Recent Federal Rate Cuts: Implications for Utility Stocks

Historical performance of utility stocks during rate cuts

Utility stocks historically benefit from rate cuts, as lower interest rates can enhance stock performance and support equity programs. However, rising interest expenses can pressure earnings, highlighting the mixed impact of rate changes on financial health within the sector.

"Earnings are lower in the first quarter relative to last year driven primarily by $0.04 of higher interest expense due to the rise in interest rates and higher levels of debt at the holding company and at some of our utilities." --- (EXC, earning call, 2024/Q1)

"When I try to kind of conceptualize some of your sensitivities that you laid out on Slide 22, interest rates are down, you did mention some pressure higher on the 1% to 2% load growth assumption and the stock is also up, which helps the accretion of your equity program." --- (DUK, earning call, 2024/Q2)

"The net increase reflects the company's proposal to mitigate the requested rate increase by accelerating over two years the return of excess deferred income tax benefits resulting from the Federal Tax Cuts and Jobs Act of 2017 ("Tax Act")." --- (DUK, press release, 2024/05/17)

"Across all jurisdictions, Duke Energy is currently on pace to recover approximately $1.9 billion of deferred fuel costs in 2024 and we anticipate being in line with our historical average balance of deferred fuel costs by the end of this year." --- (DUK, sec filing, 2024/Q2)

Impact of rate cuts on capital expenditures and regulations

Recent federal rate cuts are prompting utility companies to adjust their capital expenditures significantly. For instance, CMS Energy plans to issue $675 million to rebalance its capital structure, while Sempra Energy anticipates $3 billion in new capital expenditures over three years, driven by system expansion and renewable investments. Regulatory approvals are also being sought to include these expenditures in rate bases, indicating a proactive approach to managing financial impacts.

"Specifically, we are now planning to issue approximately $675 million in the second half of the year versus the implied estimates in our original guidance of $500 million to rebalance the rate-making capital structure at the utility in accordance with recent rate case outcomes." --- (CMS, earning call, 2024/Q2)

"for approximately $3 billion of new capital expenditures and just over $500 million of operating expenditures, to be made over a period of three years." --- (SRE, earning call, 2024/Q1)

"The increase in capital expenditures was largely due to continued system expansion and increased investment in renewable projects." --- (XEL, sec filing, 2024/Q1)

"DTE Energy plans to seek regulatory approval to include utility capital expenditures in regulatory rate base consistent with prior treatment." --- (DTE, sec filing, 2024/Q2)

"Given the 10-month stipulated period for rate cases in Michigan, we would expect to receive an order from the commission in the first quarter of 2025 and thus the related financial impact." --- (CMS, earning call, 2024/Q1)

Changes in consumer demand for utilities

Recent federal rate cuts are expected to shift consumer demand towards increased electric usage while decreasing gas and steam consumption, driven by regulatory changes aimed at reducing carbon intensity. Economic growth and rate stability are also anticipated to promote load growth, enhancing overall utility demand.

"The Utilities expect electric usage to increase and gas and steam usage to decrease in their service territories as federal, state and local laws and policies are enacted and implemented that aim to reduce the carbon intensity of the energy that is consumed in their respective jurisdictions." --- (ED, sec filing, 2024/Q1)

"I trust that everything you've heard from other utilities that are within the PJM footprint and the load projections I said will be reflected in those, in those forecasts. And as a result, we'll either have a need for generation that'll be signaled through the capacity markets or we'll have some transmission that'll be required, and you'll see that come in there through the RTEP process." --- (PEG, earning call, 2024/Q2)

"As we’ve discussed previously, much of this revenue requirement increase is associated with our investments in connection with our electric generation transition plan as we move away from coal to more efficient and cost-effective fuel types such as renewables and natural gas." --- (CNP, earning call, 2024/Q1)

"We also continue to strongly advocate for a permanent, federally funded, low-income water assistance program similar to what's been in place for many years for gas and electric utility customers and what was temporarily in place for water customers during COVID. Turning to Slide 12." --- (AWK, earning call, 2024/Q2)

"Most importantly, Iowa will benefit from economic growth, rate stability and be recognized as the state that is open for business with utilities well positioned to support the evolving needs of its customers and communities. As noted in our news release, the settlement also provides greater flexibility to attract economic development, which is expected to have a positive and meaningful impact on promoting load growth." --- (LNT, earning call, 2024/Q2)

Market sentiment towards utility stocks post-rate cuts

Post-rate cuts, market sentiment towards utility stocks remains positive as companies like NextEra Energy and Duke Energy demonstrate proactive strategies to manage costs and invest in infrastructure. Their focus on customer affordability and sustainable energy solutions reflects resilience amid rising financial pressures, bolstering investor confidence.

"And it's not just the residential sector. We're seeing the commercial and industrial sector growing too. As a result of this accelerated growth, FPL's regulatory capital employed has grown at a 12% compound annual growth rate since the beginning of 2022 compared against an estimated 9% comp in annual growth rate that was originally anticipated for the four year settlement period. We have shouldered this additional growth through our reserve amortization mechanism, which enables FPL to absorb the cost for these capital investments without increasing customer bills in the interim." --- (NEE, earning call, 2024/Q2)

"Piedmont also is requesting concurrent rate reductions for pass-through natural gas costs and to accelerate the flowback to customers of the remaining eligible balance of excess deferred income taxes, which will help mitigate the overall impact to customer bills." --- (DUK, press release, 2024/04/01)

"The requested increase in base rates was also due to the increased cost of debt resulting from market dynamics and increasing operating and maintenance expenses." --- (DTE, sec filing, 2024/Q1)

"The outcomes support essential critical infrastructure investments acknowledging the rising cost of capital through higher ROEs and allow us to meet our customers' demands for affordable, reliable and increasingly clean energy now and into the future." --- (DUK, earning call, 2024/Q2)

"Our electric rate case outlines the customer focused investments we need to make to build a smarter, stronger, more resilient electric grid of the future for our customers and to further our transition to cleaner generation." --- (DTE, earning call, 2024/Q2)

Broader economic implications of Federal rate cuts

Federal rate cuts are expected to bolster utility stocks by enhancing economic growth and energy demand, driven by factors like EV adoption and manufacturing gains. However, utilities must navigate increased interest expenses, highlighting their sensitivity to rate changes while implementing cost management strategies to mitigate inflationary impacts.

"We're seeing strong macroeconomic fundamentals supporting US energy demand with the economy continuing to grow at a steady pace with manufacturing production gains, easing of supply chain constraints and continued job creation." --- (SRE, earning call, 2024/Q1)

"The increased demand generated by EVs and the increased investments needed to facilitate that that electrification more broadly will support future earnings growth. As I highlighted earlier in my remarks, our strategy is all about creating the utilities of the future." --- (PPL, event transcript, 2024/05/15)

"Con Edison and CECONY estimate that at June 30, 2024, a 10 percent increase in interest rates applicable to its variable rate debt would result in an increase in annual interest expense of $15 million and $13 million, respectively." --- (ED, sec filing, 2024/Q1)

"We expect this initiative will save labor cost of approximately $100 million and will assist us in managing our cost to better serve our customers, allow us to redeploy resources locally in our regulated footprint and finally, mitigate impacts from inflationary pressures and interest rates." --- (AEP, earning call, 2024/Q1)

"Con Edison and CECONY estimate that at March 31, 2024, a 10 percent increase in interest rates applicable to its variable rate debt would result in an increase in annual interest expense of $14 million and $12 million, respectively." --- (ED, sec filing, 2024/Q1)

Comparison of utility stocks vs. other sectors during rate cuts

Utility stocks are experiencing mixed impacts during recent rate cuts, with Southern Company noting revenue changes due to customer bill credits and lower natural gas prices. Meanwhile, NextEra Energy highlights increased power demand across sectors, suggesting resilience in utilities compared to others, though direct comparisons remain limited.

"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)

"That 4 times increase is being driven by power demand across multiple sectors." --- (NEE, event transcript, 2024/06/11)

"Revenues from gas costs and other cost recovery decreased in the first quarter 2024 compared to the corresponding period in 2023 primarily due to lower natural gas cost recovery associated with lower natural gas prices and lower demand associated with warmer weather when compared to the corresponding period in 2023." --- (SO, sec filing, 2024/Q1)

"Low cost, fast to deploy renewables help keep power prices down, making our economy more competitive globally.Ultimately, our country needs all forms of energy as we move forward and the future has never been brighter for the power generation sector as a whole and renewables in particular." --- (NEE, earning call, 2024/Q2)

"Fuel and Purchased Power Expenses First Quarter 2024 vs. First Quarter 2023 (change in millions) (% change) Fuel $ (42) (28.6) Purchased power 2 50.0 Total fuel and purchased power expenses $ (40) In the first quarter 2024, total fuel and purchased power expenses were $111 million compared to $151 million for the corresponding period in 2023." --- (SO, sec filing, 2024/Q1)

Long-term outlook for utility stocks post-rate cuts

Utility stocks maintain a positive long-term outlook post-rate cuts, supported by stable earnings growth projections, strategic partnerships for clean energy, and proactive financial management. Companies like AEP and Duke Energy are positioning themselves to meet future energy demands, while Exelon and NextEra Energy express confidence in their competitive advantages.

"Additionally, the Utility Registrants operate in rate-regulated environments in which the amount of new investment recovery may be delayed or limited and where such recovery takes place over an extended period of time." --- (EXC, sec filing, 2024/Q2)

"Today, we reaffirm our 2024 full-year operating earnings guidance range from $5.53 to $5.73, and our long-term earnings growth rate of 6% to 7%. Regarding data center load, we have commitments from customers for more than 15 gigawatts of incremental load by the end of this decade, mostly driven by large load opportunities. To put this in perspective, AEP's system-wide peak load at the end of last" --- (AEP, earning call, 2024/Q2)

"To that end, we recently executed MoUs with Google, Microsoft, Nucor and Amazon to explore tailored solutions to meet large-scale energy needs and develop rate structures to lower the long-term cost of investing in clean energy technologies." --- (DUK, earning call, 2024/Q2)

"When I consider current energy demands, the long-term electricity needs, and our competitive advantages, I wouldn't trade our opportunity set with anyone." --- (NEE, earning call, 2024/Q1)

"To-date, we have completed 55% of our planned 2024 long-term debt financing needs, including all of our corporate needs, positioning us well for any market volatility in the balance of the year." --- (EXC, earning call, 2024/Q1)