The U.S. electric utility industry is dominated by the publicly owned utilities to the extent that around 60% of the utilities are operated by them, while the other key players are co-operatives, investor-owned utilities. In order to fund new generating plants, adequately comply with environmental regulations and upgrade its aging infrastructure, U.S. utilities are looking at aggregate investment needs of at least $100 billion per year for the next decade. Major utility companies are investing in environmental compliance, as well as new technology programs as, despite cost and rate concerns, capital expenditures and investments in electric infrastructure look to be on the rise in the coming years.
The largest utility in New England, Northeast Utilities (NU) operates six electric and gas utilities in Connecticut, Massachusetts, and New Hampshire, and serves more than 3.5 million electric and gas customers
With a commitment to building on the companies' history of delivering great service to New Englanders, NU wants to commit to its plans to make significant investments in energy infrastructure over the next five years. Regulatory impacts are key drivers in investment and the development of sustainability plans, as NU falls under the regulated category, which means more than 80% of its assets are regulated.
Carbon emissions legislation and water supply are among the top environmental concerns for NU in the current scenario. This issue is likely to remain a top industry concern for years to come and additional reasons for concern include public opinion, political agendas, legal decisions and economic conditions may likely influence the future investment strategies of the company.
Focus on Natural Gas as a future growth tool
The shift toward natural gas and the growing resource base in North America is creating price stability and long-term assurance of natural gas as a generation fuel. Natural gas is viewed by NU as the leader among clean energy technologies to address the problem of greenhouse gas emissions. The main reasons why utility companies like Northeast Utility are looking toward making significant investments to cater to the natural gas needs include reduced emissions, significant customer savings and potential positives from the reduction in oil demand.
Achieving synergies through M&A
Utilities' attempts to preserve shareholder value have driven a string of mergers and acquisitions in recent past, especially after taking into consideration the current market of financial, regulatory and market pressures. The NU-NSTAR $4.7 billion merger in 2012 created the largest utility company in New England, whereby NSTAR will operate as a subsidiary of Northeast Utilities in Massachusetts. The merger is expected to bring cost synergies of around $780 million over the next 10 years, which is mainly driven by consolidation of processes and operational improvement. The management of NU promise that it will be more diverse and better positioned to support economic growth and renewable energy opportunities in New England.
Currently, mergers and acquisitions seem to be a common phenomenon in the utilities sector. The recent merger of the two industry giants Exelon Corporation (NYSE:EXC) and Constellation Energy lays emphasis on the need for consolidation in the utilities sector.
One of NU's competitors is British multinational utility company, National grid, which like NU has presence in both England and the U.S. though it is primarily focusing on the generation and transmission of electricity in the UK. Some of the recent legislative changes like the New Energy Act could hit the growth prospects of the company in the coming years.
High potential opportunities for NU
NU's primary infrastructure growth initiatives in recent times include primary electric transmission, which has shown significant growth potential driven by reliability needs and emerging natural gas distribution, which has very attractive opportunities in New England due to low cost and environmental advantages over competing fuels. The penetration for such utilities can only be made feasible if the delivery and regulatory model constraint needs are addressed.
In its recent initiatives, NU has underlined the importance to Solar renewables, transportation and smart grid as its future growth directives. NU is already building solar generation in Massachusetts and recently got authorization to invest in Connecticut, while to serve the smart grid potential, NU has started investing in distribution automation investments across its vast system. The opportunity to electrify the transportation sector could be a new market segment for electric utilities such as NU.
With the need of alternate sources of power being recognized worldwide, NU seems to have taken the step in the right direction as it seeks to tap into the alternate energy sector, which has high growth potential. NU as a stock seems to be fundamentally strong and I would give it a buy recommendation having a long-term perspective.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.