The Federal Reserve's July 31 rate cut has possibly furnished regulated utility stocks with justification for share prices previously considered inflated, with equities continuing to perform well in the first month following the shift in U.S. monetary policy.
"On the surface, the lower federal fund rates are, the lower Treasury yields are, the lower interest rates in general are, the more appealing utility stocks are," Andrew Weisel, an analyst at Scotia Capital, said in an interview. Weisel said the rate cut has helped transform regulated utilities from an over-valued sector to a fairly-valued one. "[U]tilities are now likely to remain at these elevated levels for quite some time," Weisel wrote in a recent report.
"They're still very expensive by historical standards," said Weisel of regulated utility stocks. "But in this kind of macro environment, I think it makes sense and might be sustainable."
"Clearly the utilities are taking advantage of their soaring stock prices [driven] by the Fed," Andrew DeVries, a CreditSights Inc. senior analyst and co-head of U.S. investment grade credit, wrote in a Sept. 5, 2019 note, citing recent equity issuances and noting that utility sector exchange-traded funds are at an all-time high.
NextEra Energy Inc. was the latest to make such an offering, announcing a $1.5 billion equity issuance of units worth $5 on Sept. 4. The offering consists of a subordinated bond due to mature approximately two years after the three-year equity purchase obligation.

Weisel acknowledged economic skittishness is often a plus for utilities. "The only flipside is, if the Fed is cutting rates and the market, in general, views that as helping to postpone or avoid a recession, that actually might hurt utilities' appeal," he added.
For regulated utilities that benefit from flights to safety, fears of an economic downturn draw in investors.
"If people view Fed cuts, not as a sign that things are worse than expected, but rather as a way to support the economy, then people will be less willing to pay high multiples for the defensiveness of utilities," said Weisel.
Global trends, project finance implications
U.S. rates, alone, are not propelling investors toward utility stocks, but also a global trend toward dovishness that has encouraged people to seek out what Weisel called "a safe-haven sector in a safe-haven economy."
"Central banks globally are very dovish," said Weisel. "So, yes, the Fed is cutting and everyone's debating if it's going to be 25 points or 50 points, and how many more cuts we'll see by year-end."
While monitoring the Federal Reserve is important, investors should also be looking to the European Central Bank and the Bank of Japan, among others, for economic indicators, said Weisel. In a way, this dependence on foreign monetary policies can insulate U.S. utilities from a lack of future rate cuts or potential rate hikes at home.
"The appeal of U.S. utilities will continue even if the Fed levels out based on those global central banks continuing to cut," said Weisel.
Meanwhile, industry observers see opportunities for project refinancings and power asset M&A deals in the new lower-rate environment.
"This is all sort of in flux," said Ram Sunkara, a partner at Eversheds Sutherland and head of the law firm's natural gas liquids, petrochemical, liquefied natural gas and distributed generation and renewable corporate procurement teams.
"Lower interest rates means cheaper debt and that is the driver for a lot of energy companies because, in terms of acquisitions especially, and also debt for infrastructure, that's going to drive some level of investment in the power space, because there will be cheaper debt for companies to go out and buy generation assets."
It's not immediately clear which which types of generation will win from increased project financings, said Sunkara, noting that it depends more on where U.S. developers and investors are looking to build. For example, said Sunkara, "solar-plus-storage may be more economic than gas-fired peaking plants in some markets," adding that "there is definitely a market for gas-fired generation."
Refinancings of power assets and issuances in the project bond market could also increase due to rate cuts, according to Mona Dajani, partner and co-head of energy and infrastructure projects team at law firm Pillsbury Winthrop Shaw Pittman.
"If they go lower it could signal some more refinancings, but I think it's too early to tell right now because the market is so skittish," said Dajani, noting that further cuts could potentially lead to "an upsurge in refinancings and private placements."
