wall street update gabe grosberg regulated utilities · the empire district electric company; bbb....
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Wall Street Update
May 17, 2016
Gabe GrosbergDirectorRegulated Utilities
Copyright © 2016 by S&P Global. All rights reserved.
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Utilities Ratings Performance & Trends
Private and Confidential 2
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U.S. Regulated Utilities
0
10
20
30
40
50
60
70
AA- A+ A A- BBB+ BBB BBB- BB+ BB
Ratings Distribution as of April 25, 2016
Private and Confidential 3
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Data as of 04/25/2016
U.S. Regulated Utilities – Outlook and CreditWatch
Positive & CW Pos 14%
Negative & CW Neg 14%
Developing & CW Dev 2%Stable70%
Private and Confidential 4
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U.S. Regulated Utilities - 2015/2016 Upgrades / Positive Outlooks
Company Current Rating Action Date of Action
Avangrid Inc. BBB+ Upgrade April 2016
UIL Holdings Corporation BBB+ Upgrade April 2016
IPALCO Enterprises, Inc. BBB- Upgrade April 2016
Berkshire Hathaway Energy Company A Upgrade February 2016
SourceGas LLC BBB Upgrade February 2016
PNM Resources, Inc. BBB+ Upgrade December 2015
Green Mountain Power Corporation A- Upgrade December 2015
PG&E Corporation BBB Positive Outlook October 2015
Middlesex Water Co. A Upgrade August 2015
AGL Resources Inc. BBB+ Positive Outlook August 2015
NiSource Inc. BBB+ Upgrade June 2015
PPL Corporation A- Upgrade June 2015
American Water Works Company, Inc. A Upgrade May 2015
Eversource Energy A Upgrade April 2015
Duke Energy Corporation A- Upgrade April 2015
Entergy Corporation BBB Positive Outlook March 2015
Private and Confidential 5
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U.S. Regulated Utilities - 2015/2016 Downgrades / Negative or Developing Outlooks
Company Name Current Rating Action Outlook Action Date
FirstEnergy Corp. BBB- Negative Outlook April 2016
Cleco Corporation BBB- Downgrade April 2016
Tucson Electric Power Company BBB+ Negative Outlook February 2016
The Empire District Electric Company BBB Negative Outlook February 2016
Central Hudson Gas & Electric Corp. A Negative Outlook February 2016
Dominion Resources, Inc. BBB+ Downgrade February 2016
CenterPoint Energy, Inc. A- Negative Outlook January 2016
SEMCO Energy, Inc. BBB Negative Outlook December 2015
Consolidated Edison, Inc. A- Negative Outlook November 2015
Duke Energy Corporation A- Negative Outlook October 2015
Keyspan Gas East Corporation A- Downgrade October 2015
TECO Energy, Inc. BBB+ Negative Outlook September 2015
Southern Company A- Negative Outlook August 2015
Southern Company A- Downgrade August 2015
Private and Confidential 6
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S&P’s Corporate Ratings Criteria
Private and Confidential 7
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The Corporate Ratings Criteria Framework
Private and Confidential 8
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U.S. Regulated Utilities Financial and Business Risk Profile
Private and Confidential 9
Financial Risk Profile
Minimal
Modest
Intermediate
Significant
Aggressive
Business Risk Profile
Excellent
Strong
Satisfactory
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Combining the Business and Financial Risk Profiles
Financial Risk Profile
Business Risk Profile
Minimal Modest Intermediate Significant Aggressive Highly Leveraged
Excellent aaa/aa+ aa a+/a a- bbb bbb-/bb+
Strong aa/aa- a+/a a-/bbb+ bbb bb+ bb
Satisfactory a/a- bbb+ bbb/bbb- bbb-/bb+ bb b+
Fair bbb/bbb- bbb- bb+ bb bb- b
Weak bb+ bb+ bb bb- b+ b/b-
Vulnerable bb- bb- bb-/b+ b+ B b-
Private and Confidential 10
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U.S. Regulated Utilities
Financial Risk Profile
Business Risk Profile
Minimal Modest Intermediate Significant Aggressive Highly Leveraged
Excellent 0% 2% 19% 51% 3% 0%
Strong 1% 0% 1% 19% 1% 0%
Satisfactory 0% 0% 1% 1% 0% 0%
Fair 0% 0% 0% 0% 0% 0%
Weak 0% 0% 0% 0% 0% 0%
Vulnerable 0% 0% 0% 0% 0% 0%
Private and Confidential 11
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Combining the Business and Financial Risk Profiles
Financial Risk Profile
Business Risk Profile
Minimal Modest Intermediate Significant Aggressive Highly Leveraged
Excellent aaa/aa+ aa a+/a a- bbb bbb-/bb+
Strong aa/aa- a+/a a-/bbb+ bbb bb+ bb
Satisfactory a/a- bbb+ bbb/bbb- bbb-/bb+ bb b+
Fair bbb/bbb- bbb- bb+ bb bb- b
Weak bb+ bb+ bb bb- b+ b/b-
Vulnerable bb- bb- bb-/b+ b+ B b-
Private and Confidential 12
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Key Credit Trends in 2016
Private and Confidential 13
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Bonus Depreciation
Private and Confidential 14
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• In December 2015, Congress passed PATH Act authorizing bonus depreciation through 2019.
• Act allows investor-owned U.S. utilities to continue to depreciate capital investments at accelerated rates.
• Also extends Investment Tax Credits for wind and solar projects.
5 Year Extension of Bonus Depreciation
Bonus Depreciation Rates, 2015 - 2019
2015 2016 2017 2018 2019
50% 50% 50% 40% 30%
Private and Confidential 15
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• Bonus depreciation and low interest rates have led to a divergence in EBITDA and FFO• Based on our analysis, S&P anticipates that the extension of bonus depreciation will
increase the average utility’s FFO/debt by 300 basis points in 2016 – 2017
Effect of Bonus Depreciation
100%
120%
140%
160%
180%
200%
220%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Rela
tive
Gro
wth
FFO And EBITDA For U.S. Regulated Utilities
FFO
EBITDA
Private and Confidential 16
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Capital Expenditures
Private and Confidential 17
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Increasing Growth in Capital Spending
$0
$20
$40
$60
$80
$100
$120
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Capital Spending - US Regulated Utilites ($-Billion)
10% CAGR
Private and Confidential 18
Source: S&P Capital IQ
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Mergers and Acquisitions
Private and Confidential 19
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2016 Is on Track to Surpass Recent Years
0
10
20
30
40
50
60
2013 2014 2015 2016 (Q1)
Transaction Value of Major Announced U.S. Utilities M&As, USD Billions
Private and Confidential 20
Source: S&P Capital IQ
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Target Acquirer Year Announced Value (Billions) Implied EV/EBITDA (x) S&P Rating Reaction to Purchaser
ITC Holdings Corp. Fortis Inc. 2016 11.5 16.4 Outlook Revised to Negative
The Empire District Electric Company Liberty Utilities (Central) Co. 2016 2.4 10.9 Outlook Revised to Negative
Questar Corporation Dominion Resources, Inc. 2016 6.1 9.67 Outlook Revised to Negative
Oncor Electric Delivery Company, LLC Hunt Consolidated, Inc. 2015 18.9 12.0 N/A
SourceGas Holdings LLC Black Hills Utility Holdings, Inc. 2015 1.7 N/A Rating Affirmed
UIL Holdings Corporation Avangrid, Inc. 2015 4.8 11.84 N/A
Piedmont Natural Gas Co. Inc. Duke Energy Corporation 2015 6.6 14.82 Outlook Revised to Negative
TECO Energy, Inc. Emera Incorporated 2015 10.4 11.6 Outlook Revised to Negative
AGL Resources Inc. Southern Company 2015 12.0 9.77 Outlook Revised to Negative
Hawaiian Electric Industries Inc. NextEra Energy, Inc. 2014 4.6 8.46 Ratings Affirmed
Cleco Corporation Macquarie Infrastructure Partners Inc.. 2014 4.7 10.36 N/A
Integrys Holding, Inc. WEC Energy Group, Inc. 2014 9.1 10.09 Outlook Revised to Negative
Pepco Holdings, Inc. Exelon Corp. 2014 12.6 10.33 Ratings Affirmed
Philadelphia Gas Works UIL Holdings Corporation 2014 3.0 19.13 N/A
NV Energy, Inc. Berkshire Hathaway Energy Company 2013 10.7 8.87 N/AUNS Energy Corporation Fortis Inc. 2013 4.3 9.26 Outlook Revised to Negative
Notable Utility M&A Transactions, 2013 - Present
Private and Confidential 21
Source: S&P Capital IQ
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Key drivers of rising M&A:
• Slowing economic growth
• Conservation and distributed generation
• Low interest rate environment
• Rising value of utilities
Drivers of Consolidation in the U.S. Utility Sector
Private and Confidential 22
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U.S. Housing Starts
Private and Confidential 23
Source: S&P Capital IQ
1.9 mm
0.91 mm
0.00
500,000.00
1.00mm
1.50mm
2.00mm
2.50mm
3.00mm
United States - Total Private Housing Starts S&P Forecast 12 Year Average 9 Year Average
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Year-Over-Year Annual U.S. GDP Growth
-4.00%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
Real GDP Growth S&P Forecast Linear (Real GDP Growth)
Private and Confidential 24
Source: S&P Capital IQ
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U.S. GDP Growth vs. Growth in Electricity Sales
1.29% 0.60%
-5.00%
-4.00%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
201520142013201220112010200920082007200620052004200320022001200019991998199719961995
US Real GDP Growth (YoY%) Megawatt Hours of Electricity Sold (YoY%)
Fifteen Year Average Sales Increase (YoY%) Five Year Average Sales Increase (YoY%)
Private and Confidential 25
Source: S&P Capital IQ and U.S. Energy Information Administration
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Solar Generation Year-Over-Year Growth
1,212 1,818
4,327
9,036
17,691
26,473
36.0%
50.0%
138.0%
108.8%
102.8%
49.6%
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
140.0%
160.0%
-
5,000
10,000
15,000
20,000
25,000
30,000
2010 2011 2012 2013 2014 2015
Meg
awat
thou
rs (1
,000
's)
U.S. Solar Generation
Solar YoY % Change
Private and Confidential 26
Source: U.S. Energy Information Administration
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Total U.S. Megawatt Hours Sold (millions)
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Private and Confidential 27
Source: U.S. Energy Information Administration
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Rising Value of Utilities
Private and Confidential 28
Source: S&P Capital IQ
-40.00%
-20.00%
0.00%
20.00%
40.00%
60.00%
S&P 500 Electric Utilities Index, Total Return Market-Cap Weighted Index of Listed MLPs
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Utility Transactions - Enterprise Value to EBITDA
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
$0
$10
$20
$30
$40
$50
$60
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Total Transaction Value ($ billion) Weighted Average Implied EV/EBITDA
Private and Confidential 29
Source: S&P Capital IQ
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