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Are These Utilities’ Earnings Enough to Attract You?

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Dec. 4 2020, Updated 10:53 a.m. ET

US utilities’ earnings

US utilities (XLU) are targeting an average annual earnings growth of 4%–6% for the next few years. Despite the flat growth in electricity usage, utilities are expected to achieve this number with increased customer base and supportive weather. Apart from these factors, regulatory frameworks play an important role in utilities’ earnings.

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Natural gas pinch

The recent natural gas price correction has impacted sub-categories of utilities differently. Competitive players like Exelon (EXC) and NRG Energy (NRG) tremendously suffered from low power prices and margins.

On the other hand, regulated utilities such as Duke Energy (DUK) and Southern Company (SO) benefitted from cheap natural gas. Remember, regulations help such companies pass the burden of increased operational costs, if any, on to their customers.

Regulatory framework

Most states in the US have healthy regulatory frameworks in place for electric utilities. US regulators have allowed ROE (returns on equity) of nearly 10% for electric utilities. The transmission infrastructure in the US is regulated by FERC (Federal Energy Regulatory Commission) and thus obtains higher ROE. Remember, ROE is ultimately what utilities keep for themselves as profit.

Meanwhile, utilities in California (SRE) (PCG) follow a decoupling mechanism wherein regulators allow utilities to collect revenues based on estimates rather than actual sales. CMS Energy (CMS) and DTE Energy (DTE) in the US Midwest use forward test years for all rate cases, facilitating a faster investment recovery and eliminating regulatory lag.

Historically, higher interest rates in the US have resulted in a decline in what’s considered permissible returns on equity. So US utilities may see declines in ROE if interest rate normalization takes place in the future.

Now let’s look at other indicators that will likely impact utilities’ performances.

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