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Opportunities in Dems' clean energy plans to dominate Q2 utility earnings talks

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Opportunities in Dems' clean energy plans to dominate Q2 utility earnings talks

Investment opportunities created by federal clean energy legislation will likely be a key topic of discussion for U.S. utility investors and executives during the second-quarter earnings season.

"Investors are focused on the impact of any potential clean energy standards that are part of an infrastructure, budget or other bill, especially if the 80% clean by 2030 language holds," CreditSights analyst Andrew DeVries told S&P Global Market Intelligence. "Will this lead to another round of capex increases or merely keep out-year capex from actually falling, which it never seems to do?"

U.S. Senate Democrats are crafting a federal clean electricity standard that aims for 80% emissions-free electricity by 2030 as part of a recently announced $3.5 trillion budget agreement. The budget resolution would fund many of U.S. President Joe Biden's infrastructure and climate priorities, which should unlock significant investment potential for utilities.

"Any discussion of investment in clean energy and infrastructure involves utilities," Morningstar analyst Travis Miller said in a July 19 phone interview.

"Obviously there is a direct correlation of future capex to future earnings growth and utility investors have come to expect [4% to 7%] out of the sector so getting line of sight to that lasting until mid-decade could be a positive," DeVries said in a July 19 email. "From a bondholder viewpoint, we want to know how are they going to fund all of this capex — new [holding company] debt, new [operating company] debt or hopefully some equity?"

Outside of federal energy policy, analysts expect a focus on long-term trends and utility specific issues but not many noteworthy updates with regard to earnings guidance and financial outlooks.

"I don't expect too many surprises but you never know," Miller said.

"We expect solid results and commentary from utilities, though anticipate a generally uneventful round of quarterly updates with few likely to change financial guidance and not many seeing thesis-changing regulatory updates," Scotia Capital (USA) Inc. analyst Andrew Weisel wrote in a July 20 research report.

Miller pointed out that the sector has navigated the load declines tied to the coronavirus pandemic fairly well.

"I think we're getting back to normal levels of electricity and natural gas demand," Miller said.

Weisel, meanwhile, sees both DTE Energy Co., the firm's top pick, and WEC Energy Group Inc. in position to increase 2021 earnings guidance.

"We expect [CMS Energy Corp.] to talk up the outlooks for 2021 and 2022, but expect management to (conservatively) stop short of increasing guidance," Weisel wrote.

Public Service Enterprise Group Inc. could provide "several potential positive updates" around the sale of its merchant solar and non-nuclear generation fleet, a settlement on transmission rates and the possibility of more offshore wind investments, Weisel added.

"More broadly, we remain bullish on fundamentals and valuation but don't expect sentiment to improve anytime soon," Weisel said.

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Earnings beats/misses

Several U.S. investor-owned electric utilities are expected to report positive earnings results for the second quarter of 2021, according to an S&P Global Market Intelligence analysis of S&P Capital IQ consensus estimates.

The mean earnings per share estimate for 10 of the top 15 U.S. electric utilities is higher than actual second-quarter 2020 results, the analysis shows. However, only six of the top 15 electric utilities are expected to report quarter-over-quarter gains.

For NextEra Energy Inc., Exelon Corp., Edison International and Evergy Inc., the mean estimate is higher than actual first-quarter and prior-year results.

Of the electric utilities subject to the analysis, only Alliant Energy Corp. is expected to report a quarter-over-quarter and year-over-year EPS and revenue loss. NextEra, Edison International and PG&E Corp. are the electric utilities pegged to report revenue gains versus prior-quarter and second-quarter 2020 results.

Several companies in the multiutilities sector could see a drop in earnings in the second quarter based on consensus estimates, the analysis shows.

The mean EPS estimate for Dominion Energy Inc., Sempra, PSEG, DTE, CMS and NiSource Inc. is lower than actual first-quarter and year-over-year results.

On a positive note, 13 of the top 15 U.S. multiutilities are expected to report an uptick in revenue versus the second quarter of 2020. MDU Resources Group Inc. is the sole company among this group tabbed to report positive gains in earnings and revenue compared to prior-quarter and 2020 results.

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Ohio bribery, Elliott activism

FirstEnergy Corp. and Duke Energy Corp. are among the utilities in the headlines.

FirstEnergy executives signaled in April that the Ohio investor-owned utility could sell a partial stake in one of its regulated electric subsidiaries to raise equity to restore its balance sheet. The potential sale comes as FirstEnergy talks with the U.S. Department of Justice about resolving its involvement in an alleged bribery scheme behind the 2019 passage of Ohio's repealed nuclear subsidies.

"[A] this point, every investor under the sun is expecting a deferred prosecution agreement with the DOJ so now it is only about the timing," DeVries said. "[FirstEnergy] is also expected to announce new credit lines at each [operating company], which should allow them to turn the corner at the [rating] agencies and that should be a positive for the bonds."

Duke Energy has been touting the benefits of a major energy bill in North Carolina while battling an activist investor challenging the company's leadership and strategic direction.

House Bill 951, which provides an easier pathway for Duke Energy to shape its future energy portfolio and cement regulated cost recovery, has moved to the North Carolina Senate but still lacks the support of the state's governor.

Meanwhile, activist investor Elliott Investment Management LP has publicly released at least two letters it sent to Duke Energy's board of directors raising concerns about stock value destruction and the oversight of the utility giant's current leadership team.

"We believe there are some genuinely interesting points in Elliott's [most recent] letter, and while we still take a VERY dim view on large strategic actions like divestments/spins, we do believe the focus on operations and governance provides [Duke Energy] management with an opening to engage given their position in the shares," Guggenheim Securities LLC analyst Shahriar Pourreza wrote in a July 19 report.