Utilities: Still Twenty F-Grades, Getting Worse

When we last looked at utilities a month ago, the sector was a uniform wall of F-grades. All twenty companies. Not one B or C hiding in the data. Just failures.

A month later, nothing has changed except the trend direction. If anything, it's gotten worse. The median FCF margin sits at -9.9%. Average debt to FCF is 582.9x. Fourteen of twenty companies are now in declining trends. Five are improving, but "improving" here means going from catastrophic to merely terrible.

The Top Five Are Still Failures

NextEra Energy (NEE) leads the sector with an 11.7% FCF margin. That would be a solid C-grade in most sectors. In utilities, where the threshold for an A is 8%, it should be excellent. Instead, NEE gets an F. The balance sheet is the problem. When debt loads are high enough and cash conversion is weak enough, even double-digit margins don't save you. And NEE's trend is declining.

Public Service Enterprise (PEG) and Consolidated Edison (ED) both hover near breakeven at 0.2% FCF margin. They're treading water. PEG is improving, which means the quarterly numbers are moving in the right direction. ED is declining, which means the opposite. Both earn F-grades because breakeven cash flow in a capital-intensive sector with massive debt obligations is not a viable business model.

Eversource Energy (ES) and Edison International (EIX) round out the top five at -0.3% and -3.7% respectively. Both are improving. Both are still burning cash. The sector leader burns cash at -3.7%. Let that sit.

The Bottom Five Are Disasters

Xcel Energy (XEL) bleeds at -46.8%. Sempra (SRE) at -44.6%. Dominion Energy (D) at -44.1%. These aren't rounding errors. These are companies spending nearly 50% more than they bring in as free cash flow. XEL and D are declining trends. SRE is improving, but improving from a -44.6% margin means you're still underwater.

CenterPoint Energy (CNP) and American Water Works (AWK) sit at -25.5% and -24.2%. Both declining. AWK is particularly notable because water utilities are supposed to be the stable, boring corner of an already boring sector. Instead, it's burning a quarter of its revenue.

Why Utilities Can't Generate Cash

Utilities are capital-intensive by nature. Power plants, transmission lines, water infrastructure. All of it requires constant investment. The business model works when you can charge regulated rates that cover both operations and capital expenditure with enough left over to service debt and return cash to shareholders.

Right now, that model is broken. Capital expenditures are running ahead of operating cash flow across the sector. Regulatory rate structures haven't kept pace with the cost of maintaining and upgrading aging infrastructure. Add in the pressure to transition to renewable energy, which requires even more capital investment upfront, and you get a sector where almost no one can generate positive free cash flow.

The 582.9x average debt to FCF ratio tells you how levered these companies are. Most utilities have been borrowing to fund the gap between what they earn and what they need to spend. That works until interest rates rise or lenders get nervous. We're seeing the consequences now.

Fourteen Declining Trends

The trend breakdown is the most concerning data point. Fourteen of twenty utilities are in declining FCF trends. That means the quarterly numbers are getting worse, not better. Only five are improving, and as we've seen, "improving" in this context means moving from a -40% margin toward -30%. One company, Dominion, is stable at -44.1%. Stable just means consistently terrible.

This isn't a sector going through a rough quarter. This is a structural problem getting worse over time. The companies that are declining aren't outliers. They include sector staples like Duke Energy (DUK), DTE Energy (DTE), FirstEnergy (FE), American Electric Power (AEP), and Southern Company (SO). These are large, established utilities with decades of operating history. They're all burning cash and the burn is accelerating.

What An Improving Trend Actually Means

The five improving companies are PEG, ES, EIX, EXC (Exelon), and SRE. PEG and ES are near breakeven, which means improvement could eventually get them to positive territory. EIX, EXC, and SRE are all still deeply negative. EXC sits at -9.4%. That's close to the sector median, which tells you how low the bar is.

Improvement here doesn't mean these companies are healthy. It means they're burning slightly less cash than they were six months ago. It's the equivalent of celebrating that your car is only leaking half as much oil as it used to. You still need to fix the engine.

Not One Company Above F

Zero A-grades. Zero B-grades. Zero C-grades. Zero D-grades. Twenty F-grades. When an entire sector fails by this wide a margin, it's not a company-specific issue. It's a sector-wide structural problem. The regulatory model, the capital intensity, the debt loads, the rate structures: something fundamental is broken.

For investors, this sector offers nothing on a free cash flow basis. You're not buying cash-generating businesses. You're buying dividend yields backed by borrowing and hoping the dividends don't get cut when the debt becomes unsustainable. Some of these companies will survive. Many won't in their current form. None of them are worth owning if you care about actual cash generation.

Utilities used to be the safe, boring place to park capital and collect steady income. Now they're just boring disasters.