Utilities as Growth Stocks?

Did electric utilities suddenly become growth stocks when the market wasn’t looking? Fourth-quarter results from the 200-plus companies we track in Conrad’s Utility Investor say that may be so, at least for some.

There is a huge difference between today’s utility sector growth and the Enron-led boom of the 1990s. This time around, the vast majority of investment is in recession-resistant utility rate base, which is also growing at its fastest pace since the 1960s.

At first glance, rapid growth appears clearly unsustainable for a mature industry like electricity. In fact, since the 2008 financial crisis, weather-adjusted demand for power has been flat to negative in most parts of the country.

The difference maker is that electricity is no longer a commodity where the only thing that matters is price and adequate volume. Rather, value increasingly varies by generating source, flexibility and reliability.

During the 1960s and ‘70s, utilities spent billions building generating capacity with the sole goal of meeting demand at a good price. Investment boosted profits as non-cash AFUDC (allowance for funds used during construction). But by the time companies tried to collect that AFUDC as cash from ratepayers, actual costs had exploded, resulting in the legendary write-offs of the 1980s. Destabilizing deregulation followed in the 1990s.

In contrast, capital spending now is in much smaller bites. And it’s focused on maximizing the value of electricity by generating source, flexibility and reliability.