. The bogey between consensus and the midpoint is ~$0.05 of COVID related headwinds as NI’s base case assumes modest impacts through the 1H of 2021. NI also gave a preview of L-T growth opportunities which will be discussed in detail at its Sept. 29th Analyst Day – $1.8-2.0B of incremental renewable capex, which will drive rate base growth of 10-12% and an EPS CAGR in excess of 5-7% through 2024 (off 2021). NI outperformed the UTY index by 220bps on the day.
WEC reported 2Q20 EPS of $0.76 – well ahead of consensus/us $0.70/0.69. This also exceeded the $0.67-0.69 guidance range that was revised upward in June. Relative to $0.74 last year, the quarter was driven by favorable weather, lower O&M, and the FERC transmission ROE order; offset by lower sales due to COVID, higher depreciation, and fuel costs.
EXC reported 2Q20 EPS of $0.55, beating consensus of $0.42 and WRe of $0.45 on O&M timing. But EXC affirmed its FY20 guidance of $2.80-3.10 and said load at both its utility and retail business is in line with expectations. EXC addressed the DOJ settlement reached last month (see note for more), noting the work ComEd will have to restore trust. But the focus is on whether clean energy legislation that addresses EXC’s nukes (FRR) can pass this Nov/Dec. EXC highlighted the benefits its IL plants provide but again said uneconomic plants will be shut if there is no path to profitability. EXC’s B/S also remains a key investor focus, but an updated financial plan depends highly on the outcome of IL legislation. EXC stock outperformed the UTY by 60bp but trails it by 1,100bp YTD. We reiterate our Outperform, as EXC trades at a discount to utility-only value, implying ExGen, IL legislation and carbon are free options.
The Q2 update from CMS was a positive turnaround from Q1’s more cautious tone in the midst of the pandemic. Mgmt. had been alluding to its cost cutting plan tracking well in recent months and this was shown in today’s result. CMS reaffirmed 2020 guidance with confidence – $2.64-2.68 and targeting the midpoint. Long-term growth of 6-8% is also well on track and Michigan remains constructive. We just can’t get there on valuation. Peer Perform.
Back in June we hosted NEE’s CEO Jim Robo for a fireside chat and first heard about his excitement regarding hydrogen as the difference-maker in eliminating the last 10% of carbon from the electric sector to get to true zero emissions (not just net zero). This was reiterated by NEE mgmt. on its Q2 earnings call and a sizable portion of time was dedicated to the discussion. At its regulated utility (FP&L), NEE is launching a 20 MW pilot program costing $65M and expected in-service in 2023. This is consistent with NEE’s “toe in the water” approach, as it continues to make comparisons between hydrogen today and where storage was a decade ago. The hydrogen spend and earnings contribution is expected to be immaterial over the next few years, but for context, storage is now a $1B/year capex business for NEE. The potential growth in the next decade is clearly something that has NEE’s attention.
We’re updating our commentary on U.S. power demand in accordance with updated EIA data, as well as the latest weekly weather data from NOAA. Power demand was down 1% WoW and up 1% YoY for the week-ended 8/1. Relative to the 4-year average, demand was also up 1%. That was a solid result, though weather continues to be a meaningful tailwind as the summer heat wave continued across much of the country. CDDs were up 10% versus last year and 20% versus normal. See more detail within for charts and tables, as well as the slides that we will continue to update intra-week.
Strategic review outcome likely this month; risk/reward more in balance
We are downgrading EVRG to Peer Perform from Outperform. The stock has continued to creep up into the outcome of the strategic review instigated by Elliott’s investment early this year. We expect the outcome this month with some hints potentially this week when both EVRG (8/5) and AEE (8/7) report earnings. From current levels, we see the upside from an M&A outcome more in balance with the downside risk of a standalone outcome, even though we think M&A is still the more likely scenario. Part of our thinking is a likely wider than normal arb spread reflecting Kansas approval risks.
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