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Our Q1 investor poll shows investors remain underweight utilities even after the sector has already underperformed by 700bps YTD.  The poll has eerily similar results compared to our year ahead poll.  Only 22% expect utilities to outperform for the rest of 2019 (down from 29%) and 54% expect them to underperform (up from 51%).  There is roughly the same preference of midstream vs utilities (60%/40% vs 62%/38%).  Power remains the preferred sector within the space (52% overweight vs 53% last poll) followed by Regulateds (43% overweight vs 52%) and then Yieldcos at the bottom (25% overweight vs 33%).  Most investors (59%) expect interest rates to stay in the 2.5%-3.0% area though a lot less see rates rising back over 3% (only 5% vs 22% at last poll). 

ED reported FY18 EPS of $4.33 vs consensus at $4.29 (WRe $4.30). ED provided initial 2019 adjusted EPS guidance of $4.25-4.45, a little above vs consensus of $4.28, but in-line with our previous $4.35E (now $4.36). We note that ED’s guidance excludes the -$0.20 drag related to the HLBV accounting treatment for its renewable deal with SRE – this was not the previous expectation. ED’s muted YoY EPS growth is largely due to equity dilution. The company also expects that CECONY will earn fewer incentives in 2019 vs 2018 – we assume about 10bps less (CECONY earned 9.40% vs its 9.0% allowed in 2018, with the lion’s share at the electric business).

PCG’s impending bankruptcy will impact a wide swath of companies especially renewables suppliers.  These include large ones investors are aware of (CWEN, NEE/NEP, ED) and smaller ones not so obvious (NRG, DTE, likely others).  For the other CA utilities, EIX and SRE, investors will be focused on what this means for getting long-term fixes for wildfire risks.  Project risk continues to rear its ugly head as we have seen with ACP pipeline delays.  Key updates this quarter include D/DUK on ACP, SO on Vogtle, AGR on NECEC and Vineyard Wind, and SRE on Cameron.  Pension risk (and OPEBs and NDTs) due to the Q4 market swoon and drop in rates could hurt as D highlighted recently.  NI, ETR and others may face some headwind.

Utilities eked out a small 0.5% gain for 2018 on the heels of a massive Q4 rally as the market turned decidedly defensive ending the year down 6.2%.   Utilities 670bps outperformance came despite a lot of headwinds on the group including higher interest rates (10-yr up 23bps), lack of tax reform benefits, over $15B of equity issuance, and the CA fires impact.  Investors were looking for any place to hide and utilities fit the bill especially given their lack of exposure to tariffs and recession fears.  Utilities came in second among income sectors for the year trailing only Pharma which was up 5.2%.  Interestingly, all other income sectors underperformed the market in 2018 (see Exhibit 1).  We remain cautious on utilities going into 2019 given their heavy dependence on a negative macro call and very high relative valuations (20% adjusted P/E premium vs the historic avg of 3%).  In our view, buying defensive sectors at historically large premiums is not defensive.