5 Utility Stocks That May Win From the New EPA Carbon Ruling

Recent rulings on plant emissions of carbon dioxide by the Environmental Protection Agency (EPA) are proving to be a lot more stringent than originally thought. Worse for consumers is that if current estimates are correct, these changes will prove to be a lot more costly in the future. That is something that many of the most vocal opponents of the ruling warned would happen.

A new report from the utility analysts at Merrill Lynch finds that the EPA’s assumptions are actually very aggressive and could potentially be politically challenging to see come to fruition. They now also expect a considerable watering down of EPA’s carbon rule is more likely before finalization by June 2015.

They are positive on how the rule could affect, or at the minimum not prove to be a negative, for two of the firm’s stocks rated Buy. In the report, the analysts at Merrill Lynch also mention other companies in their coverage universe that should either not be affected by the new rules, or may actually find the ruling to be a benefit.

Calpine Corp. (NYSE: CPN) operates a mostly gas-fired fleet, predominantly in the PJM, which is a Regional Transmission Organization (RTO) in the United States. The company also serves Texas and California. The analysts at Merrill Lynch see the draft carbon rule as neutral to slightly positive for Calpine. The company posted very strong revenues and earnings last week. The stock is rated Buy at Merrill Lynch with a $26 target. The Thomson/First Call consensus target is $24.88. The stock closed Wednesday at $21.45 a share.

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Dominion Resources Inc. (NYSE: D) pulled in operating revenue of $3.2 billion for the recent three-month period, beating estimates by 4.8%. Although Dominion boosted sales, it kept less than expected as profit. Fourth-quarter adjusted earnings per share clocked in at $0.80, which was below analyst estimates. The Merrill Lynch analysts note that the company has little merchant generation, but its main growth driver is investment in gas gathering and processing assets, and the EPA bill may actually provide a tailwind. Investors are paid a 3.4% dividend. The Merrill Lynch price target is $75. The consensus estimate is $72. Dominion closed Wednesday at $64.91.

Entergy Corp. (NYSE: ETR) is rated Underperform, but the analysts view the company as the second-largest beneficiary of the ruling as the generation is largely nuclear. The analysts cite a smaller portion of equity value assigned to the merchant generation business and political opposition to its largest nuclear plant. Investors are paid a 4.1% dividend. The Merrill Lynch price target is $75, and the consensus target is $77.53. Shares closed Wednesday at $70.82.

Exelon Corp.‘s (NYSE: EXC) merchant generation fleet is also predominantly nuclear. Merrill Lynch sees Exelon as the largest beneficiary of the draft rule of companies under their coverage, given the substantial amount of equity value assigned to the merchant generation business. This is another stock rated Underperform at Merrill Lynch. Shareholders are paid a 3.4% dividend. The Merrill Lynch target price is $32, and consensus target stands at $33.93. The stock closed trading at $31.18.

Public Service Enterprise Group Inc. (NYSE: PEG) operates nuclear, coal, gas and oil-fired generation facilities with a generation capacity of approximately 13,226 megawatts. Roughly 40% of their merchant generation capacity is nuclear and 20% is coal, and the Merrill Lynch team thinks that the company will be a relative beneficiary of the draft rule. Investors are paid a 3.7% dividend. The Merrill Lynch price target for the Neutral-rated stock is $43. The consensus target is at $38.33. The stock closed Wednesday at $34.15.

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With so many people invested in utility stocks due to the long run of low interest rates, it is important to know what companies will be affected by what now appears to be a pretty harsh ruling. That said, the Merrill Lynch analysts feel that because of the huge political implications attached to this, there will be compromise in the final ruling, which is scheduled to take effect next summer.