Roger S. Conrad

So far in 2024, the Dow Jones Utility Average lags the S&P 500 by nearly 10 percentage points. But over the past month, buying interest has picked up for at least a handful of CUI portfolio companies. Leading the way are nuclear powered Constellation Energy (NYSE: CEG) and Vistra Energy (NYSE: VST), with year-to-date gains of 46 and 57 percent respectively. But even underperforming Avangrid Inc (NYSE: AGR) now has a double-digit 2024 return, as parent Iberdrola SA (Spain: IBE, OTC: IBDRY) has made a non-binding all-cash takeover offer that’s likely to go higher. I continue to believe utilities as a sector won’t really capture upside momentum until there’s a genuine Federal Reserve pivot to lower interest rates. And with the central bank reactive as ever to the latest data point, investors have no choice but to be patient.

Conservative Holding Sempra Energy (NYSE: SRE) last month raised its five-year capital-spending plan by 20 percent to $48 billion. One big reason we can be confident management will turn that into robust earnings growth: 90 percent is targeted for already regulator-approved utility system investment in California and Texas. The rest will finance a portfolio of high return, pre-contracted LNG and renewable energy projects in the southwest US and Mexico. California’s drive to simultaneously electrify everything and stanch the danger of wildfires is spurring an earnings-lifting CAPEX bonanza for its utilities. That includes natural gas, as the realization energy transitions take time convinced regulators to authorize a 50 percent capacity boost at Sempra’s Aliso Canyon storage facility—which some wanted to close not long ago. And state law linking utility returns to interest rates has seen returns on equity surge to over 10 percent this year.

It’s fair to say that Algonquin Power & Utilities (TSX: AQN, NYSE: AQN) has been a problematic recommendation the past few years. Aggressive expansion boosted profits for years, then suddenly hit a brick wall of rising borrowing costs. And Kentucky regulators broke up the acquisition of American Electric Power’s (NYSE: AEP) operations in that state. But after boosting Q4 earnings and EBITDA by 14 and 13 percent, respectively, Algonquin’s core business is strengthening again. And the long awaited sale of non-utility assets may happen as soon as mid-year—lifting the long-lagging share price with massive debt reduction and stock buybacks. Operating profit at Algonquin’s regulated utilities in 2023 increased by 10.5 percent, thanks largely to rate increases paying for system investments. That will be the major driver of growth in 2024 and beyond, along with systematic cost management. During the earnings call, management highlighted $105.8 million pending rate increase requests to be decided this year.

Last month, I highlighted three key takeaways, drawn from the Q4 results and guidance updates of Utility Report Card members I’d seen so far. They were: Number one, results and guidance demonstrated very healthy and growing business. Recommended companies met my chief criterion for continuing to own them, as well as add to current positions when appropriate. Second, every company affirmed its guidance for earnings growth as well as capital spending plans fueling it. And more than a few actually raised long-term investment targets.

Dominion Energy (NYSE: D) will drive down its payout ratio by holding dividends level the next few years. And other companies will do the same by sharply reducing the size of increases—and holding in more cash to self-fund growth. So far in 2024, however, just two companies have announced dividend cuts versus several dozen increases. The first was Orsted A/S (Denmark: ORSTED, OTC: DNNGY), a widely expected move brought on by vast cost overruns from building offshore wind projects. Since then, however, Orsted received a much needed shot in the arm, as its Sunrise Wind project won a new contract with New York state. The stock’s a buy up to 25 for patient, aggressive investors who don’t need the income.

Last year, 56,580 wildfires burned roughly 2.7 million acres in the US, according to the National Interagency Fire Center. That was actually the lowest total in the 24 years since the Center has been keeping track. It compares to a 2001-2020 average of nearly 7 million acres destroyed and nearly 10.3 million in 2020, the worst year on record. Nonetheless, wildfires in 2023 still caused billions of dollars and claimed lives. And numerous studies indicate vast areas of North America have developed a deadly combination of increasingly arid conditions and extended human settlement, putting them at elevated risk to extended and intense blazes. Few if any industries are as potentially exposed as electric utilities. Not only are wildfires capable of doing enormous damage to systems, interrupting sales and requiring massive repairs and remediation. But when damaged, live high and low voltage power wires become ready sources of ignition themselves, worsening ongoing blazes and in some cases starting them.

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Since the February issue of CUI posted, 15 more Portfolio recommendations have released calendar Q4 earnings and updated guidance. And none so far have been as potentially consequential as Dominion Energy’s (NYSE: D).