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US energy, water utility stocks close 2020 in the doldrums from SNL Power Daily with Market Report US energy, water utility stocks close 2020 in the doldrumsByline: Charlotte Cox U.S. utility shares lagged broader markets in December 2020 for a second consecutive month, with energy and water utility stocks gaining an average of 0.8% during the month, compared to increases of 3.7% and 5.7% for the S&P 500 and Nasdaq Composite, respectively. For full year 2020, utilities dropped 9.9% on average, compared to gains of 16.3% for the S&P 500 and 43.6% for the Nasdaq Composite. Within the energy and water utility sector coverage universe, the electric and water groups gained 2.0% and 4.6%, respectively, while the gas and multi-utility groups both slipped 0.9%. In full year 2020, electric, gas and multi-utilities fell 14.1%, 18.6% and 8.2%, respectively, while water utilities closed the year up 4.3%. Looking ahead to the fourth-quarter earnings season, energy and water utility quarterly earnings are projected to decrease an average of 4.5% year over year, according to S&P Capital IQ consensus estimates, although individual companies vary widely. Selected performances ALLETE Inc. moved up 10.1% in December 2020 amid a flurry of project updates. On Dec. 22, the company began commercial operations at its 303-MW Diamond Spring wind plant in Oklahoma. On Dec. 16, GE Renewable Energy announced that it had received an order for 265 MW of wind turbines for ALLETE's 303-MW Caddo Wind Farm in Oklahoma. On Dec. 7, McDonald's Corp. disclosed that it had signed a 200-MW PPA with the Caddo Wind Farm. The 250-MW Nobles 2 Power Partners wind farm in Minnesota in which ALLETE holds a 49% ownership interest also began commercial operations in December. ALLETE projects it will have a roughly 50% renewable generation mix in 2021. California Water Service Group gained 9.2% in December, and closed 2020 up 4.8%. On Dec. 3, the California Public Utilities Commission issued a final order approving an amended proposed decision in subsidiary California Water Service Co.'s general rate case, thereby authorizing a $4.4 million increase in 2020, up to $20.9 million in 2021 and $21.4 million in 2022, subject to an escalation earnings test. Additional revenue of up to $17.3 million can be authorized through the advice letter process as projects are completed during 2021 and 2022, and the decision authorizes Cal Water to invest $828 million in capital projects through 2021. Neither the proposed decision or settlement provided rate base parameters. Avista Corp. increased 7.0% in December. On Dec. 10, the Oregon Public Utility Commission adopted three partial settlements, thereby authorizing Avista Corp. a $4.4 million, or 4.4%, gas rate increase in the company's base rate case. The increase is premised upon a 9.40% return on equity (50% of capital) and a 7.24% return on a year-end rate base of $305 million for a test year ending Dec. 31, 2021. The new rates are effective Jan. 15, 2021. CenterPoint Energy Inc. fell 6.7% in December after the company announced plans to sell its Arkansas and Oklahoma gas utilities. As of the Dec. 7 disclosure, CenterPoint had not yet identified a buyer; the company instead plans to announce a transaction in the second quarter of 2021. In both Arkansas and Oklahoma, the utilities earn slightly higher-than-average equity returns and operate under annual adjustment mechanisms that allow for timely rate adjustments to reflect changes in their costs of service, which helps mitigate regulatory lag; both those elements are likely to be seen as attractive elements for potential buyers. The state utility commissions in each state would need to approve any proposed sale, though the process and threshold for a greenlight on a potential deal differ alongside the more specific elements of utility regulation. Share price volatility Smaller-cap companies generally have lower trading liquidity and, therefore, all other things being equal, tend to have more significant share price swings than larger-cap equities. An analysis of the standard deviation of log-normalized daily price returns for utility stocks over the last year supports this thesis, with the generally smaller-cap gas and water utility sectors displaying the highest average price volatility. In addition, some gas and water stocks have been attractive as potential takeover candidates. Average price volatility in the overall energy and water utility group was about 21% in December, down from 36% in November and 24% in October. Northwest Natural Holding Company exhibited the highest volatility in December with 46%, compared to its November volatility of 57%. South Jersey Industries Inc. came in second with 30%, and New Jersey Resources Corporation was third with 29%. Utilities with the lowest price volatility in December were PNM Resources Inc. with 3%, and Public Service Enterprise Group Inc. and NextEra Energy Inc. with 13%. Regulatory Research Associates is a group within S&P Global Market Intelligence. |
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