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Electric Utilities: Powered Up

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Michael S. Worms
BMO Capital Markets Corp.
[email protected]

With the 4Q10 earnings season now complete, following are some of our perceptions for 2010 and the outlook for 2011. In general, 2010 results were in line with expectations, with favorable summer and winter weather providing a boost for many. Several companies introduced 2011 EPS targets, and again, there were few surprises.

The outlook for regulated utilities remains centered on rate base growth, supporting EPS growth in the 5%-7%+ range. Despite the significant benefit of favorable weather in 2010, many utilities are projecting higher earnings in 2011, suggesting significant growth opportunities to overcome difficult weather-driven comparisons with 2010.

Economic growth continues, especially in the “rust belt” states. While the rate of industrial-sales growth will likely slow in 2011 (2010 was a bounce-back year), as per managements’ comments, this sector continues to recover. Given stubborn unemployment levels, the commercial sector continues to lag and at best is expected to be flat to up modestly in 2011. Several utilities indicated that they do not expect kilowatt hour sales to return to pre-recession levels until 2013.

Neil Kalton, CFA
Wells Fargo Securities
[email protected]

We continue to view Public Service Enterprise Group (PEG) as one of the more attractive natural gas-leveraged power names, given attractive regulated EPS growth prospects and a strong financial position. We are reiterating our Outperform rating. Our 12-18 month valuation range is $34-35 from $35-36.

In addition, we project PEG’s earnings will grow by about 10% annually through 2014 (off the 2010 earnings base of $430 million), once again driven by infrastructure investment. Importantly, as 75% of PEG’s capital expenditure has rate tracking mechanisms it is conceivable the utility could avoid the need to file for rate relief through 2014 in our view.

We are reiterating our Outperform rating on Southern Company (SO) and 12-18 month valuation range of $41-42/share. SO initiated 2011 EPS guidance of $2.48-$2.56 based on assumptions that appear reasonable, if not somewhat conservative. Our 2011E and 2012E EPS remain $2.60 and $2.80.

SO remains one of our favorite regulated electric utilities. We consider shares to be attractively valued as they trade at a modest 5% premium to peers on our 2011 estimated EPS (and only 7% based on the midpoint of SO’s guidance). We think SO shares deserve a 10-15% premium given better than peer-group average regulatory environments, allowed and earned ROEs, service territories and five-year EPS growth prospects.

Management established 2011 EPS guidance of $2.48-2.56. The range represents 8% growth off of 2010’s $2.30-2.36 guidance (exceeds the upper-end of SO’s long-term 5-7% EPS growth rate). Key underpinning assumptions include improving economic conditions throughout 2011 (3-3.5% GDP growth), 2% retail sales growth (1.6% residential, 1.9% commercial and 2.6% industrial), a roughly 4% increase in non-fuel Operations & Maintenance expense and $500-700 million of new equity.

Our 2011 estimated and 2012 estimated EPS remain $2.60 and $2.80. We consider SO’s 2011 assumptions around sales and O&M growth to be reasonable, if not slightly conservative. Therefore, in our opinion, SO should have the ability to exceed the upper end of the range.

Paul B. Fremont
Jefferies & Company, Inc.
[email protected]

Exelon Corp. (EXC) 4Q10 operating EPS was $0.96 on a diluted basis, versus $0.92 for the same period a year ago, our estimate of $0.85, and the financial community’s consensus of $0.92. The increase in earnings relative to last year relates to improved results at Exelon’s Generation, partly offset by reductions at the company’s utility subsidiaries.

We are maintaining our 2011 EPS estimate of $4.10. Our estimate is slightly above the mid-point of the company’s newly initiated guidance range of $3.90-$4.20. We are maintaining our 2012 EPS estimate of $2.95; we are increasing our 2013 EPS estimate by $0.10 to $3.05.