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posted on 15 April 2017

Clean-Air Reversal: Wires Rise Above The Fray

by Richard Stavros

Investing Daily Article of the Week

Wires utilities are shaping up to be the best investments for conservative, long-term income investors.

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These companies focus on transmitting and distributing electricity, not generating it. And that keeps them largely insulated from the current political infighting over energy policy.

Consequently, they are largely indifferent to whether federal policymaking favors fossil-fuel generation or incentivizes renewables.

This relative neutrality is an important consideration for income investors, since politicians in both parties have failed to find a middle ground on energy policy. Instead, they've endlessly shifted between extremes, thereby killing some utilities' value proposition for investors.

In the latest such shift, last week President Trump signed an executive order to reverse the Obama administration's most far-reaching climate regulations, including the Clean Power Plan. Trump also proposed spending that would cut the Environmental Protection Agency's budget by 31%.

Nevertheless, most utility executives, who think in terms of decades and not political cycles, have said they will continue to develop renewables. Meanwhile, many state regulations continue to promote green energy, while some states are pushing for even more aggressive mandates to counter actions at the federal level. As such, the effect of Trump's policies on renewables will likely be limited.

As our colleague Robert Rapier, who runs our sister publication The Energy Strategist, recently observed, Trump's policies will only slow the transition from coal to cleaner-burning natural gas and renewables. And Trump can't stop the secular decline of the coal industry since that's primarily due to energy-market dynamics, not federal policymaking.

These details are important because just about every power utility has touted some form of renewables development as part of its growth plans.

At the same time, I wouldn't put too much faith in the promises of utility CEOs to stand firm on policy, as many utilities have become political creatures over the years. And that actually gives utility investors another reason to favor wires companies over diversified utilities.

The Politics of Fanning

An excellent example of a utility executive as a political animal is Southern Company (NYSE: SO) CEO Tom Fanning.

I was stunned to hear that Fanning recently expressed skepticism during a CNBC interview regarding carbon emissions being the main cause of climate change. That's because just three years ago Fanning was echoing Obama's climate policies at an investor conference.

Back in 2014, Fanning was promoting Southern's "All of the Above" strategy, which refers to President Obama's past comments on promoting all energy resources, including renewables.

Fanning proudly noted:

"Southern Company is the only company in America, I'm proud to say, engaging in the full portfolio. We're building new nuclear. We're building 21st-century coal. We made an enormous shift in natural gas. We are the fifth-largest solar company. We do wind. We run the largest biomass plant. And we're a leader in energy efficiency."

But I don't mean to single out Fanning. His approach is par for the course for many in the industry. I've witnessed a number of utility executives abruptly reverse their positions over the years when a new party controlled the White House, Congress, or the governor's mansion.

Furthermore, there's also a huge generational divide among utility executives, with much of the old guard likely happy to revert to the fossil fuel-driven monopoly that was the model when they started their careers.

So it could take another 20 years for a new generation of senior executives to push the sector toward a high-tech, clean-energy model.

But the problem now is that in the absence of such leadership, investors must deal with shifting energy policies and utilities' changing allegiances.

Widows & Orphans First

For too long, retirees have had to accept uncertainty from an industry that was previously synonymous with safety. Prior to the policy experiments of the past 20 years, utilities were known as widows-and-orphans investments.

First, there was the push toward deregulation, which culminated in the Enron debacle. Then came sweeping environmental mandates to address climate change. Regardless of the merits of these policies, the regulatory compact shouldn't mean that income investors must endure utilities being the playthings of politicians.

And I don't think a retiree who depends on utility dividends for income should have to worry about which party controls the government.

That's why the most conservative income investors should pick utilities whose business model doesn't depend on which party occupies the White House. And those are the wires companies, which are the ultimate successor to the widows-and-orphans investments of yore

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