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Clean-Air Regulation Has Silver Lining for Utilities Stocks

Charles Fishman, CFA

Charles Fishman: Climate change has been a front-page topic recently. At Morningstar, we believe investors need to be selective in how they look at the issue to determine who are the winners and losers as our country addresses carbon dioxide emissions.

One misconception that we commonly see at Morningstar is investors who think that just because a utility has a coal-fired plant it will be hurt by this regulation. We think it is helpful to look at the past and to see what happened when other air-pollution regulations were addressed. Specifically, when the Clean Air Act amendments were passed, utilities had to address sulfur dioxide emissions, which are the primary cause of acid rain. They invested hundreds of millions of dollars on scrubbers. Regulators, however, allowed a return on these investments, and utilities, by increasing rates, were able to grow earnings and grow their dividends.

Two regulated utilities that have experienced favorable regulation in the past are Southern Company and Wisconsin Energy. Southern has one of the largest coal-fired power plant fleets in the country, operating in Georgia, Mississippi, and Alabama. Wisconsin Energy, as its name implies, operates in Wisconsin.

Both companies received favorable regulatory decisions in the past. We expect them to receive favorable decisions as they address and invest to reduce their amount of carbon dioxide emissions. Both companies offer attractive yields. They've paid dividends for decades. We expect them to increase those dividends over the next few years, in part due to the potential investments they will have to make to address carbon.