Utility Companies' Earnings Under Rising Interest Rates

Customer Demand and Consumption Patterns

Customer demand and consumption patterns in utility companies are influenced by weather, economic conditions, and price levels, as seen with Southern Company. New customer concerns about power availability and business expansion impact demand, noted by NextEra Energy. Duke Energy highlights varying bill decreases based on industry and usage, while Dominion Energy and American Electric Power observe robust and steady demand growth.

"With the exception of Atlanta Gas Light, Southern Company Gas' second largest utility that operates in a deregulated natural gas market and has a straight-fixed-variable rate design that minimizes the variability of its revenues based on consumption, the earnings of the natural gas distribution utilities can be affected by customer consumption patterns that are a function of weather conditions, price levels for natural gas, and general economic conditions that may impact customers' ability to pay for natural gas consumed." --- (SO, sec filing, 2024/Q1)

"Of course, increased load demand will not come all at once and will take some time to materialize, but it is clear that many new customers are concerned about power availability to meet their plans and consider power supply as a significant obstacle to business expansion." --- (NEE, earning call, 2024/Q1)

"Similarly, typical commercial and industrial customers will see a bill decrease between 3.5% and 7.0%, varying based on factors such as industry type and differences in customer use patterns." --- (DUK, press release, 2024/05/07)

"First, customers' needs. We're ramping into the very substantial and growing multi-decade utility investment required to address resiliency and decarbonization public policy goals, plus the very robust demand growth we're observing in real time across our system. DEV's weather-normal" --- (D, earning call, 2024/Q1)

"However, the number of large new loads anticipated to come online in the next 2 years, provides us with confidence that demand will remain steady in the face of any economic challenges for our existing customers." --- (AEP, earning call, 2024/Q1)

Impact on Debt Servicing Costs

Rising interest rates have led to increased debt servicing costs for utility companies, with higher interest expenses due to elevated interest rates and larger debt balances, as seen in NextEra Energy, Dominion Energy, Duke Energy, and Southern Company. Exelon Corporation focuses on maintaining investment-grade ratings while managing these costs.

"Interest Expense NEER’s interest expense for the three months ended March 31, 2024 decreased $176 million primarily reflecting approximately $263 million of favorable impacts related to changes in the fair value of interest rate derivative instruments, partly offset by higher average interest rates and higher average debt balances." --- (NEE, sec filing, 2024/Q1)

"  Interest and related charges increased 20%, primarily due to net debt issuances in 2023 ($64 million), higher interest rates on variable rate debt and cash flow interest rate swaps ($14 million), higher interest rates on commercial paper and long-term debt ($13 million), charges incurred due to early debt repayments associated with the business review completed in March 2024 ($12 million) and premiums paid in 2024 compared to premiums received in 2023 on interest rate derivatives ($10 million), partially offset by lower unrealized losses in 2024 compared to 2023 associated with freestanding derivatives ($15 million)." --- (D, sec filing, 2024/Q1)

"Interest Expense. The increase was primarily due to higher outstanding debt balances and interest rates." --- (DUK, sec filing, 2024/Q1)

"The increase was primarily associated with increases of approximately $5 million related to higher interest rates and approximately $3 million related to higher outstanding debt." --- (SO, sec filing, 2024/Q1)

"Each of the Registrants annually evaluates its financing plan, dividend practices, and credit line sizing, focusing on maintaining its investment grade ratings while meeting its cash needs to fund capital requirements, including construction expenditures, retire debt, pay dividends, and fund pension and OPEB obligations." --- (EXC, sec filing, 2024/Q1)

Changes in Capital Expenditure Plans

Utility companies are adjusting their capital expenditure plans to accommodate rising interest rates. Exelon and Dominion Energy have outlined significant investments in plant additions and decarbonization, respectively. NextEra Energy and American Electric Power continue to advance their capital plans, while Duke Energy monitors supply chain impacts on its execution.

"Capital Expenditure Spending As of March 31, 2024, the most recent estimates of capital expenditures for plant additions and improvements for 2024 are as follows: (In millions) Transmission Distribution Gas Total (a)" --- (EXC, sec filing, 2024/Q1)

"In March 2024, in connection with the completion of the business review, Dominion Energy announced a $43 billion capital expenditure plan for 2025 through 2029, including the impact of a 50% noncontrolling equity partner funding 50% of the CVOW Commercial Project costs, representing significant investments in decarbonization and reliability." --- (D, sec filing, 2024/Q1)

"It's actually been around 12% as we have accommodated that growth.And so we've got surplus that's right around $586 million today as we look forward for this year and next based on where we are, the capital plans that we have for the FPL business, which are still very strong to take into account the further growth that we see.We believe that with that amortization balance and those CapEx plans will probably be right around an 11.4% ROE for the full year '24 and for the full year \u201825." --- (NEE, earning call, 2024/Q2)

"Supply Chain The Company continues to monitor the ongoing stability of markets for key materials and other developments, including public policy outcomes, that could disrupt or impact the Company's supply chain and, as a result, may impact Duke Energy's execution of its capital plan, future financial results or the achievement of its clean energy goals. Goodwill" --- (DUK, sec filing, 2024/Q1)

"Now on to the regulated resource additions. We continue to advance our 5-year, $9.4 billion regulated renewable capital plan and have a total of $6.6 billion approved by state commissions at APCo, I&M, PSO and SWEPCO." --- (AEP, earning call, 2024/Q1)

Dividend Policies Under Rising Interest Rates

Utility companies like NextEra Energy and Southern Company are actively increasing dividends despite rising interest rates. NextEra plans a 10% dividend growth through 2026, while Southern Company has raised its annual dividend to $2.88 per share. Duke Energy also maintains regular dividend payments, reflecting a strong commitment to shareholder returns.

"We expect to grow adjusted earnings per share expectations by 6% to 8% off our 2024 adjusted EPS range through 2027, and we will be disappointed if we are not able to deliver financial results at or near the top end of our adjusted EPS expectation ranges in each year through 2027. We also expect to grow dividends per share by 10% off our 2024 expected DPU base through 2026." --- (NEE, Investor Day, 2024/06/11)

"over to Chris, I'd like to highlight our most recent dividend increase. Last week, the Southern Company Board of Directors approved an $0.08 per share increase in our annual common dividend, raising the annualized rate to $2.88 per share." --- (SO, earning call, 2024/Q1)

"The company also declared a quarterly cash dividend on its Series A preferred stock of $359.375 per share payable on Sept. 16, 2024, to shareholders of record at the close of business Aug. 16, 2024." --- (DUK, press release, 2024/07/15)

"We have a track record of beating consensus estimates, while our peers in the broader market have historically underperformed. Adding our attractive dividend yield together with a low beta, we have offered a compelling risk adjusted return over any time period that you measure, take your pick." --- (NEE, Investor Day, 2024/06/11)

"Southern Company also announced a regular quarterly dividend – including an increase of 2 cents per share over the prior quarter – of 72 cents per share, payable June 6, 2024 to shareholders of record as of May 20, 2024." --- (SO, press release, 2024/04/22)

Market Competition and Positioning

Utility companies are focusing on cost-effective, fast-to-market clean technologies (NEE), achieving positive outcomes for stakeholders (AEP), competitive project cost benchmarking (D), enhancing access to high-margin contracts (EXC), and offering competitive pricing to attract large customers (SO) to strengthen their market positioning.

"What technologies are best positioned to meet this new paradigm of growth least cost solutions that are fast to market, I believe it's the least cost solutions that are fast to market, that are clean. And in terms of who will win, it's the companies that have the ability to" --- (NEE, Investor Day, 2024/06/11)

"We are focused on advancing interest in each of the states we operate to achieve outcomes that are good for our customers, our communities and our investors." --- (AEP, earning call, 2024/Q1)

"kind are considered normal as we move further towards project completion. The current contingency level continues to benchmark competitively as a percentage of total budgeted costs when compared to other large infrastructure projects we've studied and ones that we've completed in the past." --- (D, earning call, 2024/Q1)

"Sponsor technical assistance programs for small and/or historically underutilized businesses to help them access high-margin contracts.Pledge to allocate at least 15% of U.S.-based contracting spending on external goods and services from small and/or underutilized businesses by 2026, with energy and utilities companies committing to higher targets.Expand the number of private companies committed to the collaborative effort to enhance access to high-margin contracts and foster supply chain resilience."The EOC envisions a competitive and inclusive U.S. economy that provides wealth creation opportunities for underserved individuals, businesses, and communities." --- (EXC, press release, 2024/07/18)

"Sometimes, as is the case with Georgia Power's recent growth, we're able to provide new large load customers with competitive market pricing that also provides meaningful benefits back to existing customers." --- (SO, earning call, 2024/Q1)