Avangrid

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Avangrid is an energy services holding company, primarily engaged in the regulated energy transmission and distribution businesses, operating through its subsidiaries across several states in New England and New York.

Investor Relations Previous Earnings Calls


The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

Avangrid operates as a regulated utility with a focus on electricity and natural gas distribution, transmission, and generation. Their business spans across New York, Maine, and various other parts of New England. The operations are organized into 2 primary segments:

  1. Networks: This segment includes regulated electricity transmission and distribution activities.
  2. Renewables: This segment includes the company’s renewable generation portfolio, primarily consisting of wind and solar power plants.

Revenue Distribution:

Avangrid generates its revenues primarily through regulated utility operations, with a significant portion of its income derived from electricity and natural gas distribution, as well as regulated transmission services. A smaller portion of their total revenue comes from the sale of power generated by their renewable sources.

Industry Trends and Competitive Landscape:

  • Shift Towards Renewables: The energy industry is experiencing a clear trend toward renewable energy sources, driven by environmental concerns and government policies. This shift is creating opportunities for companies with strong renewable generation portfolios. However, it also increases competition in the space and may limit growth for the more traditional fossil fuel powered energy companies.
  • Regulatory Influence: The regulatory environment significantly shapes the utility sector. The regulated nature of their revenue generation helps to ensure stability, but also creates hurdles for cost-recovery and pricing that can lead to conflicts with rate making bodies and other stakeholders.
  • Need for Infrastructure Investment: The energy industry is characterized by the need for substantial capital investment, including investments in generation, transmission, distribution assets, and smart grid technology. These investments are essential for reliable operation and growth. High capital outlays also mean that cost of capital and interest expense may fluctuate according to external markets.
  • Consolidation: The utility sector is experiencing consolidation, as larger players acquire smaller companies to realize synergies or gain more market share. Mergers and acquisitions may lead to greater scale, but also challenges in integrating different businesses.

What Makes Avangrid Different?

Avangrid’s operations are primarily based in New York and New England. The company is not a coast to coast utility, like others. The focus has caused the regulatory environment to become very important to its value proposition. It has also developed quite a name for itself in wind generation in areas of the United States, a market segment that has plenty of high profile companies. Furthermore, the company is investing heavily in transmission infrastructure improvements to enable cleaner energy and help facilitate government mandates.

Financials:

  • Income Statement: Avangrid has shown steady revenue growth with higher operating income from more sales. While the company has also been dealing with higher interest expense due to high debt levels and a difficult financial environment, a high cost to revenue was still a positive in the company’s recent quarterly earnings.
  • Balance Sheet: Avangrid carries a substantial debt load, which is common for capital-intensive regulated utilities. There was an increased level of cash on hand in the most recent report in order to finance short-term obligations. The company is actively engaged in managing its debt maturities.
  • Cash Flow: The most recent cash flow statement indicates the company has high investment levels for infrastructure improvements, but its free cash flow is positive and growing, with more capital coming from operating activities. They continue to focus on efficiency improvements and cost savings to ensure they can finance operations.

Recent Concerns/Controversies:

  • Rate Case Decisions: Avangrid is facing scrutiny on rates in several of its operating markets. In their most recent earnings calls, executives mention how they are trying to work within the regulatory framework to achieve the best outcomes.
  • Merger with PNM Resources: The proposed merger with PNM Resources was officially terminated in the first half of 2023 after lengthy regulatory battles. The company indicated it will focus on other growth strategies going forward, but the merger itself cost millions of dollars.
  • Capital and Operational Expenses: Avangrid is facing high expenditures in relation to operations. Higher interest expense has already been discussed, and the company may face pressure to lower costs and improve margins in the coming years.
  • High Debts: With the increased financial risks, especially higher rates, this is negatively impacting the cost of debt which is hurting overall profitability.

Moat Rating: 2 / 5

Avangrid possesses a narrow moat. This rating is based on the following factors:

  • Regulatory Moat: As a regulated utility, Avangrid enjoys a degree of protection from competition in certain markets, because of high barriers to entry, which allows them to maintain a steady stream of revenue.
  • Location-Based Advantages: the location of many of the assets they own, especially for the distribution side of the business.
  • Limited Scale Advantage: Avangrid is not one of the biggest utilities in the USA, meaning there is not much scale advantages.
  • Weakening Competitive Advantages: The market has seen a trend towards renewable energies and the industry itself has been consolidating. Thus, Avangrid has many challenges ahead in order to maintain its current moat.

Legitimate Risks That Could Harm the Moat and Business Resilience

  • Regulatory Risks: Changes in regulatory policies, adverse rate cases, or regulatory delays can significantly impact Avangrid’s profitability and growth prospects. Also, many state mandates and local politics make the regulatory bodies of these regions unpredictable to understand. This can lead to difficult forecasting for returns on capital.
  • Technological Disruption: The rapid pace of technological changes in the energy industry, including grid modernization and advancements in renewable energy technology, could affect Avangrid’s investments and competitive advantage.
  • Economic Sensitivity: The business is affected by inflation, interest rate fluctuation, and commodity price increases. This can lead to periods of unstable earnings and lower long term revenue growth.
  • Competition: Increased competition from established players in the same markets, or new competitors, may also squeeze margins and market share.
  • Political Risk: The political environment, especially in areas that AVANGRID does business, can significantly increase certain regulatory risks.

Business Resilience:

Avangrid’s regulated nature can ensure a level of predictability, but the company also has a relatively small part of their revenue coming from renewable energy sources. The stability of the business is tied to the regulatory environment that it operates within. The business’s reliance on its regulatory moat is also one of its biggest problems, because any negative sentiment towards it may impact future growth. While Avangrid is looking for new opportunities in more profitable parts of their business, there is no guarantee that those investments will turn out positively.

Understandability: 3 / 5

Avangrid’s business is moderately easy to understand:

  • Complexity: As a regulated utility with a mixture of renewables, the company’s operations can be complex to assess, but its essential role as a provider of energy infrastructure is easily recognizable.
  • Valuation Challenges: The company’s value is driven by the regulatory environment and future growth opportunities, which may be harder to accurately predict.
  • Financial Complexity: The financial statements are more complicated than other standard companies, due to the nature of the utility sector.

Balance Sheet Health: 3 / 5

Avangrid’s balance sheet health is considered neutral due to:

  • High Debt Levels: The company is highly leveraged, as a result of the infrastructure intense sector. They also have not performed well under recent interest rate increases.
  • Ample Liquidity: Avangrid is maintaining an ample level of cash on hand to meet short-term obligations and to keep the business running.
  • Tangible Assets: The company has a great level of tangible assets, and this may help with business resilience.
  • Future Growth: The company’s ability to grow in renewable energy may drive an increase in earnings down the line, but those investments take time, and there is no guarantee that they will work.