Utilities: An Entire Sector Failing Cash Flow

The Numbers Don't Lie

We analyzed 18 utilities companies. All 18 earned an F grade. Not one C. Not one D. Eighteen consecutive failures on free cash flow fundamentals.

The median FCF margin for the sector sits at -8.0%. That means half the sector is burning cash faster than that. The average debt to FCF ratio is 634x. When your debt load is 634 times your annual free cash flow, you're not running a business. You're servicing interest payments and hoping regulators stay friendly.

Utilities have the lowest grading thresholds of any sector we track. An 8% FCF margin earns an A. A 6% margin gets you a B. The bar is set low because utilities are capital-intensive by nature. Infrastructure costs money. Maintenance costs money. But even with those relaxed standards, not a single utility cleared the threshold.

WEC Energy Group tops the sector at a 5% margin. That would earn a B in most contexts. Here, it's still an F because the trend is declining and the balance sheet modifiers pull it down further. Southern Company sits at 3.1%, also declining. Duke Energy barely scrapes positive territory at 0.2%.

Three of the top five names are trending down. The sector leader is getting worse, not better.

The Bottom Is Deep

Dominion Energy anchors the sector at -49.7%. Nearly half of every dollar in revenue disappears before it becomes free cash. The company is improving, which tells you how bad the starting point was. CenterPoint Energy follows at -27.5%, also improving. Sempra clocks in at -25.1% and declining.

These aren't outliers. They're the logical endpoint of a sector built on massive capital expenditure cycles with regulated returns that lag inflation. You spend billions upgrading grid infrastructure. Regulators approve rate increases two years later, after your costs have already risen again. Meanwhile, you're carrying debt loads that would sink most businesses.

American Water Works, often positioned as a safer utility play because water infrastructure is less volatile than energy, sits at -20.6% and declining. CMS Energy is at -21.1%, also declining. The sector's problems aren't limited to one subsegment or one regulatory jurisdiction. They're structural.

What About the Improving Trends?

Eight utilities show improving trends. That sounds promising until you look at what they're improving from. AEP is at -4.9% but improving. PEG is at -12.1% but improving. Dominion, as mentioned, is at -49.7% but improving.

Improving from terrible to slightly less terrible isn't the same as generating sustainable cash flow. These companies are reducing the rate at which they burn cash. That's progress, but it's not health.

The ten declining names include most of the sector's highest-margin players. WEC, Southern, Duke, Edison International, all declining. The best performers are getting worse. The worst performers are stabilizing. The sector is compressing toward a mediocre mean, and that mean is still negative.

Why This Matters

Utilities are supposed to be boring. They're the stocks you buy for dividend income and balance. Steady cash flow, predictable earnings, low volatility. That's the pitch.

The cash flow isn't steady. It's negative. The predictable earnings come from accounting, not cash generation. These companies report net income while burning free cash because depreciation, amortization, and various non-cash charges create a gap between GAAP earnings and actual liquidity.

Investors who own utilities for the dividend need to ask where that dividend is coming from. If free cash flow is negative, the dividend is either funded by new debt, asset sales, or drawing down cash reserves. None of those are sustainable indefinitely.

The sector's 634x debt to FCF ratio isn't a temporary spike. It's the natural result of business models that require constant capital investment to maintain existing infrastructure, plus incremental spending for growth, all financed with leverage because operating cash flow isn't sufficient.

When interest rates were at zero, this worked. Borrow cheap, invest in long-lived assets, let inflation erode the real value of your debt over time. When rates rise, the math breaks. Your borrowing costs go up. Your regulated returns don't adjust fast enough. The gap widens.

The Regulatory Trap

Utilities operate in a regulatory framework designed to prevent monopoly abuse and ensure reliable service. That framework wasn't designed to optimize for free cash flow generation. Regulators approve rates based on cost recovery plus a reasonable return. The definition of "reasonable" varies by jurisdiction and lags market conditions.

When a utility spends $2 billion upgrading its grid, it doesn't immediately add $2 billion to its rate base. There's a review process. Public hearings. Cost justification. By the time the new rates take effect, the utility has already incurred the expense and borrowed to fund it.

This creates a structural lag between cash outflow and cash recovery. In a low-rate environment with stable input costs, the lag is manageable. In a higher-rate environment with volatile input costs, it's a trap. You're always spending today's dollars and recovering yesterday's costs.

What This Sector Needs

Utilities need one of three things to generate positive free cash flow at scale: dramatically higher approved returns, massive cuts to capital expenditure, or a shift to business models that don't require continuous infrastructure reinvestment.

None of those are likely. Regulators aren't going to approve 15% returns when the public is already angry about rate increases. Capital expenditure can't be cut without risking grid reliability, which invites regulatory penalties and political backlash. And there's no realistic path to a lower-capex utility model when the existing infrastructure is aging and climate adaptation requires more investment, not less.

The sector is structurally trapped. It can improve on the margins. Some companies will manage their balance sheets better than others. A few might achieve positive FCF in favorable quarters. But as a whole, utilities are not positioned to generate the kind of free cash flow that justifies equity ownership on fundamental grounds.

The Grade Is Deserved

An F isn't a punishment. It's a description. These companies are not generating free cash flow relative to the sector-adjusted thresholds we use. They're not close. And the trends suggest the problem is getting worse for the sector's better performers while stabilizing for the worst.

If you own utilities, you're not owning them for cash flow fundamentals. You're owning them for regulated monopoly status, dividend yield, or portfolio diversification. Those might be valid reasons. But they're not cash flow reasons.

The sector's median margin is -8.0%. Every single company we analyzed failed. That's not a bad quarter. That's a systemic issue with how these businesses operate in the current economic environment. Until something fundamental changes in the regulatory framework or capital structure, utilities will continue to burn cash and rely on debt markets to fund operations.

That's not a grade. That's a fact.