Rate Case Summary Q FINANCIAL UPDATE QUARTERLY REPORT OF THE U.S. SHAREHOLDER-OWNED ELECTRIC UTILITY INDUSTRY

Transcription

1 Rate Case Summary Q FINANCIAL UPDATE QUARTERLY REPORT OF THE U.S. SHAREHOLDER-OWNED ELECTRIC UTILITY INDUSTRY

2 About EEI The Edison Electric Institute (EEI) is the association that represents all U.S. investor-owned electric companies. Our members provide electricity for 220 million Americans, operate in all 50 states and the District of Columbia, and directly employ more than 500,000 workers. With more than $85 billion in annual capital expenditures, the electric power industry is responsible for millions of additional jobs. Reliable, affordable, and sustainable electricity powers the economy and enhances the lives of all Americans. EEI has 70 international electric companies as Affiliate Members, and 250 industry suppliers and related organizations as Associate Members. Organized in 1933, EEI provides public policy leadership, strategic business intelligence, and essential conferences and forums. About EEI s Quarterly Financial Updates EEI s quarterly financial updates present industry trend analyses and financial data covering 56 U.S. shareholder-owned electric utility companies. These 56 companies include 50 electric utility holding companies whose stocks are traded on major U.S. stock exchanges and six electric utilities who are subsidiaries of nonutility or foreign companies. Financial updates are published for the following topics: Dividends Stock Performance Credit Ratings Construction Rate Case Summary SEC Financial Statements (Holding Companies) FERC Financial Statements (Regulated Utilities) Fuel 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 Bill Pfister Senior Financial Analyst (202) , bpfister@eei.org Future EEI Finance Meetings 48th EEI Financial Conference November 10-13, 2013 Orlando World Center Marriott Orlando, FL For more information about EEI Finance Meetings, please contact Debra Henry, (202) , dhenry@eei.org 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 56 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) Cleco Corporation (CNL) CMS Energy Corporation (CMS) Consolidated Edison, Inc. (ED) Dominion Resources, Inc. (D) DPL, Inc. DTE Energy Company (DTE) Duke Energy Corporation (DUK) Edison International (EIX) El Paso Electric Company (EE) Empire District Electric Company (EDE) 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) Iberdrola USA 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) 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) 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) Unitil Corporation (UTL) UNS Energy Corporation (UNS) Vectren Corporation (VVC) Westar Energy, Inc. (WR) Wisconsin Energy Corporation (WEC) Xcel Energy, Inc. (XEL)

4 Companies Listed by Category (as of 12/31/12) 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 50 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 six 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 (37 of 56) ALLETE, Inc. Alliant Energy Corporation Ameren Corporation American Electric Power Company, Inc. Avista Corporation Black Hills Corporation Cleco Corporation CMS Energy Corporation Consolidated Edison, Inc. DPL, Inc. DTE Energy Company Duke Energy Corporation Edison International El Paso Electric Company Empire District Electric Company Entergy Corporation Great Plains Energy Incorporated Iberdrola USA IDACORP, Inc. Integrys Energy Group IPALCO Enterprises, Inc. Northeast Utilities NorthWestern Energy NV Energy, Inc. PG&E Corporation Pinnacle West Capital Corporation PNM Resources, Inc. Portland General Electric Company Puget Energy, Inc. Southern Company TECO Energy, Inc. UIL Holdings Corporation Unitil Corporation UNS Energy Corporation Westar Energy, Inc. Wisconsin Energy Corporation Xcel Energy, Inc. Mostly Regulated (17 of 56) CenterPoint Energy, Inc. Dominion Resources, Inc. Exelon Corporation First Energy Corp. Hawaiian Electric Industries, Inc. 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 Vectren Corporation Diversified (2 of 56) Energy Future Holdings MDU Resources Group, Inc. Note: Based on assets at 12/31/12

5 Q Rate Case Summary COMMENTARY HIGHLIGHTS Shareholder-owned electric utilities filed only four rate cases in Q The single-quarter figure does not appear to mark a change in the broad trend of elevated case activity, which reflects a construction cycle driven by the need to replace infrastructure and reduce the environmental impact of power generation. Average regulatory lag, at 6.55 months, was the lowest since This does not likely reflect any change in regulatory policy on lag, but just the chance confluence of a number of cases that were quickly litigated. Attempts to implement rate mechanisms were a factor in new filings, as were recovery of operation and maintenance expenses, concerns about utility returns, and storm and other reliability-related expenses. The average awarded ROE in Q3 was 10.05%, a number that is low and consistent with the decades-long trend of declining awarded ROEs. Shareholder-owned electric utilities filed four rate cases in Q3 2013, the fewest in a quarter since The single-period data point, however, does not likely mark a new trend or even a moderation of the recent strong pace of new filings, which reflects a construction cycle driven by the need to replace infrastructure and reduce the environmental impact of power generation. For many years, elevated capital spending, followed by rising operation and maintenance expenses, have been the main drivers of rate case filings. In recent years, utilities attempts to implement rate mechanisms, clauses, factors, etc. have also been a major driver. The third quarter followed this I. Number I. U.S. of Electric Rate Cases Output Filed (GWh) (Quarterly) % II. Average Awarded ROE (Quarterly) pattern, with attempts to implement rate mechanisms acting as a relatively important cause of new filings, followed by recovery of operation and maintenance expenses. Concerns about utility returns and storm and other reliability-related expenses were also factors. 1

6 2 RATE CASE SUMMARY III. Average Requested ROE (Quarterly) IV. Average Regulatory Lag (Quarterly) % Months % V. 10-Year Treasury Yield (1/1980 9/2013) Source: U.S. Federal Reserve The average awarded ROE in Q3 was 10.05%, a number that is low and consistent with the decades-long trend of declining awarded ROEs. Falling interest rates account for much of this trend. Attempts by state commissions to moderate rate increases during times of financial hardship for many customers have also contributed in recent years. The average requested ROE, at 10.86%, is the lowest in two years and consistent with the long-term trend that mirrors the decline in awarded ROEs. Average regulatory lag, at 6.55 months, was the lowest since While this is fortunate, it does not likely reflect any change in regulatory policy on lag, but just the chance confluence of a number of cases that were quickly litigated. Filed Cases Entergy Texas led the way on rate mechanisms by filing for five different riders: a rate case expense rider, a transmission cost recovery factor (TCRF), a deferred tax accounting tracker (DTA), a market-valued load modifying rider, and a market-valued demand response rider. The TCRF would recover incremental transmission costs associated with participation in the Midcontinent Independent System Operator (MISO). The DTA would reflect the outcome of outstanding matters before the IRS. The experimental marketvalued load modifying rider would provide a mechanism for customers with interruptible load to participate in MISO s load modifying program. The experimental market-valued demand response rider would help facilitate customers participation in MISO s demand response program. Fitchburg Gas & Electric in Massachusetts filed in Q3 for a storm cost recovery factor, while Fitchburg Gas & Electric in Massachusetts, Duquesne Light in Pennsylvania and Entergy Texas all filed for recovery of operation and maintenance expenses. Other noteworthy features of the quarter s filed cases were Gulf Power in Florida s attempt to offset some of the company s slow revenue growth, Fitchburg Gas & Electric s filing in Massachusetts for recovery of storm-related expenses and vegetation management and other similar reliability-improvement-related expenses, and Entergy Texas s attempt to recover costs associated with the transfer of control of the company s transmission assets to MISO. Decided Cases ROE The Maryland commission awarded Potomac Electric Power (Pepco) a 9.36% ROE in Q3. The commission had awarded the company a 9.31% ROE in July of In the case decided in Q the company asked for a 10.25% ROE. In response, the commission s Q3 order asked,... what has changed in less than one year since we last established a just and reasonable ROE that now might justify a higher return? The commission said that Pepco did not demonstrate any significant changes in the economic environment faced by the company. The commission also said that Pepco is a monopolistic provider of electric distribution service that operates in a stable service territory. Its customer base is heavily residential, which alleviates the risk of large scale closures or relocations faced by utilities operating in heavily dense commercial or industrial service territories. It does not own generation, which reduces the danger of market price

7 RATE CASE SUMMARY 3 VI. Rate Case Data: From Tables I-V Number of Average Average Average Average Quarter Rate Cases Filed Awarded ROE Requested ROE 10-Year Treasury Yield Regulatory Lag Q NA NA Q NA NA Q NA NA Q NA NA Q NA NA Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q NA Q Q NA Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q

8 4 RATE CASE SUMMARY VI. Rate Case Data: From Tables I-V (cont.) Number of Average Average Average Average Quarter Rate Cases Filed Awarded ROE Requested ROE 10-Year Treasury Yield Regulatory Lag Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q NA = Not available fluctuations and environmental compliance issues faced by generation owners. Consequently, the commission accepted the staff s 9.36% ROE recommendation. The commission claimed it did not reduce the ROE to compensate for the company s Bill Stabilization Adjustment (decoupling). In United Illuminating s case in Connecticut, the commission conducted an ROE analysis, incorporating both discounted cash flow (DCF) and the capital asset pricing model (CAPM) analyses applied to a proxy group that incorporated companies named both by the company and the Office of Consumer Council. The commission thereby identified a reasonable ROE range of 7.74% to 9.24%. The commission ultimately adopted a 9.15% ROE that incorporates a 20- basis-point upward adjustment for flotation costs. In determining the ROE, the commission considered the economic environment, interest rates, the company s financial condition and access to debt and equity markets, and the company s decoupling program. While the commission did not make explicit adjustments to account for decoupling, the commission said... a decoupling mechanism, which virtu-

9 RATE CASE SUMMARY 5 ally guarantees the company s ability to achieve its allowed revenues, eliminates some business risk.... Therefore the Authority finds that an allowed return selected from low to midpoint of the range of reasonableness is appropriate and supported by the record evidence and financial theory. In Tampa Electric s case, the company entered into a settlement that allowed a 10.25% ROE, which can increase to 10.5% if the yield on the Treasury bond increases within certain specifications. Potomac Electric Power (Pepco) Maryland In Pepco s Q3 decision, the commission rejected many of the company s proposals, resulting in the following reductions in revenue requirements. Certain post-test-year reliability investments: The commission said The Commission has historically rejected this type of projected adjustment finding that it is not justified by regulatory lag arguments; and as history has shown, and witnesses have testified in this case, the Company has not even typically been able to accurately estimate future costs. (Reduction in revenue requirement: $17 million). Advanced metering infrastructure investment: The commission claimed Pepco had not proven this investment cost effective. (Reduction in revenue requirement: $3.2 million). $14 million in cash working capital: Commission said Pepco s 2005 lead-lag study, supporting the company s cash working capital proposal, was outdated. (Reduction in revenue requirement: $1.9 million). Half of supplemental executive retirement plan expenses: Commission said this benefit is only available to a small number of employees and is non-qualified for IRS purposes. Further, the commission said Pepco did not justify this expense, so the commission split the recovery equally between shareholders and customers. (Reduction in revenue requirement: $1.5 million). The commission also reduced the amount of recoverable employee overtime costs by $2.2 million, saying that, while Pepco generally explained this expense, it did not conduct an audit and specify it in sufficient detail. Pepco had requested authorization to establish a general rate case to recover costs associated with projects designed to produce accelerated and incremental reliability benefits. The company proposed to revise its poorest-performing feeders. The commission found that the adding 24 feeders in addition to the 55 feeders already in the 2013 base satisfies the acceleration component of the [general rate case]. The commission also required significant documentation on the project. The commission denied the tree trimming acceleration that was part of the proposal. Northern States Power Minnesota The commission authorized a rate increase that was less than the interim rate increase the company implemented. Consequently, the company owes the customers a refund. However, in calculating the refund, the commission departed from its usual policy of using the average prime rate (3.25% in this instance) in calculating the interest due customers, and instead used the overall rate of return (7.45%) awarded in this case. The commission also adopted a higher sales forecast than the one proposed by the company, and this decreased the revenue requirement by $25 million. The commission said the company s forecast underestimated the number of customers, overestimated energy prices, improperly accounted for the loss of two large industrial customers, and over-adjusted for the effects of demand-side management. The company had a depreciation reserve surplus, which the commission required the company to amortize over eight years, rather than the average remaining life of the assets, or 33 years, that the company had proposed. The commission found that the longer amortization would give insufficient consideration to the issues of rate shock mitigation and intergenerational equity. United Illuminating (UI) Connecticut The company had proposed a 50/50 capital structure, although the company s actual capital structure contained 51.08% equity. The Connecticut Industrial Energy Consumers (CIEC) proposed a 36% capital structure, in alignment with the capital structure of UI s holding company. The commission accepted the company s proposal and rejected the CIEC s proposal, saying that imposing such an extreme change... to the company s ratemaking capitalization mix may be disruptive to its financial stability and credit rating. The commission added that it will continue to monitor electric utility industry practices with regard to capitalization mix and will make changes to the ratemaking capital structure should industry standards change significantly. The commission disallowed $8 million of net income attributable to UI s sales forecast. The commission said the proposed economic growth rate was not credible, because it was not based on specific forecasts or studies. The commission also disallowed some travel, education, and training expenses, saying that while an increase in such expenses is justified, the appropriate level of such expenses should be based on an average of those expenses over the past three years, rather than the test year level. The commission did allow UI to implement a pilot decoupling program.