Michael S. Worms
BMO Capital Markets Corp.
212-885-4031
[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
314-955-5239
[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.
