Market Dynamics Driving US Electric & Gas Utilities
Inflation is expected to be a prominent theme for the group this year, as Utilities pass most costs through to customers, offering an inflationary hedge to investors. Monitoring customer bill inflation is vital in the current backdrop. Large-cap Utilities with multi-state jurisdictions and with exposure to commodities face less project risk than smaller regional peers.
Utilities actively decarbonizing the power grid while offering investors fundamental earnings revisions via rate base additions are in focus. Despite ESG multiples retracing this year, rate of change decarbonization efforts could still affect sector fund flows.
Utilities continue to simplify their business mix, with most converging on the same growth rate. Analysis suggests that the sector is in the later phases of this trend, focusing on earnings composition mix, execution, and state-level relationships. Inflation positioning is already starting to show up in 1Q results.
Other key themes under surveillance include equity issuance, as it affects sector equity accretion/dilution math for heavier equity issuers. Also Utility Credit as Utilities are operating one notch above investment-grade status. Observers should be vigilant around Funds From Operation FFO/Debt minimums, given the potential for increased pressures on utility cost structures and customer rates.