Utilities in an uptrend
Last month, utilities witnessed solid upward momentum as investors switched to safer investment avenues. The Utilities Select Sector SPDR ETF (XLU), which tracks the S&P 500 Utilities, has risen ~5% in the last month, while broader markets have fallen ~1%.
The utility sector, among the most vulnerable to interest rate hikes, seems strong despite the rate hike in mid-June. Rising interest rates make debt servicing expensive for utilities, ultimately denting their profitability.
NextEra Energy (NEE) has outperformed peer utility stocks so far this year, rising ~9%. In fact, it is the only utility stock that’s risen. Regulated utility giants Southern Company (SO) and Duke Energy (DUK) have fallen marginally, and Dominion Energy (D) has fallen ~15%.
NextEra Energy agreed to buy Southern Company’s Florida assets for $6.5 billion in May. After the transaction, NextEra Energy is expected to strengthen in Florida, its principal state. Southern Company is planning to use the proceeds of the deal to cut debt and boost its balance sheet. Its power plants have dented its financials in the last few years, and management expects to save ~$3 billion in new equity issuances due to the asset sale. The deal involves 6% of Southern Company’s total customer base.
Dominion Energy stock has largely trended downward since the company announced its agreement to purchase SCANA (SCG) earlier this year. South Carolina lawmakers passed a proposal last month to lower electricity rates by ~15% to recover costs from SCANA’s abandoned nuclear power plants. Dominion Energy warned it might terminate the deal if lawmakers lower rates.
Note: An earlier version of the graph in this article omitted Southern Company.