Stock Performance Q FINANCIAL UPDATE QUARTERLY REPORT OF THE U.S. SHAREHOLDER-OWNED ELECTRIC UTILITY INDUSTRY

Transcription

1 Stock Performance Q FINANCIAL UPDATE QUARTERLY REPORT OF THE U.S. SHAREHOLDER-OWNED ELECTRIC UTILITY INDUSTRY

2 About EEI The Edison Electric Institute (EEI) is the association that represents all U.S. investor-owned electric companies. Our members provide electricity for 220 million Americans, operate in all 50 states and the District of Columbia, and directly employ more than 500,000 workers. With more than $85 billion in annual capital expenditures, the electric power industry is responsible for millions of additional jobs. Reliable, affordable, and sustainable electricity powers the economy and enhances the lives of all Americans. EEI has 70 international electric companies as Affiliate Members, and 250 industry suppliers and related organizations as Associate Members. Organized in 1933, EEI provides public policy leadership, strategic business intelligence, and essential conferences and forums. About EEI s Quarterly Financial Updates EEI s quarterly financial updates present industry trend analyses and financial data covering 56 U.S. shareholder-owned electric utility companies. These 56 companies include 50 electric utility holding companies whose stocks are traded on major U.S. stock exchanges and six electric utilities who are subsidiaries of nonutility or foreign companies. Financial updates are published for the following topics: Dividends Stock Performance Credit Ratings Construction Rate Case Summary SEC Financial Statements (Holding Companies) FERC Financial Statements (Regulated Utilities) Fuel We Welcome Your Feedback EEI is interested in ensuring that our financial publications and industry data sets best address the needs of member companies and the financial community. We welcome your comments, suggestions and inquiries. Contact: Mark Agnew Director, Financial Analysis (202) , magnew@eei.org Aaron Trent Manager, Financial Analysis (202) , atrent@eei.org Bill Pfister Senior Financial Analyst (202) , bpfister@eei.org Future EEI Finance Meetings 48th EEI Financial Conference November 10-13, 2013 Orlando World Center Marriott Orlando, FL For more information about EEI Finance Meetings, please contact Debra Henry, (202) , dhenry@eei.org For EEI Member Companies The EEI Finance and Accounting Division is developing current year and historical data sets that cover a wide range of industry financial and operating metrics. We look forward to serving as a resource for member companies who wish to produce customized industry financial data and trend analyses for use in: Investor relations studies and presentations Internal company presentations Performance benchmarking Peer group analyses Annual and quarterly reports to shareholders Edison Electric Institute 701 Pennsylvania Avenue, N.W. Washington, D.C

3 The 56 U.S. Shareholder-Owned Electric Utilities The companies listed below all serve a regulated distribution territory. Other utilities, such as transmission provider ITC Holdings, are not shown below because they do not serve a regulated distribution territory. However, their financial information is included in relevant EEI data sets, such as transmission-related construction spending. ALLETE, Inc. (ALE) Alliant Energy Corporation (LNT) Ameren Corporation (AEE) American Electric Power Company, Inc. (AEP) Avista Corporation (AVA) Black Hills Corporation (BKH) CenterPoint Energy, Inc. (CNP) Cleco Corporation (CNL) CMS Energy Corporation (CMS) Consolidated Edison, Inc. (ED) Dominion Resources, Inc. (D) DPL, Inc. (DPL) DTE Energy Company (DTE) Duke Energy Corporation (DUK) Edison International (EIX) El Paso Electric Company (EE) Empire District Electric Company (EDE) Energy Future Holdings Corp. (formerly TXU Corp.) Entergy Corporation (ETR) Exelon Corporation (EXC) FirstEnergy Corp. (FE) Great Plains Energy Incorporated (GXP) Hawaiian Electric Industries, Inc. (HE) Iberdrola USA IDACORP, Inc. (IDA) Integrys Energy Group, Inc. (TEG) IPALCO Enterprises, Inc. MDU Resources Group, Inc. (MDU) MGE Energy, Inc. (MGEE) MidAmerican Energy Holdings Company NextEra Energy, Inc. (NEE) NiSource Inc. (NI) Northeast Utilities (NU) NorthWestern Corporation (NWE) NV Energy, Inc. (NVE) OGE Energy Corp. (OGE) Otter Tail Corporation (OTTR) Pepco Holdings, Inc. (POM) PG&E Corporation (PCG) Pinnacle West Capital Corporation (PNW) PNM Resources, Inc. (PNM) Portland General Electric Company (POR) PPL Corporation (PPL) Public Service Enterprise Group Inc. (PEG) Puget Energy, Inc. SCANA Corporation (SCG) Sempra Energy (SRE) Southern Company (SO) TECO Energy, Inc. (TE) UIL Holdings Corporation (UIL) Unitil Corporation (UTL) UNS Energy Corporation (UNS) Vectren Corporation (VVC) Westar Energy, Inc. (WR) Wisconsin Energy Corporation (WEC) Xcel Energy, Inc. (XEL)

4 Companies Listed by Category (as of 12/31/12) Please refer to the Quarterly Financial Updates webpage for previous years lists. iven the diversity of utility holding company corporate G strategies, no single company categorization approach will be useful for all EEI members and utility industry analysts. Never-theless, we believe the following classification provides an informative framework for tracking financial trends and the capital markets response to business strategies as companies depart from the traditional regulated utility model. Regulated Mostly Regulated Diversified 80%+ of total assets are regulated 50% to 80% of total assets are regulated Less than 50% of total assets are regulated Categorization of the 50 publicly traded utility holding companies is based on year-end business segmentation data presented in 10Ks, supplemented by discussions with company IR departments. Categorization of the six non-publicly traded companies (shown in italics) is based on estimates derived from FERC Form 1 data and information provided by parent company IR departments. The EEI Finance and Accounting Division continues to evaluate our approach to company categorization and business segmentation. In addition, we can produce customized categorization and peer group analyses in response to member company requests. We welcome comments, suggestions and feedback from EEI member companies and the financial community. Regulated (37 of 56) ALLETE, Inc. Alliant Energy Corporation Ameren Corporation American Electric Power Company, Inc. Avista Corporation Black Hills Corporation Cleco Corporation CMS Energy Corporation Consolidated Edison, Inc. DPL, Inc. DTE Energy Company Duke Energy Corporation Edison International El Paso Electric Company Empire District Electric Company Entergy Corporation Great Plains Energy Incorporated Iberdrola USA IDACORP, Inc. Integrys Energy Group IPALCO Enterprises, Inc. Northeast Utilities NorthWestern Energy NV Energy, Inc. PG&E Corporation Pinnacle West Capital Corporation PNM Resources, Inc. Portland General Electric Company Puget Energy, Inc. Southern Company TECO Energy, Inc. UIL Holdings Corporation Unitil Corporation UNS Energy Corporation Westar Energy, Inc. Wisconsin Energy Corporation Xcel Energy, Inc. Mostly Regulated (17 of 56) CenterPoint Energy, Inc. Dominion Resources, Inc. Exelon Corporation First Energy Corp. Hawaiian Electric Industries, Inc. MGE Energy, Inc. MidAmerican Energy Holdings NextEra Energy, Inc. NiSource Inc. OGE Energy Corp. Otter Tail Corporation Pepco Holdings, Inc. PPL Corporation Public Service Enterprise Group, Inc. SCANA Corporation Sempra Energy Vectren Corporation Diversified (2 of 56) Energy Future Holdings MDU Resources Group, Inc. Note: Based on assets at 12/31/12

5 Q Stock Performance HIGHLIGHTS nthe EEI Index posted a solid 10.8% gain for the first half of 2013 overall, however the period was the most volatile stretch for utility shares since the financial crisis roiled markets in 2008/2009. ncomments by Federal Reserve officials late in Q2 that hinted the central bank may taper its quantitative easing program sooner than expected sent the 10-year Treasury Bond yield from 1.6% in early May to 2.6% by late June and drove utility share prices sharply lower, after strong gains earlier in the year. ntepid demand and healthy reserve margins in most regions have slowed the industry s rate base growth outlook, but analysts still expect earnings to grow an average of approximately 4% annually over the next five years. nhistorically low interest rates have distorted traditional regulated utility valuation metrics. Analysts note that PE ratios are high relative to the broad market, but strong dividend yields continue to give utility stocks good value compared to bonds. COMMENTARY The EEI Index posted a solid 10.8% gain for the first half of 2013, a move that will make for a strong year if utility stocks can hold their ground during the second half. But it wasn t enough to outperform the broad market, as the Dow Jones Industrials gained 15.2%, the S&P 500 climbed a slightly weaker 13.8% and the tech-heavy NASDAQ, held down by sluggish performance by technology shares, posted a 12.7% gain. This grouping of first half returns within a reasonably close band masked what proved to be the most volatile stretch for utility stocks since the financial crisis of I. Index Comparison (% Return) Index EEI Index Dow Jones Inds S&P Nasdaq Comp.^ Calendar year returns shown for all periods, except where noted. ^Price gain/loss only. Other indices show total return. Source: EEI Finance Department II. Category Comparison (% Return) U.S. Shareholder-Owned Electric Utilities Index All Companies Regulated Mostly Regulated Diversified mo mo Calendar year returns shown for all periods except where noted. Returns shown here are unweighted averages of constituent company returns. The EEI Index return shown in Table I above is cap-weighted. Source: EEI Finance Department, SNL Financial and company annual reports III. Total Return Comparison Value of $100 invested at close on 12/31/2008 EEI Index S&P 500 Index DJIA /30/2013 Note: Year end, except where noted. 1

6 2 STOCK PERFORMANCE IV. 10-Year Treasury Yield Monthly % Average Monthly Yield, 1/1/00 through 6/30/13 Source: U.S. Federal Reserve % Source: U.S. Federal Reserve $/mmbtu V. 10-Year Treasury Yield Weekly Weekly Yield, 1/1/07 through 6/30/13 VI. Natural Gas Spot Prices 1/1/05 through 6/30/13, Henry Hub Category* 2010 Q Q4 VIII. Returns by Quarter U.S. Shareholder-Owned Electric Utilities Index Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 EEI Index Dow Jones Industrials S&P Nasdaq Comp.^ Q Q Q Q Q Q Q Q Q1 All Companies Regulated Mostly Regulated Diversified Q2 * Returns shown here are unweighted averages of constituent company returns. The EEI Index return shown above is cap-weighted. Source: EEI Finance Department, SNL Financial and company annual reports. IX. Sector Comparison, Trailing 12 mo. Total Return For the twelve-month period ending 6/30/13 Sector Total Return Financials 32.0% Consumer Services 28.4% Healthcare 28.4% Industrials 24.5% Consumer Goods 24.0% Oil & Gas 18.5% Telecommunications 12.9% Utilities 9.0% EEI Index 7.5% Basic Materials 6.4% Technology 4.6% Note: Sector Comparison page based on the Dow Jones U.S. Indexes, which are marketcapitalization-weighted indices. Find more information at mdsidx/downloads/fact_info/dow_jones_us_indexes_industry_indexes_fact_sheet.pdf Source: EEI Finance Dept., Dow Jones & Company, Yahoo! Finance Source: SNL Financial VII. NYMEX Natural Gas Futures August 2013 through December 2017, Henry Hub $/mmbtu 6/30/ /31/ /31/ /31/ /31/ Aug 2013 Aug 2014 Aug 2015 Aug 2016 Aug-17 Source: SNL Financial X. Sector Comparison, Q Total Return For the three-month period ending 6/30/13 Sector Total Return Financials 5.8% Consumer Services 5.3% Healthcare 4.2% Consumer Goods 2.7% Industrials 2.0% Telecommunications 1.6% Technology 0.9% Oil & Gas -0.5% Utilities -1.7% EEI Index -2.2% Basic Materials -3.8% Note: Sector Comparison page based on the Dow Jones U.S. Indexes, which are marketcapitalization-weighted indices. Find more information at mdsidx/downloads/fact_info/dow_jones_us_indexes_industry_indexes_fact_sheet.pdf Source: EEI Finance Dept., Dow Jones & Company, Yahoo! Finance

7 STOCK PERFORMANCE 3 XI. Market Capitalization at June 30, 2013 (in $ Mil.) U.S. Shareholder-Owned Electric Utilities Company Stock Symbol $ Market Cap % Total Duke Energy Corporation DUK 47, % Southern Company SO 38, % NextEra Energy, Inc. NEE 34, % Dominion Resources, Inc. D 32, % Exelon Corporation EXC 26, % American Elec. Power Co. AEP 21, % Sempra Energy SRE 19, % PG&E Corporation PCG 19, % PPL Corporation PPL 17, % Consolidated Edison, Inc. ED 17, % Public Svc. Enter. Group Inc PEG 16, % Edison International EIX 15, % FirstEnergy Corp. FE 15, % Xcel Energy Inc. XEL 13, % Northeast Utilities NU 13, % Entergy Corporation ETR 12, % DTE Energy Company DTE 11, % CenterPoint Energy, Inc. CNP 10, % Wisconsin Energy Corp. WEC 9, % NiSource Inc. NI 8, % Ameren Corporation AEE 8, % CMS Energy Corporation CMS 7, % OGE Energy Corp. OGE 6, % SCANA Corporation SCG 6, % Pinnacle West Capital Corp. PNW 6, % Alliant Energy Corporation LNT 5, % Company Stock Symbol $ Market Cap % Total NV Energy, Inc. NVE 5, % MDU Resources Group, Inc. MDU 4, % Pepco Holdings, Inc. POM 4, % Integrys Energy Group, Inc. TEG 4, % Westar Energy, Inc. WR 4, % TECO Energy, Inc. TE 3, % Great Plains Energy Inc. GXP 3, % Cleco Corporation CNL 2, % Vectren Corporation VVC 2, % Hawaiian Electric Indus., Inc. HE 2, % IDACORP, Inc. IDA 2, % Portland General Elec. Co. POR 2, % Black Hills Corporation BKH 2, % UIL Holdings Corporation UIL 1, % ALLETE, Inc. ALE 1, % UNS Energy UNS 1, % PNM Resources, Inc. PNM 1, % Avista Corporation AVA 1, % NorthWestern Corporation NWE 1, % El Paso Electric Company EE 1, % MGE Energy, Inc. MGEE 1, % Otter Tail Corporation OTTR 1, % Empire District Electric Co. EDE % Unitil Corporation UTL % Total Industry 505, % Source: EEI Finance Dept., SNL Financial XII. EEI Index Market Capitalization (at Period End) U.S. Shareholder-Owned Electric Utilities $ Billions Note: Change in EEI Index market capitalization reflects the impact of buyout and spin-off activity in addition to stock market performance. Source: EEI Finance Dept., SNL Financial EEI Index Market Cap (in $Millions) Q ,035 Q ,200 Q ,668 Q ,238 Q ,331 Q ,553 Q ,598 Q ,454 Q ,073 Q ,324 Q ,601 Q ,193 Q ,460 Q ,305 Q ,663 Q ,989 Q ,727 Q ,825 Q ,899 Q ,848 Q ,281 Q ,858 Q ,088 Q ,565 Q ,946 Q ,486 Q ,711 Q ,024 Q ,472 Q ,921 Q ,070 Q ,844 Q ,185 Q ,672 Q ,281 Q ,044 Q ,014 Q ,275 Q ,164 Q ,236 Q ,352 Q ,635 Q ,597 Q ,083 Q ,540 Q ,916 Q ,163 Q ,091

8 4 STOCK PERFORMANCE XIII. Comparative Category Total Annual Returns U.S. Shareholder-Owned Electric Utilities, Value of $100 invested at close on 12/31/ /31/ /31/ /31/ /31/2012 6/28/2013 EEI Index Regulated Mostly Regulated Diversified EEI Index Annual Return (%) EEI Index Cumulative Return ($) Regulated EEI Index Annual Return Regulated EEI Index Cumulative Return Mostly Regulated EEI Index Annual Return Mostly Regulated EEI Index Cumulative Return Diversified EEI Index Annual Return Diversified EEI Index Cumulative Return mo Calendar year returns shown, except where noted. Returns are unweighted averages of constituent company returns. 2008/2009 threw all markets into turmoil. The year-to-date period has been quite unusual, as market gains through May fueled by massive support from the Federal Reserve s quantitative easing program and augmented by Japan s even more vigorous experiment with exceedingly loose monetary policy under new Prime Minister Shinzo Abe were led by defensive, dividend-paying sectors such as utilities, healthcare, consumer staples and telecom services. Strong market advances are usually led by economically sensitive cyclical sectors, as investors anticipate that strengthened economic activity will lead to broad-based earnings gains. Indeed, utility shares surged 20% from the start of the year through mid-may, then sharply dropped 13% through late June when talk by Federal Reserve officials hinted the central bank may taper its quantitative easing program if economic data improves. While Fed statements indicated no substantive policy change, the mere thought of a reduction in monetary support for markets was enough to cause a spike in interest rates, as the yield on the 10-year Treasury Bond jumped from 1.6% in early May to 2.6% by late June. XIV. EEI Index Top Ten Performers (Year to Date) For the 6-month period ending 6/30/2013 Company % Return Category Black Hills Corporation 36.4 R NV Energy, Inc R CenterPoint Energy, Inc MR ALLETE, Inc R MDU Resources Group, Inc D OGE Energy Corp MR NextEra Energy, Inc MR Cleco Corporation 17.8 R Vectren Corporation 17.4 MR NorthWestern Corporation 17.1 R Note: Return figures include capital gains and dividends. R = Regulated, MR = Mostly Regulated, D = Diversified Source: EEI Finance Department

9 STOCK PERFORMANCE 5 The EEI Index s quarterly results convey a similar pattern returning 13.3% in Q1 then -2.2% in Q2 but the data alone doesn t reveal the considerable volatility during the period. Macro Forces Dominate The first half of 2013 amplified a theme that has characterized utility stock performance since the financial crisis: broad-based global macroeconomic trends, such as changes in commodity fuel prices, interest rates and the pace of economic growth, have governed the movement of share prices more than any significant change in industry fundamentals, which are fairly slow to evolve given the industry s focus on regulated business models and the mostly predictable nature of electricity demand growth. Indeed, the industry s multi-year migration to an increasingly regulated structure continued in At yearend, EEI s group of regulated companies (where more than 80% of assets are regulated) totaled 37 of a total 56 companies, while the Mostly Regulated group (50% to 80% assets are regulated) totaled 17. The Diversified group (less than 50% of assets are regulated) fell to only two companies, one of which (Energy Futures Holdings) is privately held. The figures at year end 2005 were Regulated (33 of 68), Mostly Regulated (24 of 68) and Diversified (11 of 68), illustrating both the magnitude of structural change in the industry over the past eight years as well as the impact of M&A and buyout activity on the total number of companies. The reduction in the number of Diversified companies to only one publicly traded stock makes category returns less indicative of trends within the industry than they used to be. During the first half of 2013, the Regulated and Mostly Regulated categories showed fairly similar returns of 13.0% and 15.8%, respectively, in Q1 and 0.4% and -3.4% in Q2, while the Diversified s two positive returns, 15.0% and 7.6%, were all derived from sole constituent MDU Resources. The company s oil business benefitted from increased production at its Baaken and Paradox basin properties and its construction services business grew its contract backlog. Both developments prompted stock upgrades by Wall Street analysts and supported a rally through quarterend that defied late-quarter weakness among most other utilities. Slow Demand Growth Persists The first half of the year brought an extension of another key industry trend slow end-user electricity demand growth. While a cold March, when heating degree days were 11% above the historical average, helped power a 3.3% rise in electric output during Q1 (for the lower 48 states), output fell 2.2% in Q2, bringing growth during the year s first half to just 0.5% year-to-year. Due to a combination of energy efficiency measures, the decline in industrial output as a contributor to U.S. economic growth and a slow-growth economy, nationwide power demand has shown no growth since 2007, when U.S. electric output was 4,100,611 gigawatthours. Output has declined slightly in each of the past three years, falling to 3,995,885 gigawatthours in 2012 from 4,065,051 in 2011 and 4,090,200 in The industry s forward looking expectation is only a modest 0% to 1% overall growth rate, with variations across different regions of the country tied to local economic trends and weather, a marked slowdown from the higher-single-digit growth that characterized much of the last several decades. Little Relief for Competitive Generation Natural gas spot prices, an important factor that has shaped power prices and industry fortunes in recent years, showed some strength during Q1, rising from $3/mm BTU to near $4/mmBTU by quarter end, but then held around $4 through the end of Q2. And the natural gas futures curve showed no net change from yearend 2012 to the end of June. There was little relief for competitive generators, who are suffering from a multi-year decline in natural gas prices that has eroded power prices in many competitive markets. Combined with stagnant demand and generally adequate reserve margins nationwide (with the exception of the Texas market, where analysts see demand growth and opportunities for generators with a footprint there), the year s first half brought no evidence of impending change in competitive market trends. The bearishness was reinforced by weak capacity auction pricing in the PJM Regional Transmission Organization (RTO) auction in May, where pricing for some locations fell by more than 50%, driven down by weak demand and significant new natural gas plant additions in recent years. A strong rise in wind power production has also had an impact, pushing off-peak capacity needs and pricing down as wind production is strongest at night and is supported by the production tax credit. The weak PJM auction was cited by many analysts as a factor that compounded the June sell-off in utility shares, weighing on those with merchant exposure to the region. Rate Base Growth Pauses Slow demand growth and adequate capacity across most of the country is taking a toll on the industry s formerly torrid pace of capex and rate base growth. EEI s latest projections for industry capex anticipate a slowing from $95.3 billion in 2013 to $92.0 billion in 2014 and to $85.0 billion in Many analysts have ratcheted down slightly their expectation for earnings growth by regulated utilities, although they still expect that many are capable of low- to mid-single-digit gains in both earnings and dividends.

10 6 STOCK PERFORMANCE A review of consensus analyst estimates for the 50 publicly traded EEI Index companies confirms that general outlook. The average revenue growth across the industry (calculated as an arithmetical average of analyst projections, not accounting for market capitalization) shows projected growth of 4.6% in 2013 slowing to 3.0% in The average projected five-year earnings growth rate for the industry is 4.3% as of mid July, ranging from small single-digit declines for some utilities exposed to weak prices for competitive generation to as high as 7% to 8% for companies undertaking relatively strong capital investment programs and/ or benefitting from supportive regulatory outcomes in recent rate cases. Carbon Capture: Extending the Capex Cycle? In recent years, there has been a general expectation across the industry that widespread public and political concern over global warming would eventually lead to some form of nationwide CO 2 regulation, and President Obama made this a second-term priority with a policy speech delivered in late June in which he called on the Environmental Protection Agency (EPA) to develop measures to reduce greenhouse gas emissions under the authorization provided by the Clean Air Act. It s possible that a future carbon remediation regime will eventually require significant investment in carbon capture and storage technologies, but it will take several years before mandated requirements are clear. The president s directive sets a time frame of June 2014 for the EPA to develop proposed standards for existing plants, with finalization of standards targeted for June 2015 (a goal was set to propose rules for new plants by September of this year). There appeared to be little about the president s plan that wasn t consistent with general expectations on the part of the industry and Wall Street analysts. And it is not until late in the decade that final rules in whatever form they ultimately take would go into effect. As a result, the speech had little impact on the current or even medium-term outlooks for utility stocks; other forces impacting industry fortunes will likely have a far stronger role in shaping stock price changes over the next few years. Yet it s fair to note that the financial burden of longer-term investment stemming from carbon regulation will fall most heavily on competitive coal generators, which cannot finance capital spending in regulated rate base and run the risk that market forces could make such investment un-economic. And given the myriad forces at play from economic growth, fuel price changes, technological change that may effect electricity usage patterns, movement of interest rates, to name just a few any predictions as to the ultimate impact of CO 2 regulation on the industry s stock prices would be speculation. Share Valuations Give Mixed Messages The Federal Reserve s relentless support of the financial system through near-zero short-term interest rates and its suppression of long-term yields through purchase of Treasury bonds and mortgage-backed securities has held interest rates at multi-decade lows since the financial crisis. Whether the May-June rate spike marks the first stage of an inevitable bear market for bonds, with a prolonged period of rising rates, remains to be seen. But there s no doubt that historically low market yields have distorted traditional regulated utility valuation metrics. Analysts observed that the 20% jump in utility share prices through early May brought utility PE ratios, based on 2014 earnings, to their highest premium relative to the S&P 500 since the 1960s a rich 25%. And when the utility industry s approximate 4% dividend yield is compared against the S&P 500 s 2% yield, utilities also look pricey; analysts note utility dividend yields would have to climb to 5% (meaning share prices would have to fall) to bring the difference back to its historical average. Of course, such metrics aren t precise indications of fair value at any point in time market trends can take stocks away from fair or historically average values for extended periods but they do serve as rough indicia of valuation patterns. On the other hand, compared to today s very low corporate bond yields utilities are decidedly cheap, with dividend yields only 1.5% below BBB corporate bond yields versus a historical average of about 3%. This means either utility shares can rise (reducing yields and increasing the gap to more normal levels) or bond yields can rise (meaning dividend yields and utility stock prices might remain stable even in an environment of rising rates). Industry balance sheets are sound, dividends appear to be generally safe and supported by healthy business fundamentals, and the industry s regulated focus offers long-term stability in an uncertain economy. Utility investors get dividend growth potential in addition to favorable tax treatment relative to bonds, an attractive mix for investors willing to assume the share price risk. Utility stock price trends in the immediate future will probably mirror those of the past few years. Utilities will likely do better than the broad market if economic growth stalls, interest rates fall and the fears that stalk markets return whether in the form of instability in Europe, slowdown in China, or eruption of geopolitical risks in emerging markets such as Brazil, Turkey or in the Middle East. Conversely, if all is quiet on the risk front and confidence in economic growth strengthens, interest rates will likely continue to rise. Whether that means utility shares fall remains to be seen, but they will probably lag the performance of other sectors when bullish sentiments dominate markets.