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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.

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.

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.