Utility Sector's Positive Attributes

A combination of steady electricity price gains and stable-to-improving demand are helping the utility sector’s earnings power. The favorable demand backdrop is a function of the improving outlook for the U.S. economy, with recent readings confirming that growth has resumed in the current period following the weather-induced sub-par showing in Q1. Measures of labor market, housing and other areas have started showing strong momentum lately.

Utility companies are steadily improving the environmental impact of their operations by investing in more environment-friendly power generation facilities. Per a recent release from the U.S. government’s Energy Information Administration (EIA), 31 gigawatts (GW) of coal-fired generating capacity is projected to be retired and 4 GW converted to natural gas facilities between 2014 and 2016. The phasing out of coal-fired plants will largely be influenced by the need to comply with Mercury and Air Toxics Standards and exploit low natural gas prices.

The EIA also projects that the share of renewables to total electricity generation will rise from 13% in 2013 to 18% in 2040.

We believe a constructive rate environment, increase in electricity production from natural gas and renewables and investments in infrastructure upgrade projects will definitely enable the utilities to efficiently serve a larger customer base.

In the segments below, we discuss the basic strengths of the utility sector:

Stable & Growing Demand

The biggest positive as well as the fundamental strength of the utilities sector is that there is basically no viable substitute for their services. The endless need for electricity and utility services are driving the sector. This gives the revenues and cash flows a high level of certainty and visibility.

Regular Dividend & Share Buybacks

Utility operators generate more or less stable earnings unless there are severe factors disrupting their operations. The regulated nature of operations provides stability and removes volatility from future earnings. These operators in turn reward their shareholders through the payment of sustainable dividends and share buybacks. This was evident during the economic crisis of 2008–2009 when utilities continued to pay dividends without fail.

Focused on R&D

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