They say bull markets climb a wall of worries and this year has been a great example. November was a breakout month for the S&P 500 (up 3.4%) and a breakdown month for defensive sectors like utilities (down 2.3%). The market is now up 25.3% for the year beating utilities by 680bps. This is despite a nearly 100bps decline in 10-year Treasury bond yields YTD. In retrospect, utilities moved ahead of bonds with their strong yearend 2018 move so they had less room to run once it happened. And lower bond yields and Fed easing have helped the market even more than utilities. While there is a lot to worry about in 2020, not the least of which is the election, we remain underweight utilities and wait for the current 10% premium to get closer to its historic 4% average.
Search Coverage List, Models & Reports
Search Results1-10 out of 1409
After close on 11/25, a CPUC ALJ issued a proposed decision in the Cost of Capital applications, which will set allowed returns and capital structures for each CA utility’s respective state-regulated rate base in 2020-22. The ROEs would be unchanged for EIX (10.30%) and PCG (10.25%). SRE’s SDG&E electric would get 10.20% vs 10.15% currently. EIX’s SCE would get a 52% equity ratio (vs 48%) – in line with the other two utilities. Balancing fire and inverse risk against a lower interest environment, we see the PD as in line with expectations. The ROEs would be close to the midpoint between the utilities’ requests and intervenors’ recommendations: 115-220bp increases due largely to wildfire risk vs 150-185bp decreases. And the political backlash from recent shutoffs does not appear to have significantly impacted the PD.
After market close yesterday (11/25), Fortis announced a $1.1B CAD equity offering via a $600M “bought deal” with a bank and $500M “concurrent offering” to a sole institutional investor. Both offerings priced at $52.15/sh CAD – 1.7% discount to Friday’s close, with the stock down -0.7% yesterday. The $600M “bought deal’” will result in 11.51M shares, with an additional 1.73M via greenshoe ($90M). The “concurrent offering” will result in 9.588M shares directly to an institutional investor. Proceeds are expected to be used to fund the capital plan, repay debt, and for general corporate purposes. The offering was a bit unexpected, thought it looks like the company is trying to take risk off the table and pull-forward balance sheet improvement.
This morning, it was announced that Dutch energy company Eneco would be purchased by Mitsubishi (80%) and Chubu Electric Power (20%) for $4.1B Euros. This followed a sale process that kicked off almost a year ago, which garnered interest from the likes of Shell, KKR, Macquarie, and EDF as well (Total and Enel dropped out earlier). This got us thinking. Asian investors have already shown a keen interest in U.S. power plant investments, as seen by the readily available financing in CCGT new build. Why couldn’t one of these foreign power companies buy a U.S. IPP? Granted, Eneco is a bit different, in that it has a quasi-regulated gas and electric retail business, as well as growing investments in renewable energy that includes offshore wind. But clearly there is an interest here to diversify out of Asia. When we published our annual power supply update back in September, the number of Japanese and Korean utilities investing in U.S. gas plants was endless.
We’ve now been waiting 17 months for FERC to decide on new PJM capacity auction rules since determining its tariff was unjust/unreasonable. There have been a few false starts, but with Commissioner Glick’s recusal on the issue set to end on 11/29 and James Danly’s nomination as commissioner moving one step closer this week, we feel as though an actual order is finally upon us. In this note, we’re simply reviewing exposures to hypothetical scenarios. At the end of the day, it’s probably fair to say that EXC and VST have the most at stake here. However, it’s important to note that the PJM capacity auction is simply not as important as it used to be. EXC has the most capacity in PJM and addressing its subsidized (and non-subsidized) nuclear plants is critical in how this plays out. VST has the second most capacity in PJM, with about 25% of its EBITDA coming from energy/capacity revenues combined in the region.
FERC issued an order today in two MISO transmission ROE complaints, setting a methodology that differed from its last proposal, establishing a 9.88% base ROE and dismissing the last of the two complaints. That 9.88% base is lower than the 10.3% that FERC set a few years ago under a methodology that has since been vacated. FERC did not rule on the four New England ISO ROE complaints, as Comm. Glick – one of the three seated FERC commissioners (two vacancies) – cannot vote on those. But that base ROE also likely would decline under today’s order. Transmission makes up less than half of earnings for the impacted utilities (FTS and ES almost 40%, AEE 20%). To the negative, the base ROEs are now under 10%, which optically looks bad, given they were around 12% earlier this decade and are now in line with the 9.7% average awarded at the state level. But the MISO names will still earn about 10.4% – when including the 50bp RTO/ISO adder.
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.
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.
- 1 of 141
- next →