How Are Competitive Utilities Placed Heading into 2017?
Considering their higher exposure to wholesale power prices, competitive utilities are a relatively risky part of the utilities universe. Also called hybrid utilities, they generally derive their revenues from a combination of regulated and competitive operations. In this series, we’ll analyze the operational and financial performance of leading US competitive utilities.
The chart below compares the stock price performance of the three largest hybrid utilities by market capitalization—Exelon Corporation (EXC), FirstEnergy (FE), and Public Service Enterprise Group (PEG)—with the Utilities Select Sector SPDR ETF (XLU).
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Will these utilities outperform?
Lower natural gas prices have influenced wholesale power prices for the last couple of years, which led to volatile earnings and the relative underperformance of competitive utilities. However, if the natural gas supply glut eases in the near future, it could revive wholesale power prices and positively impact competitive utilities.
Nuclear power producer Exelon Corporation (EXC) outperformed its peers in the last year, rallying more than 30%. In comparison, FirstEnergy and Public Service Enterprise Group (PEG) rose 2% and 16%, respectively, in the last year. The Utilities Select Sector SPDR ETF (XLU) gained 13% during the same period.
After the Fed’s rate hike
In its December 2016 meeting, the Federal Reserve increased its benchmark interest rates by 25 basis points. Utilities corrected more than 2% while competitive utilities were relatively poised for the rate hike.
The Fed now expects to deliver three quarter-point rate rises in 2017, up from its expectation of two hikes, as noted during its September 2016 meeting. This could be a concern for utility companies and their investors, as the higher cost of capital could dent profitability.