Feature Article

Earlier this month, Duke Energy (NYSE: DUK0 closed the sale of its commercial distributed generation unit to a private capital consortium for $364 million. And later this year, it will complete the sale of its utility scale renewable energy unit to Brookfield Renewable Partners (NYSE: BEP, BEPC) for $2.8 billion.

Let’s not sugarcoat it: Utility stocks are having one of their worst years in quite a while. And the going has been even worse for a whole host of companies in the Utility Report Card coverage universe, especially renewable energy stocks and almost all small-to-mid-sized communications companies. The damage is there to see in this issue’s URC comments, which highlight total returns for the first nine months of 2023.

Normally, when a stock drops nearly 60 percent in just three weeks to yield more than 15 percent, you can bet a dividend cut is on the way. These, however, are no ordinary times in utility world. And a lower payout is far from a foregone conclusion for NextEra Energy Partners (NYSE: NEP). In late September, parent NextEra Energy (NYSE: NEE) cancelled a planned asset sale or “drop down” to Partners, citing tough capital market conditions that didn’t make sense to ignore. To make up for the lost proceeds, it instead announced the $923.4 million sale of its non-core Florida natural gas utility unit to Chesapeake Utilities (NYSE: CPK). And to compensate for the lost revenue to Partners, it cut the affiliate’s projected dividend growth rate to 6 percent from the previous 12 percent.

For the 10^th time in the post-World War II period, the S&P Utilities Index has dropped by more than -20 percent from its previous all-time high—reached in September 2022. Last month’s feature article highlighted key headwinds facing utilities and essential service stocks this year—and reasons why I didn’t think we’d seen the worst of this now more than year-old downturn.

Adding water and wastewater customers by acquiring cash-poor systems on the cheap, then upgrading systems under reliable rate plans: That’s been the formula for Essential Utilities’ (NYSE: WTRG) reliable 7 to 10 percent annual earnings and dividend growth since the early 1990s, when it was known as Philadelphia Suburban.

In the short-term, the stock market is basically a popularity contest. Investors large and small chase the upside momentum of the hottest themes. Concepts like what a business is actually worth are given lip service at best. And every once in a while, things run so far in one direction that even safe, generous dividends lose their luster. But if you’ve invested for more than a cycle or two, you’ve by now learned the long-term market is more of a weighing machine. And outperforming businesses that gain strength and size over time are eventually rewarded with higher stock prices.

Hawaiian Electric Industries (NYSE: HE) suspended its dividend last month, saving roughly $158 million if continued over the next year. That’s a key piece of the utility’s defense against a wave of lawsuits resulting from Maui’s devastating wildfire, which wiped out the town of Lahaina and killed upwards of 100 people. Management has also drawn down most of the company’s $375 million in credit lines. And it’s considering restructuring moves including spinning out its American Savings Bank unit.

Nine times since the end of World War II, the S&P Utilities Index has dropped by more than -20 percent from its previous high. The most recent occurred over the space of just one month: February 2020 to March 2020 in the wake of the pandemic panic. Over the following 30 months or so, utilities generally moved higher greatly outperforming the broader stock market for most of 2022. But since then, headwinds have generally overwhelmed tailwinds, though the S&P Utilities to date has sustained less damage than any of the periods highlighted in my table “Utilities’ Post-War Ups and Downs.”

The Inflation Reduction Act’s hundreds of billions of dollars of tax credits are the law of the land. But you wouldn’t know that from the sorry performance of renewable energy stocks. That includes Aggressive Holding Clearway Energy (NYSE: CWEN), which has lost nearly one-quarter of its value so far in 2023.

In July 2017, new Aggressive Holding Avista Corp (NYSE: AVA) accepted an all-cash takeover offer of $53 per share from Canadian utility Hydro One (TSX: H, OTC: HRNNF). Then followed basically a year and a half of futility. And the parties eventually broke off their deal in January 2019, when regulators in Idaho and Washington rejected it due to concerns about then Ontario premier Doug Ford. Avista shares overnight dropped from low-50s to the low-30s and have been attempting to fight their way back ever since. The primary hurdle: Investor concerns about regulation in Alaska, Idaho, Montana, Oregon and especially Washington (60 percent of rate base), where the needs of the utility’s eastern state franchise are a world away from coastal politicians.