Wells Fargo on Utilities: Brief Thoughts On Outperform-Rated Names Part I
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Price: $45.50 --0%
Rating Summary:
5 Buy, 7 Hold, 1 Sell
Rating Trend: = Flat
Today's Overall Ratings:
Up: 11 | Down: 12 | New: 13
Rating Summary:
5 Buy, 7 Hold, 1 Sell
Rating Trend: = Flat
Today's Overall Ratings:
Up: 11 | Down: 12 | New: 13
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Wells Fargo on Utilities: Brief Thoughts On Outperform-Rated Names Part I
1) ITC Holdings (NYSE: ITC)
EPS Growth - Strong and transparent EPS growth prospects on a stand-alone basis (excluding the proposed Entergy transaction). We project a compound annual EPS growth rate of 17% during the period 2011-15. We further expect the 5-year capex refresh (2012-16), which is likely to be released in Q1 2012, to support the company’s guidance for 15-17% annual EPS growth through 2016.
Entergy Transaction - Under our analysis, the ETR transaction is 15% additive to ITC’s present value. We further project the transaction will be additive to ITC’s growth prospects post-merge and should increase the probability that the growth is attained given the capex will likely skew more toward “base” vs. development capex.
Valuation Comments – After adjusting for the approximate $13.50/share special dividend, shares trade at 15.3x and 13.0x our 2013 and 2014 EPS estimates of $4.15 and $4.90. This compares with the Regulated Electric medians of 14.0x and 13.4x. We believe a substantially higher premium is warranted given ITC’s better longer-term EPS growth prospects and more constructive regulation.
2) Northeast Utilities (NYSE: NU)/NSTAR (NYSE: NST)
Merger - Our positive thesis, particularly for NST, ascribes a high likelihood that the proposed merger between NU and NST gains the necessary regulatory approvals and is closed.
Features - In our view, the NU/NST combination has a lot of positive attributes. These include 5-year annual EPS growth potential of 6% with a comparatively heavy concentration of FERC-regulated transmission earnings, no equity needs through 2015 based on the current capital plan and a comparatively light regulatory calendar through 2014.
Valuation Comments - NU shares trade at 13.9x our 2013 EPS estimate of $2.60, which compares with the Regulated Electric peer group median of 14.0x. Given the aforementioned features, we think shares arguably warrant a 5-10% premium.
3) NorthWestern Corp. (NYSE: NWE)
Solid Regulated EPS Growth - Near-term state-regulated infrastructure projects should allow NWE to achieve a low risk, 5-year EPS CAGR of 5-6%. Projects include pollution control equipment, gas-fired generation, wind capacity, incremental natural gas reserves and accelerated distribution system upgrades (DSIP).
FERC Transmission Opportunities - NWE has significant FERC-regulated transmission opportunities given its geographic footprint in wind-rich areas. While the "flagship" MSTI line has suffered timing delays, we continue to believe the line's merits make it a matter of "when" rather than "if." Importantly, MSTI-related capex and EPS are not incorporated into our model until 2015E. Higher probability and more near-term opportunities include the Colstrip 500-kV upgrade as well as partnering on some of the MISO MVP lines.
Financial Flexibility - Growing earnings and a backlog of tax credits provides operating cash flow in excess of maintenance capex and dividend payments. External capital raises will only be necessary as shareholder value creating growth projects materialize. In fact, we forecast only $400MM of debt and $170MM of equity from 2012E-15E to fund our projected 5-year capex of $1.6B while supporting a healthy 4% dividend CAGR.
4) OGE Energy (NYSE: OGE)
EPS Growth – OGE targets an attractive 5-7% compound annual EPS growth rate driven by strong and transparent rate base growth at the utility and a significant expansion of Enogex’s gathering and processing system. We believe this EPS growth rate target is achievable.
Attractive Utility Operations – OGE forecasts a compound annual growth rate of 8.5% for utility rate base from 2010-2014. Given our view that Oklahoma is a constructive regulatory environment and most of OG&E’s rate base growth relates to “known and committed” projects, we see good visibility on this growth rate.
Enogex is Strategically Located – In our view, Enogex’s assets are strategically located in the Arkoma and Anadarko basins of Oklahoma and the Texas panhandle. We expect increased drilling activity in these basins to continue to provide Enogex with strong intrinsic growth opportunities.
Valuation Comments – Although there is somewhat modest 10% total return potential to the high end of our $57-61 valuation range, we see additional upside from the possible formation of an MLP structure at Enogex.
1) ITC Holdings (NYSE: ITC)
EPS Growth - Strong and transparent EPS growth prospects on a stand-alone basis (excluding the proposed Entergy transaction). We project a compound annual EPS growth rate of 17% during the period 2011-15. We further expect the 5-year capex refresh (2012-16), which is likely to be released in Q1 2012, to support the company’s guidance for 15-17% annual EPS growth through 2016.
Entergy Transaction - Under our analysis, the ETR transaction is 15% additive to ITC’s present value. We further project the transaction will be additive to ITC’s growth prospects post-merge and should increase the probability that the growth is attained given the capex will likely skew more toward “base” vs. development capex.
Valuation Comments – After adjusting for the approximate $13.50/share special dividend, shares trade at 15.3x and 13.0x our 2013 and 2014 EPS estimates of $4.15 and $4.90. This compares with the Regulated Electric medians of 14.0x and 13.4x. We believe a substantially higher premium is warranted given ITC’s better longer-term EPS growth prospects and more constructive regulation.
2) Northeast Utilities (NYSE: NU)/NSTAR (NYSE: NST)
Merger - Our positive thesis, particularly for NST, ascribes a high likelihood that the proposed merger between NU and NST gains the necessary regulatory approvals and is closed.
Features - In our view, the NU/NST combination has a lot of positive attributes. These include 5-year annual EPS growth potential of 6% with a comparatively heavy concentration of FERC-regulated transmission earnings, no equity needs through 2015 based on the current capital plan and a comparatively light regulatory calendar through 2014.
Valuation Comments - NU shares trade at 13.9x our 2013 EPS estimate of $2.60, which compares with the Regulated Electric peer group median of 14.0x. Given the aforementioned features, we think shares arguably warrant a 5-10% premium.
3) NorthWestern Corp. (NYSE: NWE)
Solid Regulated EPS Growth - Near-term state-regulated infrastructure projects should allow NWE to achieve a low risk, 5-year EPS CAGR of 5-6%. Projects include pollution control equipment, gas-fired generation, wind capacity, incremental natural gas reserves and accelerated distribution system upgrades (DSIP).
FERC Transmission Opportunities - NWE has significant FERC-regulated transmission opportunities given its geographic footprint in wind-rich areas. While the "flagship" MSTI line has suffered timing delays, we continue to believe the line's merits make it a matter of "when" rather than "if." Importantly, MSTI-related capex and EPS are not incorporated into our model until 2015E. Higher probability and more near-term opportunities include the Colstrip 500-kV upgrade as well as partnering on some of the MISO MVP lines.
Financial Flexibility - Growing earnings and a backlog of tax credits provides operating cash flow in excess of maintenance capex and dividend payments. External capital raises will only be necessary as shareholder value creating growth projects materialize. In fact, we forecast only $400MM of debt and $170MM of equity from 2012E-15E to fund our projected 5-year capex of $1.6B while supporting a healthy 4% dividend CAGR.
4) OGE Energy (NYSE: OGE)
EPS Growth – OGE targets an attractive 5-7% compound annual EPS growth rate driven by strong and transparent rate base growth at the utility and a significant expansion of Enogex’s gathering and processing system. We believe this EPS growth rate target is achievable.
Attractive Utility Operations – OGE forecasts a compound annual growth rate of 8.5% for utility rate base from 2010-2014. Given our view that Oklahoma is a constructive regulatory environment and most of OG&E’s rate base growth relates to “known and committed” projects, we see good visibility on this growth rate.
Enogex is Strategically Located – In our view, Enogex’s assets are strategically located in the Arkoma and Anadarko basins of Oklahoma and the Texas panhandle. We expect increased drilling activity in these basins to continue to provide Enogex with strong intrinsic growth opportunities.
Valuation Comments – Although there is somewhat modest 10% total return potential to the high end of our $57-61 valuation range, we see additional upside from the possible formation of an MLP structure at Enogex.
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