Positioning for the Future with Utilities

Monday, June 15, 2020

Positioning for the Future with Utilities

Summary:

  • We expect the growth of renewable energy to be a multi-year tailwind for utilities companies.
  • The EIA estimates that nearly 75% of US power generation will be from the combination of cleaner-burning natural gas and renewable power sources by 2050.
  • Utilities are deploying capital on natural gas and renewables projects to position for the future.
  • This growth trajectory—away from coal towards renewables and natural gas power generation—is reinforced by public opinion and regulatory support.

We expect the growth of renewable energy to be a multi-year tailwind for utilities companies.

In its Annual Energy Outlook 2020, the US Energy Information Administration (EIA) said it expected electricity generation from renewables to surpass coal in the coming years, and it estimated that nearly 75% of US power generation will be from the combination of cleaner-burning natural gas and renewable power sources by 2050.1 In fact, the EIA reported that we already saw renewables surpass coal in May 2020.2

EIA expects U.S. electricity generation from renewables to soon surpass nuclear and coal ►


Electricity from Renewables

Source: US Energy Information Administration (EIA), Monthly Energy Review May 26, 2020


The coal to natural gas and renewables switch is still in the early innings, and we see a significant growth opportunity for utilities in renewables, in particular.

Notably, the growth trajectory is reinforced by public opinion and regulatory support:

  • 26 states have green house gas emissions targets—and 65% of the US population resides in these states
  • 29 states have adopted the Renewable Portfolio Standard
  • 11 states have a 100% clean energy goal or mandate—these are long-term targets, typically ranging from 2040-2050

While commitment levels and timetables vary, we think, in aggregate, these initiatives will provide a tailwind for the utilities space.


Natural Gas and Renewables map

Source: UCLA Luskin Center for Innovation; Center for Climate and Energy Solutions; Miller/Howard Research & Analysis, 2019


Clearly, this transition will require significant capital deployment from utilities companies. Utilities do have to balance capital deployment plans against the impact on consumer bills, but utilities have also stated that they have huge backlogs of potential projects. As a reminder, in the utility model, rate-base growth puts upward pressure on consumer costs, but we believe these prospects for growth put certain utilities in an enviable position today.


Thermal Coal Power Generation

Based on Utilities Plus holdings as of May 11, 2020 and last-reported Sustainalytics data for coal power generation.
Source: Sustainalytics; Miller/Howard Research & Analysis


We believe the Miller/Howard Utilities Plus portfolio is poised to capture this opportunity. According to Sustainalytics, 85% of the companies in the portfolio have less than 25% involvement in coal power generation, so we do not have significant concerns about stranded assets as coal plants are retired. Meanwhile, we see the companies in our portfolio focusing their capital deployment on natural gas and renewables projects to position for the future.

Source:
1. https://www.eia.gov/todayinenergy/detail.php?id=42655#:~:text=In%20the%20latest%20long%2Dterm,surpass%20natural%20gas%20in%202045.

2. https://www.eia.gov/todayinenergy/detail.php?id=43895


Bryan J. Spratt, CFA, focuses on utilities, telecommunications, and energy stocks. Before joining Miller/Howard in 2004, Bryan worked as an analyst and portfolio manager in investment subsidiaries of Comerica Bank and Munder Capital Management, where he was a member of the energy and power team. Prior to that, Bryan was at Banc One Investment Advisors and the One Group Funds where he was responsible for utilities and telecom for the value team. He graduated summa cum laude from Spring Arbor College with a BA in Economics/Computer Science.

Adam Fackler, CFA, focuses on utilities, telecommunications, and midstream energy including master limited partnerships (MLPs). Prior to joining Miller/Howard in 2016, Adam spent 10 years at Rodman & Redshaw and KLR Group, focusing on MLPs, and at MLV & Co., covering exploration & production companies and MLPs. Adam holds a BS in Business Administration with a minor in Economics from Bucknell University. 

INVESTMENT PRODUCTS: ARE NOT FDIC INSURED - MAY LOSE VALUE - ARE NOT BANK GUARANTEED

Opinions and estimates offered constitute Miller/Howard Investments' judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. Nothing stated herein, including the mention of specific company names, should be construed as a recommendation to buy, hold, or sell any security, sector, or MLPs in general. All investments carry a certain degree of risk, including possible loss of principal. It is important to note that there are risks inherent in any investment and there can be no assurance that any asset class will provide positive performance over any period of time. The material may also contain forward-looking statements that involve risk and uncertainty, and there is no guarantee they will come to pass.

Common stocks do not assure dividend payments. Dividends are paid only when declared by an issuer’s board of directors, and the amount of any dividend may vary over time. Dividend yield is one component of performance and should not be the only consideration for investment.

The information above is from sources deemed to be reliable and is provided strictly for the convenience of our investors and their advisors. These materials are solely informational. Legal, accounting and tax restrictions, transaction costs, and changes to any assumptions may significantly affect the economics of any transaction.

The information and analyses contained herein are not intended as tax, legal, or investment advice and may not be appropriate for your specific circumstances; accordingly, you should consult your own tax, legal, investment, or other advisors, at both the outset of any transaction and on an ongoing basis, to determine such appropriateness. Any investment returns — past, hypothetical, or otherwise — are not indicative of future performance.

Investment Decisions: Do not use this report as the sole basis for investment decisions. Do not select an allocation, investment discipline, or investment manager based on performance alone. Consider, in addition to performance results, other relevant information about each investment manager, as well as matters such as your investment objectives, risk tolerance, and investment time horizon.

Past performance does not guarantee future results.

© 2020 Miller/Howard Investments.

DISCLOSURE

INVESTMENT PRODUCTS: ARE NOT FDIC INSURED - MAY LOSE VALUE - ARE NOT BANK GUARANTEED

Opinions and estimates offered constitute Miller/Howard Investments' judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. Nothing stated herein, including the mention of specific company names, should be construed as a recommendation to buy, hold, or sell any security, sector, or MLPs in general. All investments carry a certain degree of risk, including possible loss of principal. It is important to note that there are risks inherent in any investment and there can be no assurance that any asset class will provide positive performance over any period of time. The material may also contain forward-looking statements that involve risk and uncertainty, and there is no guarantee they will come to pass.

Common stocks do not assure dividend payments. Dividends are paid only when declared by an issuer’s board of directors, and the amount of any dividend may vary over time. Dividend yield is one component of performance and should not be the only consideration for investment.

The information above is from sources deemed to be reliable and is provided strictly for the convenience of our investors and their advisors. These materials are solely informational. Legal, accounting and tax restrictions, transaction costs, and changes to any assumptions may significantly affect the economics of any transaction.

The information and analyses contained herein are not intended as tax, legal, or investment advice and may not be appropriate for your specific circumstances; accordingly, you should consult your own tax, legal, investment, or other advisors, at both the outset of any transaction and on an ongoing basis, to determine such appropriateness. Any investment returns — past, hypothetical, or otherwise — are not indicative of future performance.

Investment Decisions: Do not use this report as the sole basis for investment decisions. Do not select an allocation, investment discipline, or investment manager based on performance alone. Consider, in addition to performance results, other relevant information about each investment manager, as well as matters such as your investment objectives, risk tolerance, and investment time horizon.

Past performance does not guarantee future results.

© 2020 Miller/Howard Investments.