Fitch: US Utilities on Track for Better Year After a Solid 3Q

Warmer summer temperatures helped the US utilities, gas and power sector exhibit a solid third quarter and kept the sector on track for a better 2015, according to Fitch Ratings. Median earnings for the third quarter grew by 5% year over year. In addition to favorable weather, higher margins from base rate increases and modest weather-normalized load growth also drove earnings growth.

US states experienced an average of 45% more cooling degree days during the three summer months of 2015 than the same period of 2014. Overall 3Q sales volume grew by 3.3%. On a weather-adjusted basis, many companies reported modest industrial and commercial load growth ranging from 0.5% to 1.3% even as others saw a pullback in industrial demand from the oil and gas sectors due to low oil prices.

A strong dollar continued to hamper results for utility holding companies (UHCs) with international operations during the third quarter. AES reduced its mid-point guidance by 6.5% due to material depreciation of the Brazilian Real and lower demand in Brazil. Others, such as Sempra, were able to make up the mild currency devaluation with strong fundamental local economic growth in Chile, Peru and Mexico.

The 42% of sample UHCs in the report that provided preliminary 2016 guidance showed a 3.3% average increase in mid-point EPS. The increase incorporates continued expense control, base rate increases and tepid customer growth, offset by normal weather. Some independent power producers (IPP) have announced conservative 2016 EBITDA guidance, citing lower expected capacity revenue and hedged energy prices entered in 2015.

The final Clean Power Plan promulgated by the Environmental Protection Agency continues to garner attention and debate. Coal-dependent utilities expressed uncertainties about the timing and implementation of the rule. Nevertheless, many utilities are encouraging their states to file state implementation plans in September 2016. New resource planning and capital investment needs are unlikely to be clarified until the state plans are finalized, which could stretch to 2018.