Post close, CAL Fire issued a press release saying PCG’s transmission lines caused the Nov 2018 Camp Fire, which killed 85 and destroyed 18,804 structures. CAL Fire found a second ignition source, also involving PCG’s equipment. CAL Fire did not publicize the report, referring it to the Butte County DA. In some 2017 investigations, CAL Fire referred its reports to local DAs if there was evidence of violations; those reports were not made public, and many of the prosecutors did not bring charges. In those press releases, CAL Fire said that it found evidence of violations; it did not say that in today’s release. Still, the Butte DA and CA AG already are conducting criminal probes. PCG said last Feb that it was “probable” its equipment caused Camp. With PCG accepting CAL Fire’s determination, focus is on damages/fees from Camp and the 2017 fires on which CAL Fire has blamed PCG. Implied pretax damages/fees in the stock is $36B. Although the Camp headline is negative, we believe the stock
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Utility earnings rose 5.0% in Q1, slightly above our 4.9% estimate. No companies changed guidance for 2019 but the same companies that disappointed at year end had issues again such as AGR, CNP, and NI (not EVRG, phew). Earnings quality stuck out to us as weak with tax or other gains driving numbers at SRE, DUK, NRG among others. AEP may have been the most incrementally positive with increasing confidence in the upper half of their 5-7% growth rate. Mega project risk continued to overhang D and DUK (ACP) and SRE (more Cameron delays), though SO kept Vogtle on schedule (for now). Finally, weak renewables conditions hurt in Q1 causing misses at AGR, CWEN, and NEP, but the influence of renewables keeps accelerating overall.
AEE 1Q19 EPS of $0.78 beat then-consensus by $0.10, but AEE affirmed its 2019 guidance of $3.15-3.35, as the quarter benefited from some weather and timing items. AEE continues to target 6-8% EPS growth through 2023 off 2018A of $3.05, largely driven by its $13B capital plan. Excluded from that plan is potentially another $200M of wind investment at least. AEE is in talks with developers and could soon announce new projects to meet its “at least 700 MW” target by YE20 (two projects totaling 557 MW already in plan). We estimate growth in the top half of AEE’s 6-8% through 2022; our estimate assumes $250M more wind capex than the $1B planned. AEE beat the UTY by 85bp and is ahead by 200bp YTD. AEE is a low-risk, high-quality name, but it trades at a 1x premium to peers; we await a more attractive point to reenter.
DUK 1Q19 EPS of $1.24 was in line but included $0.06 from a tax gain. DUK affirmed 2019 guidance of $4.80-5.20 and its 4-6% EPS growth through 2023 off 2019. DUK trailed the UTY by 100bp and is among the worst performer YTD, as it faces several overhangs (below). NC legislation could improve sentiment. We see DUK trading at a 7-10% discount to peers, given overhangs, higher leverage and subpar div growth.
EVRG reported solid Q1 earnings, while affirming 2019 guidance and the long-term outlook. The buyback pace quickened some, but perhaps not unexpected given stock weakness. Most importantly, mgmt. began speaking to long-term capex opportunities that could improve rate base growth. There is still more wood to chop before the Q4 debacle is forgotten, but this was a good first step. We think EVRG can work back to an average multiple with more execution. Raise Price Target to $60 on group multiples. Remain Outperform.
Wolfe Research's Senior Utilities analyst, Steve Fleishman, hosted a webcast to discuss EIX upgrade, views on CA legislation, and VST reiteration.
We are upgrading EIX stock to Outperform from Peer Perform, making us bulls on EIX, PCG and SRE. Although EIX just announced $1.5B of equity needs, and CA has yet to reform wildfire liability rules, we continue to believe the state this year will fix an untenable situation for utilities and, importantly, victims, ratepayers and the state’s clean energy goals. EIX shares trade at the lowest P/E in the industry other than PCG, and they have trailed peers by over 2000bp since the Nov 2018 fires, including about 500bp last week. We believe the weakness is overdone and see at least 25% upside in the stock. Our $75 PT includes the $1.5B of equity needs and has room to deal with uncertainties, such as fire damages more than our assumed $5B and shareholder contributions to any wildfire fund. Notably, fire officials have not found that EIX violated any laws in the fires, implying possible cost recovery.
ES’ 1Q19 of $0.97 beat consensus of $0.91, but ES affirmed 2019 guidance of $3.40-3.50 and its 5-7% EPS growth target through 2023. Investor focus remains on timing of equity issuances; ES said in Feb it would need $2.0B to fund its 5-year $13B capital plan and known offshore wind projects in the outer years. ES said it would be opportunistic on the equity, monitoring cash needs and the equity market. ES also reminded investors that its 5-7% growth target includes the $2B equity but no material earnings from offshore wind; the latter will be significant in 2024 when the two wind projects are in-service. ES has trailed the UTY by over 200bp since Feb’s announcement and is in line with it YTD. Despite the equity overhang and offshore risk, we continue to like to ES’ high-quality T&D/water utility business. Our new 2022E reflects 6% EPS growth and ~$2B of equity. At a 2% premium to peers, we believe ES has room to go once equity is done. Outperform.
The fear of a less favorable regulatory environment in the UK persists, and Ofgem is expected to issue a final decision in the RIIO-2 sector specific methodology for transmission and gas distribution this month. Although Ofgem has said that consultation decision should not be a read-across to distribution network operators (e.g., PPL’s WPD), we anticipate the market will do just that. PPL believes it can manage through the RIIO-2 framework (which will be in place Apr 2023 for PPL) and expects incremental investments in the UK to meet policy targets, like electrification. Still, shares have again trailed the UTY recently and are nearing the relative lows reached last Dec; they also trade at a 27% discount to US utilities. We believe when the UK fears stabilize, the market will revert to a more reasonable P/E based valuation. Outperform.
LNT reported 1Q19 EPS of $0.53 that matched us and finished slightly ahead of consensus at $0.51 and $0.52 last year. The quarter was driven by cold weather (+$0.05 vs. normal) and rate relief in both Iowa and Wisconsin; offset by higher depreciation / interest, and taxes timing. LNT also reaffirmed its 2019 guidance range at $2.17-2.31, with the year appearing well on track.
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