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Challenges, Opportunities for Utilities Under Trump

Challenges, Opportunities for Utilities Under Trump

Andrew Bischof: President Trump's election will present challenges and opportunities for utilities. The administration has been an outspoken advocate for natural gas and coal, which likely will keep gas and power prices low. We expect gas demand will continue growing, supporting infrastructure investment and earnings growth for many utilities. We think Dominion and Duke Energy will benefit the most from gas-related infrastructure growth.

We don't expect a resurgence in coal generation, as economics now drive the decision to burn natural gas over coal, rather than the additional costs from environmental regulation. Low gas and power prices will continue to make the economics challenging for both coal and nuclear generators, hurting utilities like Exelon.

Environmental regulations, notably the EPA's carbon-focused Clean Power Plan, will likely be challenged. This reduces risk for unregulated fossil-fuel generators like Dynegy, NRG, and Calpine. Calpine is trading at the lowest price to fair value in the peer group, and we believe its efficient natural gas fleet is positioned in a low natural gas environment.

We think renewable energy growth will continue despite the election rhetoric. State-level laws and regulations are driving most renewable energy investment, and we don't expect that to change. We also think it is unlikely to see a repeal of the renewable energy tax credits, as Republican representation in renewable-heavy Iowa and Nevada make Senate action challenging. Economics for renewables have also improved materially in the last decade, making the generation cost competitive in some regions. NextEra Energy is the best positioned for continued renewable growth.

What we view to be the most threatening to utility valuations is the potential rising interest rates given the administration's proposed economic policies and ability to control future policy through open Federal Reserve appointments. While utilities have consistently produced absolute total returns regardless of how interest rates move, utilities have underperformed the S&P 500 in a rising interest-rate environment.

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