Despite the flat electricity demand growth in the past eight or so years, US utilities’ (XLU) earnings have grown steadily. Importantly, their earnings capabilities seem to have improved fairly as their operations extended beyond traditional electric segments.
Top US utilities Southern Company (SO) and Duke Energy (DUK) have significantly increased their gas distribution operations after acquiring AGL Resources and Piedmont Natural Gas, respectively, last year. Renewables titan NextEra Energy (NEE) might continue to look for takeover targets, now that regulators have rejected its Oncor acquisition.
NextEra Energy growing fastest among peers
In terms of earnings growth, NextEra Energy is one of the fastest-growing utility in the sector. The company aims to grow its EPS (earnings per share) by 8%–10% over the next few years, while the industry average is around 4%–6%. Duke Energy and Southern Company also aim for industry-average earnings growth in the next few years.
The chart above shows net profit margins of the top three utilities since 2014. NextEra Energy’s net profit margin in 1Q17 does not include a $1 billion gain on the sale of its fiber-optic telecommunication network.
Expanding customer base
Utilities’ revenue growth heavily depends on expanding the customer base. Duke Energy, Southern Company, and NextEra Energy expand their customer bases by around 1% annually, and SO and DUK witnessed noteworthy additions of customers after completing their acquisitions last year.
Now that utilities are expanding in gas, midstream, and renewables operations, we can infer a declining dependence on traditional, slow-growing electric operations—which, ultimately, bodes well for utilities’ long-term earnings growth.