Americans' heating bills could surge this winter. What that means for utility stocks

Published Sun, Oct 17 20218:33 AM EDT

Jesse Pound @/in/jesse-pound @jesserpound

The spike in natural gas prices may lead to higher power bills for Americans this winter, but that is not necessarily a good thing for utilities companies, according to Wall Street analysts. European natural gas prices surged over the past month as countries across the Atlantic grappled with a supply shortage. The U.S. market has seen a smaller, but still substantial, rise, with natural gas futures climbing from $4.38 per one million British Thermal Units at the end of August to north of $6 earlier this month. The good news for customers is that utilities often hedge their power source costs, so a scary spike in natural gas prices will likely only impact bills if it is sustained, said Sophie Karp, an equity research analyst at KeyBanc Capital Markets. Still, the U.S. Energy Information Administration said on Wednesday that it expected U.S. households to pay 30% more for natural gas this year than in 2020. The increases for propane and heating oil were even higher. And, given the way that utility bills work in the United States, that will hit customers directly. "For regulated utilities commodity costs are a 'pass-through' to customers without a profit margin but there are indirect implications. Higher bills reduces the bill headroom or 'wallet share' available for utilities to invest in rate base that generates earnings," Bank of America analyst Julien Dumoulin-Smith said in an Oct. 5 note. The damage to utility stocks, on the other hand, is more indirect. When prices rise, the higher costs can anger customers and politicians and "crowd out" the fundraising need to fund infrastructure improvements, which need to be approved by regulators, Karp said. "You can only push the envelope so far. And if the customer bills begin to increase significantly faster than historical norm or than inflation … something will have to give," Karp said. Utilities, which often pay healthy dividends, can also be threatened by rising interest rates. Higher rates can lead to higher costs that again put upward pressure on customer bills, Karp said, while also making the dividends less attractive. So, what should investors who want to buy utility stocks examine in picking companies? Bank of America suggested looking for companies with low customer bills and high approval ratings, calling neutral-rated Xcel Energy at "clear standout" in this regard. Looking for utilities with varied energy sources, and therefore less reliance on natural gas, could also be a smart strategy, the firm said. On the other hand, utilities with high customer bills relative to their customer populations could struggle. Bank of America highlighted Eversource Energy as a utility with high cost and low customer satisfaction. Karp said geography also plays a role. "Northeast utilities would be in the toughest spot because the northeast historically has higher prices, and it's further away from all the pipelines and the producing regions, so the gas differentials are pretty wide going into New England," Karp said. KeyBanc upgraded CenterPoint Energy , whose customer base includes parts of Louisiana and Texas, to overweight last month. The overall outlook for utility stock is mixed among Wall Street pros. Here are the stocks with the highest approval rating among analysts, according to FactSet. -CNBC's Michael Bloom contributed to this report.

Steam rises from the cooling towers of the coal-fired power plant at Duke Energy's Crystal River Energy Complex in Crystal River, Florida, U.S., March 26, 2021.

Dane Rhys | Reuters

The spike in natural gas prices may lead to higher power bills for Americans this winter, but that is not necessarily a good thing for utilities companies, according to Wall Street analysts.