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Executive Summary

Utilities To Triple Growth in 2019-20, Not All Will Advance

By Roger S. Conrad on Oct. 7, 2019

Wall Street consensus projects utility sector earnings growth will reach 6 percent in 2020. That’s triple this year’s anticipated 2 percent.

Accelerating sector growth is in marked contrast to diminished expectations for most industries. But even more impressive is how well insulated the primary drivers are from the macro environment.

For example, many companies will get a boost because they no longer have to issue equity to compensate for lower cash flow due to reduced tax pass throughs. They’ll get another lift from the massive decline in corporate borrowing rates since the start of 2019.

Utility Report Card comments show a full percentage point drop in yields to maturity for the vast majority of coverage universe companies’ long-term debt. And an unprecedented number issued very low cost debt in the past month, simultaneously driving interest costs lower and reducing refinancing risk by extending maturities.

Those savings will flow straight to the bottom line over the next 12 months. So will the continuation of the fastest rate base growth since the 1960s, fueled by everything from smart grid deployment and electric vehicle infrastructure to replacing worn out mains, wires and pipes.

As I noted in the September 24 Alert “What Utilities’ New Highs Mean for Us,” extreme investor expectations embodied in record high valuations are the greatest impediment to further share gains. And despite a pullback of sorts the past week, the Dow Jones Utility Average is still on track to break 900 by the end of 2019.

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