FBR Capital on Diversified Industrials: Utility Capex Rebounding; T&D and Environmental Spending Drive Strong Outlook
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Rating Summary:
1 Buy, 3 Hold, 1 Sell
Rating Trend:
Up
Today's Overall Ratings:
Up: 6 | Down: 13 | New: 13
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FBR Capital on Diversified Industrials: Utility Capex Rebounding; T&D and Environmental Spending Drive Strong Outlook
Our follow-up analysis of capex plans of 46 U.S. shareholder-owned electric utilities (SOEU) suggests that following two years of decline (–4%/–2% in 2009/2010), spending could have bottomed as utility capex is estimated to be up a solid 10% in 2011. This expected pickup in spending is especially noteworthy, in our view, given the macro environment is far from robust and utility reserve margins remain elevated. Our discussions with utilities point to several drivers for this pickup, including: (1) an element of “catch-up” helping in the near term, where utilities that had deferred maintenance projects during the recession can no longer postpone such spending given the critical nature of the power infrastructure (Avista (NYSE: AVA), Pinnacle West (NYSE: PNW), and Pepco (NYSE: POM), among others); (2) compliance with stricter EPA rules that is driving the upgrade of the existing fleet and replacement of retired capacity (including AEP, PPL, Southern Company, and Duke Energy); (3) the outlook for recovering electricity consumption, as several utilities indicated expectations for low-single-digit growth; (4) investment in the transmission and distribution (T&D) infrastructure driven by the need to integrate renewable resources, upgrade system reliability to meet NERC and/or local standards,
and the ongoing need to upgrade the aging grid (a large portion of the grid was built in the 1970s); (5) utility-specific events including updated rate cases for several large utilities (non-covered NV Energy (NYSE: NVE), OGE Energy (NYSE: OGE), Northeast Utility (NYSE: NU) among others); and (6) a recovery in the credit markets that seized up in 2008–2009, resulting in the postponement of several projects (e.g., Calpine-GE power gen financing). We believe many of the above drivers are sustainable and, despite high reserve margins, could drive a strong capex up-cycle for several year Recent order trends for electrical equipment suppliers and construction contractors support our analysis; several companies have seen significant increases in order activity and backlog. This improving capex outlook has positive implications for electrical equipment suppliers, in our view. Specifically, we see upside for suppliers with product portfolios geared toward T&D and environmental spending, including Outperform rated SPX, Cooper, and WESCO. Non-covered companies in the group include ABB, Hubbell, CECE, and Babcock-Wilcox. For utilities under coverage, high levels of capital expenditures remain consistent with robust rate base growth trajectories for the regulated utilities for the foreseeable future.
Our utilities team’s recent estimates suggest the potential for 35 GW to 50 GW of coal plant retirements over a multiyear period, and this reduction in capacity would need to be offset by increased investment, likely in gas-based generating capacity, with positive implications for suppliers, including SPX (NYSE: SPW)(Outperform), Cooper (NYSE: CBE)(Outperform), and WESCO (NYSE: WCC)(Outperform). Other companies in the group include GE (NYSE: GE)(Not Rated), Alsthom (NYSE: ALO)(Not Rated), ABB (NYSE: ABB)(Not Rated), and Siemens (NYSE: SI)(Not Rated). We also expect investment in environmental control equipment, such as scrubbers, selective catalytic reductions (SCRs), bag-houses, DSI, and ACI, to make the existing fleet compliant, with likely positive implications for SPW. Similar companies include CECO Environmental (NYSE: CECE)(Not Rated) and Babcock-Wilcox (NYSE: BWC)(Not Rated).
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Our follow-up analysis of capex plans of 46 U.S. shareholder-owned electric utilities (SOEU) suggests that following two years of decline (–4%/–2% in 2009/2010), spending could have bottomed as utility capex is estimated to be up a solid 10% in 2011. This expected pickup in spending is especially noteworthy, in our view, given the macro environment is far from robust and utility reserve margins remain elevated. Our discussions with utilities point to several drivers for this pickup, including: (1) an element of “catch-up” helping in the near term, where utilities that had deferred maintenance projects during the recession can no longer postpone such spending given the critical nature of the power infrastructure (Avista (NYSE: AVA), Pinnacle West (NYSE: PNW), and Pepco (NYSE: POM), among others); (2) compliance with stricter EPA rules that is driving the upgrade of the existing fleet and replacement of retired capacity (including AEP, PPL, Southern Company, and Duke Energy); (3) the outlook for recovering electricity consumption, as several utilities indicated expectations for low-single-digit growth; (4) investment in the transmission and distribution (T&D) infrastructure driven by the need to integrate renewable resources, upgrade system reliability to meet NERC and/or local standards,
and the ongoing need to upgrade the aging grid (a large portion of the grid was built in the 1970s); (5) utility-specific events including updated rate cases for several large utilities (non-covered NV Energy (NYSE: NVE), OGE Energy (NYSE: OGE), Northeast Utility (NYSE: NU) among others); and (6) a recovery in the credit markets that seized up in 2008–2009, resulting in the postponement of several projects (e.g., Calpine-GE power gen financing). We believe many of the above drivers are sustainable and, despite high reserve margins, could drive a strong capex up-cycle for several year Recent order trends for electrical equipment suppliers and construction contractors support our analysis; several companies have seen significant increases in order activity and backlog. This improving capex outlook has positive implications for electrical equipment suppliers, in our view. Specifically, we see upside for suppliers with product portfolios geared toward T&D and environmental spending, including Outperform rated SPX, Cooper, and WESCO. Non-covered companies in the group include ABB, Hubbell, CECE, and Babcock-Wilcox. For utilities under coverage, high levels of capital expenditures remain consistent with robust rate base growth trajectories for the regulated utilities for the foreseeable future.
Our utilities team’s recent estimates suggest the potential for 35 GW to 50 GW of coal plant retirements over a multiyear period, and this reduction in capacity would need to be offset by increased investment, likely in gas-based generating capacity, with positive implications for suppliers, including SPX (NYSE: SPW)(Outperform), Cooper (NYSE: CBE)(Outperform), and WESCO (NYSE: WCC)(Outperform). Other companies in the group include GE (NYSE: GE)(Not Rated), Alsthom (NYSE: ALO)(Not Rated), ABB (NYSE: ABB)(Not Rated), and Siemens (NYSE: SI)(Not Rated). We also expect investment in environmental control equipment, such as scrubbers, selective catalytic reductions (SCRs), bag-houses, DSI, and ACI, to make the existing fleet compliant, with likely positive implications for SPW. Similar companies include CECO Environmental (NYSE: CECE)(Not Rated) and Babcock-Wilcox (NYSE: BWC)(Not Rated).
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