Utility Sector's Positive Attributes

In their pursuit of improving the standard of services, utility operators have steadily invested in research and development (R&D). They have brought new smart meters, transmission and distribution lines, and gas pipelines into operation to meet the rising demand for power without compromising on energy efficiency.

Utility operators are also benefiting from ongoing research in the solar photovoltaic (PV) sector. Solar energy is a growing alternate energy source and the new solar cells with higher conversion rates allow operators to generate more power from fewer solar panels. This enables the operators to lower the cost of generating power from alternate sources as these are generally more expensive than fossil fuel sources.

Barriers to Entry

Utility businesses are by their very nature monopolistic. In fact, that’s the primary reason why they are so heavily regulated in the first place. But flip side of this heavy regulation is that they don’t have to worry about new entrants in their area of operations as companies in other industries have to do. The need for greater capital investments also creates a big hurdle for new operators in the space.

Mergers and Acquisitions

Utility sector operators don’t shy away from relying on M&A activities to supplement their organic growth measures. In addition to giving their operations greater scale and scope, such measures also lead to cost synergies and better utilization of resources.

We believe that in a mature energy market like the U.S., mergers and acquisitions represent a sure way to enhance market share. This expands market reach through the usage of transmission and distribution lines, diversifies the generation portfolio of the companies and also lowers operating costs through the usage of common back office space to control the expanded operation.

Two utility majors, Exelon Corporation (EXC - Analyst Report) and Wisconsin Energy Corporation (WEC - Analyst Report), are currently working on their respective acquisition deals. Exelon expects to close the acquisition of Pepco Holdings (POM - Analyst Report) in second half of 2015 and Wisconsin Energy Corp. expects to close the acquisition of Integrys Energy Group, Inc. (TEG - Analyst Report) by 2015, subject to all necessary approvals.

In Dec 2014, NextEra Energy Inc. (NEE - Analyst Report) announced that it has entered into a definitive agreement to acquire the utility wing of Hawaiian Electric Industries, Inc. (HE - Analyst Report) for a total consideration of $4.3 billion.

Utility Services Have No Alternative

We can have different fuel types like coal, oil, natural gas, nuclear power and renewable sources to produce electricity, but do not have any alternative to electricity. Similarly, clean water does not have any substitute. This is perhaps the most vital driving factor for the industry.

To Sum Up

Stable operations, highly visible revenues and cash flows, combined with the sector’s income/yield attributes are some of its key defining features. That’s why this sector has historically provided investors a safe refuge in times of market turbulence and uncertainty.

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