The Impact of Interest Rate Cuts on Utility Sector Growth

Financial implications of interest rate cuts on utilities

Interest rate cuts could significantly enhance financial performance in the utility sector by reducing interest expenses. Companies like NextEra Energy and Duke Energy emphasize managing capital costs, while Exelon highlights the negative impact of rising rates on earnings. Overall, lower rates may improve affordability and support economic development initiatives.

"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)

"We remain focused on achieving our objective, which include improving the financial performance of our utilities, offsetting cost increases due to inflation to keep electricity affordable and embracing the opportunity to bring economic development to our communities by serving large loads." --- (AEP, earning call, 2024/Q1)

"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)

"Although target levels of inflation have yet to be achieved, the U.S. Federal Reserve has indicated its current intention to pause future rate increases and evaluate rate cuts depending on the current economic data." --- (SO, sec filing, 2024/Q1)

"Moving to Gas Utilities & Infrastructure. Results were down $0.02 compared to last year as favorable rider revenue was offset by higher interest expense and depreciation." --- (DUK, earning call, 2024/Q2)

Consumer demand trends in response to interest rate cuts

Consumer demand in the utility sector is influenced by macroeconomic growth and rate relief measures. Companies report strong energy demand supported by economic fundamentals, while rate reforms aim to enhance affordability, potentially boosting consumer behavior. However, some residential sales have declined, indicating mixed responses to these changes.

"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)

"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)

"But as I mentioned in my prepared remarks, rate relief net of investments has been helpful getting constructive orders the electric rate order in early March, the gas rate case last year, we're still seeing the residual benefits from that." --- (CMS, earning call, 2024/Q2)

"NSP-Wisconsin — Residential sales declined due to a 3.6% decrease in use per customer, partially offset by 0.8% increase in customers." --- (XEL, press release, 2024/08/01)

"Another example of this is rate reform. Improving affordability for all of our utility customers is a top priority and I'm pleased to share that a proposed decision was issued at the CPUC in March to implement a fixed charge for residential electric customers." --- (SRE, earning call, 2024/Q1)

Regulatory impacts on utility growth post-rate cuts

Regulatory impacts on utility growth post-rate cuts are significant, as evidenced by approved rate increases enhancing margins (WEC), growth in regulated investments affecting net income (PEG), and plans for capital expenditures to be included in the rate base (DTE). These factors collectively drive utility sector growth.

"Results are expected to be driven by the impacts from significant asset sales closed in 2023 and expected to close in 2024, as well as prior year margins earned on LNG transactions, partially offset by contributions from new renewables projects, improved margins in Chile, rate base growth at US utilities." --- (AES, press release, 2024/05/02)

"The primary factors impacting the increase in natural gas utility margins were: • A $1.5 million increase related to MGU's rate increase approved by the MPSC that was effective January 1, 2024." --- (WEC, sec filing, 2024/Q2)

"The main drivers for both net income and non-GAAP results for the quarter were growth in rate base from higher regulated investments, offset by higher investment-related depreciation and interest expense, awaiting rate recovery in our pending rate case, as well as higher O&M costs due to regulatory, safety and weather-related activities. Compared to the second quarter of 2023, electric margin increased by $0.02 per share due to customer growth in the Conservation Incentive Program or CIP." --- (PEG, earning call, 2024/Q2)

"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)

"These opportunities will even further increase our industry-leading U.S. utility rate base growth plans." --- (AES, earning call, 2024/Q2)

Economic environment and its influence on utility growth

The economic environment significantly influences utility sector growth through capital investments. Companies like DTE and EIX emphasize the need for substantial spending to modernize infrastructure and support electrification, while SRE and AEP highlight job creation and demand increases, despite inflationary pressures affecting residential load.

"Growth in the utilities is expected to be driven primarily by capital spending which will increase the base from which rates are determined." --- (DTE, sec filing, 2024/Q1)

"As SCE highlighted in its GRC request, serving customers with a reliable, resilient and ready grid will require the utility to significantly expand the electric system through a substantial investments that will drive continued rate base growth.As our investment levels grow to support economy-wide electrification, affordability remains top of mind." --- (EIX, earning call, 2024/Q2)

"C&I and residential growth, which is creating jobs, increasing electricity demand and requiring significant investments to modernize and expand the electricity grid." --- (SRE, earning call, 2024/Q1)

"Industrial sales were strongest in Texas, driven by an influx of new customers, mainly in the energy industry. Thanks to our success over the past few years on the economic development front, we expect to see our industrial sales continue to be resilient in the next few years as several new large customers in steel, energy, renewable energy, and semiconductors come online across our footprint. In the residential segment, we continue to see growth in customer count and load in Texas, but residential load remains weak in most of our territories, likely due to the cumulative effects of inflation." --- (AEP, earning call, 2024/Q2)

"DTE Energy's non-utility businesses' capital investments are primarily for expansion, growth, and ongoing maintenance in the DTE Vantage segment, including approximately $1 billion to $1.5 billion from 2024-2028 for renewable energy projects and custom energy solutions, while expanding into carbon capture and sequestration." --- (DTE, sec filing, 2024/Q1)

Long-term growth strategies in a low-rate environment

In a low-rate environment, utility companies are focusing on long-term growth strategies. NextEra Energy emphasizes its robust playbook for growth, while Exelon plans a $34.5 billion investment to achieve 5-7% earnings growth. Southern Company anticipates a 6% retail electric sales growth from 2025-2028, indicating positive sector momentum.

"This is a long term growth opportunity. We have the playbook and the platform to win in any environment." --- (NEE, event transcript, 2024/06/11)

"That includes investing $34.5 billion to grow rate base at 7.5%, resulting in annualized earnings growth of 5% to 7%. For the quarter, we delivered $0.47 per share of adjusted operating earnings, above our expectations, driven primarily by favorable weather in our non-decoupled jurisdictions, along with timing of spend and ComEd distribution revenues." --- (EXC, earning call, 2024/Q2)

"Longer term, we continue to guide toward the high end of our adjusted EPS growth range of 6% to 8%, which implies and includes 7% up to 8%. With that, I'll hand the call over to Rejji." --- (CMS, earning call, 2024/Q2)

"As a reminder, during our year-end earnings call in February, we updated our forecast to reflect projected retail electric sales growth that is expected to accelerate in the latter part of this decade with a projected growth rate of approximately 6% from 2025 to 2028." --- (SO, earning call, 2024/Q2)

"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)

Historical context of interest rate cuts in utilities

Interest rate cuts have historically influenced utility financing needs and operational strategies. Companies like PPL and Duke Energy highlight that lower rates can enhance load growth assumptions and improve stock performance, although the historical context of these impacts remains less emphasized in current discussions.

"But obviously, there's other things that drive those financing needs to determine what will ultimately do, interest rates, inflation, our efficiency strategy certainly plays a role in that and then rate case outcome. So, as we go through the plan, and incorporate all of these factors, including potential additions for data centers and other opportunities, we'll take that into -- but again, our balance sheet is in really good shape." --- (PPL, earning call, 2024/Q2)

"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)

"Cost recovery for future expenditures is anticipated and will be pursued through the normal ratemaking process with federal and state utility commissions, which permit recovery of necessary and prudently incurred costs associated with Duke Energy’s regulated operations. Generation Mix Planning Process" --- (DUK, sec filing, 2024/Q2)

"Cost recovery for future expenditures is anticipated and will be pursued through the normal ratemaking process with federal and state utility commissions, which permit recovery of necessary and prudently incurred costs associated with Duke Energy’s regulated operations." --- (DUK, sec filing, 2024/Q2)

Short-term vs. long-term growth impacts

Interest rate cuts can create short-term financing challenges for utilities, impacting immediate growth. However, companies like AEP and DTE Energy emphasize their commitment to long-term growth rates of 6-7% and sustained dividend growth, indicating resilience and a focus on long-term strategies despite short-term hurdles.

"We remain committed to our long-term growth rate of 6% to 7% and FFO to debt solidly in the 14% to 15% range." --- (AEP, earning call, 2024/Q1)

"So you see growth between those 2, 2 year periods. And secondly, it is when we are starting to see the impacts of this demand." --- (NEE, Investor Day, 2024/06/11)

"Over the long-term, DTE Energy expects continued dividend growth and is targeting a payout ratio consistent with pure-play utility companies." --- (DTE, sec filing, 2024/Q1)

"Facing challenges in securing financing or getting access to capital for short term as well as long term needs." --- (EXC, press release, 2024/06/06)

"It's added that durability. It's massively derisked kind of the outlook. But it's going to take continued momentum on this front more investment, more sales growth over the long-term." --- (SO, earning call, 2024/Q1)