AI-driven power demand to drive discussions on US utilities' Q1 earnings calls

US utility analysts expect AI and datacenter power demand to continue to drive discussions on first-quarter 2024 earnings calls, with "stubbornly high" interest rates, regulatory risk and wildfire exposure also top of mind for investors.

"The key theme on these upcoming earnings calls will surely be around datacenters, including things like updated forecasts to load growth, impacts to the overall US fuel mix ... recovery mechanisms around all the new spend and how this might impact company funding plans/credit metrics, plus customer affordability just to name a few," CreditSights analyst Nicholas Moglia said in an April 19 email.

The potential for new technology such as liquid cooling to lower total power demand from datacenters is also a subject analysts and investors hope to hear about from utilities with large exposure to the sector, according to Moglia, who mentioned Dominion Energy Inc., which serves the largest datacenter market in the world.

Although building the 2,587-MW Coastal Virginia Offshore Wind project, which would be the nation's largest once operational, Dominion has proposed delaying fossil fuel retirements and adding gas capacity as it expects demand in its Virginia, North Carolina and South Carolina service areas to "nearly double over the next 15 years."

The company also has wrapped up a 16-month business review and rolled out a $43.2 billion capital plan for 2025–2029.

"There's no doubt that datacenters, and their robust demand for 24/7 power, are providing a big spark of excitement among utility investors," Scotia Capital (USA) analyst Andrew Weisel wrote in an April 22 report. "It's clear that capex opportunities are rising, perhaps more rapidly than we've seen in a generation or two, but there are two questions: how will customers pay for it, and how will companies raise the capital?"

Scotia Capital on April 22 lowered target prices across the US utility sector based on "stubbornly high and rising interest rates."

Still, sector analysts expect companies will stick to their 2024 and long-term financial forecasts.

"We think that utilities, for the most part, are in good financial position and will reaffirm their growth plans," Morningstar analyst Travis Miller said in an April 22 interview. "We haven't seen anything yet this year that should materially change the outlook for at least the next year."

NextEra Energy Inc. on April 23 reported first-quarter 2024 adjusted earnings of $1.87 billion, or 91 cents per share, compared to $1.68 billion, or 84 cents per share, in the first quarter of 2023. Those results topped the S&P Capital IQ consensus normalized EPS estimate of 78 cents for first-quarter 2024, and NextEra reaffirmed its 6% to 8% long-term EPS growth rate.

NextEra expects adjusted EPS of $3.23 to $3.43 for 2024, followed by adjusted earnings of $3.45 to $3.70 per share for 2025 and $3.63 to $4.00 for 2026.

Among independent power producers, analysts expect much of the focus to be on plans to capitalize on AI demand, particularly after Talen Energy Corp. affiliate Cumulus Growth Holdings LLC sold its hyperscale datacenter campus in Pennsylvania to Amazon Web Services Inc. for $650 million.

The 960-MW datacenter campus will be powered by Talen's 2,494-MW Susquehanna Nuclear power plant in Luzerne County, Pa. Similar deals could follow, according to recent Morgan Stanley reports, which said that merchant nuclear power plants are particularly well-positioned to supply on-site generation for tech companies building US datacenters. The reports cited generation assets totaling nearly 22 GW poised to take advantage.

"There's growing expectations that [Constellation Energy Corp.]'s going to go down a similar path with one or more of their facilities over time," Neil Kalton, managing director of utility equity research at Wells Fargo Securities, said in an interview.

"For independent power names, importantly, the improvement in forward power prices outpaced the move in regional gas hub pricing ... which would suggest the anticipated tightness in power is now being reflected in forwards, validating investors' bullish outlook on the sector," analysts at BMO Capital Markets wrote in an April 21 report.

BMO expects Constellation, NRG Energy Inc. and Vistra Corp. to see about a 33% increase in earnings per share compared to the prior-year period.

Wells Fargo's Kalton also anticipates NextEra, which has nearly 60 GW of renewables generation capacity, will benefit from datacenters' electricity needs.

Renewable energy developers secured contracts for at least 4,012.6 MW of capacity in the 12 months ended Feb. 1 that tech companies will use in part or entirely to power US datacenters, according to an analysis of S&P Global Commodity Insights data.

Earnings growth for regulated utilities related to large tech companies' operations will likely not be as pronounced, according to Scotia Capital analysts, who wrote, "For most, we see the potential for faster EPS as being quite modest; hearing this prediction tends to disappoint generalists looking for a reason to be more upbeat about the sector."

Wildfire, regulatory risks

Xcel Energy Inc.'s management team will likely address Texas wildfires "to an extent" but will be reluctant to share much about the situation given legal issues, Miller said.

Xcel Energy in March issued a statement disputing claims that Amarillo, Texas-based subsidiary Southwestern Public Service Co. "acted negligently in maintaining and operating its infrastructure" but acknowledged "that its facilities appear to have been involved in an ignition of the Smokehouse Creek fire."

The Smokehouse Creek fire in late February, which grew to become the largest wildfire in Texas history, burned more than 1 million acres in the Texas panhandle and killed two people. Xcel Energy received a letter from a law firm Feb. 28 on behalf of various property insurers providing notice of "potential exposure for damages resulting from the Smokehouse Creek Fire."

"We have seen renewed and continued pressure on names with perceived wildfire exposure, as these names are among the worst performers in the group," Mizuho Securities USA analyst Anthony Crowdell wrote in an April 19 report.

While a "national or regional solution is frequently discussed by investors," Crowdell pointed out that California has implemented "a number of financial and legal safeguards for utilities in the case of a wildfire incident, and yet [PG&E Corp.] and [Edison International] continue to trade at the lowest [price-to-earnings] multiples in the group."

Analysts and investors also have concerns with the overall regulatory environment for utilities following some adverse decisions and related impairments, but some view these concerns as overblown.

"While bad news from regulators gets the headlines, we disagree with the notion that regulation is getting worse across the board," Scotia Capital's Weisel wrote. "[W]hile bears are quick to point out that interest rates have been jumping much more rapidly, we remind that allowed returns were more sticky on the way down, so it wouldn't be reasonable to expect lockstep increases on the way up."

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