Utilities are a class of companies that provide essential services to the public. Also called public utilities, these companies fill an important segment of the economy. During the early part of the 20th century, utilities were mostly government-owned, however, ever since most of the utilities across the world have been privatized and are managed professionally. Nonetheless, governments play an important role in overseeing public utilities. Governments typically let utilities set prices within a band and let them pass on higher raw material costs to the public, but with a cap on the margins that can be earned. As such, public utilities usually have predictable cash flows and earnings and payout a consistent dividend.
Classification and operating model:
Public utilities work in slightly different models based on their country and region of operations. In the US, utilities can be broadly classified into Power generators, Power distributors, energy traders, and retail energy service providers including electricity, gas, and heating oil. Utilities are almost monopolistic within the area they operate with not more than two or three operating in the same area. This fact combined with limits on their profitability makes them provide services to the public at fairly stable prices. Utilities also require large amounts of upfront capital expenses to set up and maintain the infrastructure. They usually issue bonds to fund such expenses, and given they have predictable cash flows, utility bonds carry an investment-grade rating.
Let us look at some of the largest utilities in the US:
NextEra Energy, based in Florida, is one of the largest electric utility companies in the US. The firm has over 58 Gigawatts of power generation capacity and supplies power to over half of Florida. NextEra reported over $20 billion in revenues during the most recent year.
Based in Charlotte, North Carolina, Duke Energy Corp. is a major electric utility in the region. The company distributes power to households across Ohio, Kentucky, Indiana, South Carolina, North Carolina, and Florida. Duke reported $21 billion in revenues during last year.
Southern Company is a Gas and electric utility company based in Atlanta. The firm distributes electricity and gas to a wide swathe of the country. Southern Co. also operates renewable facilities including solar and wind power generation facilities across the US. The firm reported close to $24 billion in 2021 revenues.
American Electric Power Co. (AEP) is based in Ohio. The firm generates power and distributes electricity across more than 10 states. AEP also owns and operates one of the largest transmission networks in the country. AEP reported close to $9 billion in revenues last year.
Consolidated Edison Inc. (ConEd) is one of the largest utility companies in the US. Founded in 1823, it is also one of the oldest utility companies. ConEd distributes electricity across the New York metro area, and New Jersey. The firm reported close to $14 billion in 2021 revenues.
Source: Morningstar
Some of the largest non-US utilities that trade on the US markets include:
Enel Americas, based in Santiago Chile, is a holding company with generation and distribution businesses across the south and Central America, including Chile, Argentina, Panama, Colombia, and Peru. Its parent is the Enel S.p.A of Italy. Enel Americas reported close to $14 billion in 2020 revenues.
National Grid is an electricity and gas utility company based in London and operating across both the UK and North Eastern US. The firm owns and operates several major transmission networks in the UK. In the US, National Grid delivers power to Massachusetts, New York, and Rhode Island. The firm reported close to £15 billion in 2021.
Companhia de Saneamento Básico do Estado de São Paulo S.A, more commonly known as Sebesp, is a water and waste-management utility company based in Brazil. The firm provides water to households across the Sao Paulo region. It also provides sewage management across the region. Sabesp reported close to $4 billion in 2021 revenues.
Ultrapar Participações S.A., more popularly known as Ultrapar, is a conglomerate operating across fuel storage, fuel distribution, and specialty chemical businesses. Ultrapar is one of the largest players in the Brazil LPG market. The firm generated over $21 billion in 2021 revenues.
Source: Morningstar
Emerging Trends and the future of Utilities:
Some of the important trends that are likely to alter the utility sector include clean energy and global warming. The world is moving towards decarbonization and adopting alternatives to fossil fuels. The traditional power generation and distributing companies rely largely on coal and gas to generate power. Utilities are increasingly adopting wind, solar and other alternatives to fossil fuels. However, these involve additional capital expenses and are less predictable in terms of output compared to fossil fuel-driven generation.
The second major factor affecting utilities is the increase in extreme weather phenomena. One of the side effects of global warming is the prevalence of more violent tropical storms and more severe seasonal weather such as snowstorms, ice, forest fires, and hail. This leads to a breakdown in infrastructure and additional costs to repair. Catastrophe insurance premiums have also gone up because of a recent increase in violent weather.
Investment options:
Several individual stocks are available that are publicly listed utility companies. The sector in general is favored by investors seeking a steady dividend and want some defensive exposure in their portfolios. Directly investing in stocks is one of the ways to invest in this sector. However, ETFs offer an easier and well-diversified way to invest in a basket of utilities. Several ETFs are available that offer exposure to the US and global public utility market Some of the popular ones are, Utilities Select Sector SPDR Fund (XLU), Vanguard Utilities ETF (VPU), iShares Global Infrastructure ETF (IGF), FlexShares STOXX Global Broad Infrastructure Index Fund (NFRA), Fidelity MSCI Utilities Index ETF (FUTY).
Source: Morningstar
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