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 up 4% WoW, but down 9% YoY for the week-ended 5/23 – the worst YoY mark since we started tracking this data in mid-March. Relative to the 4-year average it wasn’t much better – demand was down 8%, which was close to the worst we’ve seen. Mild weather likely isn’t helping, but we’re becoming increasingly concerned on this trend. Total degree days (HDDs and CDDs) fell by nearly 30% WoW. Heating degree days were down 21% versus last year and 6% versus normal when looking across the U.S. in aggregate. Similarly, cooling degree days were down 23% versus last year and 4% versus normal. See more detail within for charts and tables, as well as the slides that we will continue to update intra-week.
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We hosted virtual meetings with 14 utilities as part of the American Gas Association (AGA) this week. The tone was the same or better than recent earnings season where 2/3 of utilities reconfirmed 2020 guidance despite COVID pressures. Even companies like CMS that were subdued on their earnings call seemed more confident on being able to meet investor expectations. Regulatory environments remain stable with most implementing some form of COVID deferrals to address bad debts and other costs. Bad debts still seem to be a minor issue. We see a clear disconnect between utilities fundamentals and recent stock performance and recommend buying into the weakness.
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 down 6% YoY for the week-ended 5/16. Relative to the 4-year average, demand was down 9% – the worst reading since we started tracking this data in mid-March. The flattish WoW print is less impressive as we move towards the higher-load months. While many states are starting to reopen and some believe we have bottomed, power demand may not be out of the woods yet, as the declines have ticked up to the high-single digits on a YoY-basis, after previously hovering around the mid-single digits. Weather is beginning to play less of a factor in a shoulder month. Heating degree days were up 17% relative to last year and up 41% relative to normal when looking across the U.S. in aggregate.
On 5/12, DUK’s 1Q20 of $1.14 missed consensus of $1.19 on mild weather and storm costs. But DUK affirmed its FY20 guidance and LT EPS growth rate of 4-6%, as the projected lost sales of $0.25-0.35 (mostly in 2Q20) will be more than offset by incremental cost cuts of $0.35-0.45 (in 2H20). Although still early, DUK suggested at least some of the efficiency improvement would be permanent and pandemic-costs like bad debts may get deferral treatment assuming regulatory approval. DUK’s NC rate cases could still be decided on time. And key ACP events are approaching. With a confident message of cost cutting, DUK beat the UTY by over 100bp and is outperforming by 300bp YTD. The stock has had a solid run, trading at a 2x discount to peers now vs a 3.5x discount in Feb. But we view the current valuation as fairly reflecting the new cost cuts and overhangs from rate cases and ACP. Our $83 PT reflects a 2.5x discount to our utility avg 2022E P/E of 17x (vs 18.5x in Mar).
Most utilities reaffirmed their 2020 guidance and nearly all reaffirmed their LT growth rate outlooks. Specifically, 21 companies reaffirmed 2020, 7 cut their 2020, and 3 suggested a potential future cut. Our bottom-up 2020 and 2021 outlooks show 2.7% and 6.6% growth, respectively, modestly down from prior estimates of 4.0% for 2020 but up from 6.0% for 2021. Mild Q1 weather and recession-driven weakness in C&I sales are being offset by higher-margin residential sales boosts and accelerated cost cutting. There is risk in the event of a muted recovery, but we leave earnings season more confident utility fundamentals can hold up through this crisis. The stocks seem lost between a momentum stock bubble and a preference for recovery plays, but we think investors will come back to utilities as they refocus past the virus cycle.
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 up 2% WoW and down 6% YoY for the week-ended 5/9. Similarly, demand was down 6% relative to the 4-year average. This was the best WoW result and only the second positive move, since we started tracking the data in mid-March. That said, we are moving towards the higher-load months where this should be expected. On a YoY-basis and versus the 4-year average, demand fell 6%. This is consistent with the recent run-rate and an improvement from the prior week’s low that showed an 8% decline YoY and versus the 4-year average. Heating degree days were up 49% relative to last year and up 30% relative to normal when looking across the U.S. in aggregate. Everywhere except the West coast saw lingering colder weather before summer kicks off.
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 flat WoW and down 8% YoY for the week-ended 5/2. Similarly, demand was down 8% relative to the 4-year average. While the weekly moves have remained stable, this was the largest decline relative to last year and the 4-year average that we have seen since we started tracking the data in mid-March. The previous high was a 6% decline YoY and 7% decline versus the 4-year average in early April. On average the declines YoY and versus the 4-year average have tracked at ~5%. That said, we are in a shoulder period and weather was more mild, so we’re not seeing a cause for additional concern yet. Heating degree days were down 22% relative to last year and down 16% relative to normal when looking across the U.S. in aggregate.
Our thesis on utilities investing is to buy low and sell high. For the last two years, Regulated utes have been trading at a large premium to the S&P 500 even amidst a bull market and we stayed underweight. Ironically, it has taken a bear market for the relative valuation to correct to levels that are intriguing. Utilities are underperforming the market for the year (160bps) and even more so since the Feb 19 peak (420bps). We discuss potential explanations below (none of which are compelling), but our sense is utilities are lost between the market’s preference for momentum stocks (tech and health care) or recovery plays (cyclicals, discretionary). While this may continue, we think the best time to buy utilities is when they are cheap and they are now. They are not only trading at a discount on 12-month forward earnings, but also on 2021E when a recovery is better embedded.
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 down 4% YoY for the week-ended 4/25. Similarly, demand is down 5% relative to the 4-year average. This is very similar to the prior week and continues to show demand decline stabilization. The average decline has been hovering around 5% YoY. Weather also once again helped last week. Heating degree days were up 73% relative to last year and up 14% relative to normal when looking across the U.S. in aggregate. The majority of regions saw HDDs both above last year and normal. See more detail within for charts and tables, as well as the slides that we will continue to update intra-week.
So far in 2020, mild weather has been a bigger earnings impact than the virus. Q1 degree days were 15-20% below average throughout most of the US. But all the focus will be the impact of the virus and implications for 2020 guidance. On the right, we show which companies we think will reaffirm 2020, those on the bubble, and those likely to cut or guide down. Companies that can reaffirm typically have a lot of levers to pull in their budget/costs or have constructive regulatory mechanisms like decoupling or bad debts trackers. Managements may have different base assumptions on recovery timelines so we will be very interested to pin those down. Finally, we value utilities off 2021/2022 earnings so we will care most about any issues with the virus today that could somehow impact L-T results – so far, we see little lingering impact.
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