Utilities (XLU) have been actively seeking growth opportunities beyond traditional electric generation and distribution operations from the last few years, when electricity consumption per customer remained largely flattish after 2008, due to energy efficiency initiatives.
Southern Company (SO), one of the leading regulated utilities, has been aggressively expanding its natural gas distribution and renewables.
Double whammy for competitive utilities
The chart above shows the year-over-year revenue growth of our hand-picked utilities over the past five years. Utilities’ revenue growth was roughly flat to negative in during that period. A notable surge in Southern Company’s revenue growth later in 2016, is due to the contribution of AGL Resources, which SO acquired last year.
The competitive operations of Entergy (ETR) and FirstEnergy (FE) have continued to strain their overall performances. For this reason, the management of FirstEnergy is planning to become a pure-play regulated utility in order to attain earnings stability. The planned transition is expected to be completed by mid-2018.
Lower electricity demand growth and falling wholesale power prices could continue to dent utilities’ competitive operations. SO’s relatively lower exposure to competitive operations and increased contribution from gas could bode well for its revenue and earnings growth.