Dive Brief:

• Moody’s Investors Service on Thursday raised its outlook for the regulated utility sector to “stable,” citing the firm’s expectations for lower natural gas prices, moderating inflation and regulatory support for the recovery of fuel and purchased power costs. 
• The credit ratings agency had lowered the sector’s outlook to “negative” in November, but now believes utilities are better positioned to promptly recover their costs. “The outlook could change to positive if the regulatory and political environment turns even more credit supportive,” Moody’s said.
• Analysts at Bank of America Global Research were less sanguine in a Wednesday report. The S&P utilities stock subsector is down about 13% this year, they said, but despite the decline, “we do not view the pullback as an overly attractive buying opportunity,” though there is potential upside for specific companies.

Dive Insight:

A “sustained decline” in natural gas prices since January has helped many regulated utilities by easing “both affordability pressures and regulatory risk,” Moody’s said. Less than a year ago, the ratings agency had expressed concern over whether regulators would allow prompt recovery of costs, as utility customers struggled to pay rising bills.

“Inflation rates are also declining, particularly compared to 2022 highs, which helps alleviate the strain on household budgets and moderates utility maintenance and construction costs,” Moody’s said.

The average monthly spot price for natural gas at the U.S. benchmark Henry Hub fell 34% between January and June on milder weather and higher production, according to the U.S. Energy Information Administration.

On the whole, the U.S. regulatory environment “remains supportive,” Moody’s said. “Rate case outcomes have been more constructive than we had anticipated, particularly considering high fuel charges on customer bills, costs incurred by utilities from extreme weather events and the economic challenges facing utility customers.”

Analysts for BofA Global Research, however, say they are “not so constructive on utilities.”

“At risk of overly simplifying, the utilities sector has simply been tracking US Treasury rates,” BofA said. ”With most utilities yielding below 4%, the merits of ownership for a wide group of investors is simply not there.”

Wildfires add to the “complex setup and wider aversion of the group from investors,” BofA said.

Hawaiian Electric last month revealed it had considered the possibility of restructuring in bankruptcy in the wake of recent devastating wildfires on Maui. But BofA noted the fire risk is not just a summer worry, pointing to the Marshall Fire in Colorado in December 2021, in the territory of Xcel Energy.

“We perceive investors as increasingly in a de-risking mode, seeing the consistent existential risk posed by wildfires outflanking any other factor exposure of a given utility equity,” BofA said. Analysts say investors are looking for a pattern of “responsibility and diligence” among utilities and this is “particularly true in the West.”

Utilities are “close to fairly valued,” BofA said, with recent underperformance of the sector seen as a “needed adjustment rather than a temporary dip resulting in a clear buying opportunity.”