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Quarter-End Insights

Our Outlook for the Utilities Sector

Merchant generation is back in vogue.

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Although we still appreciate the relative safety of regulated utilities compared with their unregulated peers, our outlook for the latter group has improved significantly over the past year given recent industry dynamics. High commodity prices combined with generation capacity growth that has failed to keep pace with persistently increasing power demand have brought the good times back to the merchant generation business. The excess supply glut of five years ago, brought on by too many natural-gas-powered initiatives to increase capacity, appears to have all but evaporated, which has endowed the industry's survivors with plentiful cash flows of late. Additionally, several factors have aligned that have led us to believe that the next few years could be even better for this once-battered subsector of the electric industry.

Paul Justice does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.