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Msg  1907 of 1946  at  7/30/2022 11:10:59 AM  by

jerrykrause


US utility Q2 results should appease investors seeking safety

from SNL Energy Finance Daily
 

US utility Q2 results should appease investors seeking safety

 
 
Byline: Allison Good, Anna Duquiatan, Darren Sweeney
 

Traders work on the floor of the NYSE on July 13. Wall Street sees inflation and "soaring natural gas prices" dominating second-quarter earnings calls for the U.S. utility sector. Source: Michael M. Santiago/Getty Images News via Getty Images North America Industry observers expect U.S. utility management teams to emphasize financial stability on second-quarter earnings calls as investors continue to seek safety in the sector, against a backdrop of record-setting inflation and high commodities prices.

"Hands down, the most important issue on [second-quarter] calls will be the impact of soaring natural gas prices on customer electric and gas bills and if there is any risk to out-year (2024+) capex programs, and thus EPS growth," CreditSights analyst Andrew DeVries said in an email.

Scotia Capital (USA) Inc. analyst Andrew Weisel agreed that affordability will likely be "top of mind."

"There's no doubt that inflation has gotten worse over the past three months, and that arrearages are likely up," Weisel wrote in a July 20 earnings preview. "However, we believe that utilities comprehensively addressed this topic with the last round of earnings updates. Most management teams seem cautiously confident that they'll be able to manage rates reasonably well, though we do worry about those with high-profile rate cases underway."

Merchant windfall

Spiking power prices, along with conservation and curtailment efforts by grid operators the Electric Reliability Council of Texas Inc., PJM Interconnection LLC and Midcontinent ISO will also put independent power producers in focus for second-quarter earnings, according to analysts at BMO Capital Markets.

"While ratable hedging programs dampen the near-term upside for merchant power, we see the continued strength in natural gas and power prices as a tailwind for the merchant power sector's longer-term (2024+) cashflow profile as they are able to add incremental hedges at attractive prices through both retail and wholesale channels," they told clients July 20.

Morgan Stanley wrote July 18 that Vistra Corp.'s 2 GW to 2.5 GW of unhedged generation capacity could net the company a $100-million plus EBITDA windfall during a recent Texas heatwave that saw ERCOT set several demand records as power prices peaked at $5,000/MWh.

Both Vistra and Constellation Energy Corp., BMO added, should be able to increase their EBITDA guidance and "add incremental visibility to their ability to return a significant amount of cash flow to shareholders in the intermediate term."

Amid macroeconomic trends like rising inflation, a potential recession and energy industry fallout from Russia's invasion of Ukraine, gas is taking center stage as multiple U.S. regions face reliability challenges, according to analysts at Scotiabank.

"'Gas' is no longer a four-letter word, but 'bridge fuel' may have become one," they wrote July 20. "We expect management teams to emphasize their view that natural gas infrastructure is critical, as are the needed investments."

Policy implications

On the policy front, Weisel believes many companies will "un-delay 2023 solar projects" after U.S. President Joe Biden said he will impose a two-year moratorium on tariffs on solar cells and panels from Southeast Asia and invoke the Defense Production Act to "accelerate domestic production of clean energy technologies."

"We view that development as being undoubtedly positive for utilities developing solar given the removal of the near-term uncertainty that had been impeding the industry," Weisel wrote. "To whatever degree investors may have worried about pressure on 2022-2024 earnings and cash flows, we now view that risk as essentially off the table."

In addition, a U.S. Supreme Court decision that restricts the U.S. Environmental Protection Agency's authority to regulate greenhouse gas emissions from existing power plants and stalled climate legislation in the U.S. Senate have made headlines in recent weeks.

Glenrock Associates LLC analyst Paul Patterson, however, does not expect a substantial change in generation or capital growth strategies on second-quarter calls based on recent developments.

"We're kind of in early days here in terms of where things are going and I think there is just a lot of unanswered questions about what is going to happen with interest rates, what is going to happen with the economy, with inflation," Patterson said in a July 20 phone interview. "These are sort of conservative managements. ... They don't usually change on a dime."

But Patterson said he would not rule out some individual company changes.

A haven for investors

While the top North American utilities lost market value during the second quarter, the sector continues to materially outperform the S&P 500.

"Not only is this flight to safety readily apparent but we believe we are witnessing an even deeper redistribution within investors' asset allocations across the market," BMO noted. "The sector has clearly benefited this year from the 'TINA' effect (There Are No Other Alternatives)."

Guggenheim Securities LLC agreed that the North American utility sector has even more unit price upside to capture and said that "the field remains a stock picker's market," as stocks deconsolidate from inflation.

Another factor supporting utility stocks is that rate case stakeholders are taking "a less aggressive stance on cost of capital discussion in the regulatory arena," which could lead to a "potential upward revision in [returns on equity] for the first time in a decade," Guggenheim said.

Earnings beats/misses

Several top U.S. investor-owned electric utilities are expected to report stronger year-over-year earnings results for the second quarter of 2022, according to an S&P Global Market Intelligence analysis of S&P Capital IQ consensus estimates.

NextEra Energy Inc. on July 22 reported second-quarter 2022 adjusted earnings of $1.59 billion, or 81 cents per share, compared to about $1.40 billion, or 71 cents per share, in the second quarter of 2021. The S&P Capital IQ consensus estimate, as of July 13, was 76 cents per share.

Outside of NextEra, Xcel Energy Inc., Eversource Energy, PPL Corp. and PG&E Corp. are all expected to report higher results than they did in the second quarter of 2021. Results for American Electric Power Co. Inc. and Southern Co. are expected to be in line with last year.

Mean earnings per share estimates for seven of the 15 largest U.S. electric utilities by market cap are lower than actual second-quarter 2021 results, the analysis shows.

Other than NextEra, Evergy Inc. is the only electric utility subject to the analysis expected to report a quarterly gain.

In addition, the analysis shows Duke Energy Corp., Southern, AEP, Xcel Energy, Eversource Energy, Edison International, FirstEnergy Corp., PPL, PG&E, Entergy Corp., Evergy and Avangrid Inc. should report annual revenue gains. NextEra reported revenue of $5.18 billion, up from $3.93 billion.

The mean revenue estimate for nearly all of the top 15 electric utilities is below actual first-quarter 2022 results.

Exelon Corp., meanwhile, is expected to report losses in earnings and revenue versus actual first-quarter 2022 and second-quarter 2021 results. Power provider Constellation Energy was spun off from Exelon during the first quarter, thus impacting the Chicago-headquartered utility's earnings and revenue.

In the multi-utilities sector, Dominion Energy Inc., Sempra, Consolidated Edison Inc., Ameren Corp. and NiSource Inc. are all expected to report an uptick in year-over-year earnings and revenue. Black Hills Corp., CMS Energy Corp. and Avista Corp. also are expected to beat last year's revenue numbers.

All 13 large gas and electric businesses subject to the analysis are expected to fall short of actual first-quarter 2022 earnings and revenue results.

Scotia Capital's Weisel expects utilities to report strong results based on "favorable weather," the number of customers still working from home and constructive regulatory outcomes.

"Coupled with extreme July heat so far, we expect many to sound confident about [near-term] earnings, possibly increasing 2022 EPS guidance," Weisel wrote, adding the firm's estimates are "above consensus" for the second quarter and full year for the majority of companies it covers.

 


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