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US utilities expected to outline equity needs, earnings guidance on Q4'19 calls

With weather expected to play a smaller part in fourth-quarter 2019 results, management teams in the U.S. electric utility sector could instead hone in on equity needs, earnings guidance and rate case activity.

"Equity needs should be a hot topic, but the focus should be on dilution, not headlines," Scotia Capital (USA) Inc. analyst Andrew Weisel wrote in a Jan. 22 report. "We anticipate more equity than people might expect from [Consolidated Edison Inc.] and [Eversource Energy], while [Dominion Energy Inc.] and [Southern Co.] may need more should they face additional issues at [Atlantic Coast Pipeline LLC] and [the Alvin W. Vogtle Nuclear Plant expansion], respectively (though we don't expect announcements with 4Q19 results)."

In addition, Exelon Corp., Public Service Enterprise Group Inc., Duke Energy Corp., Southern, Con Edison and DTE Energy Co. are all expected to provide 2020 EPS guidance.

While favorable weather in the third quarter of 2019 was a driving force behind strong earnings overall for the sector, analysts do not expect weather to have a material impact on earnings for the final quarter of the year. NextEra Energy Inc. kicked off the earnings season Jan. 24, reporting adjusted earnings down slightly from fourth quarter 2018, but full-year results up by 8.7%.

An S&P Global Market Intelligence analysis shows that the vast majority of the top U.S. electric and multi-utilities are expected to report a drop in EPS in the fourth quarter of 2019 versus the prior three-month period.

All of the top 15 U.S. electric utilities by market capitalization are projected to report earnings below actual third-quarter 2019 results, the analysis shows.

Outside of results and with less focus on weather, Scotia Capital noted that the fourth-quarter 2019 earnings season could be "uncharacteristically quiet."

"Most companies provided big-picture updates at [the Edison Electric Institute Financial Conference] last November, so we don't expect too many headlines from (the) 4Q19 earnings season," Weisel wrote.

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Analysts believe the primary focus should be on the outlook for the sector overall and individual companies.

"Underpinning growth in electric utility earnings is a long runway of capital spending opportunities driving above-average rate base growth," Mizuho Securities USA LLC analysts wrote in a Jan. 21 report.

Mizuho points to CenterPoint Energy Inc., FirstEnergy Corp., NextEra and PNM Resources Inc. as its top picks for 2020.

"We believe pure-play regulated utilities with little to no regulatory exposure over the next couple of years, and trading at a discount to the sector, will outperform the [Philadelphia Utilities Index] this year," Mizuho analysts wrote.

Mizuho expects the settlement agreement in CenterPoint Energy Houston Electric LLC's rate case will likely be approved in the first quarter, leaving equity needs for CenterPoint as the "greatest overhang in 2020." CenterPoint management is expected to provide guidance on the company's equity needs on its upcoming earnings call.

Mizuho said NextEra is likely to "continue looking for accretive regulated transactions" as the company pursues cost reductions through "smart capital investments."

"We believe a regulated transaction is crucial for [NextEra] to maintain the preferred business mix for rating agencies given its unregulated business is growing at [an approximately 12% compound annual growth rate]," Mizuho analysts wrote. "We remain skeptical that the Santee Cooper transaction will advance, given JEA recently took their sale off the table."

Santee Cooper is known legally as South Carolina Public Service Authority.

Scotia's Weisel pointed out primary subsidiaries of Con Edison, Southern, Alliant Energy Corp. and WEC Energy Group Inc. recently resolved rate cases with the attention now shifting to the impact on outlooks.

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Management for Exelon and PSEG could provide some color on the Federal Energy Regulatory Commission's December 2019 order to expand the PJM Interconnection's minimum offer price rule to mitigate the impact of state-subsidized resources on the region's annual capacity auction.

After the release of FERC's order, Exelon said in a statement that the new rule could "cost thousands of jobs, increase air pollution and unnecessarily raise electricity bills by $2.4 billion annually."

Management for Evergy Inc. could face some questions on Elliott Management Corp.'s push to unlock up to $5 billion in value through a change in investment strategy and management or a "premium stock-for-stock merger."

The activist investor believes Evergy should abandon its share repurchase plans and instead invest in core utility operations and "critical system infrastructure."

'War on natural gas'

Meanwhile, CreditSights analyst Andrew DeVries noted that outside of some utility-specific issues, including an update on Southern's Vogtle expansion and Dominion Energy's progress on offshore wind, "the one overriding theme we will be paying close attention to is comments from management teams on the recent war on natural gas, not just for generation but for heating as well."

There has been a wave of pipeline opposition amid New York's now-resolved natural gas service moratorium and wide-scale bans on the fuel.

"In theory this could be a major long-term positive for electric business models at the expense of gas ones so it will be very interesting to hear what the pure-play electrics say vs. the pure-play gas utilities," DeVries said in an email, adding that he will also be looking to hear comments on this issue from companies that operate in both spaces.

If either U.S. Sen. Elizabeth Warren or U.S. Sen. Bernie Sanders wins the 2020 Iowa Democratic presidential caucuses in February, "this issue will be front and center for utility investors," DeVries said.