How Will These 5 Utilities Deal With Falling Sales?

A new study released this week puts the dimmer on any hope for increased electricity use. Even with an economic recovery, energy efficiency programs are squeezing more out of less, shrinking top-line growth for at least the next 10 years. But clean energy and technological innovation are allowing for more bottom-line growth than ever before, and some companies are gearing up for major market share in the next decade. Here's what you need to know.

Energy efficiency 101
It might seem counterintuitive, but there are three main reasons that less electricity use can mean better business for utilities.

1. Consumer-paid: First (and probably foremost), a large amount of energy efficiency programs are paid for by either the consumer or, for larger projects like grid technology, by government agencies.


2. Less infrastructure: Electricity generation is extremely capital intensive, and many utilities are more than happy to put off some lackluster growth if it means they can hold off on building new plants or upgrading old ones.

3. Sustainable growth: Utilities are heavily regulated, and it's not always easy to grow sales. Demand is usually out of the company's control and depends on macroeconomic activity like industrial production or demographics such as population growth.

A new report by the Department of Energy predicts that spending on energy efficiency programs will double by 2025, offsetting more than half of the minimal 0.58% compound annual growth rate expected over the next decade. Efficiency initiatives already cut annual electricity sales by 0.5% in 2010, but $9.5 billion worth of customer-funded programs will help bump savings up to 0.8% by 2025.

Traditionally, investors looked to utilities for inflation-proof steady income with delectable dividends to boot. But because end-use efficiency is becoming more important (and more varied), margin expansion will make or break growth opportunities for domestic utilities. Top-line and bottom-line metrics are important to analyze, so let's look at five utilities to see if their sales and net income growth stand up to the margin efficiency test.

Sales and net income
First up: sales. Here's how five of the nation's bigger utilities managed to fare through the Great Recession and beyond.

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Data by YCharts.

Everyone had a tough 2009, but the ensuing diversion presents investors with a nearly 20-percentage-point spread. Duke Energy (NYSE: DUK) and Exelon (NYSE: EXC) muddy the waters slightly, since both companies went through big mergers in 2012. Duke partnered up with Progress Energy to become the largest U.S. utility by customers (more than 7 million; thanks for asking). Meanwhile, Exelon cozied up with Constellation to diversify its 19,000 MW of nuclear energy (54% of total generation; again, thanks for asking) and pave the way for scalable profits.

Ignoring the mergers, Southern (NYSE: SO) managed to come out on top with a 3% gain, while NextEra's (NYSE: NEE) and Dominion's (NYSE: D) sales dropped 6.5% and 9.5%, respectively.

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Data by YCharts.

Net income provides a closer look at a utility's actual profitability and doesn't always match up with sales. Southern Company and Duke are neck-and-neck with 25%+ gains, but Duke could once again have benefited from its merger. NextEra's net income rose 17.3%, showing that its natural gas and wind generation facilities have proved to be a formidable pair for its energy portfolio. Bringing up the rear are Exelon and Dominion. Exelon's nuclear priciness has pushed its profitability down in recent years, and Dominion has been in expansion mode as it improves transmission lines, breaks ground on new generation plants, and renovates coal-fired power plants to reduce overall emissions.

Margins matter
Gross profit margins are the easiest way to tell how much a utility is spending to simply deliver electricity to its customers versus overall sales. While a seven percentage point spread might not seem like much, it's reflective of a company's first line of defense: cheap energy generation.

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Data by YCharts.

Southern beats the pack, likely because of its 37% coal and 35% gas/oil energy portfolio. Both have remained low, and since gross profits don't account for capital expenditures necessary to pull coal plants up to code, this utility is solidly in the black.

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Data by YCharts.

Operating margins are perhaps the best way to analyze a utility's overall efficiency, as they account for expenses such as fuel, operations and maintenance, and depreciation/amortization. NextEra takes the lead on this front, using just over 75% of total sales to generate electricity and operate its business. Southern's margins wouldn't calculate correctly on the graph, so I ran the numbers myself. The utility's margin has historically hovered around 21% but most recently jumped up to 24% in FY 2011.

My Foolish pick
Utilities are changing. Fast. And depending on where you look, you'll find different answers for which companies take the cake. Although no metric is a secret recipe to riches, NextEra has embraced the "more with less" mentality better than any of its competitors. Even as its revenue has fallen, the utility has pushed up its net income and sports industry-defying margins. I've made an outperform call on NextEra on my Motley Fool CAPS page and am looking forward to seeing how this utility grows, booming sales or not.

As the nation moves increasingly toward clean energy, Exelon is perfectly positioned to capitalize on having the largest nuclear fleet in North America. Combine this strength with an increased focus on renewable energy, and Exelon's recent merger with Constellation places Exelon and its best-in-class dividend on a short list of top utilities. To determine if Exelon is a good long-term fit for your portfolio, you're invited to check out The Motley Fool's premium research report on the company. Simply click here now for instant access.

The article How Will These 5 Utilities Deal With Falling Sales? originally appeared on Fool.com.

Justin Loiseau has no position in any stocks mentioned. The Motley Fool recommends Dominion Resources, Exelon, and Southern. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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