Today, the PUCT adjudicated most of the contested issues in Houston Electric’s rate case. Most notably, the PUCT looks poised to award a 40% equity ratio and 9.25% ROE – both below the ALJ’s PFD, which suggested a 45% equity ratio and 9.42% ROE. The PUCT agreed with ALJ’s recommendation for enhanced ring-fencing provisions, meaning that CEHE will have restrictions on the amount of dividends it can send up to CNP. To the positive, the PUCT overturned half of the capital disallowances from the PFD and is opting to include a prepaid pension asset in rate base. CNP underperformed the utility average by over 500bps today.
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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.
The annual EEI conference will be held November 10-12. Management from most of our covered companies will be there. This report is a helpful guide for investors attending and includes questions to ask each company and summary model information.
OGE reported 3Q19 EPS of $1.25, handily beating consensus $1.11 (WRe $1.13). Driving the beat was favorable weather and continued sales growth. OGE raised its FY19 consolidated guidance to $2.24-2.30 from $2.05-2.20 largely due to rider true ups (+$0.07) and favorable weather (+$0.04). For LTM ending 9/30, weather normal sales growth was just north of 2%. Management is now expecting OG&E’s LT sales growth forecast to be higher than the previously anticipated level of ~1%; every 1% of growth translates to ~$0.05 of EPS
CNP reported 3Q19 EPS of $0.53, handily beating us/consensus at $0.42. The beat was primarily attributable to O&M management and favorable weather in TX. CNP pointed to FY19 ending at $1.69, toward the top end of its $1.60-1.70 range. CNP noted the expectation for ~$100M in O&M savings vs 2018, inclusive of merger synergies which sound to be tracking better than the original ~$50M target. Mgmt. noted that 2019’s O&M level will be the starting point going forward and that it sees the opportunity for further improvement.
AES reported 3Q19 EPS of $0.48, well-above consensus $0.41 (WRe $0.40). Driving the beat was timing of insurance recoveries and a lower tax rate. AES affirmed its FY19 guidance of $1.30-1.38 and noted two headwinds expected for Q4, a higher tax rate and a planned outage at Warrior Run. Tone from management on the call was positive – AES just received an investment grade rating (Fitch) for the first time, renewable adds / LNG opportunities are both materializing, and the new partnership with Google sounds like it will result in real benefits. AES outperformed the UTY by 260bps today following the report.
There were two major growth updates with Q3 results. First, sponsor GIP back-levered the Carlsbad plant, reducing the purchase price for CWEN to a much more manageable $180M from $387M. Terms were very attractive and increased the equity return to 15% from 10%. An acquisition of Carlsbad is likely by 1H20. On the negative side, CWEN will pass on the planned acquisition of Mesquite Star in order to prioritize capital toward Carlsbad during a period of PG&E-related capital constraints. Updated financing plans for major near term acquisitions – the wind repowering and Carlsbad – imply only $65M of equity needs. So there is a visible plan in place for CWEN to grow over the next 6-9 months while only needing modest equity likely through the ATM. This is positive while customer PCG remains in bankruptcy.
We thought Sempra had a very constructive Q3 call: raising 2019 guidance $0.25/sh to $6.00-$6.50, maintaining 2020 guidance at $6.70-$7.50 despite dilution from the South American asset sales (which went at much better prices than expected), a constructive CA rate case outcome, expanded rate base investment at Oncor and moving the ball ahead on LNG. Execution has continued to be impressive and we continue to see SRE as attractive; remain Outperform.
Dominion reported 3Q19 EPS of $1.18, beating consensus of $1.14 (WRe $1.15) on a $0.05 weather benefit. FY19 guidance was narrowed to $4.15-4.30, still targeting the same midpoint. Management sounded confident in being able to execute on the plan going forward – highlighting the improved business mix, opportunities for investment at the core utilities and progress made on ACP. D’s opportunity set for investment in offshore wind at VEPCO is highly unique and could help drive robust rate base growth throughout the next decade. We reiterate our Outperform and continue to believe the stock is attractive with or without ACP.
After a long headline-filled year, the S&P 500 broke out to new highs last month and caught up to utilities, both up a little over 21% through October. The market has climbed a wall of doubters, while our recent poll shows utilities continuing to gain investor support. From a contrarian standpoint, we take the market. Investors have been leaning defensive most of the year such that a typical year-end defensive trade seems unlikely. In fact, the defensive trade over the past few weeks has been to buy depressed value stocks and cyclicals. Utilities still trade at a 17% premium to the market and we would like to see them closer to the average to be more constructive.
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