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Could Utility Stocks' Weakness Persist?

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Could Utility Stocks' Weakness Persist? PART 1 OF 4

Could Trump’s Tax Reform Hurt Utilities?

US utility stocks last week

President Trump unveiled his administration’s much-awaited corporate tax reform proposals last week. The reform, if approved by Congress, could bring down rates from 35% to 20%.

US utility stocks reacted negatively to the news, falling 1.3% on September 27, 2017, and 0.3% altogether last week. In comparison, the SPDR S&P 500 ETF (SPX-INDEX) (SPY) rose 0.7%.

Could Trump&#8217;s Tax Reform Hurt Utilities?

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Taxing utilities

Lower corporate income tax is likely to hamper utilities, as it would result in lower tax expenses and ultimately lower utilities’ rate recovery. Income tax is a major operating expense for utilities. The rates charged by utilities are designed to recover these operating expenses, with an additional rate of return on capital employed to provide those services.

Whereas large-cap utility NextEra Energy (NEE) rose marginally, Duke Energy (DUK) fell 0.4% last week. Utility stocks generally trade inversely to Treasury yields. Strength in Treasury yields, which rose to 2.2%–2.3%, likely impacted utilities last week.

The second-largest rate-regulated utility, Southern (SO), rose 0.7% last week. It recently received an additional federal loan guarantee of $3.7 billion for its Vogtle power plant, highlighting the government’s support for the country’s struggling nuclear generation. However, whereas the Vogtle nuclear plant was supposed to start producing electricity last year, according to recent estimates, production might not start until 2022. Also, the cost of this project rose beyond $25 billion recently, against the original estimate of $14 billion.

Another utility stung by struggling nuclear generation is SCANA (SCG). It was the biggest loser last week among S&P 500 utilities (XLU), falling 13%. For more about SCANA’s challenges, read How SCANA Dug a Hole in Investors’ Pockets.

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