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2 Electric Utilities With Bright Prospects

Travis Miller

Travis Miller: We recently took an in-depth look at where electricity demand in the U.S. is headed over the next two decades. Although low interest rates remain a key factor in near-term tailwind for the sector, long-term fundamental demand growth is what concerns us the most.

We think electric demand in the U.S. will grow at 1.1% annually over the next 15 years. That's half the rate of the GDP estimates that we've used, and it's well below the 4% annual growth rate in the U.S. since 1949 when data collection began.

Energy efficiency at the residential and commercial level, especially energy-efficient lightbulbs and appliances, are the key factor. Also energy intensity shrinking at the industrial level is a key factor that's going to depress demand. Electric vehicles, despite all of the attention they've gotten, take so little electricity to charge they are not going to be the savior for electricity demand.

Although slowing demand is bad for most utilities in the sector, we think there are two utilities that stand out that can either benefit from above-average demand growth or benefit from constructive regulation and energy efficiency moves among residential and commercial customers.

First is wide-moat Dominion Resources. This utility is positioned in Virginia, where we think it's going to be one of the highest-demand growth regions. It's also investing in wide-moat projects for transmission and distribution and gas and electric.

The second is Edison International based in California. Edison is investing $4 billion per year to promote and support energy efficiency and distributed generation among its California customers. We think that this will drive 7% earnings and dividend growth for the foreseeable future.