AGA/EEI Accounting Leadership and Chief Audit Executives Conference:

Transcription

1 AGA/EEI Accounting Leadership and Chief Audit Executives Conference:. Wall Street Perspective The Investor s View, Insights, and Concerns Sarah E. Akers, CFA Senior Analyst; Director Office: ; Cell: sarah.akers@wellsfargo.com June 2015 All estimates/forecasts are as of June 12, 2015 unless otherwise stated. Please see page 14 for rating definitions, important disclosures and required analyst certifications. Wells Fargo Securities, LLC does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of the report and investors should consider this report as only a single factor in making their investment decision.

2 What Exactly Does a Sell-Side Analyst Do? Constant Dialogue with Institutional Investors (Hedge Funds, Mutual Funds) Research Disseminated to Retail System Retail brokers can call us directly Publish Opinions on the Industry and Covered Stocks Nearly 50 electric, gas, and water utilities under coverage Source for images: Microsoft clipart 1

3 Topics to Examine Why Do Capital Markets Matter to Utilities? How is the Utility Space Doing and Why? What Do We Look For in a Utility Stock? What s New and Interesting in Utility Land? Source for images: Microsoft clipart 2

4 Why Are Capital Markets Important? Capital Intensive Industry % Dividend Payout = Reliance on Capital Markets to Fund CapEx Plans Equity investors buy shares of common stock in a company in exchange for: Dividend payments and/or The potential for earnings growth (share price appreciation) Fixed Income investors provide debt capital to utility companies in exchange for interest payments Source for images: Microsoft clipart

5 How s the Sector Doing Now? (Stock Performance) Source: FactSet and Wells Fargo Securities, LLC 4

6 How s the Sector Doing Now? (Stock Performance) Source: FactSet and Wells Fargo Securities, LLC 5

7 How s the Sector Doing Now? (Stock Valuation) Source: FactSet and Wells Fargo Securities, LLC 6

8 How s the Sector Doing Now? (Fundamentals) Rate Base Growth + Supportive Regulation = Earnings Growth Source for images: Microsoft clipart 7

9 Sector Fundamentals: Capital Investment Remains Robust Reliability/safety spend (Aging infrastructure; gas pipe rules) Shifting generation mix (Emission restrictions, new gas/renewable generation) Source: Edison Electric Institute and Wells Fargo Securities, LLC 8

10 Sector Fundamentals Generally Supportive Regulatory Trends Allowed ROEs trending downward but haven t fallen as much as interest rates AND earned ROEs being helped by better regulatory support (multi-year rate plans, forward-looking test years, rider recovery mechanisms, expense trackers, etc.) Note: ROE averages excludes rate cases where allowed ROEs were not specified Source: Wells Fargo Securities, LLC and SNL Financial LC SNL Disclaimer: SNL FINANCIAL LC. CONTAINS COPYRIGHTED AND TRADE SECRET MATERIAL DISTRIBUTED UNDER LICENSE FROM SNL. FOR RECIPIENT S INTERNAL USE ONLY 9

11 10 How s the Sector Doing Now? (RISKS) Rising in Interest Rates Potential Rise in Inflation Low Interest Rate / Inflation / Commodity Environment Has Helped Mitigate Risks Associated with Heavy CapEx Cycle A Reversal of These Factors Could Magnify Financing & Regulatory Risks Further Downward Pressure on Allowed ROEs Cost recovery risk as capital expenditures continue to outpace depreciation (customer and regulatory backlash to rising bills) Flat to Modest Sales Growth Energy Efficiency, Conservation, Slow Economy

12 What Do We Look For In A Utility Stock? GROWTH CapEx/Rate Base Growth, Sales/Population Growth + CONSTRUCTIVE REGULATION Allowed ROE & Ability to Earn ROE Forward Test Years Multi-Year Rate Plans Formulaic Rate Plans Investment Riders, Expense Trackers + STRONG FINANCIAL POSITION Balance Sheet, Ability to Fund Growth + SHAREHOLDER-FRIENDLY MANAGEMENT TEAM These characteristics describe a high quality utility company in order to be a good stock (buy recommendation), also have to have attractive VALUATION Source for images: Microsoft clipart 11

13 What s New & Interesting in the Utility Space? RENEWABLES Cost/Efficiency Improvements Storage Advancements Address Intermittency Safe & Carbon Free DISTRIBUTED GENERATION Cutting the Cord Not Economic Opportunity for Utilities to Invest in the Grid Companies Need to Embrace New Technologies M&A and ALTERNATIVE STRUCTURES Yieldcos, MLPs and REITs, Oh My! Source for images: Microsoft clipart 12

14 Wall Street Perspective. The Investor s View, Insights, and Concerns Source for images: Microsoft Clip Art 13

15 Wells Fargo Securities, LLC Electric Utility Research Disclosures 14

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