Impact of Recent Federal Rate Cuts on Utility Stocks

Historical relationship between rates and utility stocks

Historically, utility stocks have shown sensitivity to interest rate changes, with rate cuts potentially lowering the cost of capital and influencing investor demand. However, economic uncertainties complicate this relationship, affecting energy demand and operational costs, as noted by various utility executives.

"We continue to see strong investor demand for our debt relative to the sector, which is proof of the strength of our balance sheet and our value proposition as the premier T&D utility with low-risk attributes. There has been no change in our guidance to issue $1.6 billion of equity from 2024 to 2027 to fund our estimated $34.5 billion capital plan in a balanced manner." --- (EXC, earning call, 2024/Q2)

"Within the segments, Electric Utilities & Infrastructure was up $0.34. Growth was driven by rate increases in riders, higher sales volumes and warmer-than-normal weather across our service territories, which is a complete reversal of the extremely mild weather in the second quarter of 2023." --- (DUK, earning call, 2024/Q2)

"utilities were $0.46 per share, down $0.05. Positive drivers included favorable year-over-year weather and rate changes across multiple jurisdictions, with the 2022 PSO base case and the 2023 Virginia proceeding being the most significant." --- (AEP, earning call, 2024/Q2)

"So as we approach our renewable portfolio, we've been very mindful of making sure that we are locking in our cost of capital through interest rate hedge products swaps in that regard.As I think about the future and the rate the one, the two rate cuts, who knows where we ultimately end up on those fronts." --- (NEE, earning call, 2024/Q2)

"The shifting economic policy variables and weakening of historic relationships among economic activity, prices, and employment have increased the uncertainty of future levels of economic activity which will directly impact future energy demand and operating costs." --- (SO, sec filing, 2024/Q1)

Impact on dividend yields and investor demand

Recent federal rate cuts are positively impacting utility stocks, as companies like DTE and PPL project 6% to 8% annual growth in earnings and dividends. Their strong financial positions and commitments to shareholder returns enhance investor demand, making these stocks attractive in a low-rate environment.

"So that's our going-in position and we see that as very possible. It will also add value for our investors because those investments will be in rate base and they'll attract the typical returns. So, I think it's a win-win all around." --- (DTE, earning call, 2024/Q1)

"We're achieving strong financial results, which positions us to deliver at least the midpoint of our targeted EPS growth this year and to grow earnings and dividends by 6% to 8% through at least 2027. We're maintaining one of the premier balance sheets in our sector that supports the growing investment needs across our jurisdictions." --- (PPL, earning call, 2024/Q2)

"DTE continues to be well positioned to deliver the premium total shareholder returns that our investors have come to expect with a strong balance sheet that supports our future capital investment plan." --- (DTE, earning call, 2024/Q1)

"As we set our sights on our priorities in 2024 and beyond, we're well positioned to deliver 6% to 8% annual earnings per share and dividend growth through at least 2027. We expect to invest more than $3,000,000,000 this year and more than $14,000,000,000 from 2024 to 2027 to strengthen grid reliability and resiliency and advance a cleaner energy mix without compromising on affordability." --- (PPL, event transcript, 2024/05/15)

"We remain committed to deliver premium shareholder returns that our investors have come to expect and that we will deliver." --- (DTE, earning call, 2024/Q1)

Capital expenditure plans post-rate cuts

Utility companies are planning significant capital expenditures post-rate cuts, with PEG targeting a 6-7.5% growth in their regulated rate base, XEL investing $39 billion for a 9% rate base growth, and WEC aligning $500 million in equity issuances with capital spending. AWK aims for $3.1 billion in 2024 investments, reflecting a strong commitment to capital growth.

"We expect these capital investments to result in a compound annual growth rate in our regulated rate base in a range of 6% to 7.5% from year-end 2023 to year-end 2028." --- (PEG, sec filing, 2024/Q2)

"But I would expect that when we're investing $39 billion of capital at a 9% rate base growth." --- (XEL, earning call, 2024/Q1)

"Post 2024, our equity issuances will be tied to our capital spending ratably with approximately $500 million expected per year in the current plan." --- (WEC, earning call, 2024/Q2)

"The quarter-over-quarter variances in our ongoing earnings per share were mainly driven by the successful execution of WPL’s customer-focused capital investment program, which supported new electric and gas rates that took effect on January 1, and resulted in higher financing and depreciation expenses." --- (LNT, earning call, 2024/Q2)

"This result keeps us on pace to hit our goal of approximately $3.1 billion of capital investment in 2024. With that, I'll hand it over to John to cover our financial results and plans in further detail. John?" --- (AWK, earning call, 2024/Q2)

Overall market conditions affecting utility stocks

Overall market conditions affecting utility stocks are influenced by economic growth, technological advancements, regulatory engagement, and infrastructure challenges. Companies express confidence in earnings growth despite these dynamics, emphasizing the importance of adapting to changing conditions and investing in reliable infrastructure to meet increasing demand.

"Demand for electricity and natural gas in the Registrants' service territories is primarily driven by the pace of economic growth or decline that may be affected by changes in regional and global economic conditions, which may impact future earnings." --- (SO, sec filing, 2024/Q1)

"Thank you. As technology As technology disrupts every industry across our economy, power and technology have converged and are now codependent on each other, driving productivity and electric demand growth across all sectors." --- (NEE, event transcript, 2024/06/11)

"We operate in constructive growing jurisdictions supported by 1 of the industry's largest regulated capital plans, which gives us confidence in our 5% to 7% earnings growth target through 2028, while maintaining reliability and affordability for our customers and communities.Now I'll turn it over to" --- (DUK, event transcript, 2024/05/09)

"And as the utility industry is changing, now more than ever, AEP's operating company leaders are staying increasingly engaged with regulators amidst this dynamic environment." --- (AEP, earning call, 2024/Q2)

"and the increased strain on our grid caused by severe weather. The broken investment has only accelerated as the proliferation of artificial intelligence has significantly boosted data center development, as Jeanne will discuss in her remarks.The states are simply too high to lack confidence that we are prioritizing the investments most important to our customers, multiyear plans can provide that confidence and transparency to customers and when done right, ensure alignment with all stakeholders." --- (EXC, earning call, 2024/Q2)

Regulatory impacts of recent rate cuts

Recent federal rate cuts have led to positive regulatory outcomes for utility companies, as seen in DTE and CMS Energy's earnings. Constructive rate orders and gas rate plans have increased revenues, demonstrating how regulatory mechanisms can mitigate the impacts of rate cuts and enhance financial performance.

"The increase was due to the following: Three Months (In millions) Implementation of new rates $ 85 Base sales 16 Regulatory mechanism - DTE Securitization I and II 16 Regulatory mechanism - TRM 12 Power Supply Cost Recovery 6 Weather (6) Interconnection sales (7) Regulatory mechanism - RPS (12) Rate mix (17) Other regulatory mechanisms and other (a) (2) $ 91   ______________________________ (a) Primarily includes regulatory mechanism relating to EWR." --- (DTE, sec filing, 2024/Q1)

"From a regulatory perspective, we're assuming $0.18 per share of positive variance which is largely driven by the constructive electric rate order received from the commission in early March." --- (CMS, earning call, 2024/Q1)

"Operating revenues increased $7 million in the three months ended June 30, 2024 compared with the 2023 period primarily due to an increase in gas revenues under the company's gas rate plan ($52 million), offset in part by lower gas purchased for resale ($34 million), a change in incentives earned under the earnings adjustment mechanisms ($5 million) and higher interest accrual on net plant reconciliation ($3 million)." --- (ED, sec filing, 2024/Q1)

"On the regulatory front, we continue to progress toward constructive rate case outcomes for both DTE electric and DTE Gas." --- (DTE, earning call, 2024/Q2)

"Rate relief net of investment-related expenses resulted in $0.05 per share of positive variance due to constructive outcomes achieved in our most recent electric rate case and last year's gas rate case settlement coupled with residual benefits from our 2023 electric rate case settlement approved last January." --- (CMS, earning call, 2024/Q1)

Future outlook for utility stocks

Utility stocks are poised for a bright future, driven by strategic focuses on clean energy and customer growth. Companies like NextEra Energy and Xcel Energy emphasize their commitment to renewables, while Duke Energy's agreements with major corporations highlight the sector's adaptability to evolving energy demands.

"As I've been saying, NextEra Energy was built for this moment and our future outlook has never been stronger. Our strategic focus is to deliver low cost clean energy and storage for customers both inside and outside Florida, while building new transmission where required to support new generation." --- (NEE, earning call, 2024/Q2)

"As we look forward, we see a future that is bright for our communities, our customers, our coworkers and our investors. This year and in years to come, we will continue to lead the clean energy transition, adding renewables, exploring advanced technologies, building transmission and achieving our net zero vision." --- (XEL, event transcript, 2024/05/22)

"We were also very pleased to add 43,000 customers in our first half of the year from acquisitions and organic growth. Our outlook for future acquisitions remained very strong as we have nearly $500 million in acquisitions under agreement." --- (AWK, earning call, 2024/Q2)

"☀️The future is looking bright. ☀️ Solar energy hit a milestone in 2023, accounting for more than half of the new U.S. electricity generating capacity." --- (SO, Twitter, 2024/04/05)

"Responding to growing demand, Duke Energy, @amazon, @Google, @Microsoft and Nucor execute agreements to accelerate clean energy options to help utilities serve the future energy needs of large businesses in North Carolina and South Carolina. Read more: https://t.co/eq8Oyo7udE." --- (DUK, Twitter, 2024/05/29)

Comparison with other sectors' responses to rate cuts

Utility stocks, particularly those focused on renewables like NextEra Energy, are positioned favorably amid federal rate cuts, benefiting from stable pricing and low operating costs. In contrast, other sectors may not experience the same level of resilience, highlighting utilities' competitive edge in attracting investment.

"Just there's also a projection for two rate cuts this year and I'm just curious if you can kind of talk about how that changes the returns for near that you kind of communicated at the Analyst Day in previous quarters, if you could just update us on that?" --- (NEE, earning call, 2024/Q2)

"First Quarter 2023 (change in millions) (% change) Rates and pricing $ 126 9.1 % Sales growth 3 0.2 Weather 40 2.9 Fuel and other cost recovery 15 1.1 Retail revenues $ 184 13.3 % Revenues associated with changes in rates and pricing increased in the first quarter 2024 when compared to the corresponding period in 2023 primarily due to customer bill credits in 2023 related to the flowback of certain excess accumulated deferred income taxes as well as an increase in Rate CNP New Plant revenues." --- (SO, sec filing, 2024/Q1)

"Renewables are energy independence, it's electricity generated from the sun and the wind, it's not subject to fuel price volatility. Low cost renewables are also bringing power bills down which attract new investment from data centers, semiconductor chip manufacturers and other sectors that are looking to invest in the U.S., and low power bills can really dictate which states they select to make those investments in." --- (NEE, earning call, 2024/Q2)

"ranks among the best in the industry and operating costs that are by far the lowest in the sector. Energy Resources has industry leading market share of 20% in renewables and storage, and has what I believe is the number one competitive transmission business in the sector." --- (NEE, event transcript, 2024/06/11)

"And fortunately, we've either seen slightly declining or at a minimum stable backdrop, which is certainly helpful for decreasing our risk and also providing an attractive price and attractive product to our customers. So between the attractive price, the speed to market, the clean attribute of renewables and storage as well as the fact as we talked about last month in the queue across the United States today, all of the projects that are looking to be connected, 90% of those megawatts are renewables and storage, and we have a healthy portion of those." --- (NEE, earning call, 2024/Q2)