Morningstar Names EPA Clean Power Plan Winners — And One Potential Loser

The Environmental Protection Agency's Clean Power Plan will make money for most electric utilities and their investors, who may be "laughing all the way to the bank," according to a report Morningtar just released to institutional investors.
Even coal dependent utilities will benefit as EPA forces them to invest in cleaner energy sources, while virtually assuring regulatory approval as they expand their businesses and raise rates.
"For the six utilities we highlight, parts of the CPP should enhance their competitive advantages, boost earnings growth and create shareholder value," write equity analyst Charles Fishman and utilities director Travis Miller in the February issue of Morningstar's Utilities Observer.
The Morningstar analysts predict:
• The EPA plan will force regulated coal-dependent utilities, like Southern Company and Duke, to expand, diversify, and increase rates, while incurring little opposition from regulators.
• The EPA's final plan will provide stronger support for existing nuclear plants than the current draft does, which will bolster the nation's largest nuclear utility, Exelon.
• The EPA plan depends on switching from coal generation to cleaner natural gas, which means stronger sales for wholesale power producers that operate gas plants, like Calpine.
• The EPA plan's reliance on natural gas will create opportunities for natural-gas transmission operations, like Dominion Resources.
• As new gas plants and wind farms come online, electric transmission systems will need to expand, benefitting companies like the Midwest's largest transmission owner, ITC Holdings.
While the Clean Power Plan spells hard times for companies that depend on coal, the Morningstar analysts believe those hard times have already been priced into the companies' stocks. Cheap natural gas has already reduced demand for coal, and other environmental regulations have already shut down the worst polluting and highest cost coal plants.
So Morningstar expects most coal-dependent utilities to fare no worse under the Clean Power Plan, some better:
"NRG Energy is one of the largest merchant coal plant owners in the U.S., but we think it is positioned to be a net winner. Its nuclear and natural gas plants should benefit and its largest, most efficient coal plants in Texas and the mid-Atlantic should thrive as coal prices fall, heat rates expand, and higher natural-gas demand drives higher costs for competitors."
However, the analysts warn of higher risks for one company, Dynegy, particularly if it goes through with plans to purchase coal plants that Duke is unloading in Ohio.
"Dynegy faces more risks, especially if it acquires Duke's Ohio coal plants," the analysts write. "Dynegy's Midwest coal plants already operate at high utilization rates and some would face closure risk. We doubt higher earnings from its large coal plants and gas fleet can offset the plant closures."