The following post was written by research groups within our energy offering, including Regulatory Research Associates, or RRA. For further information on the full reports, please request a call.
- Utility indexes hit all-time highs in the first half of 2017, but storm clouds are appearing on the horizon. Over the past few weeks, utility indexes have fallen as bond yields surge and expectations build for a relatively weak second-quarter utility earnings season.
- The DJ Utility Average finished the first half of 2017 up 7% after having risen almost 12% by mid-June. The steep drop coincided with a rise in short-term interest rates by the Federal Reserve and a subsequent climb in bond yields. The 10-year Treasury note closed the half with a rise of more than 200 basis points in the last week and is currently trading with a yield of about 2.33%.
- Despite early summer heat across much of the nation, earnings-season comps look difficult given the record hot weather also experienced in the second quarter 2016. RRA-covered utilities are expected to report 2.8% lower EPS in the second quarter, compared to the year-ago period, based on S&P Capital IQ consensus earnings estimates.
Utilities underperformed the broader market at the start of 2017, but gradually began to outperform as investors sought a safe haven in the face of questions over President Trump's ability to enact his economic agenda. So far, Trump's plans for wholesale corporate tax reform and major infrastructure spending to goose the U.S. economy appear in limbo as his administration deals with internal and foreign affairs issues, and has yet to score a major legislative victory. Utilities look to benefit from infrastructure spending, while corporate tax reform could pose negative impacts to utilities if a popular interest expense deduction is eliminated.
In addition to monetary and fiscal policy changes, a number of broad industry themes could dominate investor attention as the year progresses. Owners of uneconomic nuclear plants are seeking subsidies to continue to operate in several states; New York and Illinois have already approved them. The future of major new nuclear projects in South Carolina and Georgia is being closely monitored in the wake of contractor Westinghouse's Chapter 11 bankruptcy filing in March.
Merger and acquisition rumors continue to swirl about the struggling independent power producer space. Among regulated utilities, failed mergers have dominated the headlines with Texas regulators rejecting NextEra Energy's buy of Oncor Electric and Kansas regulators turning down Great Plains Energy's buy of Westar Energy. Recently, Berkshire Hathaway Energy signed a merger agreement with Oncor, but it is facing a rival offer from a hedge fund.
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