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US Utilities Underperform Slightly Less Turbulent Broader Markets

Highlights

Utility performance has been mixed relative to the broader market measures, as indicated in the adjoining table.

S&P Global Ratings revised significantly downward its global growth estimate for 2020.

This week's markets and outlook

In one of the less volatile weeks for equity markets in recent memory, utilities underperformed the broader market measures. Through midday Friday, the Dow Jones Utility Average declined 6.5%, while the S&P 500 decreased 2.2% and the Nasdaq Composite fell 1.6%. Thus far in 2020, utility performance has been mixed relative to the broader market measures, as indicated in the table below.

As the increasing economic fallout associated with the coronavirus continues to be factored into economic and financial forecasts, S&P Global Ratings revised significantly downward its global growth estimate for 2020. It now expects global GDP to increase by 0.4% this year, down from its previous forecast for a range of 1.0% to 1.5%. In 2021, the global economy is expected to rebound with 4.9% growth. According to S&P Global Ratings, the U.S. and Eurozone economies are projected to contract 1.3% and 2.0%, respectively, in 2020.

In further reaction to the coronavirus fallout, S&P Global Ratings, while expecting North American regulated utilities to remain a high-credit-quality investment-grade industry, projects a modest weakening of credit quality, and indicated that its median rating of A- could drop to BBB+. Ratings also noted that before the coronavirus became a serious concern, about 25% of North American utilities either already held a negative outlook or had ratings that were on CreditWatch with negative implications.

In what should not have come as a major surprise given the economic dislocations and outright closing of some businesses, jobless claims surged by more than 6.6 million for the week ended March 28. This comes after a 3.3 million increase in jobless claims for the week ended March 21. In addition, the unemployment rate rose to 4.4% in March from 3.5% a month earlier, with additional substantial increases expected in the coming months given the surge in jobless claims in late March.

Natural gas consumption in the U.S. for the week ended April 1 declined 7.0% to an average 71.9 Bcf/d compared to the 77.3 Bcf/d noted a week earlier, according to the U.S. Energy Information Administration. With the winter heating season waning, consumption in the residential and commercial sectors declined 10.3% to an average of 23.6 Bcf/d from 26.3 Bcf/d a week ago. While it is likely premature to draw reasonable conclusions, in what may reflect an economy negatively impacted by COVID-19, power sector demand declined 6.5% to 26.1 Bcf/d compared to 27.9 Bcf/d during the previous week, and industrial demand decreased 3.5% to an average 22.2 Bcf/d from 23.0 Bcf/d.

Outperforming the electric utility group's average 6.3% decline, FirstEnergy Corp. rose marginally this week through midday Friday after affirming 2020 operating earnings guidance of $2.40 per share to $2.60 per share, while noting that the company is well-positioned to manage the economic impacts stemming from the COVID-19 pandemic. Management also affirmed the company's 6% to 8% annual earnings growth outlook through 2021 and 5% to 7% thereafter through 2023, emphasizing that its electric transmission and distribution revenues benefit from geographic and economic diversity. FirstEnergy noted that residential sales comprise approximately two-thirds of its base distribution revenues. The company described its EPS sensitivity to a 1% increase or decrease in sales as 2 cents for the residential customer class, $0.006 for commercial and 0.5 cents for industrial.

Top performers

Xcel Energy Inc. continues to be a relative fan-favorite during recent market unrest, outperforming the energy utility group in three of the past five weeks. The stock was flat for the week ended midday Friday and has lost only 7.4% of market value thus far in 2020. Xcel was one of various utilities that disclosed actions this past week to demonstrate access to capital during turbulent credit markets. Xcel sold $600 million of 3.40% senior notes due June 1, 2030. Proceeds are to be used to repay short-term debt borrowings and for other general corporate purposes.

Avista Corp. was up 0.3% this week and is down 14.8% year-to-date, outperforming the group average loss of 20.9%. On March 25, the Washington Utilities and Transportation Commission approved a partial settlement in Avista's electric and gas general rate cases, thereby authorizing $25.8 million electric and $8 million gas base rate increases. The commission fast-tracked customer refunds so as to offset the approved rate increases in order to minimize ratepayer impact during the ongoing coronavirus pandemic.

Bottom performers

The roller-coaster ride for PG&E Corp. continues with the company's shares down this week 16.3% through midday Friday. Last week the stock rose 33% while the previous week they declined 29.3%. Thus far in 2020, the shares have decreased 26.1%. PG&E Corp. filed for Chapter 11 bankruptcy protection in January 2019, and the shares of companies in bankruptcy typically exhibit considerable volatility. In what can be viewed as a positive development for PG&E Corp., a California Public Utilities Commission administrative law judge recommended that the commission establish a central buying structure for local resource-adequacy procurement, in which utility subsidiaries of PG&E Corp. and Edison International would buy generation capacity on behalf of other energy service providers for any forecast shortfall in future energy needs. The proposed decision may be considered by the PUC on May 7, at the earliest.

As things currently stand — as specified by Assembly Bill 1054, which was enacted in July 2019, PG&E Corp. needs to emerge from bankruptcy by June 30, 2020 to participate in California's insurance fund for prospective wildfires. As per AB 1054, PG&E Corp.'s bankruptcy plan of reorganization requires the approval of the PUC.

CenterPoint Energy Inc. fell 15.9% this week through midday Friday and is down nearly 50% year-to-date. On April 1, Enable Midstream Partners, in which CenterPoint owns a 53.7% limited partner interest and a 50% general partner interest, announced that it was cutting its quarterly distribution by 50% and its planned 2020 expansion capital expenditures by $115 million. In response, CenterPoint reduced its quarterly dividend by 48% and its planned 2020 capital expenditures by $300 million. On April 2, S&P Global Ratings revised its outlook on CenterPoint to negative from stable, but affirmed the company's issuer credit rating at BBB+.

Sempra Energy slipped 12.8% this week through midday Friday, and is down about 30% year-to-date. On March 31, the company announced the resignation of President and Chief Legal Officer Georga Cilicic, effective March 30. Current Sempra Energy CEO Jeffrey Martin was appointed to be the new president. Sempra has also faced some uncertainty related to its exposure to the LNG export business. On March 24, the company delayed its final investment decision on an LNG project in Baja California to the second quarter of 2020 and signaled that the current market headwinds could impact its final decision on the Port Arthur LNG project in Texas.

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

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