You may think this sector is boring, but when comes to investments, why bother with all the excitements, after all, the reason for investment is to make money.
Utilities sector is a very stable business, and they are usually included in conservative investors’ portfolios, as a starting point, let’s look at why utilities sector is very attractive:
1. Predictable income
2. Usually high dividend yield
3. Stable business, usually with regional monopoly position
4. Long term infrastructure in place
5. Essential business, no one can live without them
6. Able to increase price regularly, hence the profit
7. Many are privatized companies, which means they usually have government backing or support
Risks faced by utilities sectors
Like any sector, nothing is risk-free. The utilities sectors have some specific risks:
1. Debt: Most of infrastructure projects are debt funded, and require significant cashflow to service the loan, rising interest rate can have adverse impact on utilities companies.
2. New energy: Utilities companies are also facing changes in technology and energy. The current environment means they have make changes to reduce carbon commission, and this requires more capital requirements
3. Competition: More and more markets are opening up for new competition, the utilities companies today do not have the monopoly position once they enjoyed.
4. Significant cost to maintain infrastructure
5. Vulnerable to natural disasters, which have occurred frequently and will disrupt the services.
Australian Utilities Stocks
While there are quite a few ASX-listed companies in the utilities category, the majority of them are small companies with the exception of a number of billion+ companies.
Advanced Energy Systems (AES) – is an Australian based company engaged in research, development and marketing of renewable energy products with a particular focus on solar energy. It is still at early stage of energy development, and is considered as a solar company.
Agl Energy (AGK) – Formerly called the Australian Gas Light Company, the AGL Energy Limited (AGK) is an Australian-based integrated energy company engaged in the sales of electricity and gas, energy processing infrastructure, power generation, natural gas production facilities development, extraction, exploration, coal seam methane gas (CSM) production and sales, of liquid petroleum gas (LPG) extraction and sales and crude oil extraction and sales.
AGL is one of the most well known utilities company in Australia, it also the largest gas provider in NSW, and had started providing electricity about 5 years ago, competing with the incumbent Government owned entity : Energy Australia.
AGL has been expanding into other states in the recent years, especially into QLD and VIC, and has made some success so far.
Apa Group (APA) – is an established energy transmission infrastructure in Australia which comprises Australian Pipeline Trust and APT Investment Trust. This is a different type of utilities company you can find on Australian Stock Exchange, pipelines are regarded as infrastructures with consistent income over long period of time.
Challenger Infrastructure Fund (CIF) – is a global diversified infrastructure fund, with operations in Australia, the United Kingdom, Europe and the United States. The Fund makes investments in regulated and contracted monopoly-like assets such as sea-ports. However, the company is facing challenges as it is also highly geared.
Duet Group (DUE) – invests in a portfolio of energy utility assets mainly across Australia and New Zealand and it is basically a joint venture between Macquarie Bank Ltd and AMP Capital Investors. Duet encompasses two stapled registered managed investment schemes and one Australian public company.
Energy Developments (ENE) – Energy Development (ENE) is a company engaged in the ownership, development and operation of power transmission, waste-to-energy conversion and power generation projects. ENE is an interesting company, it owns and operates a number of power stations across Australia, typically small to medium sized power stations.
The Company currently owns and operates an international portfolio of power generation facilities in Australia, the United States, the United Kingdom and Europe from a range of fuel sources including landfill gas (LFG), waste coal mine gas(WCMG) natural gas and liquefied natural gas (LNG).
Geodynamics (GDY) – is solely focused on the development of renewable geothermal energy from Hot Fractured Rocks in Australia. The Company’s HFR geothermal tenements are held in New South Wales, Queensland and in the north-eastern part of South Australia. While the concept had received significant support initially, the company had hit several obstacles, and this had caused a large slide in its share price this year.
Hastings Diversified Utilities Fund (HDF) – is a diversified utility fund. The Fund invests in a portfolio of gas transmission and water utilities infrastructures assets across Australia and worldwide.
Sp Ausnet (SPN) – is a leading energy delivery business, with operations in Australia and New Zealand. The Company is focused on the supply of gas and electricity along with the transmission of electricity. This is another popular gas pipeline company listed in Australia.
Spark Infrastructure Group (SKI) – is a leading infrastructure investment Company, with a market capitalisation of about A$1.8 billion. The fund invests in a portfolio of utility infrastructure assets in Australia and worldwide, with a focus on gas transmission and distribution, regulated water and other infrastructure-related assets.
Origin Energy (ORG) is a energy group with an established portfolio of operating businesses in energy generation, as well as a mix of alternative energy reserves and projects, including large Coal-Seam-Gas reserves, LNG development, and renewable energy.
The company initially started in Queensland, and had evolved significantly, it is now a global energy company. It provides residential and businesses with different energy related products, it also owns and invests in a variety of infrastructure and assets. However, some of its investments had not performed well such as Innmincka Deeps JV and Geodynamics; which had impacted on its financial results.
Origin Energy is now operating in and outside Queensland and has been expanding into NSW’s residential and business market in the recent years.
The utilities companies are not just a boring industry anymore. As you can see, many are now developing their own renewable energy projects and technologies, some are also entering joint-ventures to develop new energy fields or even mining deals. American, Asian and European utility companies are also strategic investors to many emerging renewable energy innovations as well.
The Australian utilities companies are also adopting this model, as an example, AGL has co-invested with Macquarie Bank into a new charging station technology for electric cars. A number of Spanish and German utilities companies have struck new deals to invest into gas fields in the Middle East last year.
The utilities companies are becoming investment houses, this model is not a new model in US and Europe, but it is a relatively new model adopted by Australian utilities companies; some may argue that this would change the risk profile of these companies as seen in the case of Origin Energy, but other investors are attracted by these new opportunities for once considered “boring companies”.