Neil Kalton, CFA
Wells Fargo Securities
Public Service Enterprise Group (PEG) reported Q3 operating EPS of $0.83 and guided to the upper end of the $2.50-$2.75 range for 2011. We reiterate our Outperform rating and 12-18 month range of $36-$37 per share.
Our revised EPS outlook reflects strong year-to-date results in 2011, PEG’s updated hedge and volume disclosures for 2011E-2013E and recent forward power and fuel prices. Lower assumed power prices (both hedged and open) in our model post-2011 were partially mitigated by higher-than-expected output for PEG’s intermediate coal, combined cycle and peaking units and lower assumed coal costs. We remain positive on PEG for the following reasons: (1) a diverse unregulated generation fleet, which is attractively located in a constrained power market, (2) strong regulated growth opportunities driven largely by investment with contemporaneous returns, and (3) a comparatively strong balance sheet that provides financial flexibility.
On the [recent analysts’] call, Exelon Corporation (EXC) addressed measures being implemented and/or considered in the wake of the poor power market outlook. These included (1) layering in more put options in the hedging program to mitigate exposure to natural gas but maintain exposure to a potential enviro-driven heat rate recovery and (2) evaluating the capital intensive nuclear uprate program.
In addition, management affirmed a commitment to the dividend. While we viewed the strategic discussion favorably, we are cognizant that the maneuvers and need to restate a commitment to the dividend are indicative of a prudent but increasingly defensive posture.
Jefferies & Company, Inc.
We believe that Southern Company (SO), an integrated electric company with an average dividend yield and below average risk, should trade at a premium to a peer group of largely regulated electric utilities.
Southern Company reported fourth-quarter earnings of $0.30, below our estimate of $0.31 but in line with consensus of $0.30. Earnings were $0.18 in the same period a year ago. The primary drivers for the quarterly improvement were new rates at Georgia Power and strong results at Southern Power.
The company provided 2012 EPS guidance of $2.58-$2.70, which is within the company’s 2010 plan of 5%-7% growth rate. Off of these higher numbers Southern is forecasting 4%-7% growth. For 1Q12, management is forecasting earnings of $0.45. Investors focused on the “changing” growth rates, but mathematically there is no change to the plan the company laid out in 2010. Included in 2012 guidance is a 1.3% assumption of sales growth. In 2011, weather-normal retail sales grew 1% compared to 2010. Management estimates that for every 1% change in retail sales there is a corresponding $0.07 change in earnings.
Earnings at Southern Power improved slightly versus the same period a year ago. The improvement was due to new long-term wholesale power contracts and higher energy margins driven by low natural gas prices. An increase in average shares outstanding had a ($0.01) impact on 4Q results.
We believe that Exelon (EXC) is attractive at current levels with an above average yield and upside leverage to improving U.S. power markets. Exelon 4Q11 operating EPS was $0.82 on a diluted basis, versus $0.95 for the same period a year ago, our estimate of $0.90, and financial-community consensus of $0.88. The decrease in earnings relative to last year relates to weaker results at Exelon’s Generation partly offset by improvement at the company’s utility subsidiaries.