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MDU Resources stays on top as utility stocks reverse course in Q3

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MDU Resources stays on top as utility stocks reverse course in Q3

Utilitystocks fell from their post-Brexitpeak in June, losing ground with the broader S&P 500 by the endof the third quarter. At thebeginning of the quarter, Wall Street analysts debated whether the sector was overvalued or underappreciatedat the midpoint of 2016.

Whilethe S&P 500 gained 3.31% in the most recent quarter, the S&P 500 UtilitiesIndex dropped by 6.72%. The Dow Jones Utility Index was also down 6.75% and theSNL Energy Index was down 1.75%.

Safehavens like utilities reversed course on the back of central bank jitters, includinga much awaited interest rate decisionfrom the U.S. Federal Reserve during the third quarter. Utilities particularly bottomedright before U.S. Fed and Bank of Japan meetings on Sept. 12, although the sectormanaged to briefly outperform the S&P 500 until Sept. 23, according to EvercoreISI.

Goinginto the fourth quarter, Evercore ISI believes the macro economic environment andrate hike expectations will affect the performance of utility stocks. "Witha Fed rate hike base case now of December, for companies that have ROE exposurein the next 12-24 months there is definitely downside risk," the firm said.

Top-performing stocks

MDU Resources GroupInc. continuedto top performance among utility stocks, with a 6% gain over the quarter.  In August, MDU Resources reported higher second-quarter earnings which beat the consensusestimate by 4 cents.

Otter Tail Corp.shares recorded a 3.28% increase. During the quarter, the Minnesota Department ofCommerce Division of Energy Resource recommended that the Minnesota Public UtilitiesCommission authorize Otter Tail PowerCo. an 8.86% return on equity that, well below the average ROE authorizednationwide, as calculatedby Regulatory Research Associates.

SNL Image

For AES Corp.,the third quarter highlighted DaytonPower and Light Co.'s shiftfrom its pursuit of an income guarantee for more than 2,000 MW of coal-fired generationin Ohio, opting instead for a distribution rider tied to modernizing its distributionsystem.

AES executives are optimistic that Ohio regulators will approveDP&L's plan, despite the obstacles faced by rival utilities and in the state. AESshares closed the quarter at $12.85, representing a 2.96% increase.

Rounding out the top five performing utility stocks were mergertargets Westar Energy Inc.and Empire District Electric Co.

Westar filed for its acquisition by GreatPlains Energy Inc. with federal agencies, including FERC, within thethird quarter. By the end of that period, Westar shares were up 1.18%.

Empire District Electric, meanwhile, won key regulatory approvalsfrom the Missouri Public Service Commission and the Federal Trade Commission tocombine with , while also seeing its stock improve 0.50% in the third quarter of 2016.

The remaining five companies on the top-performing list — , , El Paso Electric Co., Black Hills Corp. and CenterPoint Energy Inc. — recorded negative returns for thethird quarter.

Bottom-performing stocks

GreatPlains shares fell more than 10% in the third quarter. While the company integration planning withWestar, the company sparred with Missouri Public Service Commission staff over theirassertion that state regulators should formally review the deal. Great Plains contendedthat since Westar is not a public utility under Missouri law, the deal is not subjectto state PSC jurisdiction.

Stateregulators later ruledthat a formal complaint must be filed for it to decide if it has jurisdiction overthe case, and Great Plains said it is ready to respond if such a complaint is filed.

continued its downward streak for another period with an 8.97% drop.

In July,NextEra Energy Inc. its bid to acquire and has since moved on to acquire OncorElectric Delivery Co. LLC from EnergyFuture Holdings Corp.

opened the quarter justabove $36 and ended down 8.44% at $33.29, limping into the fourth quarter afterthe U.S. Tax Court rejectedthe company's deferral of approximately $1.2 billion of tax gain on the sale ofCommonwealth Edison Co.'sIllinois coal-fired power plants in 1999.

Amongother utilities, Public Service EnterpriseGroup Inc. saw its share value drop by 10.17% and Eversource Energy by 9.55%.

In anOct. 10 note, The Williams Capital Group described the recent selloff in utilitiesas "way over-done at this point."

"Aswe have noted for a while, utility fundamentals remain unusually strong. Earningsand dividend growth generally are expected in the 4.0%-6.0% per annum range overthe longer-term while the sector remains in a super-cycle for infrastructure investment,"Williams Capital analysts opined. "Compared with overall lackluster U.S. GDPgrowth, the strength of utility growth combined with its low risk, and greater growthcertainty provide a compelling fundamental backdrop for utility stocks providinghigher current yields than the broader market, in our opinion."

SNL Energy and RRA are offeringsof S&P Global Market Intelligence, which is owned by S&P Global Inc.