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Utilities: Regulatory Environment, COVID-19, And Taxes - Location Matters

Jun. 04, 2020 12:20 PM ETBRK.B, D, EMRAF, NEE, NFG, SO, WEC, DUK, EMA:CA55 Comments
George Fisher profile picture
George Fisher


  • For several decades, the S&P has offered a rating of how supportive state regulators are to the utilities in their jurisdiction.
  • Nine states are rated as “More Constructive.” Eight states are rated as “Least Constructive” with the balance rated as "Average”.
  • With decreasing utility demand, decreasing accounts receivable collections, and with higher corporate income taxes potentially on the horizon, utilities will be greatly impacted by their state regulators.

Never has the geographic location of an investor’s utility selection been more important. The changes taking place will greatly impact utility shareholder performance over the next several years. Regulatory oversight will be critical in how utilities deal with the financial impacts of the COVID-19 outbreak and the ramifications on utilities of a substantial decline in consumption, a delay in accounts receivable collections, and the impact of future tax increases.

Demand Destruction, Cash Flow Issues

The coronavirus pandemic has triggered a macroeconomic shock that is unparalleled in peacetime. In a report issued by the International Energy Agency, IEA, found on average for the 30 countries representing 30% of global electricity consumption, for each month of lock-own, electricity demand declines by 20%. The IEA expects global demand to decline by 5% in 2020, the largest decline since the 1920s and eight times the electricity demand destruction of the global financial crisis in 2008-2009.

The following chart is from the June 2020 issue of Power Magazine and outlines changes in global energy demand for the past 120 years. As they say, a picture is worth a thousand words, and this graphic certainly tells a strong tale.

In the US, different state’s lockdown restrictions impact electricity demand differently. For example, according to the same Power Magazine issue, New York ISO reported NYC has experienced an 8% decline in peak power demand and up to a 20% decline at other times. Texas ERCOT has reported only a small peak power demand reduction with overall electricity demand down about 2% to 5%. In the Southwest Power Pool, demand is down 7% to 9% from like-degree days of last year. According to the Brattle Group, national electricity demand was down 6.5% in April, as reported by the seven ISO regional overseers. In a nutshell, the collapse in commercial and industrial demand for electricity is not offset by the increased residential demand caused by stay-at-home orders.

This article was written by

George Fisher profile picture
I am the author of Guiding Mast Investments monthly newsletter, focused on timely dividend paying stocks. Our mission at Guiding Mast Investments is to help investors keep a steady pace of wealth accumulation as they navigate through their financial voyage.  I have been a Registered Investment Advisor, financial author, and entrepreneur. I bring a variety of expertise to my clients, from personal investment planning and management to stock market analysis skills. I am the creator of the late 1990s investment newsletter Power Investing with DRIPs focused on timely selections of dividend paying stocks. I have also published two books through McGraw Hill, All About DRIPs and DSPs (2001), and The StreetSmart Guide to Overlooked Stocks (2002). My work experience covers a variety of fields.Prior to being a RIA, I spent 15 years as a corporate manager at Georgia-Pacific Corp before venturing out on my own, operating several businesses from manufacturing to export marketing management. President Ronald Reagan appointed me to the National Advisory Council overseeing the Small Business Administration from 1988 to 1991. Now comes the obligatory disclaimers: The opinions and any recommendations expressed in this commentary are those of the author . None of the information or opinions expressed in this article constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this commentary constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. The information contained in this report does not purport to be a complete description of the securities market, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Expressions of opinion are as of this date and subject to change without notice. Either Mr. Fisher or his employer, if any, may hold or control long or short positions in the securities or instruments mentioned.

Analyst’s Disclosure: I am/we are long BRK.B, D, DUK, EMRAF, NEE, NFG, SO, WEC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (55)

waterlogger profile picture
@george Fisher
In light of $D decision this weekend, and your owning both sides with $BRK.B, maybe an addendum to this article would be of great interest to many.

CEO Farrel had many statements in support of strong regulator oversite and $D now looking for escape from midstream mania.

Also $BRK.B will have 18% of NatGas pipes in the USA says there is a tectonic shift in the utility and energy sectors coming.

If enviro-warriors can stop pipelines, their next targets certainly will be electric UTEs.
They already are with renewable regulatory hurdles.

The regulated UTEs can't shift in and out of their capital projects fast enough to escape the eco-terrorism assault on investor's returns.

All solar and wind won't get it done. A balance mix of generation is needed to maintain availability and standing reserve capabilities.
George Fisher profile picture
@waterlogger , @msoku

Thanks for reading and posting your comment. I am in the process of writing an article on why I reduced D and added to BRK.B in the wake of the surprise exit from their gas pipeline business.
Thank you, very interesting.
George Fisher profile picture

It's my pleasure and I am pleased you found the article to be useful
Greg_Maryland profile picture
Interesting article.
George Fisher profile picture

I appreciate your stopping by and posting your comment. Glad you found it "interesting" and hopefully helpful.
Awayk profile picture
George - Thank you for this and your related articles. Wonder if you have ever looked at Alliant Energy (LNT), which seems to serve some the more advantaged geographies. Only a handful of articles on SA published on LNT over the past few years and nothing on M*.
George Fisher profile picture
@Awayk Investing

Thanks for reading and posting your question. I have not reviewed $LNT in any deep dive analysis. It has come up as one of the utes serving better regulatory areas, and is worthy of a better review. I agree my usual sources don't offer much analysis. I'll look at it again and thanks for the suggestion.
Thank you for taking the time to write this useful analysis.
George Fisher profile picture

Thanks for your comment and I'm pleased you found it useful.
AlanS9 profile picture
Very informative article, George. I see you own both common utility stocks and utility preferreds. Is there a criteria you use in determining whether to purchase the common or the preferred of a utility? Thanks
George Fisher profile picture

Interesting question. The choice is not common vs preferred but rather which utility preferred do I want to own as a replacement for a laddered date-specific corporate bond ETF.

I was quite amazed at the decline in my portfolio of BulletShare ETFs, which I had built over the years into a 7-yr ladder. In addition, with the sector being targeted for Federal Reserve support, it was not giving me the comfort level I was seeking with the initial investment. While low on the duration scale (which is critical to principal retention in low interest rate environments), the risk profile seems to have changed. So, time to change horses.

I have been in and out of preferreds over the years. They made great investments during the last crisis, but selectivity was key. I was looking to build a portfolio focused on the safety of the utility sector. I went to those firms outlined above (except HAWLN) as having the "safest" regulatory environment. My other criteria was to buy only cumulative issues, with yields of close to or above 5%. I then bought different types: traditional, convertible, and reset. I don't anticipate expanding the names too much in the future, but I may nibble on these selections which the opportunity arises.

Hope this helps.
Thanks for the update on Utility Regulatory Environments and it's nice to confirm my holdings are all in above average regulatory environments. Always enjoy your articles on the Utility space.
Long WEC, D, EMRAF and AEP by PV.
George Fisher profile picture

Thanks for reading and posting your comment. Glad I can be of service.
great coverage. RRA was from 2017 and some states have loosened up to let utilities improve ROE, ROIC,faster depreciation, prices on $/kwhr. Ameren in Missouri and Illinois is now able to spend more money and make more money. Utilities may experience some unpaid bills from this unemployment crisis. States will give the UTES some flexibility. As utilities are very essential during this period of lockdown. LONG: AEE/HE/WEC/D NEE, AEP/SO SR_A. NB: this ytd more electricity was made from other fuels/ sources than coal. source-wsj.
George Fisher profile picture

Thanks for stopping by. I take some issue with your comment of PUC's allowing higher ROE. Allowed ROE has been on a downward slope of many years, with the most recent average quarterly new approval of around 9.5%. The average allowed ROE for new cases has not exceeded 10% since 2015. However, requested ROE has steadily increased from a decades low of just under 10% in 2017 and averaged 10.5% in 2019.

Industry trade groupEEI usually publishes quarterly recaps of rate cases, with usually about 2 quarters lag. All I could find this search is the year end 2019 as described on pages 68-70 on their year end review. This whole report is a wealth of utility information for those willing to spend a few minutes perusing it.

Nice utility portfolio. Again, thanks for your time and interest in this article.
4corners profile picture
There is a recent article in SA about AEP being cash flow negative, dividends covered debt. Does this influence your future thoughts On AEP?
George Fisher profile picture

Thanks for reading and posting your question. Most utilities operate on a negative cash flow basis, mainly due to their large capital expenditure budgets. Approved cap ex expenditures become part of the rate base and earns an approved return on equity invested in the project. Some cap ex, such as replacing natural gas pipes for gas LDCs, carry a "tracker mechanism" for immediate inclusion into the rate base. This is one of the reasons PUC constructive financial support is so critical.

Hope this helps
4corners profile picture
Thanks for the update.
I like your new ranking of stocks. different optics for different times.
George Fisher profile picture

If you are talking about the changes in our GMI stock recommendation list, thanks for your comment. I find it to be an interesting list of stocks that have outperformed the "market" based on their 200 day MA. Interestingly, many of these stocks rate poorly based on their fundamentals - except for momentum and a 10-yr history of increasing earnings and dividends both of which are very important in today's topsy-turvey investing world. These days, finding "value" stocks remain tenuous. With the potential for multiple negative "earnings surprises" over the next several quarters, and with the retraction of many 2020 and 2021 earnings guidance, calculating value becomes more than difficult. To me, there are several names which satisfy both strong momentum characteristics and rate high on our value scale, and I nibbled on a few of them in May as indicated.

I appreciate your input.
RoseNose profile picture
Hi @George Fisher !
Important information for us all, thank you!
If the state makes it easy to operate the company usually does well and the customers will be happy as well. Long SO, D, having lived in WI also bought XEL, MGEE and WEC.
Sold FE and LNT, but might buy LNT again.
Long your useful utility articles : Ute the Best !
Happy Investing :)) Rose
George Fisher profile picture

Thanks for stopping by and I appreciate your kind words. Over the first half of 2020, I sold out of CNP, CNP preferred, and FE, most of which were in late Feb/early March through the use of stop loss orders entered in late Dec 2019. In late March/early April, I started new positions in DUK and WEC with the proceeds. In early April, I also started buying a portfolio of several utility preferred issues as a replacement for a laddered date-specific corporate bond ETF portfolio I have been trimming.
RoseNose profile picture
I like the idea of DUK too !
Today is just too green for me to consider buying much...
Thanks and best to you @George Fisher !
Again another very informative review. Thanks much
George Fisher profile picture

Thanks for reading and posting your comments. I am pleased you find my writing and stock research efforts to be useful.
Hi George,very interesting article.shocked at were California ranks.
Thanks B/L
George Fisher profile picture
@Big Louie

I agree that I continue to be surprised by the positioning of CA within the states rankings. See my comments below.

Thanks for reading and posting your comment.
This is a superb review. I have had positions in D and NEE for about 15 years and have been enjoying the dividends as well as the very nice cap gains I have seen over the years. Have been thinking about adding some SO and some DUK and am encouraged by the write up and analysis
George Fisher profile picture

I appreciate stopping by and posting your comments. I am also pleased you found my musing to be informative. Let me know of any questions you may have.
Can count on you for an informative post, George, and this one certainly does not disappoint. The RRA ranking is quite instructive to me as a utility-heavy investor.

Retired income investor
George Fisher profile picture

I appreciate your kind words and am pleased I can provide some additional insight.

When my dad gave me my first DRIP of 7 shares of then Sierra Pacific Power in the late 1960s and for many years after, I thought all utes were pretty much the same. The recent history of CenterPoint in Jan of this year again demonstrates this is far from reality. Thanks for your comment.
@George Fisher

CNP hit me pretty hard too, but I should have heeded the warning signs. Decided to just be done with it and sold with no regrets.
Coming soon... a lot of very unhappy investors in dividend-land, especially those that bought into utilities at elevated P/Es during the coronavirus upset.
George Fisher profile picture

Thanks for reading and posting your comment. I tend to agree most utilities are overvalued on historic PE comparisons.
Gridbird profile picture
@George Fisher, Actually price wise, utes are lower now than when they were pre Corona outbreak. Many are down 15%, and some are down past 52 weeks. So there really isnt a “Corona High” per pricing (not P/E) Now of course earnings will be impacted as you suggested. Fine article and thanks for sharing.
It is not prices that you should be worried about (or focused on); rather, it is valuations, especially in the current context and in light of what is unfolding going forward.

There are mounting problems in the utility space, and they will not go away once lockdowns are fully lifted. Indeed, they will become manifest for many in the next few months.

Best to steer clear of this space until after the (price) re-set. However, most dividends, I am afraid, will likely not survive the sector re-set.
waterlogger profile picture
Thanks, George Fisher.
Always a clear and easy read looking at your reasoning.

Amazing how far away California has changed since the 2017 map.
I look at California as a place where your money goes to die.
George Fisher profile picture

I appreciate your compliments of my writing style.

I used to own uts in California, mainly water and electric. During the Enron-led electric crisis in CA in 2000 and 2001, the electric operating costs for water utilities skyrocketed as electric-driven pumps are used to move water around and electricity is a water utility largest operating cost (beyond labor). As an operating cost, these should have been passed along to ratepayers, but the CA PUC decided shareholders should shoulder the brunt of the out sized cost increase, and earnings collapsed in the process. In other words, the CA PUC changed the rules of the game midstream. I sold all CA utes, and with the exception of minor service territories from companies like Southwest Gas Holding $SWX and some oil holdings of $NFG Seneca, I have avoided most regulated businesses in CA. I, too, was surprised by the relatively high rating of CA in the RRA listing and continue to be amazed it is not lower on the list.
Gridbird profile picture
@waterlogger, I wouldnt ever invest in a common stock ute, but the CA ute preferreds have been awesome. Made a killing on the SCE fire scare a year and a half ago, and have had the PCG preferreds by the throat right now making good money and watching them rise as they head for exiting bankruptcy and distributing all those accrued dividends that the preferreds are reflecting already pretty nicely.
Gridbird profile picture
@George Fisher, The regulated utes are allowed a ROE that most utes from other states would die for. Its all the other problems, inverse condemnation being a tiny one, lol.
Catmanrog profile picture
Wonderful utilities regulatory insight George ! As a long time retiree, utilities SO, D, PPL, and DUK maintain an overweight 18% portfolio allocation by value and income. Your continued guidance in this defensive sector is greatly appreciated. Best Regards, Rog 🐾
George Fisher profile picture

Thanks for reading and posting your kind words. I'm glad I can be of service.

With your focus on FL and Southeast utes, you may want to look at one of my favs Emera $EMRAF - owner of Tampa Electric and Peoples Gas of Florida. As a Canadian firm, there are positive attributes to its share price and its income due to currency fluctuations for US investors if/when the US Dollar begins an overdue decline.
aida2003 profile picture
Hi George,

Thanks for a nice article. I own a few of these companies and hope they don't disappoint for many years to come.

What are your thoughts about UGI? I think you wrote an article about it, but by the time I got curious about this company your write-up got behind the pay-me wall :-(.
Is UGI a better company than say CNP that you sold?

George Fisher profile picture

Thank for reading and posting your comment. Here is the conclusion of my Feb 14 article when UGI was trading at $41.79 vs $35.69 currently.

"Income investors looking for exposure to the mature and slow-growing propane business could consider UGI as a viable candidate with its stable and competitive yield. Technical investors could look at UGI at a current entry point for a starter position based on its holding to the double bottom, and to add shares if prices bounce off the longer-term bottom at $39. However, it should be noted the current share price is below the 200-day moving average of $48.32 and 75-day moving average of $44.10 – neither of which is a good sign.

Personally, I rate UGI as Neutral and don’t plan on adding it as a portfolio addition but will watch closely during the next market downturn."

Share prices broke below the $39 double bottom. I think there are better utility selections, if you are looking for that sector exposure. I admit the exchangeable propane tank business could add a bit more growth to the story, but it, too, is a mature, unregulated, business.

Hope this helps
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