Stock Performance Q FINANCIAL UPDATE QUARTERLY REPORT OF THE U.S. SHAREHOLDER-OWNED ELECTRIC UTILITY INDUSTRY

Transcription

1 Stock Performance Q FINANCIAL UPDATE QUARTERLY REPORT OF THE U.S. SHAREHOLDER-OWNED ELECTRIC UTILITY INDUSTRY

2 About EEI The Edison Electric Institute is the association of U.S. shareholderowned electric companies. Our members serve 95% of the ultimate customers in the shareholder-owned segment of the industry, and represent approximately 70% of the U.S. electric power industry. We also have 79 international electric companies as Affiliate members and more than 190 industry suppliers and related organizations as Associate members. About EEI s Quarterly Financial Updates EEI s quarterly financial updates present industry trend analyses and financial data covering 61 U.S. shareholder-owned electric utility companies. These 61 companies include 56 electric utility holding companies whose stocks are traded on major U.S. stock exchanges and eleven electric utilities who are subsidiaries of nonutility or foreign companies. Financial updates are published for the following topics: We Welcome Your Feedback EEI is interested in ensuring that our financial publications and industry data sets best address the needs of member companies and the financial community. We welcome your comments, suggestions and inquiries. Contact: Mark Agnew Director, Financial Analysis (202) , magnew@eei.org Aaron Trent Manager, Financial Analysis (202) , atrent@eei.org Erin Hailes Financial Assistant (202) , ehailes@eei.org Dividends Stock Performance Credit Ratings Construction Rate Case Summary SEC Financial Statements (Holding Companies) FERC Financial Statements (Regulated Utilities) Fuel For EEI Member Companies The EEI Finance and Accounting Division is developing current year and historical data sets that cover a wide range of industry financial and operating metrics. We look forward to serving as a resource for member companies who wish to produce customized industry financial data and trend analyses for use in: Investor relations studies and presentations Internal company presentations Performance benchmarking Peer group analyses Annual and quarterly reports to shareholders Edison Electric Institute 701 Pennsylvania Avenue, N.W. Washington, D.C

3 The 61 U.S. Shareholder-Owned Electric Utilities The companies listed below all serve a regulated distribution territory. Other utilities, such as transmission provider ITC Holdings, are not shown below because they do not serve a regulated distribution territory. However, their financial information is included in relevant EEI data sets, such as transmission-related construction spending. ALLETE, Inc. (ALE) Alliant Energy Corporation (LNT) Ameren Corporation (AEE) American Electric Power Company, Inc. (AEP) Avista Corporation (AVA) Black Hills Corporation (BKH) CenterPoint Energy, Inc. (CNP) Central Vermont Public Service Corporation (CV) CH Energy Group, Inc. (CHG) Cleco Corporation (CNL) CMS Energy Corporation (CMS) Consolidated Edison, Inc. (ED) Constellation Energy Group, Inc. (CEG) Dominion Resources, Inc. (D) DPL, Inc. (DPL) DTE Energy Company (DTE) Duke Energy Corporation (DUK) Edison International (EIX) El Paso Electric Company (EE) Empire District Electric Company (EDE) Energy East Corporation Energy Future Holdings Corp. (formerly TXU Corp.) Entergy Corporation (ETR) Exelon Corporation (EXC) FirstEnergy Corp. (FE) Great Plains Energy Incorporated (GXP) Hawaiian Electric Industries, Inc. (HE) IDACORP, Inc. (IDA) Integrys Energy Group, Inc. (TEG) IPALCO Enterprises, Inc. MDU Resources Group, Inc. (MDU) MGE Energy, Inc. (MGEE) MidAmerican Energy Holdings Company NextEra Energy, Inc. (NEE) NiSource Inc. (NI) Northeast Utilities (NU) NorthWestern Corporation (NWE) NSTAR (NST) NV Energy, Inc. (NVE) OGE Energy Corp. (OGE) Otter Tail Corporation (OTTR) Pepco Holdings, Inc. (POM) PG&E Corporation (PCG) Pinnacle West Capital Corporation (PNW) PNM Resources, Inc. (PNM) Portland General Electric Company (POR) PPL Corporation (PPL) Progress Energy (PGN) Public Service Enterprise Group Inc. (PEG) Puget Energy, Inc. SCANA Corporation (SCG) Sempra Energy (SRE) Southern Company (SO) TECO Energy, Inc. (TE) UIL Holdings Corporation (UIL) UniSource Energy Corporation (UNS) Unitil Corporation (UTL) Vectren Corporation (VVC) Westar Energy, Inc. (WR) Wisconsin Energy Corporation (WEC) Xcel Energy, Inc. (XEL)

4 Companies Listed by Category (as of 12/31/10) Please refer to the Quarterly Financial Updates webpage for previous years lists. iven the diversity of utility holding company corporate G strategies, no single company categorization approach will be useful for all EEI members and utility industry analysts. Never-theless, we believe the following classification provides an informative framework for tracking financial trends and the capital markets response to business strategies as companies depart from the traditional regulated utility model. Regulated Mostly Regulated Diversified 80%+ of total assets are regulated 50% to 80% of total assets are regulated Less than 50% of total assets are regulated Categorization of the 58 publicly traded utility holding companies is based on year-end business segmentation data presented in 10Ks, supplemented by discussions with company IR departments. Categorization of the five non-publicly traded companies (shown in italics) is based on estimates derived from FERC Form 1 data and information provided by parent company IR departments. The EEI Finance and Accounting Division continues to evaluate our approach to company categorization and business segmentation. In addition, we can produce customized categorization and peer group analyses in response to member company requests. We welcome comments, suggestions and feedback from EEI member companies and the financial community. Regulated (39 of 62) ALLETE, Inc. Alliant Energy Corporation Ameren Corporation American Electric Power Company, Inc. Avista Corporation Central Vermont Public Service Corporation CH Energy Group, Inc. Cleco Corporation CMS Energy Corporation Consolidated Edison, Inc. DPL, Inc. DTE Energy Company El Paso Electric Company Empire District Electric Company Energy East Corporation Entergy Corporation Great Plains Energy Incorporated IDACORP, Inc. Integrys Energy Group IPALCO Enterprises, Inc. Northeast Utilities NorthWestern Energy NSTAR NV Energy, Inc. PG&E Corporation Pinnacle West Capital Corporation PNM Resources, Inc. Portland General Electric Company Progress Energy Puget Energy, Inc. Southern Company TECO Energy, Inc. UIL Holdings Corporation UniSource Energy Corporation Unitil Corporation Vectren Corporation Westar Energy, Inc. Wisconsin Energy Corporation Xcel Energy, Inc. Mostly Regulated (19 of 62) Allegheny Energy, Inc. Black Hills Corporation CenterPoint Energy, Inc. Dominion Resources, Inc. Duke Energy Corporation Edison International Exelon Corporation First Energy Corp. MGE Energy, Inc. MidAmerican Energy Holdings NextEra Energy, Inc. NiSource Inc. OGE Energy Corp. Otter Tail Corporation Pepco Holdings, Inc. PPL Corporation Public Service Enterprise Group, Inc. SCANA Corporation Sempra Energy Diversified (4 of 62) Constellation Energy Group, Inc. Energy Future Holdings Hawaiian Electric Industries, Inc. MDU Resources Group, Inc. Note: Based on assets at 12/31/10 The following companies were removed from the consolidated financial statements for 2009 and 2010 because they did not file Form 10-K with the SEC: Duquesne Light Holdings, Green Mountain Power, KeySpan, Kentucky Utilities, Louisville Gas and Electric and Niagara Mohawk Power.

5 Q Stock Performance COMMENTARY HIGHLIGHTS The EEI Index slightly outperformed the broad market averages during the first half of 2011, returning 8.8% compared to the Dow Jones 8.6% return, the S&P 500 s 6.0% return and the Nasdaq Composite s 4.6% return. The continuation of low bond yields supported dividend-paying regulated utility stocks particularly during Q2 when Treasury yields fell and the EEI Index outperformed the broad market. Persistently low natural gas prices continued to weigh on the profit outlook for competitive generators. There was little change during the first half of 2011 in the industry s long-term outlook. Many regulated utilities are engaged in capital spending programs that should, according Wall Street analysts, help drive slow but steady earnings growth over the next several years. New and stricter EPA emissions regulations, set to take effect next year, may boost required industry capex by 30% relative to EEI s latest capex survey (based on a review of estimates by industry analysts and consultants). The EEI Index slightly outperformed the broad market averages during the first half of 2011, returning 8.8% compared with the Dow Jones 8.6% return, the S&P 500 s 6.0% return and the Nasdaq Composite s 4.6% return. However, the first half of the year was a distinct tale of two quarters, one that highlights the sector s return to its traditional role as a defensive investment following its reemphasis in recent years of core regulated businesses with slow but predictable earnings growth and steady dividends. The EEI Index underperformed the broad markets dur I. Index Comparison (% Return) Index EEI Index Dow Jones Inds S&P Nasdaq Comp.^ U.S. Shareholder-Owned Electric Utilities Index All Companies Regulated Mostly Regulated Diversified EEI Index S&P 500 Index DJIA 2011* Calendar year returns shown for all periods except where noted. / * Through June 30 ^Price gain/loss only. Other indices show total return. Full year, except where noted. Source: EEI Finance Department II. Category Comparison (% Return) 2011* Calendar year returns shown for all periods except where noted. / *Through June 30 Returns shown here are unweighted averages of constituent company returns. The EEI Index return shown in Table I above is cap-weighted. Source: EEI Finance Department, SNL Financial and company annual reports. III. Total Return Comparison Value of $100 invested at close on 12/31/ * Note: Year end, except where noted. / *At June 30 Source: EEI Finance Department EEI Q2 2011

6 2 STOCK PERFORMANCE % % Daily Yield, 1/1/07 through 6/30/ IV. 10-Year Treasury Yield Monthly Source: U.S. Federal Reserve Average Monthly Yield, 1/1/00 through 6/30/11 Source: U.S. Federal Reserve V. 10-Year Treasury Yield Daily $/mmbtu Aug 2011 Aug 2012 Aug 2013 Aug 2014 Aug 2015 Aug 2016 Source: SNL Financial VII. NYMEX Natural Gas Futures Aug 2011 through December 2016, Henry Hub Index Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 EEI Index Dow Jones S&P Nasdaq Comp.^ ^Price gain/loss only. Other indices show total return. Source: EEI Finance Department 6/30/ /31/ /31/ /31/2008 VIII. Returns by Quarter $/mmbtu VI. Natural Gas Spot Prices 1/1/05 through 6/30/11, Henry Hub Category* Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 All Companies Regulated Mostly Regulated Diversified * Returns shown here are unweighted averages of constituent company returns. The EEI Index return shown above is cap-weighted. Source: EEI Finance Department, SNL Financial and company annual reports. 0.0 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Source: SNL Financial ing the year s first quarter, returning 2.9% as confidence about global economic growth and rising corporate earnings drove the major averages up 5% to 7%. The second quarter brought a reversal of the trend, as investors were rattled by the civil unrest throughout the Middle East, the lengthy trauma of the Japanese tsunami and nuclear crisis and its disruption of global supply chains, and the recognition that the U.S. economy was entering what came to be called a soft patch of slowing growth. Given that backdrop, the EEI Index significantly outperformed, delivering a 5.7% return compared to the 0% to 1% returns posted by the major averages. Impact of Industry Consolidation There was no particularly noteworthy trend in returns by company category during the year s first half. Measured as an unweighted average of constituent company returns, the Regulated, Mostly Regulated and Diversified categories all produced mid-single digit gains in both quarters (the EEI Index is cap weighted). However, return data by category is perhaps less revelatory than it was early last decade, when the industry was contending with deregulation and experimenting with business models that embraced not only competitive generation but ventures outside the electricity business. At December EEI Q Financial Update

7 STOCK PERFORMANCE 3 IX. Market Capitalization at June 30, 2011 (in $ Mil.) U.S. Shareholder-Owned Electric Utilities Company Stock Symbol $ Market Cap % Total Southern Company SO 34, % Exelon Corporation EXC 28, % Dominion Resources, Inc. D 27, % Duke Energy Corporation DUK 25, % NextEra Energy, Inc. NEE 23, % American Elect. Power Co., Inc. AEP 18, % PG&E Corporation PCG 16, % Public Svc. Enter. Group Inc. PEG 16, % Consolidated Edison, Inc. ED 15, % FirstEnergy Corp. FE 15, % Progress Energy, Inc. PGN 14, % PPL Corporation PPL 13, % Sempra Energy SRE 12, % Edison International EIX 12, % Entergy Corporation ETR 12, % Xcel Energy Inc. XEL 11, % DTE Energy Company DTE 8, % CenterPoint Energy, Inc. CNP 8, % Constellation Energy Grp., Inc. CEG 7, % Wisconsin Energy Corporation WEC 7, % Ameren Corporation AEE 6, % Northeast Utilities NU 6, % NiSource Inc. NI 5, % SCANA Corporation SCG 5, % CMS Energy Corporation CMS 4, % OGE Energy Corp. OGE 4, % Pinnacle West Capital Corp. PNW 4, % NSTAR NST 4, % Alliant Energy Corporation LNT 4, % Company Stock Symbol $ Market Cap % Total Pepco Holdings, Inc. POM 4, % MDU Resources Group, Inc. MDU 4, % Integrys Energy Group, Inc. TEG 4, % TECO Energy, Inc. TE 4, % NV Energy, Inc. NVE 3, % DPL Inc. DPL 3, % Westar Energy, Inc. WR 3, % Great Plains Energy Inc. GXP 2, % Hawaiian Elec. Industries, Inc. HE 2, % Vectren Corporation VVC 2, % Cleco Corporation CNL 2, % IDACORP, Inc. IDA 1, % Portland General Elec. Co. POR 1, % UIL Holdings Corporation UIL 1, % PNM Resources, Inc. PNM 1, % Avista Corporation AVA 1, % ALLETE, Inc. ALE 1, % UniSource Energy Corporation UNS 1, % El Paso Electric Company EE 1, % NorthWestern Corporation NWE 1, % Black Hills Corporation BKH 1, % MGE Energy, Inc. MGEE % CH Energy Group, Inc. CHG % Empire District Elec. Co. EDE % Otter Tail Corporation OTTR % Cen. Vermont Pub. Svc. Corp. CV % Unitil Corporation UTL % Total Industry 433, % Source: EEI Finance Department and Wall Street Journal X. EEI Index Market Capitalization (at Period End) $ Billions U.S. Shareholder-Owned Electric Utilities Note: Change in EEI Index market capitalization reflects the impact of buyout and spin-off activity in addition to stock market performance. Source: EEI Finance Department and Wall Street Journal EEI Index Market Cap (in $Billions) Q ,035 Q ,200 Q ,668 Q ,238 Q ,331 Q ,553 Q ,598 Q ,454 Q ,073 Q ,324 Q ,601 Q ,193 Q ,460 Q ,305 Q ,663 Q ,989 Q ,727 Q ,825 Q ,899 Q ,848 Q ,281 Q ,858 Q ,088 Q ,565 Q ,946 Q ,486 Q ,711 Q ,024 Q ,472 Q ,921 Q ,070 Q ,844 Q ,185 Q ,672 Q ,281 Q ,044 Q ,014 Q ,275 Q ,164 Q ,236 EEI Q Financial Update

8 4 STOCK PERFORMANCE XI. Comparative Category Total Annual Returns U.S. Shareholder-Owned Electric Utilities, Value of $100 invested at close on 12/31/2005 EEI Index Regulated Mostly Regulated Diversified /31/ /31/ /31/ /31/ /31/2010 6/30/ EEI Index Annual Return (%) (20.93) EEI Index Cumulative Return ($) Regulated EEI Index Annual Return (15.59) Regulated EEI Index Cumulative Return Mostly Regulated EEI Index Annual Return (27.00) Mostly Regulated EEI Index Cumulative Return Diversified EEI Index Annual Return (33.90) 8.07 (5.16) Diversified EEI Index Cumulative Return * Calendar year returns shown, except where noted. / * At June 30 Returns are unweighted averages of constituent company returns. 31, 2004, EEI tracked 71 utilities, of which 38 were regulated (regulated assets at 80% of total), 22 were Mostly Regulated (regulated assets at 50% to 80% of total) and 11 were Diversified (regulated assets less than 50% of total). By December 31, 2007 after much of the industry had implemented a back to basics strategy, selling off non-energy operations, exiting geographically far-flung merchant power businesses, and reemphasizing regulated transmission and distribution the Regulated group had grown to 44 companies, the Mostly Regulated had shrunk to 19 and the Diversified group had been reduced to 7. At December 31, 2010, the Diversified group numbered only four companies, while the Regulated group stood at 39 and the Mostly Regulated at 19. Over the six-year period (December 2004 through December 2010) M&A activity reduced the total number of companies from 71 to 62. The industry s migration back to a focus on regulated operations (albeit with competitive power subsidiaries viewed by a number of companies as integral to their core focus), is also somewhat evident in the list of EEI Index top-ten per- XII. EEI Index Top Ten Performers For the 6-month period ending 6/30/11 Company Category % Return Central Vt. Public Service Corporation R 68.1 PNM Resources, Inc. R 30.6 CenterPoint Energy, Inc. MR 25.7 Constellation Energy Group, Inc. D 25.7 FirstEnergy Corp. MR 22.5 DPL Inc. R 20.0 El Paso Electric Company R 19.0 Portland General Electric Company R 18.9 Unitil Corporation R 18.9 NiSource Inc. MR 17.6 Note: Return figures include capital gains and dividends. R = Regulated, MR = Mostly Regulated, D = Diversified Source: EEI Finance Department EEI Q Financial Update

9 STOCK PERFORMANCE 5 formers for the year ending June 30, Six of the ten are in the Regulated category, three are Mostly Regulated and one is Diversified. Central Vermont Public Service (CVPS) led the industry with a 68.1% return, resulting in part from a May 30 acquisition bid by the Canadian distribution utility Fortis for $35.10 per share, a 44 percent premium over the CVPS common share closing price of $24.32 on Friday, May 27. (CVPS ultimately agreed to a merger on July 12 with another Canadian utility, Quebec-based Gaz Metro, valued at $35.25 per share.) Macro Watch: Interest Rates and Natural Gas Prices Arguably the two most significant macroeconomic trends in recent years that have impacted stock prices across the industry are persistently low bond yields and low natural gas prices. Dividend-paying regulated utilities are valued by investors as bond substitutes with dividend growth potential. Their stock prices are supported by declining rates and negatively impacted by rising rates in the same manner that bond prices are. Natural gas-fired generators are typically the marginal price setters in many competitive power markets across the country, therefore natural gas prices exert a strong influence on competitive power prices and on the profitability of competitive generation. The 10-year Treasury bond yield trended slightly upward as Q1 progressed, but finished the quarter (at 3.5%) about where it started (at 3.4%). With concerns about an economic soft patch marking Q2, the yield drifted down to under 3.0% in early June, no doubt supporting the utility sector s relatively strong performance for the quarter. Natural gas spot prices during the first half of 2011 bounced along the $4/mm BTU floor established after a sharp two-year decline from a spike over $10/mm BTU in mid 2008, with the weakness driven first by the outbreak of the financial crisis and demand destruction in the deep economic recession and second by the advent of a prospective supply glut due to shale gas drilling. The two-year bear market in natural gas has weighed heavily on the earnings prospects for competitive generators and on the share prices of utilities with significant competitive operations. The natural gas forward curve also seemed to find a floor during the first half of 2011 with a gradual upward slope to $5/mm BTU by 2012 and $6 by 2015 after declining markedly during 2009 and Nevertheless, analysts are projecting profit declines over the next few years for most competitive generators in response to much lower electricity prices, as hedges (put in place when gas and power prices were higher) roll off. XIII. Share Ownership by Investor Category (% of total) U.S. Shareholder-Owned Electric Utilities Institutional Retail Insider Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Institutional Insider Retail Total Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-09 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Institutional Insider Retail Total Dec Dec Mar Mar Source: SNL Financial and EEI Finance Department. Note: Institutional figures represent end-of-quarter, unweighted average of the 58 publicly traded EEI Index companies. EEI Q Financial Update

10 6 STOCK PERFORMANCE Sluggish Recovery in Electricity Demand While not a major determinant of stock prices in the short term, electricity demand remained depressed during the first half of EEI weekly electric output data showed a 0.1% decline nationwide for the period overall, with a 0.5% decline in Q1 (impacted by a mild winter) and a 0.4% gain in Q2. Energy Information Administration (EIA) preliminary data for January through May 2011 showed flat residential electricity deliveries for the period., a 0.7% gain in commercial deliveries and 2.7% growth in industrial demand. Several utilities noted the sluggish residential demand. Whether due to the weak economy across much of the nation, to the housing foreclosure mess, energy efficiency and demand response programs, or some combination, the slow recovery in residential power demand is a form of uncertainty for the industry that bears watching. Industry-Specific Fundamentals Remain Good There was not much change during the first half of the year in the industry s broader long-term outlook. Many regulated utilities are engaged in capital spending programs that should, according to Wall Street analysts, help drive solid mid- to high-single-digit earnings growth over the next several years. Recent Environmental Protection Agency (EPA) moves to limit coal plant emissions through the Cross-State Air Pollution Rule (CSAPR) which will target SOx and NOx emission and a Maximum Achievable Control Technology (MACT) rule for mercury, will take effect next year and conceivably force the retirement of 50 to 60 gigawatts of older, inefficient coal plants within the next five to ten years, according to industry analysts. This represents a sizeable slice of a total coal fleet that totals approximately 340 gigawatts. EEI s most recent annual survey of industry capital spending shows the industry plans to spend at least $83 billion to $85 billion per year from 2011 through 2015 on transmission and distribution upgrades, new generation in some power markets and grid-related investments marking a recovery back to 2008 s capex level after a dip to $77.8 billion and $73.9 billion, respectively, in 2009 and The projected totals do not extend the torrid growth trend in capex seen during the period. However, they also do not include spending related to compliance with the EPA s wide-ranging new and stricter emissions regulations, which are being finalized this year. Industry analysts predict that the new rules may boost the numbers in the EEI survey by an annual average of 30% over the next decade. Such a strong ongoing investment need offers the potential for extended strong rate base growth at regulated utilities. However, as is always the case in this most political of industries, maintaining healthy regulatory relationships will be a key to achieving reasonable returns for investors. The sharp decline in natural gas prices in recent years has helped to moderate the rise in end-user rates required to finance the industry s elevated capital spending. While most analysts now predict that natural gas prices will remain low over the next few years, any significant uptrend has the potential to boost the fuel cost component of rates and renew the more confrontational regulatory politics seen in some jurisdictions several years ago, when power prices were forced upward by surging natural gas prices. Political Strengths However, utilities have important political strengths as well. Their capital investment programs are a source of highquality jobs and they are often among the largest employers in a given state. In an economy burdened by chronically high unemployment and considerable nervousness about job stability even among those who are employed regulators, utility managements, company employees and local communities all agree that financially healthy utilities and the good jobs they offer serve everyone s best interest. Nevertheless, the judicious management of regulatory relationships will likely be among the most important factors in achieving success for shareholders and all stakeholders in the years ahead. Valuations: Average to High As June came to a close, industry analysts remained generally upbeat about the fundamental prospects for regulated utilities and the industry s financial strength, but predictably differed somewhat on the outlook for utility stocks relative to the broad market. Utility valuations, in general, were pegged as average to somewhat rich measured in terms of historical price-to-earnings ratios, but still seemed undervalued when the group s dividend yields are compared to the 10-year Treasury yield. However, the 10-year Treasury yield has remained low since the 2008/2009 financial crisis, as Treasuries remain a safe harbor for still-skittish investors concerned about European financial stability and the impact of inflation on emerging markets, and may be a distorted benchmark as a result. The perennial fear of rising rates, especially in light of the U.S. debt ceiling drama in Washington, was cited as a risk for regulated valuation, but there was little that is actually news about the U.S. debt load and economists forecast of rising interest rates has been repeatedly confounded over the past several years. Japan, after all, had its own bubble and government debt problem 20 years ago, and has had rock bottom interest rates ever since. EEI Q Financial Update