How quickly utility companies recover from hurricanes like Ian can tell you which of their stocks is the best

Nearly 2 million electric customers across Florida were left without power Friday, a modest improvement from the previous day as the state recovers from Category 4 Hurricane Ian, a storm rated as one of the worst to hit this part of the United States has met

In a Friday alert, there were 1,933,573 customers without power statewide, accounting for 17% of all customers, according to the state’s Public Service Commission.

For at least one fund manager dedicated to picking attractive utility stocks, the way publicly traded and heavily regulated companies prepare for and respond quickly to storms like the mighty Ian can be a valuable test for picking individual utility stocks, mutual funds or exchange-traded stocks that rely heavily on the industry to round out a portfolio. Utilities are often sought after for their dividends.

Read: Lost Sanibel Causeway and “Reversed” Tampa Bay: Why Ian will rank among the worst hurricanes in Florida history

“There is no doubt [Florida’s] The electrical system has suffered serious damage and customers will be without power for long periods of time. That said, residents should take comfort in the fact that we believe the NextEra NEE
-1.95%
Florida Power & Light is the best managed utility in America, particularly in terms of storm recovery,” said John Bartlett, President of Reaves Asset Management. NextEra is down about 1% on Friday, trading about flat from where it was a year ago.

Deaths and property damage were still being determined, and many Floridians were cut off by flooding. Ian was recategorized as a hurricane when it moved to the Carolinas on Friday.

“Florida Power & Light has also been a national leader in investments to improve system resiliency. It’s circumstances like these where utilities can demonstrate the value of those expenses: faster recovery time and a potentially lower storm damage bill billed to ratepayers,” Bartlett said.

“Over the past five years, FPL’s track record in this regard has been outstanding. It will be very interesting to see how quickly they can recover. The stock market doesn’t seem to be worried at the moment. We share the confidence of the market,” he said.

The utility is also trying to make the challenges transparent.

“Hurricane Ian’s catastrophic winds will mean parts of our system will need to be rebuilt – not restored. Be prepared for widespread, prolonged outages while we assess the damage. We are already in the process of restoring power where we can safely do so,” Florida Power & Light said in a note to its customers.

With a focus on utilities, Bartlett and his team lead the Reaves Utility Income Fund UTG,
-2.05%,
That’s down about 9% from where it was at this point last year. It has a dividend yield of 7.7%. The S&P 500 SPX,
-1.51%
has fallen by 16% over the same period. Meanwhile, the Virtus Reaves Utilities ETF UTES,
-1.62%
is down 3.6% year-to-date but up 4.5% from a year ago.

Do not miss: Read this weekend: What to Expect for Home Prices, Stocks and Bonds Now

The Fed and the IRA: Other factors to consider

Because investors often buy utility companies for their dividends, the Federal Reserve’s interest-rate hikes in the past, aimed at curbing inflation, can mean that comparable income generators such as bonds are more sought after than utilities in a rising interest rate environment. In addition, inflation can cause utility costs to exceed their revenues. For this reason, it’s important to differentiate stock names within the broader sector. For example, investors might wonder if the regulator associated with a particular utility would allow that utility to increase tariffs enough to pass higher operating costs on to consumers?

There is also a relatively new “screen” for stock selection in utilities, linked to the Anti-Inflation Act, which includes numerous climate change and energy regulations in late summer. It provides federal dollars that can improve the economics of solar and wind energy ICLN,
-0.05%
Generation and battery storage projects – for households, but also for manufacturers and the energy suppliers themselves.

The IRA offers $370 billion in spending and tax incentives for clean energy. These regulations are intended to stimulate investment not only from traditional energy and utility companies, but also from companies in related industries such as transportation, real estate and manufacturing. The IRA includes significant upgrades when projects meet specific wage, domestic manufacturing, or location requirements. It also charges a methane-related emissions fee and includes various other consumption taxes. Overall, this means that the health and agility of selected utilities in managing these changes will be important to their long-term standing.

Bartlett told MarketWatch at the time of the IRA’s passage that the legislation contributed to its overall upside outlook for utilities, with some choices now favored over others, even in this rising interest rate environment.

“Utilities are there to be a public service, right? And so, from a practical standpoint, they’re about the most malleable thing the government has to implement its environmental policies,” he said. “The focus is on the tax credits, but above all on the transferability of the tax credits. That’s not money in the providers’ pockets. But it makes it cheaper for all utilities to grow renewable resources and ultimately allows utilities to give their customers what they want at a lower cost than they would have had without the law.”

The transfer effectively allows utilities to bypass tax stock markets to take advantage of the subsidies. Currently, many renewable energy developers are working with banks, which use their tax capital to realize the full value of the loans. But partnering with financial institutions has relationship disadvantages for energy suppliers. The new transfer fees essentially create a new market for utilities to operate in themselves.

“So now the tax credit is transferrable, so a utility could sell it to a highly profitable company that wants the tax offset,” Bartlett said, adding that it’s another factor supporting his optimistic view of utilities at large.

In addition, the new law essentially offsets the tax benefits for the solar power that a utility could build or buy, which has historically favored wind.

It will matter which utilities jump on the stimulus and smartly prioritize investments for the inevitable future of electricity. A slow transition was in the works before the IRA, but with tax credits of up to $30 per megawatt-hour and up to 50% tax credits for renewable energy and storage investments, there’s a clear economic case for early action, said Dan Esposito, senior Policy Analyst in Energy Innovation’s Electricity Program, and Kimani Jeffrey, program intern, write in a comment.

“Many states and energy companies have committed to 100% clean electricity by 2050, but few have committed to significant short-term emissions reductions. That can change now — IRA funding makes it a smart economic choice for states and utilities to maximize clean energy by 2030, putting United States climate goals within reach,” Esposito said.

The IRA also includes other tax credits that may benefit public utilities, such as: These include a tax credit for electricity produced at a qualifying nuclear plant and $250 billion in loans that utilities can use to phase out coal.

Bartlett told Constellation Energy CEG,
+0.18%,
the largest operator of nuclear power plants, is a prime example of a utility benefiting from federal action and a stock held by its company. “It really changes the whole story for her,” he said.

It’s not called “transition” for nothing.

Because renewable energy is more capital-intensive than existing and new fossil-fuel infrastructure, the construction of new renewable energy also enables utilities to increase revenues from the energy transition. As an example, Morgan Stanley researcher noted that coal-heavy utility stocks have great potential for a re-rating as utilities get on track near-term “charcoal for cleaning” investment strategies. New direct payment and portability options will make it even easier to develop clean energy projects, Esposito and Jeffrey said in agreement with Bartlett.

But one thing is clear: not all suppliers are created equal and the energy transition will bring growing pains.

dominance energy D,
-2.74%
In recent weeks, a major offshore wind investment has been announced in Virginia, a project Bartlett hailed as a prerequisite.

“This is a huge win for tariff payers because it obviously reduces costs [energy source] volatility and we’re less dependent on CO2 because they’re using all that offshore wind,” he said. “But it’s also great for utility owners, the shareholders, because we’re turning fuel costs into capital.”

In a recent conference call on the results Dominion doubted the project after regulators made a decision obliging Dominion to guarantee that the wind farm will meet the company’s expected generation projections. In the event of a shortage of generation capacity, Dominion would have to bear the cost burden.

Bartlett sees differentiators within the utility sector that may be driven by the response to Ian or any of the other storms that are intensifying as the oceans warm, or the potential pain points within the energy transition. All in all, however, he remains optimistic about what a new look for US power generation will bring.

“We love stability, and our idea of ​​a good time is a company that you know can yield 3.5%, grow its dividend 5% to 6% a year, and get you into the high single digits,” he said.

https://www.marketwatch.com/story/how-fast-utilities-recover-from-hurricanes-like-ian-can-tell-you-which-of-their-stocks-is-best-11664568380?rss=1&siteid=rss How quickly utility companies recover from hurricanes like Ian can tell you which of their stocks is the best

Brian Lowry

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