PNW reported 2Q19 EPS of $1.28, missing consensus of $1.42 and our $1.38. The $0.20 YoY decline was largely driven by unfavorable weather. May was the coolest since 1980 and June was the coolest in the past 8 years. As a result, PNW is now expecting to come in at the low-end of its $4.75-4.95 guidance. Other items putting pressure on numbers include the ACC’s inaction on the 4 Corners step increase (worth $0.07) and the customer disconnection moratorium for which PNW expects to incur a $5-10M pre-tax hit. PNW is managing O&M to help offset some of these impacts, but absent significant weather in Q3, it’s unlikely PNW would be able to get back to the midpoint.
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PPL reported 2Q19 of $0.58, slightly ahead of then-consensus of $0.56. PPL affirmed its 2019-21 EPS outlook. PPL also said Ofgem’s recent open letter consultation for RIIO-ED2 was generally in line with expectations. But the elephant in the room continues to be UK political uncertainty, tied to Brexit. The GBP has sunk to near post-Brexit-vote lows ($1.21 last week), and not coincidentally PPL stock fell to 52-week lows relative to peers in the past week. The stock gained 80bp over the UTY after reporting today but trails by ~1000bp YTD. We believe the market will revert to a more reasonable valuation of the stock when the UK uncertainty has abated. Meanwhile, investors are getting paid a juicy yield to wait – a premium in the current market environment.
This morning (08/06/19) DUK reported 2Q19E of $1.12, beating then-consensus of $0.98 in part due timing of O&M (+$0.07) and better weather than normal (+$0.08). But DUK reaffirmed its FY19 guidance of $4.80-5.20, despite a solid 1H19 because Q3 can be highly variable. Prior-consensus for FY19 was $4.92; our 2019E was $4.93 but is now $5.00 on the new disclosures. Our 2020-22E are unchanged and we still see EPS growth of 4.5% – in the bottom half of DUK’s 4-6% target. The Q2 beat helped DUK stock outperform the UTY by 100bp today, but it still lags by 1100bp YTD and trades at a 14% discount to peers. While steep, we see it trading at a 10%+ discount until there is certainty on NC legislation (this summer), ACP Phase 1 (possibly this year) and Phase 2 (potentially next summer). Plus, DUK is expected to have several material rate cases by yearend: IN (recently filed) and two in NC.
This past Thursday (8/1), a gas explosion leveled a Franklin County home in Pennsylvania and NI’s Columbia Gas was at fault. We saw little news coverage following and don’t believe many investors were aware last week. Thankfully there were no deaths / life-threatening injuries sustained as a result, but the incident is alarming given what transpired in the Merrimack Valley last year. At a high-level, the cause of the explosion appears to have closely mirrored that in MA. Columbia crews were replacing a low-pressure gas system and failed to recognize that the home was connected to the system. Thus, when re-activating the line, there was no regulator in place to moderate the pressure going into the home, leading to the explosion. This was the one thing NI could not let happen – Downgrade to Peer Perform.
WEC posted 2Q19 EPS of $0.74 – beating consensus’ $0.70 and our $0.72, while also topping $0.70-0.72 guidance. Q2 was up versus $0.73 last year on cost cutting and wind PTCs, offsetting mild weather. Mgmt. raised 2019 guidance to $3.50-3.53 (from $3.48-3.52) and still expects being at the top-end of the range – likely extending its streak of beating guidance every year since 2004. The stock outperformed the group by 200bps in a severe risk-off tape – the ideal scenario for a high-quality utility sector bellwether.
Quietly our Wolfe Yieldco Index has become the top income sector YTD and the only one beating the S&P 500 (see Ex 1). Yieldcos have overcome the huge uncertainty caused by PCG’s bankruptcy filing in January. Why have they done so well? 1) long-term contracts that are not subject to ROE resets like utilities so should benefit directly as interest rates fall; 2) the neighborhood improved meaningfully as parent companies changed from distressed owners to higher-quality parents (SunEdison to Brookfield, Abengoa to Algonquin, NRG to Global Infrastructure Partners); 3) Its Renewables stupid – the top growth space in energy with huge economic and tax subsidy momentum. While we are a bit wary of competition and financial discipline in renewables, we think the backdrop remains bullish. There is no better way to play all of this than NEP given their connection to industry leader NEE, huge growth backlog, cost-of-capital advantages and visibility on 15% dividend growth for at least the next 5 y
POR reported 2Q19 EPS of $0.28 – missing us/consensus considerably at $0.48/$0.51 and was down from $0.51 a year ago. The largest drags on the quarter were significantly lower than average hydro production, lower PTCs and higher O&M. POR seems to routinely be on the wrong side of weather / wind / hydro conditions. That said, POR affirmed FY19 guidance of $2.35-2.50. We see the company tracking in the lower half of the range and are reducing our 2019E by $0.06 to $2.39 as a result. Two important variables to monitor over the balance of the year will be improving net variable power costs (PCAM) and sales / customer growth, both of which are embedded in POR’s guidance. POR underperformed the UTY by 190bps today (8/2/19).
LNT reported 2Q19 EPS of $0.40 that missed consensus/us at $0.44. The quarter fell versus $0.43 last year on milder weather, higher depreciation, and taxes timing; offset by rate relief in both Iowa and Wisconsin. LNT also reaffirmed its 2019 guidance range at $2.17-2.31 and indicated it is tracking toward the top-half given weather benefits (+0.03 in 1H19 and +0.02 in July).
ES’ 2Q19 of $0.74 was in line with prior-consensus, and ES reaffirmed 2019 guidance of $3.40-3.50. ES also reaffirmed its 5-7% EPS growth target through 2023, though some investors interpreted management’s comments as suggesting a key driver of 2023 earnings is offshore wind projects being developed by ES and its JV partner Ørsted. While some projects come online in 2022-23, the earnings contribution is not meaningful. The bulk of offshore wind earnings kick in post 2023, when EPS growth could top ES’ current target. There has been an increasing focus on ES’ business mix as the company and Ørsted win projects (S&P recently downgraded ES ratings to A- from A+ on it). We understand but still see the business being mostly T&D for many more years and warranting a premium in line with low-risk, high-quality utilities. ES slightly trailed the UTY after its call in the morning (8/1/19), but it is ahead by nearly 350bp YTD, even after a $1.3B equity deal in May.
ED is currently in the midst of settlement discussions for CECONY’s rate case. Last time around, ED was able to get a filed settlement in September. We get the sense that it may take a little longer this time given that PSC staff currently has other items on its plate as well (e.g., NYSEG rate case). Given recent reliability issues, political pressure has been mounting on ED at an inopportune time. A tail risk that could hamper negotiations is if Gov. Cuomo elects to intervene in the case given his recent criticism of the company. Nonetheless, under the NY PSC’s formulaic approach to awarding ROEs, we see considerable pressure on ED’s future allowed return given that utility valuations are at relative highs and interest rates are now near all-time lows.