President-elect Donald Trump speaks during an event to discuss his economic plans at the Detroit... [+]
Republicans’ promises of massive federal spending, tax cuts and an unprecedented rollback of regulation have pushed the stock market to new highs since election night. Utility stocks, however, initially sold off amid fears that President-elect Donald Trump’s policies will stoke inflation and put the brakes on renewable-energy development.
Never mind that the primary argument against utility stocks in recent years has been that adoption of distributed solar power would push incumbent power producers into a death spiral—a sensationalist claim that hasn’t been borne out (see Barron’s Bashes Utility Stocks for All the Wrong Reasons), and as we’ve pointed out repeatedly, the Dow Jones Utility Average historically has exhibited scant correlation to interest rates over the long term; earnings and dividend growth ultimately drive returns for the sector.
If the federal government’s policies under President-elect Donald Trump accelerate economic growth, utilities will benefit. With utility stocks trading at elevated valuations heading into the final day of the election, these developments gave investors an excuse to rotate out of this defensive sector, but investors shouldn’t mistake the selloff in utility stocks as a sign of deteriorating fundamentals or challenges created by the election.
In fact, many of the ballot initiatives and gubernatorial elections that we identified as meaningful for electric utilities in Focus on Policy, Not Politics and Election 2016: What’s at Stake for Utility Stocks? worked out in the industry’s favor.
Changes in which party controls three, and possibly four, governors’ mansions promise to improve formerly contentious regulatory environments. And voters rejected rooftop solar-power companies’ campaign to shake up the Arizona Corporation Commission. At the federal level, utilities would also benefit from reduced corporate taxes, relaxed regulation and government spending on infrastructure.
Questions remain about what policies President-elect Donald Trump will enact, but the election results have enhanced utilities’ capacity to build wealth for shareholders over the next three to five years—and their stocks will be better buys than ever when valuations come down a bit more.
For the companies in our coverage universe, most of their contact with the federal government involves four regulatory agencies: the Federal Energy Regulatory Commission (FERC), the Federal Communications Commission (
Federal Regulation: Gas & Power
FERC, the FCC and the NRC are large organizations where policies are set by a board of five commissioners who serve staggered terms. By law, the president can appoint three board members from his or her own party and two from the opposition. The US Senate then confirms these appointees for multiyear terms.
Under President Obama, the Democrats had operational control of the boards of these agencies and set the agenda. Under President-elect Trump, Republicans will determine the priorities. Change, however, may come more slowly than most expect.
Although the new president will be able to name a new FCC, FERC and NRC chairman immediately, the current commissioners can serve out their terms if they so desire. FCC Chairman Tom Wheeler, for example, still has a couple years left in his term, even if he is replaced as chairman, and thanks to the gridlock between the White House and Congress over the past two years, these regulatory agencies have an unprecedented number of vacancies. FERC’s five-member board, for example, currently has three Democrats and no Republicans. And Chairman Norman Bay’s term won’t expire until mid-2017.
President Trump will have many regulatory appointments to make. However, a single senator can block a nomination without providing a reason for his or her opposition; these commissions could remain understaffed until well into a Trump presidency, especially when you consider the number of higher-priority positions that will take precedence.
In fact, FERC could wind up with only two commissioners on its board at some point next year. Since their inception, FERC and the NRC have operated as nonpartisan agencies where policies have built on the work of previous administrations.
Under President Obama, the NRC followed the path treaded by George W. Bush’s appointments and supported the relicensing of most nuclear power plants based on evidence that they can continue to run safely and efficiently. The NRC also supported the development of new nuclear power plants under the previous two administrations.
As the primary federal regulator for electric power and gas transmission, FERC pushed for improved regional grid integration through President George W. Bush and President Barack Obama’s two terms in office. FERC generally has approved utility and midstream mergers and acquisitions expeditiously and without imposing restrictive conditions.
And under Bush and Obama, FERC consistently granted utilities higher returns on equity than the rates approved by state regulators. This observation still holds true even after some reductions to the allowed returns for utilities serving New England and the Midwest. FERC also routinely approved the construction of new pipelines and high-voltage transmission lines, often despite fierce local opposition. In fact, the only projects to fall by the wayside involved questionable economics or encountered stiff opposition at the state and local level.
Bottom Line: Sweeping changes at FERC or the NRC are unlikely under a Trump administration, but some individual projects that previously encountered opposition at the federal level could prove to be exceptions.
Energy Transfer Partners LP’s (ETP) stock price surged after the election, as investors bet that the stalled Dakota Access pipeline would move forward with Donald Trump in the White House. This joint-venture project will transport crude oil from North Dakota to the Gulf Coast.
Unfortunately, completing this pipeline isn’t the only challenge facing the master limited partnership (MLP), which had counted on the cash flow from this project and the sale of some of its interest in the asset to cover its distribution and fund future growth projects. Energy Transfer Partners LP generated enough cash flow to cover 82 percent of its distribution in the third quarter. Nine-month distribution coverage came in at 0.87-to-1.
TransCanada Corp (TRP) likewise could benefit if the president-elect lives up to his promise to approve the Keystone XL pipeline’s cross-border leg, a project shelved by the Obama administration. The Canada-based midstream giant is ready to start construction. Although the pipeline will entail higher costs than when it was first announced, the project should still be immensely profitable.
Unlike Energy Transfer Partners, TransCanada doesn’t need the Keystone XL pipeline to deliver on its guidance for 8 to 10 percent earnings and dividend growth through 2020.
New blood at FERC could also accelerate the approval process for
A new administration in Washington could also change the level of enforcement by these various regulatory agencies.
For example, FERC is investigating Dominion Resources for releasing electricity into the PJM (Pennsylvania, Jersey, Maryland) grid from April 2010 to September 2014. The probe probably won’t saddle the utility with material financial penalties, but the inquiry suggests that FERC has taken an aggressive tack to enforcing the rules in wholesale-power markets.
At the Edison Electric Institute’s recent financial conference (see my key takeaways and best investment idea from this event), several utility executives articulated a desire for fewer of these enforcement actions, if not an overhaul of how regional transmission operators run. A new balance of power in FERC could push the regulatory agency in this direction.
Such a development would provide some much-needed good news for Dynegy (DYN),
Although more of a hands-off approach from FERC would be an incremental positive, these companies face much bigger challenges, including low natural-gas prices and state-mandated expansions of renewable energy—two trends that will continue to weigh on wholesale-electricity prices.
Among companies with exposure to wholesale-power markets, we prefer Conservative Income Portfolio holding
Exelon could also benefit if the NRC opts to take a hands-off approach, though
Given the technical issues and potential dangers associated with nuclear power, the NRC likely will remain outside the political fray. But an administration that owes nothing to New York’s Democratic governor may be more willing to break the logjam on Indian Point.
The relicensing of this nuclear power plant would remove a cloud that’s dogged Entergy’s stock for several years and potentially make it easier for the company to divest its reactors in the Northeast—or negotiate an amicable deal with Gov. Cuomo to shut down Indian Point.
Next year, the NRC will rule on Entergy’s plan to sell its shuttered Vermont Yankee nuclear power plant, a deal that will eliminate the financial risk associated with decommissioning the facility.
A favorable outcome on both scores could enable Entergy to accelerate its dividend growth and prompt a re-rating of the stock. Meanwhile, Entergy stands to benefit from ample investment opportunities at its regulated franchises and favorable demographic trends that continue to drive demand growth in its service territory.
