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Analysts anticipate 'delightfully boring' Q1 electric utility earnings season

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Analysts anticipate 'delightfully boring' Q1 electric utility earnings season

While the ongoing fallout from the Texas grid crisis and an economic rebound from the COVID-19 pandemic could still dominate discussions during first-quarter U.S. electric utility earnings calls, analysts do not anticipate major updates.

Scotia Capital (USA) Inc. analyst Andrew Weisel said he expects a "delightfully boring" first-quarter 2021 earnings season.

"This should be the least eventful quarter in nearly two years," Weisel wrote in an April 20 research report. "While some companies will have noteworthy updates ... we expect the earnings season to be particularly quiet, especially compared to the past six."

The analyst added that he expects the sector's "bond-like stocks to be left behind" amid excitement and euphoria over economic growth as COVID-19 vaccines roll out and businesses reopen, "particularly if fears of inflation and higher yields persist."

American Electric Power Co. Inc. is the firm's top pick with earnings estimates "well above consensus."

AEP on April 22 reported first-quarter 2021 operating earnings of $570.5 million, or $1.15 per share. This marked an increase from first-quarter 2020 earnings of $504.2 million, or $1.02 per share.

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Earnings beats/misses

U.S. investor-owned utilities are expected to report largely positive earnings results for the first quarter of 2021.

The mean earnings per share estimate for 10 of the top 15 U.S. electric utilities is expected to be higher than actual first-quarter 2020 results, according to an S&P Global Market Intelligence analysis. The analysis shows 13 of the top 15 electric utilities should report quarter-over-quarter gains.

Of the companies subjected to the analysis, only Exelon Corp. is expected to report a quarter-over-quarter and year-over-year EPS loss.

NextEra on April 21 topped analyst estimates reporting adjusted earnings of $1.33 billion, or 67 cents per share, an increase from $1.17 billion, or 59 cents per share, in the same quarter of 2020. The S&P Capital IQ consensus normalized EPS estimate for the quarter was 58 cents.

Scotia Capital (USA) Inc. reiterated its "sector outperform" rating on NextEra's stock following the company's earnings call.

"We believe that some of the excitement about incremental support for renewables and decarbonization-enabling technologies earlier in 2021 might have been a bit overdone, but see a stellar outlook even without any new support from D.C.," Weisel wrote.

Dominion Energy Inc., Sempra Energy and CenterPoint Energy Inc. are the multiutilities expected to report a drop in first-quarter 2021 earnings compared to actual first-quarter 2020 results. Meanwhile, the mean EPS estimate for 12 of the top 15 U.S. multiutilities is higher than actual fourth-quarter 2020 and year-over-year results.

The estimates for MDU Resources Group Inc., Avista Corp. and NorthWestern Corp. are lower than actual fourth-quarter 2020 EPS.

The majority of the top 30 electric and multiutilities are projected to report an increase in revenue versus the prior quarter and year-ago period.

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Analysts will be listening for regulatory updates out of the sector.

In the past few weeks, Duke Energy Corp. utilities Duke Energy Carolinas LLC and Duke Energy Progress LLC received orders in their respective electric rate cases in North Carolina. The North Carolina Utilities Commission approved partial rate increases and the adoption of an agreement on coal ash costs and grid improvement spending in both rate cases.

Investors also are expected to closely watch the earnings review for Dominion subsidiary Dominion Energy Virginia, known legally as Virginia Electric and Power Co.

Dominion Energy Virginia is not seeking an increase in base rates as part of its triennial review filed March 31 with the Virginia State Corporation Commission. A 2018 state law reinstated rate reviews for Dominion Energy Virginia in 2021 following a controversial freeze in 2015.

"There has been a lot of discussion in the [Virginia General Assembly] over the past few sessions regarding this framework and there have been various amendments to it in recent years," said Lillian Federico, energy research director at Regulatory Research Associates. "There have also been reports from several quarters talking about the level of 'over-earnings' as well as the serial rate changes that have been occurring under [Dominion Energy Virginia's] varied adjustment clauses."

The utility proposes to use $206 million of excess earnings to forgive unpaid customer bills for customers financially impacted by the pandemic with $26 million earmarked for reinvestment in the Coastal Virginia Offshore Wind project.

Federico said the commission "may favor a more immediate financial benefit for ratepayers given the ongoing economic impacts of COVID-19."

In Florida, NextEra Energy Inc. subsidiaries Florida Power & Light Co. and Gulf Power Co. in March filed for an increase in electric base rates of about $1.7 billion over two years along with recovery for spending on up to 1,788 MW of solar projects in 2024 and 2025.

Texas grid crisis, economic rebound

Similar to the fourth-quarter 2020 earnings season, management teams are likely to focus on the potential rebound in retail electricity sales and the ongoing impacts of COVID-19 on load trends.

With an increase in residential sales likely to continue, as commercial and industrial sales remain down, "the dollar impact to margins should likely be moderate," Weisel wrote.

Federico added that "it seems pretty clear that the adoption of more flexible work from home policies is going to take root."

This could add to volatility in electricity usage by residential customers.

In addition, it's likely that office buildings that reopen will be "less densely populated for some time, if not permanently" as companies continue to implement social distancing, Federico said.

"It remains to be seen whether this substantially reduces the electric usage at these facilities," Federico said.

The February energy emergency in Texas and the ongoing regulatory, legislative and financial fallout will also be top of mind for companies and investors.

Given a "rash of resignations" at the Public Utility Commission of Texas and Electric Reliability Council Of Texas Inc.'s board of directors, Federico noted that lawmakers are considering several different pieces of legislation that would revamp the agencies, "creating a good deal of uncertainty in the short-term and the prospect of policy shifts longer term."

It's even harder to sort out what a prospective regulatory or legislative fix for the ERCOT market might be.

"The previously discussed remedies such as instituting a capacity market or [increasing] reserve requirements for retail electric providers or power generation companies may have had only limited success in averting what occurred in February," Federico said, "as at least a portion of the problem resulted from facilities that became inoperable due to the weather and another portion seems to have stemmed from the way that gas deliveries to power generation facilities were prioritized relative to the deliveries to end use customers."

Regulatory Research Associates is a group within S&P Global Market Intelligence.