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Bull market leaves US utilities behind in August

U.S. utility shares underperformed for a fifth consecutive month in August as broader markets rallied to record highs. Energy and water utility stocks fell an average of 3.2% during the month, compared to increases of 7.0% and 9.6% for the S&P 500 and Nasdaq Composite, respectively. Year-to-date, utilities are down 15.3% on average, compared to gains of 8.3% for the S&P 500 and 31.2% for the Nasdaq Composite.

Within the energy and water utility sector coverage universe, the electric, gas, multiutility and water groups fell 5.3%, 2.8%, 2.0% and 1.9%, respectively.

On the regulatory front, decisions could be issued during August in at least seven pending rate cases followed by Regulatory Research Associates, a group within S&P Global Market Intelligence, including in the two ongoing cases in North Carolina for Duke Energy Corp. subsidiaries Duke Energy Progress LLC and Duke Energy Carolinas LLC.

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Selected performances

Evergy Inc. struggled in August, with the shares losing 18.3% by month-end. On Aug. 5, the company announced its decision to implement changes to its business on a stand-alone basis instead of pursuing a merger. Evergy's new five-year "sustainability transformation plan," or STP, envisions increased capital expenditures focused on electric transmission and distribution investments, a reduction of approximately $330 million of operating and maintenance expense by 2024 from 2018 levels, a reduction of approximately $145 million of fuel and purchased power expense between 2019 and 2024, and expedited CO2 emissions reductions via coal plant retirements and the expansion of renewable energy. On Aug. 12, the Missouri Public Service Commission opened a "fact-finding investigation" into the STP after PSC staff expressed concerns that "Missouri ratepayers might experience higher rates and diminished quality of service due to Evergy's adoption and implementation of the sustainability transformation plan." On Aug. 19, the staff of the Kansas Corporation Commission requested that the commission begin an investigation of the company's plans. In the filing, the commission staff said the investigation is warranted to "provide staff, stakeholders, and Evergy an avenue to collaborate and fully vet" the STP and "for any other such relief the commission deems just and reasonable."

Portland General Electric Company shares also fell hard in August, losing 13.5%. On Aug. 24, the company reported that its trading desk had experienced realized losses of $104 million and unrealized, mark-to-market losses of $23 million as of Aug. 24. The company estimated that third-quarter losses in the portfolio could total as much as $155 million, subject to market conditions. Portland General Electric blamed volatile wholesale electricity prices in the western U.S. that were caused by extreme weather, transmission constraints and power supply changes. Management cut the company's 2020 earnings guidance to $1.30 to $1.60 per share from the previous range of $2.20 to $2.50 per share and will not seek regulatory recovery of the losses from ratepayers.

On the other hand, National Fuel Gas Co. gained 13.0% in August, and was down just 1.5% year-to-date through the end of the month, compared to the utility group average year-to-date loss of 15.3%. On Aug. 6, the company reported second quarter adjusted earnings of 57 cents per share, surpassing the S&P Capital IQ consensus estimate of 51 cents per share. Management initiated its 2021 earnings guidance with a range of $3.40 to $3.70 per share, the midpoint of which would represent roughly 27% earnings growth year-over-year. The company's recent acquisition of Shell's Appalachian shale assets is the main driver of the projected earnings increase.

Share-price volatility

Smaller-cap companies generally have lower trading liquidity and, therefore, all other things being equal, tend to have more significant share price swings than larger-cap equities. An analysis of the standard deviation of log-normalized daily price returns for utility stocks over the last year supports this thesis, with the generally smaller-cap gas and water utility sectors displaying the highest average price volatility. In addition, some gas and water stocks have been attractive as potential takeover candidates. Average price volatility in the overall energy and water utility group was about 24% in August, compared to 26% in July and 34% in June.

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Evergy exhibited the highest volatility in August, at 51%, compared to its June volatility of 19%. SJW Group came in second with 42%, while Portland General Electric was third with 40%. Utilities with the lowest price volatility in August were Atmos Energy Corporation with 15%, Avangrid Inc. with 14% and Dominion Energy Inc. with 13%.

Regulatory Research Associates is a group within S&P Global Market Intelligence.

For a complete, searchable listing of RRA's in-depth research and analysis, please go to the S&P Global Market Intelligence Energy Research Library.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.

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