What to Expect from Utilities Sector Earnings This Season

Revenue and Profit Trends

Revenue and profit trends in the utilities sector show a mixed picture. Southern Company and Exelon reported declines in retail revenues and adjusted operating earnings, respectively. Factors such as natural gas costs, regulatory outcomes, and market prices significantly impact revenues, as seen with Xcel Energy and Duke Energy. However, NextEra Energy remains optimistic, focusing on growth through investments in renewables and expecting earnings growth.

"    Index to Financial Statements MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Retail Revenues In the first quarter 2024, retail revenues were $221 million compared to $236 million for the corresponding period in 2023." --- (SO, sec filing, 2024/Q1)

"ComEd's Adjusted (non-GAAP) Operating Earnings for the first quarter of 2024 decreased to $219 million from $251 million in the first quarter of 2023, primarily due to decreases in electric distribution earnings (reflecting lower allowed ROE due to U.S. Treasury rates no longer applying to distribution revenue) and carrying costs related to the CMC regulatory asset." --- (EXC, press release, 2024/05/02)

"Electric Revenues Electric revenues are impacted by fluctuations in the price of natural gas, coal and uranium, regulatory outcomes, market prices and seasonality." --- (XEL, sec filing, 2024/Q1)

"This paradigm shift towards simultaneous growth and transformation across our sector positions us well to keep making investments in renewables, storage, and transmission, where we expect to deploy capital not only to realize long term stable cash flows, but at superior returns and delivering adjusted earnings and adjusted earnings per share growth." --- (NEE, event transcript, 2024/06/11)

"Operating Revenues. The variance was driven primarily by: • a $66 million decrease due to lower natural gas costs passed through to customers, lower rates, and decreased off-system sales natural gas costs." --- (DUK, sec filing, 2024/Q1)

Regulatory Impacts

Regulatory recovery mechanisms, such as transmission formula rates and riders, impact utilities' revenues and net earnings by adjusting for recoverable costs and changes in rate base, capital structure, and ROE (EXC). Regulatory mechanisms also mitigate the effects of interest rate fluctuations on pension costs (XEL). Rate changes require state utility regulator approval, delaying immediate impacts (DUK).

"For other regulatory recovery mechanisms, including transmission formula rates and riders across the utilities, revenues increase and decrease i) as fully recoverable costs fluctuate (with no impact on net earnings), and ii) pursuant to changes in rate base, capital structure and ROE (which impact net earnings)." --- (EXC, press release, 2024/05/02)

"The impacts of fluctuations in interest rates on pension and postretirement costs are mitigated by pension cost calculation methodologies and regulatory mechanisms that minimize the earnings impacts of such changes." --- (XEL, sec filing, 2024/Q1)

"In general, the net impact of these income statement line items must be adjusted, in part, by reserve amortization to earn the targeted regulatory ROE." --- (NEE, sec filing, 2024/Q2)

"As a regulated business, Duke Energy's rates can only be changed after approval from state utility regulators, so there is no immediate impact from this request." --- (DUK, press release, 2024/04/04)

"We continue to review plans to strengthen our regulatory compacts as we work through the past and are ready for the future." --- (AEP, earning call, 2024/Q1)

Cost Management Strategies

Utilities are focusing on efficient recovery mechanisms, portfolio optimization, and leveraging rebates to manage costs. Advanced analytics and global supply chain practices are also employed to secure critical equipment and best pricing. Strategies include business combinations, partnerships, and internal restructuring to optimize financial performance.

"Our strategy will drive continued growth, underpinned by our five-year $73 billion capital plan, efficient recovery mechanisms and track record of constructive regulatory outcomes." --- (DUK, earning call, 2024/Q1)

"That said, we are open to equity alternatives through portfolio optimization, looking at opportunities where price meets execution, while at the same time, staying focused on our efforts to achieve constructive regulatory outcomes." --- (AEP, earning call, 2024/Q1)

"For building managers of MUDs, business sector rebates ranging from $8,000-$80,000 are available to offset the cost of infrastructure serving Level 2 EV chargers and up to $500,000 for infrastructure serving DC Fast Chargers." --- (EXC, press release, 2024/04/25)

"We're able to secure critical equipment so we never get caught short in our ability to interconnect, whether it's transformers, switch gears or the like. We have applied advanced analytics to our global supply chain practices, ensuring we're able to obtain the best pricing for our customers while also managing geopolitical risks, as we have leveraged our scale to secure interconnect spots." --- (NEE, event transcript, 2024/06/11)

"These strategies may include business combinations, partnerships, and acquisitions involving other utility or non-utility businesses or properties, disposition of, or the sale of interests in, certain assets or businesses, internal restructuring, or some combination thereof." --- (SO, sec filing, 2024/Q1)

Investments in Renewable Energy

Utilities are heavily investing in renewable energy, with Duke Energy and NextEra Energy leading in wind energy and rapid deployment capabilities. Xcel Energy is committed to a clean energy transition, while American Electric Power advances a $9.4 billion renewable capital plan. These investments underscore the sector's shift towards sustainable energy solutions.

"We are in the early development stages of that, and we're working with our industry partners, our suppliers and our regulators to really understand what that investment in wind is. Duke is and will continue to be a renewables energy investment leader and generation leader in the future." --- (DUK, AGM, 2024/05/09)

"Energy Resources' operating portfolio gives us a distinct competitive advantage to do something no one else in the industry can do, deploy renewables quickly where and when customers need them. One of the other greatest opportunities for value creation in our portfolio, an opportunity that allows us to again quickly provide customers what they need, is wind repowering." --- (NEE, Investor Day, 2024/06/11)

"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, AGM, 2024/05/22)

"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)

"We believe natural gas must be a part of not just Duke's but our nation's energy transition strategy in the face of unprecedented demand from AI data centers, chips manufacturers and other economic development, natural gas remains an essential tool to provide reliable and affordable energy for customers and complements our substantial investments in renewables and energy storage." --- (DUK, earning call, 2024/Q1)

Customer Demand and Revenue Trends

Utilities are experiencing robust demand growth, driven by economic development and customer migration, with Dominion Energy and Duke Energy forecasting steady increases. American Electric Power anticipates new loads to sustain demand despite economic challenges. Southern Company adjusts forecasts for potential delays, while Xcel Energy notes mixed trends in residential sales and usage.

"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)

"We operate in some of the most attractive jurisdictions for both economic development and customer migration, which underpins our confidence in our 2% volume growth forecast in 2024 and 1.5% to 2% growth rate over the 5-year planning horizon." --- (DUK, 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)

"Importantly, even once a customer has committed to one of our utilities, we further risk adjust the forecast based on the likelihood of delays on the customer side, whether those are construction delays or delays in ramping up production." --- (SO, earning call, 2024/Q1)

"NSP-Minnesota — Residential sales decreased due to a 3.5% decrease in use per customer, partially offset by a 1.5% increase in customers." --- (XEL, press release, 2024/04/25)

Short-term Outlook

Utilities companies like Dominion Energy and Exelon are focusing on managing short-term debt and liquidity through borrowing, issuing commercial paper, and intercompany money pools. These strategies are crucial for maintaining financial stability and meeting short-term obligations.

"Financial Covenants As part of borrowing funds and issuing both short-term and long-term debt or preferred securities, Dominion Energy must enter into enabling agreements." --- (D, sec filing, 2024/Q1)

"So that's all we carry in short-term debt, and that's typically what we would normally carry." --- (EXC, earning call, 2024/Q1)

"These factors include short-term borrowing and short-term investment rates, the spread over these short-term rates at which Dominion Energy can issue commercial paper, balance sheet impacts, the costs and fees of alternative collateral postings with these and other counterparties and overall liquidity management objectives." --- (D, sec filing, 2024/Q1)

"PHI Corporate meets its short-term liquidity requirements primarily through the issuance of short-term notes and the Exelon intercompany money pool." --- (EXC, sec filing, 2024/Q1)

Long-term Predictions

Utilities sector leaders like Xcel Energy, NextEra Energy, and Southern Company express strong confidence in long-term earnings growth, driven by robust EPS and dividend growth objectives, strategic preparedness, and sustained investment in clean energy transitions. These factors collectively support optimistic long-term predictions for the sector's performance.

"Long-Term EPS and Dividend Growth Rate Objectives — Xcel Energy expects to deliver an attractive total return to our shareholders through a combination of earnings growth and dividend yield, based on the following long-term objectives: Deliver long-term annual EPS growth of 5% to 7% based off of a 2023 actual ongoing earnings base of $3.35 per share." --- (XEL, press release, 2024/04/25)

"I feel very confident in long term trends. I feel really excited and pleased with our team's preparedness in terms of the development of that pipeline." --- (NEE, earning call, 2024/Q1)

"As I said earlier, we have the people, the experience and the scale for sustained long-term success." --- (SO, earning call, 2024/Q1)

"But I think overall, as we think fundamentally, everything is intact from a long-term perspective in terms of maintaining a strong balance sheet and funding the investment needs for the cleanest transition with equity as we need to maintain that balance sheet." --- (XEL, earning call, 2024/Q1)