3 Utilities at Risk

As the Biden administration pushes its American Jobs Plan and clean energy agenda, utilities will be cast in a leading role. Utilities in constructive regulatory environments with timely cost recovery and attractive returns on investment have a big growth opportunity under President Joe Biden's ambitious plans. For those in less constructive regulatory environments, however, more investment could constrain cash flow and become a liability.

Eversource Energy is well positioned to benefit from the infrastructure investment that will be required as the Northeast moves toward a carbon-free energy mix. Offsetting this growth potential, however, is a challenging regulatory environment that we don't think the market appreciates. Connecticut has a long history of favoring customers over Eversource's investors. This is a key reason that Eversource is one of the few utilities we cover with no economic moat. We're hesitant to assign any incremental shareholder value to what we estimate could be $2 billion of offshore wind investment, given the regulatory, financial, and logistical hurdles that remain.

Xcel Energy is aiming to keep its lead as the largest renewable energy provider in the United States, but that will take a lot of support from regulators that haven't been particularly accommodating in the past. Xcel plans $24 billion of investment in 2021-25 across its eight-state service territory, including $18 billion in its largest service territories, Colorado and Minnesota. This large investment program means more regulatory risk than other utilities. Colorado regulators and politicians have been quick to support Xcel's plans to close coal plants and invest in renewable energy, but they haven't provided much financial incentive to fund those investments.

PG&E has no shortage of disgruntled stakeholders, including shareholders who lost two thirds of their investment through PG&E's 2019-20 bankruptcy. Meanwhile, PG&E is attempting one of the largest investment programs in the U.S. during the next five years, averaging $8 billion of annual investment. Most of this is directed to meeting California's clean energy and zero-carbon emission goals during the next two decades. But this level of investment also could mean large customer bill increases, which won't go over well with regulators if blackouts and wildfires like the last few years become a regular occurrence. The fate of PG&E's large natural gas system remains uncertain, too, given that some municipalities in and around PG&E's service territories are mandating reductions in retail natural gas use. PG&E's gas business could end up another large liability for shareholders.

Senior analyst Andy Bischof, analyst Charles Fishman, and strategist Travis Miller contributed the research behind this segment.