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In This List

Taxes, power prices to drive moderate downside for power sector Q2 earnings

Essential Energy Insights - September, 2020

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Taxes, power prices to drive moderate downside for power sector Q2 earnings

Whileweather is not seen as a major driver for utilities and power companies in thesecond quarter, higher taxes and lower power prices are expected to have amoderate impact on the sector.

SunTrust RobinsonHumphrey analyst Ali Agha projects a 1% decline in earnings in thequarter with rate increases largely offsetting the drag from taxes and powerprices.

BarclaysCapital Inc. analysts said they expect second-quarter 2016 results forregulated utilities to show modest upside of approximately 2.5% compared tolast year and downside of just under 1% versus consensus estimates.

"Weexpect a few beats and misses that are largely based on timing issues due tomaintenance, rate cases and tax timing," Barclays analysts wrote in a July20 research report. "Weather was not a major factor."

For power companies, Barclays analysts said they anticipateEBITDA "down 4.25% year on year versus consensus expectations of EBITDAdown approximately 3%."

"More importantly, given adequate balance of yearhedging levels, we do not anticipate any revisions to 2016 annual guidance,especially preceding the late summer season, which is projected to bewarmer than normal," analysts wrote.

SunTrusthighlighted American ElectricPower Co. Inc., CMS Energy Corp., Duke Energy Corp. and as "potentialpositive earnings surprise[s] versus consensus" for the second quarter.

Companies that could be negative earnings surprises include , , and ,according to SunTrust.

SunTrustnoted that electric consumption declined 1% in the quarter based on fewercooling degree days with the weakest areas identified as the Mid-Atlantic andNew England, while the South Central and West Central regions were thestrongest areas. On-peak power prices, gas prices and coal prices also droppedin the second quarter.

SNLEnergy data showsthat day-ahead market on-peak power prices were up 22.5% in June versus theprior month, but still down 8.2% versus 2015. Average spot natural gas prices,meanwhile, increased 27% in June versus May to an average of $2.388/MMBtu, butstill 7% below last year, according to SNL Energy data.

Outsideof the impact from power and gas prices, several macro trends from low interestrates to fallout fromBritain's vote to leavethe European Union have driven high valuations and strong investment interestfor U.S. utilities.

"Afteryears of denial, investors now believe that we are in a low interest rateenvironment for the foreseeable future and that in turn has further boosted theinvestment appeal of shares of US utilities," Macquarie Capital (USA) Inc.analysts wrote in a July 21 research report.

Thevaluations have prompted WallStreet debate on how long the rally will last and if the sector isovervalued or underappreciated.

"Webelieve as long as rates remain low, investors will continue to seek safe yieldin utilities, and absent a rise in rates, the sector's valuation is sustainablein the near term," Jefferies LLC analyst Anthony Crowdell wrote in a July21 report.

Sale updates

Analysts also expect updates on mergers and acquisitions inthe U.S. and overseas on second-quarter calls, especially from AEP and DukeEnergy.

AEP is exploringthe sale of nearly 8,000 MW of competitive generation assets in twoseparate strategic reviews.

Final bids for the resources in AEP's strategic review of more than5,000 MW of gas and coal assets are reportedly due in the next few weeks, withan announcement possible on the company's third-quarter earnings call.

"We find AEP undervalued trading at a discount, andbelieve the stock should trade at a premium, as the company is moving towardsbeing more heavily weighted in regulated earnings, and as the company increasesits investment in transmission assets, which tend to earn higher-than-averageROEs and feature mechanisms for fast cost recovery," Jefferies analystCrowdell wrote.

The S&P Capital IQ consensus estimate for AEP is 89cents per share, while Jefferies estimates 90 cents per share.

Duke Energy is marketingits international business, while also movingtoward the close of its acquisition of PiedmontNatural Gas Co. Inc.

TheS&P Capital IQ consensus EPS estimate for Duke Energy is $1.00.

FirstEnergyCorp.'s July 22 announcement to abandon several coal units will likely be top of mind onthe company's July 29 earnings call. The S&P Capital IQ consensus estimatefor FirstEnergy is 54 cents per share.

and Hawaiian Electric IndustriesInc. also will likely be pressed on their canceled merger and outlooks for each stand-alone company, while could provide additionalcolor on its plan to sellthe James A. FitzPatricknuclear plant to Exelon.

Barclaysestimates second-quarter EPS of $1.64 for NextEra, above the $1.54 S&PCapital IQ estimate. Entergy is projected to report EPS of $1.06, whileJefferies has lowered its EPS estimate by 5 cents to 90 cents.

Clickhere to access SNL Energy's events calendar, including a schedule offirst-quarter 2016 earnings calls.

SNL Energy and S&PCapital IQ are offerings of S&P Global Market Intelligence.