q4 2017 industry financial highlights · 2018. 2. 7. · oncor electric delivery company otter tail...

Q4 2017

Industry Financial

Highlights

February 7, 2018

This document is comprised of EEI-prepared

Q4 2017 Financial Updates for Stock Perfor-

mance, Dividends, and Rate Case Summary.

This report and other EEI Finance Department

material can be found at: www.eei.org/QFU.

About EEI

The Edison Electric Institute (EEI) is the association that repre-sents all U.S. investor-owned electric companies. Our U.S. mem-bers provide electricity for 220 million Americans and operate in all 50 states and the District of Columbia. EEI also has dozens of international electric companies as International Members, and hundreds of industry suppliers and related organizations as Associ-ate Members. Safe, reliable, affordable, and increasingly clean ener-gy enhances the lives of all Americans and powers the econo-my. As a whole, the electric power industry supports more than 7 million jobs in communities across the United States and con-tributes 5 percent to the nation’s GDP. 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 49 U.S. investor-owned electric utility companies. These 49 companies include 43 electric utility holding companies whose stocks are traded on major U.S. stock exchanges and six electric utilities who are subsidiaries of non-utility or for-eign companies. Financial updates are published for the following topics:

Dividends Rate Case Summary

Stock Performance SEC Financial Statements (Holding Companies)

Credit Ratings FERC Financial Statements (Regulated Utilities)

EEI Finance Department material can be found online at: www.eei.org/QFU.

For EEI Member Companies

The EEI Finance and Accounting Division maintains 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

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 Senior Director, Financial Analysis (202) 508-5049, [email protected] Bill Pfister Director, Financial Analysis (202) 508-5531, [email protected] Michael Buckley Senior Financial Analyst (202) 508-5614, [email protected] Future EEI Finance Meetings

EEI Financial Conference November 11-14, 2018 Hilton San Francisco Union Square San Francisco, California For more information about future EEI Finance Meetings, please contact Debra Henry at (202) 508-5496 or [email protected], or Devin James at (202) 508-5057 or [email protected].

Edison Electric Institute

701 Pennsylvania Avenue, N.W.

Washington, D.C. 20004-2696

202-508-5000

www.eei.org

The 49 U.S. Investor-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)

AVANGRID, Inc. (AGR)

Avista Corporation (AVA)

Berkshire Hathaway Energy

Black Hills Corporation (BKH)

CenterPoint Energy, Inc. (CNP)

Cleco Corporation

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)

Entergy Corporation (ETR)

Eversource Energy (ES)

Exelon Corporation (EXC)

FirstEnergy Corp. (FE)

Great Plains Energy Incorporated (GXP)

Hawaiian Electric Industries, Inc. (HE)

IDACORP, Inc. (IDA)

IPALCO Enterprises, Inc.

MDU Resources Group, Inc. (MDU)

MGE Energy, Inc. (MGEE)

NextEra Energy, Inc. (NEE)

NiSource Inc. (NI)

NorthWestern Corporation (NWE)

OGE Energy Corp. (OGE)

Oncor Electric Delivery Company

Otter Tail Corporation (OTTR)

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)

Unitil Corporation (UTL)

Vectren Corporation (VVC)

WEC Energy Group, Inc. (WEC)

Westar Energy, Inc. (WR)

Xcel Energy, Inc. (XEL)

Companies Listed by Category (as of 12/31/2017)

Please refer to the Quarterly Financial Updates webpage for previous years’ lists.

G iven the diversity of utility holding company corporate strat-egies, no single company categorization approach will be

useful for all EEI members and utility industry analysts. Never-the-less, 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 tradi-tional regulated utility model. Regulated 80% or more of total assets are regulated

Mostly Regulated Less than 80% of total assets are regulated

Categorization is based on year-end business segmentation data presented in SEC 10-K filings, supplemented by discussions with and information provided by parent company IR departments.

The EEI Finance and Accounting Division continues to eval-uate our approach to company categorization and business seg-mentation. 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 (35 of 49)

Alliant Energy Corporation

Ameren Corporation

American Electric Power Company, Inc.

Avista Corporation

Berkshire Hathaway Energy

Black Hills Corporation

Cleco Corporation

CMS Energy Corporation

Consolidated Edison, Inc.

Duke Energy Corporation

Edison International

El Paso Electric Company

Entergy Corporation

Eversource Energy

FirstEnergy Corp.

Great Plains Energy Inc.

IDACORP, Inc.

IPALCO Enterprises, Inc.

NiSource Inc.

NorthWestern Corporation

OGE Energy Corp.

Oncor Electric Delivery Company

Otter Tail Corporation

PG&E Corporation

Pinnacle West Capital Corporation

PNM Resources, Inc.

Portland General Electric Company

PPL Corporation

Puget Energy, Inc.

Southern Company

Unitil Corporation

Vectren Corporation

WEC Energy Group, Inc.

Westar Energy, Inc.

Xcel Energy Inc.

Mostly Regulated (14 of 49)

ALLETE, Inc.

AVANGRID, Inc.

CenterPoint Energy, Inc.

Dominion Resources, Inc.

DPL Inc.

DTE Energy Company

Exelon Corporation

Hawaiian Electric Industries, Inc.

MDU Resources Group, Inc.

MGE Energy, Inc.

NextEra Energy, Inc.

Public Service Enterprise Group Incorporated

SCANA Corporation

Sempra Energy

Note: Based on assets at 12/31/2016

COMMENTARY

Utility investors began 2017 with the now-perennial fear of

rising interest rates, amplified by the Federal Reserve’s desire

to finally wean markets off the near-zero short-term yields in

place since the 2008/2009 financial crisis. The Fed did raise

the Federal Funds target rates by 25 basis points three times

in 2017 (in March, June and December) and the three-month

Treasury Bill rate ended the year at 1.4% up from 0.5% when

2017 began. But longer-term rates again defied market

Index 2011 2012 2013 2014 2015 2016 2017

All Companies 21.4 4.8 17.3 27.6 -2.0 22.2 11.6

Regulated 22.3 4.7 17.0 28.9 -0.7 21.2 11.7

Mostly Regulated 19.5 5.8 16.0 27.5 -3.7 24.6 11.3

Diversified 21.4 0.8 47.5 6.6 -14.4 25.6 n/a*

U.S. Investor-Owned Electric Utilities

I. Index Comparison (% Return)

Q4 2017

Stock Performance

1

HIGHLIGHTS

nThe EEI Index returned 11.7% in 2017, posting a

second consecutive year of double-digit gains after 2016’s

17.4% return. However, the broad market was lifted even

higher by optimism over strengthening U.S. and global

economic growth; the Dow Jones Industrials returned

28.1%, the Nasdaq Composite gained 28.2% and the

S&P returned 21.8%.

nThe industry’s stock performance in 2017 was a reflec-

tion of its strong fundamentals, which include healthy

balance sheets, steady mid-single-digit earnings growth

from capital investment programs and an industry aver-

age dividend yield just above 3%.

nMost analysts see the industry’s current earnings

growth trend continuing over the next several years, with

rising dividends and healthy balance sheets, and with re-

gional pockets of opportunity for higher growth rates.

nUtilities have been a reliable hedge on broad market

weakness since the 2008/2009 financial crisis. When

stocks have declined so have interest rates, and utilities

have shined on a relative basis. But if rising rates cause

the next market correction, this trend may be challenged.

Index 2011 2012 2013 2014 2015 2016 2017

EEI Index 20.0 2.1 13.0 28.9 -3.9 17.4 11.7

Dow Jones Inds. 8.4 10.2 29.6 10.0 0.2 16.5 28.1

S&P 500 2.1 16.0 32.4 13.7 1.4 12.0 21.8

Nasdaq Comp.^ -1.8 15.9 38.3 13.4 5.7 7.5 28.2

Calendar year returns shown for all periods, except where noted. ^Price gain/loss only. Other indices show total return.

Source: EEI Finance Department, S&P Global Market Intelligence

II. Category Comparison (% Return)

Calendar year returns shown for all periods except where noted.

Returns shown here are unweighted averages of constituent company returns.

The EEI Index return shown in Table I above is cap-weighted.

*Diversified category eliminated in 2017 due to lack of constituent companies.

Source: EEI Finance Department, S&P Global Market Intelligence and company reports

III. Total Return Comparison

EEI Q4 2017 Financial Update

Value of $100 invested at close on 12/31/2012


100

150

200

250

2013 2014 2015 2016 2017

EEI Index S&P 500 Index DJI

2.0

4.0

6.0

8.0

Feb-18 Feb-19 Feb-20 Feb-21

12/31/2017 12/31/2016 12/31/2015

12/31/2014 12/31/2013 12/31/2012

12/31/2010

2 STOCK PERFORMANCE


IV. 10-Year Treasury Yield — Monthly

V. 10-Year Treasury Yield — Daily

$/mmBTU

VI. Natural Gas Spot Prices

1/1/2005 through 12/31/2017, Henry Hub

Source: U.S. Federal Reserve

VII. NYMEX Natural Gas Futures

$/mmBTU

Category*

2015

Q1

2015

Q2

2015

Q3

2015

Q4

2016

Q1

2016

Q2

2016

Q3

2016

Q4

2017

Q1

2017

Q2

2017

Q3

2017

Q4

All Companies -4.0 -7.7 7.5 2.8 15.5 7.7 -4.3 2.7 5.2 2.5 3.2 0.2

Regulated -3.7 -8.3 9.4 2.8 15.9 7.2 -4.3 1.9 5.8 2.7 3.5 -0.7

Mostly Regulated -4.4 -6.0 4.5 2.6 13.2 10.1 -3.7 3.8 3.9 2.0 2.5 2.5

Diversified -5.8 -7.1 -6.5 4.6 21.6 2.2 -7.8 9.5 n/a** n/a** n/a** n/a**

^Price gain/(loss) only. Other indices show total return. / * Returns shown here are unweighted

averages of constituent company returns. The EEI Index return shown above is cap-weighted.

** Diversified category eliminated in 2017 due to lack of constituent companies.


Index

2015

Q1

2015

Q2

2015

Q3

2015

Q4

2016

Q1

2016

Q2

2016

Q3

2016

Q4

2017

Q1

2017

Q2

2017

Q3

2017

Q4

EEI Index -5.0 -6.3 6.3 1.6 15.6 6.9 -5.4 0.5 6.1 2.4 2.7 0.1

Dow Jones Industrials 0.3 -0.3 -7.0 7.7 2.2 2.1 2.8 8.7 5.2 4.0 5.3 11.3

S&P 500 1.0 0.3 -6.4 7.0 1.4 2.5 3.9 3.8 6.1 3.1 4.5 6.6

Nasdaq Comp.^ 3.5 1.8 -7.4 8.4 -2.8 -0.6 9.7 1.3 9.8 3.9 5.8 6.3

VIII. Returns by Quarter


IX. Sector Comparison, Trailing 12 mo. Total Return

Sector Total Return

Technology 37.3%

Basic Materials 25.2%

Industrials 24.6%

Healthcare 22.9%

Consumer Services 20.4%

Financials 20.1%

Consumer Goods 17.1%

Utilities 12.5%

EEI Index 11.7%

Telecommunications -0.2%

Oil & Gas -1.5%

For the twelve-month period ending 12/31/17

Note: Sector Comparison page based on the Dow Jones U.S. Indexes, which are market-

capitalization-weighted indices.

Source: EEI Finance Dept., Dow Jones & Company, Google Finance, Y Charts

X. Sector Comparison, Q4 2017 Total Return

For the three-month period ending 12/31/17

Note: Sector Comparison page based on the Dow Jones U.S. Indexes, which are market-

capitalization-weighted indices.

Source: EEI Finance Dept., Dow Jones & Company, Google Finance, Y Charts

Sector Total Return

Consumer Services 9.6%

Technology 8.9%

Financials 7.0%

Basic Materials 7.0%

Industrials 6.8%

Oil & Gas 6.6%

Consumer Goods 5.6%

Telecommunications 4.3%

Healthcare 1.7%

Utilities 0.5%

EEI Index 0.1%

0%

1%

2%

3%

4%

5%


February 2018 through December 2021, Henry Hub

Daily Yield, 1/1/2008 through 12/31/2017

Source: S&P Global Market Intelligence

Source: S&P Global Market Intelligence

0%

4%

8%

12%

16%

Average Monthly Yield, 1/1/1980 through 12/31/2017

0.0

4.0

8.0

12.0

16.0

Q3-02 238,331

Q4-02 249,553

Q1-03 240,598

Q2-03 289,454

Q3-03 288,073

Q4-03 314,324

Q1-04 329,601

Q2-04 323,193

Q3-04 342,460

Q4-04 380,305

Q1-05 395,663

Q2-05 425,989

Q3-05 454,727

Q4-05 428,825

Q1-06 422,899

Q2-06 432,848

Q3-06 464,281

Q4-06 503,858

Q1-07 525,088

Q2-07 515,565

Q3-07 514,946

Q4-07 514,486

Q1-08 456,711

Q2-08 482,024

Q3-08 404,472

Q4-08 361,921

Q1-09 316,070

Q2-09 343,844

Q3-09 363,185

Q4-09 389,672

Q1-10 377,281

Q2-10 360,044

Q3-10 402,014

Q4-10 407,275

Q1-11 411,164

Q2-11 433,236

Q3-11 442,352

Q4-11 471,635

Q1-12 450,597

Q2-12 475,083

Q3-12 479,540

Q4-12 463,916

Q1-13 507,163

Q2-13 505,091

Q3-13 499,776

Q4-13 504,365

Q1-14 548,006

Q2-14 587,735

Q3-14 557,472

Q4-14 632,185

Q1-15 596,851

Q2-15 549,164

Q3-15 568,250

Q4-15 576,819

Q1-16 662,574

Q2-16 706,366

Q3-16 658,728

Q4-16 659,845

Q1-17 690,205

Q2-17 708,329

Q3-17 722,423

Q4-17 720,427

STOCK PERFORMANCE 3

XI. Market Capitalization at December 31, 2017 (in $ Mil.)


Company Stock Symbol $ Market Cap % Total

NextEra Energy, Inc. NEE 73,316 10.18%

Duke Energy Corporation DUK 58,877 8.17%

Dominion Resources, Inc. D 52,081 7.23%

Southern Company SO 48,234 6.70%

Exelon Corporation EXC 37,912 5.26%

Amer. Elec. Power Co. AEP 36,185 5.02%

Sempra Energy SRE 26,940 3.74%

Consolidated Edison, Inc. ED 26,148 3.63%

Public Svc. Enter. Group Inc. PEG 26,008 3.61%

Xcel Energy Inc. XEL 24,468 3.40%

PG&E Corporation PCG 22,998 3.19%

PPL Corporation PPL 21,249 2.95%

WEC Energy Group, Inc. WEC 20,965 2.91%

Edison International EIX 20,616 2.86%

Eversource Energy ES 20,053 2.78%

DTE Energy Company DTE 19,593 2.72%

AVANGRID, Inc. AGR 15,654 2.17%

Entergy Corporation ETR 14,615 2.03%

Ameren Corporation AEE 14,311 1.99%

FirstEnergy Corp. FE 13,595 1.89%

CMS Energy Corporation CMS 13,282 1.84%

CenterPoint Energy, Inc. CNP 12,224 1.70%

Company Stock Symbol $ Market Cap % Total

Alliant Energy Corporation LNT 9,843 1.37%

Pinnacle West Capital Corp. PNW 9,526 1.32%

NiSource Inc. NI 8,500 1.18%

Westar Energy, Inc. WR 7,523 1.04%

Great Plains Energy Inc. GXP 6,951 0.96%

OGE Energy Corp. OGE 6,572 0.91%

SCANA Corporation SCG 5,689 0.79%

Vectren Corporation VVC 5,397 0.75%

MDU Resources Group, Inc. MDU 5,250 0.73%

IDACORP, Inc. IDA 4,601 0.64%

Portland General Electric Co. POR 4,060 0.56%

Hawaiian Electric Indus., Inc. HE 3,933 0.55%

ALLETE, Inc. ALE 3,792 0.53%

Avista Corporation AVA 3,317 0.46%

PNM Resources, Inc. PNM 3,233 0.45%

Black Hills Corporation BKH 3,200 0.44%

NorthWestern Corporation NWE 2,895 0.40%

El Paso Electric Company EE 2,238 0.31%

MGE Energy, Inc. MGEE 2,188 0.30%

Otter Tail Corporation OTTR 1,756 0.24%

Unitil Corporation UTL 642 0.09%

Total Industry 720,427 100.00%

XII. EEI Index Market Capitalization (at Period End)

Source: EEI Finance Dept., S&P Global Market Intelligence

EEI Index Market Cap (in $Millions)

Note: Change in EEI Index market capitalization reflects the impact of buyout and spin-off activity in addition to

stock market performance.



$ Billions


-

100

200

300

400

500

600

700

800

Company % Return Category

AVANGRID, Inc. 38.1 MR

NextEra Energy, Inc. 34.4 MR

Avista Corporation 32.9 R

Vectren Corporation 28.2 R

Great Plains Energy Inc. 22.2 R

El Paso Electric Company 22.0 R

Xcel Energy Inc. 21.9 R

Public Service Enterprise Group Inc. 21.8 MR

PNM Resources, Inc. 20.9 R

American Electric Power Company, Inc. 20.9 R

STOCK PERFORMANCE 4


XIII. Comparative Category Total Annual Returns

Note: Return figures include capital gains and dividends.

R = Regulated, MR = Mostly Regulated

Source: EEI Finance Department

U.S. Investor-Owned Electric Utilities, Value of $100 invested at close on 12/31/2012

XIV. EEI Index Top Ten Performers

For the 12-month period ending 12/31/2017

expectations. The 10-year Treasury began the year at 2.45%.

But instead of rising it fell — to almost 2.0% by September

— before climbing back to end the year about where it began,

at just over 2.4%.

Absolute Strength but Relative Weakness

Viewed in isolation, and separate from the broader markets,

utility stocks had a strong year. The EEI Index returned

11.7%, posting a second consecutive year of double-digit

gains after 2016’s 17.4% return. But unlike last year, when the

EEI Index led the broad market averages, this year it lagged.

The Dow Jones Industrials returned 28.1%, the Nasdaq

Composite gained 28.2% and the S&P 500 returned 21.8%.

The broad market in 2017 was lifted by optimism about

strengthening U.S. and global economic growth. U.S. real

gross domestic product (GDP) rose 3.2% in Q3 and 3.1% in

Q2 — the highest quarterly readings since Q1 2015 — up

from a sluggish 1.2% gain in 2017’s first quarter. Markets

were also powered higher by improving global growth pro-

spects, which solidified in 2017 following the economic stag-

nation in Europe, Japan and broad-based concern about a

weak global economy that weighed on markets early in 2016.

By late in 2017, economists estimated global growth this year

Calendar year returns shown, except where noted.

*Diversified category eliminated in 2017 due to lack of constituent companies.

Returns are unweighted averages of constituent company returns.


2013 2013 2014 2015 2016 2017

EEI Index Annual Return (%) 17.27 27.63 (2.05) 22.21 11.56

EEI Index Cumulative Return ($) 100.00 117.27 149.67 146.59 179.15 199.86

Regulated EEI Index Annual Return 16.97 28.92 (0.67) 21.16 11.66

Regulated EEI Index Cumulative Return 100.00 116.97 150.80 149.79 181.48 202.64

Mostly Regulated EEI Index Annual Return 15.97 27.46 (3.67) 24.57 11.32

Mostly Regulated EEI Index Cumulative Return 100.00 115.97 147.81 142.38 177.36 197.45

Diversified EEI Index Annual Return 47.54 6.61 (14.43) 25.59 n/a*

Diversified EEI Index Cumulative Return 100.00 147.54 157.29 134.60 169.04 n/a*

100

150

200

250

12/31/2013 12/31/2014 12/31/2015 12/31/2016 12/31/2017

EEI Index Regulated Mostly Regulated Diversified

STOCK PERFORMANCE 5

and next at a strong 3.6% to 3.7%. Euro-area economies, in

particular, finally experienced an emerging wide-spread con-

fidence after years of near-recessionary conditions, with

2%+ real GDP growth forecast for 2017 and 2018, up from

1.5% when the year began. U.S. corporate earnings are

pegged to rise 9% to 10% in 2017 and 2018 while Euro-area

corporate profits are set to gain more than 30% in 2017 and

about 10% next year. Given these trends, most economic

sectors outgained the EEI Index for the year with the eco-

nomically sensitive technology (+37.3%), basic materials

(+25.2%) and industrials (+24.6%) sectors as market lead-

ers.

Despite the stronger economic growth, persistently low

inflation was one factor that held down interest rates. U.S.

and European inflation remained below 2% and in Japan it

remained well below 1%. While U.S. longer-term yields

failed to rise in 2017, they were still far higher than yields

available in Europe and Japan, where bond yields broadly

remained below 1% and short-term interest rates were be-

low zero. These very low global yields outside the U.S. may

have been one source of support for utility shares, as yield-

starved investors sought the income available from utilities’

sturdy dividends.

Q4 produced a separation of fortunes between utilities

and the major averages. Utilities generally declined in De-

cember, partially giving up their year-to-date gains, and the

EEI Index rose just 0.1% in Q4 compared to the Dow

Jones 11.3% jump and the S&P and Nasdaq’s 6%+ gains.

Industry Fundamentals Remain Healthy

The industry’s stock performance in 2017 was something of

a reflection of its strong fundamentals, which include

healthy balance sheets, steady mid-single-digit earnings

growth from capital investment programs and an industry

average dividend yield just above 3%. Analysts noted several

other supportive themes that colored 2017.

Natural gas prices and low-cost renewable power

(mostly wind) have helped fuel costs remain low and have

reduced pressure on customer bills that might otherwise be

required to fund capex programs. Regulation in general re-

mains constructive. Many utilities now have rate mecha-

nisms in place that allow for more timely recovery of capital

expenditures and address the impact of very slow to flat

sales growth, bad debts and pension costs. Analysts also

noted more states are implementing multi-year rate plans

with fewer rate cases and better opportunities for utilities to

earn their allowed return on equity.

Federal and state policymakers also offered support for

baseload coal and nuclear plants through federal energy

market reforms set for 2018 along with court rulings and

state decisions that supported zero emission credits for nu-

clear plants, which could improve cash flow and ease con-

cern about decommissioning liabilities. These moves in part

supported share prices for select companies within the EEI

Index’s Mostly Regulated category, which returned 11.3% in

2017, nearly matching the Regulated category’s 11.7% return

even as natural gas spot prices held at multi-year lows, rang-

ing from $2.50-3.00/mm BTU. And the natural gas futures

curve was little changed from year-end 2016, remaining at

the lowest levels of the past decade.

Such regulatory and policy support is crucial in an envi-

ronment where power demand is virtually flat. Driven by

the changing nature of the U.S. industrial economy and the

impact of energy efficiency programs, nationwide demand

in 2016 totaled 3.76 billion megawatthours, nearly the same

as that of 2007. And power demand through October of

2017 (latest EIA data available) was down 2.7% year-to-year.

Top Gainers

AVANGRID (+38.1%) was the EEI Index’s top gainer for

2017. The company reported profits that beat analyst’s esti-

mates for the first three quarters of the year and said it

hopes to grow earnings 8% to 10% annually through 2020,

mostly through regulated operations. The company said it

plans to invest $9 billion in its utilities and competitive re-

newable operations through 2020. NextEra Energy

(+34.4%) was the next-strongest gainer and likewise rose on

strong growth prospects driven by a focus on renewable

investment. Management in June said it hopes to grow earn-

ings at a 6-8% rate and dividends at a 12-14% rate between

2017 and 2020, investing over $40 billion in its competitive

and regulated operations. Avista (+32.9%) shares jumped

over 20% in July, adding to strength earlier in the year, on

news it would be acquired in an all-cash transaction for $53/

share by Canadian utility Hydro One. Midwestern gas and

electric utility Vectren (+28.2%) likewise jumped 9% in Au-

gust on news it was working with a financial adviser in re-

sponse to takeover interest from at least one potential buyer.

Great Plains Energy (+22.2%), which is seeking a no-

premium merger of equals with neighboring Westar, beat its

Q3 earnings forecast and benefitted from analyst upgrades

that cited potential for wind power and distribution system

investment provided the companies get regulatory support.

El Paso Electric (+22.0%) also gained on rising earnings

expectations and, potentially, on the wave of buyout interest

in small- to mid-cap utilities with rate base growth pro-

spects.

Outlook Remains Steady

It may be a truism to say that regulated utility growth funda-

mentals change slowly and are reasonably easy to predict —

at least relative to those of most other business sectors. It’s


STOCK PERFORMANCE 6

the macro calls, such as movement of interest rates and

changes in economic growth fortunes, that buffet stocks of

other sectors and cause gyrations in utilities’ relative perfor-

mance. The industry continues to execute capital investment

programs that are transforming the nation’s power system

with a focus on clean and renewable generation, transmis-

sion investment, reliability and safety enhancements and a

modernization of the grid to facilitate potentially more elec-

tric vehicles, customer control over power options and in-

creased amounts of distributed renewable generation.

EEI’s most recent capital spending survey (conducted in

August 2017) shows the industry has grown capex from

$74.3 billion in 2010 to a projected $122.8 billion for 2017.

The survey indicates a pullback to about $109.0 billion in

2019, but out-year estimates are usually conservative due to

the uncertainties surrounding longer-term planning and are

generally understated. Yet broad longer-term opportunities

seem robust for grid modernization, transmission invest-

ment and provision of the clean energy demanded by state

renewable portfolio standards and by increasing numbers of

corporations expressed by long-term contracts for renewa-

ble power.

Most analysts see the industry set to continue its mid-

single-digit earnings growth over the next several years, with

growing dividends and healthy balance sheets, and with re-

gional pockets of opportunity for higher growth rates. Of

course, this optimism is reliant on continued support from

state regulators for utility investment (and the jobs thereby

produced); a trend that could be threatened if fuel prices

rise and pressure rates upward rather than down. The

Trump Administration’s tax reform provides an additional

benefit for regulated utilities; savings passed to customers

are one more measure that can limit bill increases in a time

of rising capex. According to EIA data, the average cost of

electricity in late 2017 was about 10.58 cents/kilowatthour,

not too far above the 9.74 cent level ten years ago in 2008.

Utilities’ Macro Hedge: Different This Time?

Utilities have been a reliable hedge on broad market weak-

ness almost continuously since the 2008/2009 financial cri-

sis. When stocks have declined so have interest rates, and

utilities shares have shined on a relative basis versus the

broad market, outperforming anywhere from 8% to 15% in

market corrections (credit to J.P. Morgan’s December 2017

utility industry equity research for mapping this trend). Only

the May 2013 “taper tantrum”, when the 10-year Treasury

yield jumped in response to then-Fed Chief Ben Bernanke’s

hints at a reduction in Fed support for markets, did utilities

lag on a relative basis, but only by about 3%.

Investors have feared rising rates for longer than many

professional investors have been in the business. But the 35-

year bond bull market has defied all skeptics and yields have

fallen rather than risen. At the outset of 2018, the 10-year

Treasury yield, at 2.5%, is at the high end of the 1.5% to

2.5% range that has held since late 2011. But if rates do

finally begin a rising trend and cause, in part anyway, a stock

market correction, it’s unclear if utilities will strongly out-

perform. The industry has no control over such macro forc-

es, only its own business strategies and to some extent its

fundamentals. At the beginning of 2018, those look fairly

strong and utilities seem poised to offer investors slow and

steady earnings growth and rising dividends. What value the

market places on that only time will tell and it can’t be pre-

dicted with any consistency.


COMMENTARY The investor-owned electric utility industry added to its long-

term trend of widespread dividend increases during 2017.

Fifteen companies raised their dividend in Q4, typically the

most active for dividend changes after Q1. A total of 38

companies increased or reinstated their dividend in 2017 as a

whole compared to 40 in 2016, 39 in 2015, 38 in 2014 and

36 in both 2013 and 2012. Only 27 of the 65 companies

tracked by EEI increased their dividend in 2003, just prior to

the passage of legislation that reduced dividend tax rates.

Q4 2017

Dividends

1

HIGHLIGHTS

The investor-owned electric utility industry extended

its long-term trend of widespread dividend increases in

2017. A total of 38 companies increased or reinstated

their dividend, similar to the 40 in 2016, 39 in 2015, 38 in

2014 and the 36 in both 2013 and 2012.

The percentage of companies that raised or reinstated

their dividend in 2017 was 88%, the second-highest on

record after 2016’s 91%.

The industry’s average dividend increase per company

during 2017 was 5.6%, with a range of 1.4% to 12.9%

and a median increase of 5.6%. The industry’s dividend

payout ratio was 55.9% for 2017, remaining among the

highest of all business sectors.

As of December 31, 2017, 42 of the 43 the publicly

traded companies in the EEI Index were paying a com-

mon stock dividend.

The Tax Cuts and Jobs Act signed into law in Decem-ber 2017 maintained pre-existing tax rates for dividends and capital gains. This is crucial to avoid a capital raising disadvantage for high-dividend companies.


Last Twelve Months

I. Sector Comparison, Dividend Payout Ratio

Sector Payout Ratio (%)

EEI Index Companies* 55.9%

Energy 95.1%

Utilities 63.3%

Consumer Staples 59.1%

Industrial 42.0%

Materials 39.1%

Consumer Discretionary 30.8%

Technology 30.6%

Health Care 28.0%

Financial 27.7%

*For this table, EEI (1) sums dividends and (2) sums earnings of all index companies

and then (3) divides to determine the comparable dividend payout ratio (DPR).

EEI Index Companies payout ratio based on LTM common dividends paid and income

before nonrecurring and extraordinary items.

S&P sector payout ratios based on 2017E dividends and earnings per share

(estimates as of 12/31/2017).

For more information on constituents of each S&P sector see www.sectorspdr.com.

Source: AltaVista Research, S&P Global Market Intelligence, EEI Finance Department

II. Sector Comparison, Dividend Yield

at 12/31/2017

Sector Yield (%)

EEI Index Companies 3.4%

Utilities 3.5%

Consumer Staples 2.7%

Energy 2.6%

Industrial 1.9%

Materials 1.8%

Financial 1.6%

Health Care 1.6%

Technology 1.5%

Consumer Discretionary 1.3% *EEI Index Companies’ yield based on last announced, annualized dividend rates

(as of 12/31/2017); S&P sector yields based on 2017E cash dividends (estimates as

of 12/31/2017).

For more information on constituents of each S&P sector see www.sectorspdr.com.

Source: AltaVista Research, S&P Global Market Intelligence, EEI Finance Department

The percentage of companies that raised or reinstated

their dividend in 2017 was 88%, the second-highest on rec-

ord after 2016’s 91%. This followed results of 85% in 2015,

79% in 2014, 74% in 2013, 73% in 2012, 58% in 2011 and

60% in 2010. The 2016 record high is based on data going

back to 1988. The 15% dividend tax rate has supported the

high number of increases in recent years.

As of December 31, 2017, 42 of the 43 publicly traded

companies in the EEI Index were paying a common stock

dividend. Table III shows the industry’s dividend paying

patterns over the past 24 years. Each company is limited to

one action per year. For example, if a company raised its

dividend twice during a year, that counts as one in the

Raised column. Companies generally use the same quarter

2


III. Dividend Patterns 1994−2017


2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2002 2001 2000

Avg. Increase 5.8% 18.7% 8.4% 9.2% 7.4% 9.4% 7.2% 8.2% 6.8% 7.2% 5.3% 5.7% 5.8% 5.6% 11.1% 6.1% 30.5% 5.6%

Avg. Decrease 38.4% 47.4% 40.0% NA NA 45.7% 46.4% NA 100% NA 41.0% 34.5% NA NA 48.3% 43.7% 42.8% NA

Note: Prior to 2000: Total industry dividends/total industry earnings. Starting in 2000: Average of all companies paying dividend. Only one action per company per year is counted. If

a company raised its dividend twice, this counts as one in the Raised column. / * Current year figures reflect dividend changes (raised, lowered, etc.) through 12/31/2017 and

earnings and dividends through 9/30/2017 (payout ratio). / Source: AltaVista Research, S&P Global Market Intelligence, EEI Finance Department

Last Twelve Months

IV. Category Comparison, Dividend Payout Ratio

Regulated: 80% or more of total assets are regulated

Mostly Regulated: Less than 80% of total assets are regulated

Diversified: Prior to 2017, less than 50% of total assets are regulated

*2017 figures reflect earnings and dividends through 9/30/2017.

Source: EEI Finance Department, S&P Global Market Intelligence and company

reports.

at 12/31/2017

V. Category Comparison, Dividend Yield

Category Dividend Yield (%)

EEI Index 3.4

Regulated 3.4

Mostly Regulated 3.4

Regulated: 80% or more of total assets are regulated

Mostly Regulated: Less than 80% of total assets are regulated

Source: EEI Finance Department, S&P Global Market Intelligence and company

reports.

DIVIDENDS

Dividend

Raised No Change Lowered Omitted Reinstated Not Paying Total Payout Ratio*

1994 54 37 6 0 0 3 100 79.8%

1995 52 40 3 0 0 3 98 75.3%

1996 48 44 2 1 1 2 98 70.7%

1997 40 45 6 2 0 3 96 84.2%

1998 40 37 7 0 0 5 89 82.1%

1999 29 45 4 0 3 2 83 74.9%

2000 26 39 3 1 0 2 71 63.9%

2001 21 40 3 2 0 3 69 64.1%

2002 26 27 6 3 0 3 65 67.5%

2003 26 24 7 2 1 5 65 63.7%

2004 35 22 1 0 0 7 65 67.9%

2005 34 22 1 1 2 5 65 66.5%

2006 41 17 0 0 0 6 64 63.5%

2007 40 15 0 0 3 3 61 62.1%

2008 36 20 1 0 1 1 59 66.8%

2009 31 23 3 0 0 1 58 69.6%

2010 34 22 0 0 0 1 57 62.0%

2011 31 22 0 1 1 0 55 62.8%

2012 36 14 0 0 1 0 51 64.2%

2013 36 12 1 0 0 0 49 61.5%

2014 38 9 1 0 0 0 48 60.4%

2015 39 7 0 0 0 0 46 63.2%

2016 40 4 0 0 0 0 44 62.6%

2017 38 4 0 1 0 0 43 62.1%

Category 2009 2010 2011 2012 2013 2014 2015 2016 2017

EEI Index 69.6 62.0 62.8 64.2 61.5 60.4 67.0 62.9 62.1

Regulated 68.2 64.1 63.4 62.1 60.5 59.4 68.7 61.1 57.7

Mostly Reg. 72.2 60.7 63.1 69.7 64.7 63.8 62.6 68.0 72.2

Diversified 69.2 49.7 54.7 53.4 44.7 56.4 64.9 64.6 --

Company Annualized Payout Yield Last Date

Company (Stock Symbol) Category Dividend Ratio (%) (%) Action To From Announced

ALLETE (ALE) MR $2.14 65.0 2.9 Raised $2.14 $2.08 2017 Q1

Alliant Energy (LNT) R $1.26 64.9 3.0 Raised $1.34 $1.26 2017 Q4

Ameren (AEE) R $1.83 68.8 3.1 Raised $1.83 $1.76 2017 Q4

American Electric Power (AEP) R $2.48 69.5 3.4 Raised $2.48 $2.36 2017 Q4

AVANGRID, Inc. MR $1.73 80.3 3.4 Raised $1.73 $1.69 1996 Q1

Avista Corp. (AVA) R $1.43 71.0 2.8 Raised $1.43 $1.37 2017 Q1

Black Hills Corp. (BKH) R $1.90 41.8 3.2 Raised $1.90 $1.78 2017 Q4

CenterPoint Energy (CNP) MR $1.07 76.5 3.8 Raised $1.11 $1.07 2017 Q4

CMS Energy (CMS) R $1.33 65.9 2.8 Raised $1.33 $1.24 2017 Q1

Consolidated Edison (ED) R $2.76 64.7 3.2 Raised $2.76 $2.68 2017 Q1

Dominion Resources (D) MR $3.08 84.7 3.8 Raised $3.08 $3.02 2017 Q4

DTE Energy (DTE) MR $3.53 59.8 3.2 Raised $3.53 $3.30 2017 Q4

Duke Energy (DUK) R $3.56 65.1 4.2 Raised $3.56 $3.42 2017 Q3

Edison International (EIX) R $2.42 43.8 3.8 Raised $2.42 $2.17 2017 Q4

El Paso Electric (EE) R $1.34 53.7 2.4 Raised $1.34 $1.24 2017 Q2

Entergy (ETR) R $3.56 26.6 4.4 Raised $3.56 $3.48 2017 Q4

Eversource Energy (ES) R $1.90 60.0 3.0 Raised $1.90 $1.78 2017 Q1

Exelon (EXC) MR $1.31 47.3 3.3 Raised $1.31 $1.27 2017 Q1

FirstEnergy (FE) R $1.44 14.5 4.7 Lowered $1.44 $2.20 2014 Q1

Great Plains Energy (GXP) R $1.10 68.5 3.4 Raised $1.10 $1.05 2016 Q4

Hawaiian Electric (HE) MR $1.24 75.1 3.4 Raised $1.24 $1.22 1998 Q1

IDACORP (IDA) R $2.36 53.6 2.6 Raised $2.36 $2.20 2017 Q4

MDU Resources (MDU) MR $0.79 63.7 2.9 Raised $0.79 $0.77 2017 Q4

MGE Energy (MGEE) MR $1.29 56.8 2.0 Raised $1.29 $1.23 2017 Q3

NextEra Energy, Inc. (NEE) MR $3.93 68.8 2.5 Raised $3.93 $3.48 2017 Q1

NiSource (NI) R $0.70 58.7 2.7 Raised $0.70 $0.66 2017 Q1

NorthWestern Corporation (NWE) R $2.10 61.9 3.5 Raised $2.10 $2.00 2017 Q1

OGE Energy (OGE) R $1.33 63.2 4.0 Raised $1.33 $1.21 2017 Q3

Otter Tail (OTTR) R $1.28 70.4 2.9 Raised $1.28 $1.25 2017 Q1

PG&E (PCG) R $ -— 43.8 0.0 Omitted $0.—-- $2.12 2017 Q4

Pinnacle West Capital (PNW) R $2.78 52.8 3.3 Raised $2.78 $2.62 2017 Q4

PNM Resources (PNM) R $0.97 43.8 2.4 Raised $1.06 $0.97 2017 Q4

Portland General Electric (POR) R $1.36 55.8 3.0 Raised $1.36 $1.28 2017 Q2

PPL Corp. (PPL) R $1.58 69.8 5.1 Raised $1.58 $1.52 2017 Q1

Public Svc. Enter. Group (PEG) MR $1.72 161.7 3.3 Raised $1.72 $1.64 2017 Q1

SCANA Corporation (SCG) MR $2.45 51.4 6.2 Raised $2.45 $2.30 2017 Q1

Sempra Energy (SRE) MR $3.29 47.9 3.1 Raised $3.29 $3.02 2017 Q1

Southern Company (SO) R $2.32 57.1 4.8 Raised $2.32 $2.24 2017 Q2

Unitil Corporation (UTL) R $1.44 72.5 3.2 Raised $1.44 $1.42 2017 Q1

Vectren Corporation (VVC) R $1.80 62.0 2.8 Raised $1.80 $1.68 2017 Q4

Westar Energy (WR) R $1.60 59.4 3.0 Raised $1.60 $1.52 2017 Q1

WEC Energy Group (WEC) R $2.08 67.1 3.1 Raised $2.21 $2.08 2017 Q4

Xcel Energy (XEL) R $1.44 59.9 3.0 Raised $1.44 $1.36 2017 Q1

Industry Average 62.1 3.4

Categories — R = Regulated (80% or more of total assets are regulated), MR = Mostly Regulated (Less than 80% of total assets are regulated).

Dividend Per Share — Per share amounts are annualized declared figures as of 12/31/2017.

Dividend Payout Ratio — Dividends paid for 12 months ended 9/30/2017 divided by net income before nonrecurring and extraordinary items for 12 months ended 9/30/2017.

Dividend Yield — Annualized Dividends Per Share at 12/31/2017 divided by stock price at market close on 12/31/2017.

NM applies to companies with negative earnings or payout ratios greater than 200%.

While net income is after-tax, nonrecurring and extraordinary items are pre-tax, as there is no consistent method of gathering these items on a tax adjusted basis under current

reporting guidelines. On an individual company basis, the Payout Ratio in the table could differ slightly from what is reported directly by the company.

Source: EEI Finance Department and S&P Global Market Intelligence

DIVIDENDS 3


VI. Dividend Summary

U.S. Investor-Owned Electric Utilities (at 12/31/2017)

DIVIDENDS


VII. Free Cash Flow


each year for dividend changes, with the first quarter being

the most common for electric utilities.

2017 Increases Average 5.6%

The industry’s average dividend increase per company dur-

ing 2017 was 5.6%, with a range of 1.4% to 12.9% and a

median increase of 5.6%. NextEra Energy (12.9% in Q1),

Edison International (11.5% in Q4) and OGE Energy

(9.9% in Q3) posted the largest percentage increases.

NextEra Energy, headquartered in Juno Beach, Florida,

raised its quarterly dividend from $0.87 to $0.9825 per share

in Q1. The increase is consistent with the company’s plan,

announced in 2015, to target 12 to 14 percent annual

growth in dividends per share through at least 2018, off a

2015 base. NextEra also had the highest percentage increase

in 2016 (tied at 13.0% with Edison International and DTE

Energy).

Edison International, based in Rosemead, California,

announced an increase in its quarterly dividend from

$0.5425 to $0.605 per share in Q4, marking the fourth

straight year of a $0.25 per share annual increase. The com-

pany called this another meaningful step in raising its divi-

dend payout ratio toward the upper end of its targeted range

of 45% to 55% of subsidiary Southern California Edison’s

earnings.

OGE Energy, based in Oklahoma City, announced an

increase of $0.03 per share in Q3, from $0.3025 to $0.3325.

The company affirmed its commitment to ten percent divi-

dend growth annually through 2019.

In December, PG&E Corporation announced that it

would suspended its dividend beginning with the fourth

quarter of 2017, citing uncertainty related to causes and po-

tential liabilities associated with the extraordinary October

2017 Northern California wildfires.

Payout Ratio and Dividend Yield

The industry’s dividend payout ratio was 55.9% for the cal-

endar year 2017, remaining among the highest of all U.S.

business sectors. The broader Utilities sector (consisting of

electric, gas and water utilities) was somewhat higher at

63.3%. The industry’s payout ratio was 62.1% when meas-

ured as an un-weighted average of individual company rati-

os; 55.9% represents an aggregate figure.

While the industry’s net income has fluctuated from

year to year, its payout ratio has remained relatively con-

sistent after eliminating non-recurring and extraordinary

items from earnings. From 2000 through 2017, the indus-

try’s annual payout ratio ranged from 60.4% to 69.6% (see

Table III). We use the following approach when calculating

the industry’s dividend payout ratio:

1. Non-recurring and extraordinary items are eliminated

from earnings.

2. Companies with negative adjusted earnings are elimi-

nated.

3. Companies with a payout ratio in excess of 200% are

eliminated.

The industry’s average dividend yield was 3.4% on De-

cember 31, 2017, higher than all other business sectors ex-

cept the broader Utilities sector’s average 3.5% yield. The

industry’s yield was 3.3% on September 30, 3.3% on June

30 and 3.4% on March 31. This follows yields of 3.4% at

year-end 2016, 3.8% at year-end 2015, 3.3% at year-end

2014, 4.0% at year-end 2013 and 4.3% at year-end 2012.

We calculate the industry’s aggregate dividend yield

using an un-weighted average of the EEI Index companies

that are paying a dividend. The strong dividend yields preva-

lent among most electric utilities have helped support their

share prices over the past decade, especially given the peri-

od’s historically low interest rates. The industry’s dividend

yield was unchanged over the last year as the rise in utility

stock prices was offset by strong dividend increases.

The EEI Index delivered a positive total shareholder

return of 11.7% in 2017 but underperformed the broad

market. This followed a 17.4% return in 2016, a negative

3.9% return in 2015 and positive returns from 2014 back to

2009, respectively, of 28.9%, 13.0%, 2.1%, 20.0%, 7.0% and

10.7% . The EEI Index has produced a positive total return

in 13 of the last 15 years.

4

($ Billions) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017*

69.4 61.1 61.3 82.9 77.7 84.4 84.0 87.1 89.0 101.6 98.3 78.0

— Capital Expenditures (59.9) (74.1) (82.8) (77.6) (74.2) (78.6) (90.3) (90.3) (96.1) (104.0) (112.5) (82.1)

— Div. Paid to Common Shareholders (16.1) (15.4) (16.5) (17.1) (18.0) (19.3) (20.5) (20.8) (21.1) (22.5) (23.8) (19.0)

Free Cash Flow (6.6) (28.4) (38.0) (11.8) (14.4) (13.5) (26.8) (24.0) (28.2) (24.8) (38.0) (23.2)

Source: S&P Global Market Intelligence and EEI Finance Department / * Year to date through September 30

DIVIDENDS 5


Business Category Comparison

As shown in Table V, at year-end 2017 the Regulated and

Mostly Regulated categories each had a 3.4% average divi-

dend yield. The Diversified category no longer exists, as the

only two remaining companies from 2016 were merged into

the Mostly Regulated category at the start of 2017. The yields

for the Regulated and Mostly Regulated categories were

3.4% and 3.5%, respectively, on December 31, 2016.

The Regulated category had a dividend payout ratio of

57.7% in 2017 compared to 72.2% for the Mostly Regulated

group (see Table IV). The Regulated category produced the

highest annual payout ratio in 2015, 2011 and 2010 and in

each year from 2003 through 2008. It was exceeded by the

Mostly Regulated category in 2016, 2014, 2013, 2012 and

2009; it’s likely that the weaker earnings from the competi-

tive power business contributed to the higher payout ratio

among Mostly Regulated companies in those years.

Share Repurchases Remain Low After 2007 Spike

Twelve of the industry’s publicly traded companies repur-

chased an aggregate $182 million of common shares during

the first nine months of 2017 as an alternate way of return-

ing cash to shareholders. This compares to ten companies

and $232 million in the year-ago period. On a calendar-year

basis, ten companies repurchased $267 million during 2016

compared to 11 companies and $1.9 billion in 2015, 12 com-

panies and $668 million in 2014, ten companies and $410

million in 2013, 14 companies and $821 million in 2012, 15

companies and $1.8 billion in 2011, 13 companies and $2.7

billion in 2010, 11 companies and $908 million in 2009, and

18 companies and $2.4 billion in 2008 — all levels far below

the $11.9 billion of 2007. The industry’s common share re-

purchases exceeded $6.0 billion in 2004, 2005 and 2006 after

rising from only $120 million in 2003.

Free Cash Flow Deficit Continues in 2017

The industry’s aggregate free cash flow remained in a deficit

during the first nine months of 2017, at negative $23.2 bil-

lion compared to negative $21.9 billion in the comparable

2016 period. Net cash from operations and capital expendi-

tures were each nearly unchanged; the $1.3 billion, or 7.3%,

increase in dividends paid produced most of the difference.

Calendar-year free cash flow was negative $38.0 billion in

2016, compared to negative $25.1 billion in 2015, marking

the twelfth consecutive year of deficits. While some analysts

define free cash flow as the difference between cash flow

from operations and capital expenditures, we also deduct

common dividends due to the utility industry’s strong tradi-

tion of dividend payments.

The industry’s capital spending remains historically high

due to elevated levels of investment in environmental com-

pliance, transmission and distribution upgrades, and new

generation capacity. EEI’s latest projections (as of August

2017) for industry capex are $122.8 billion in 2017, $114.0

billion in 2018 and $109.0 billion in 2019. These figures are

based on a review of the latest capex projections for our en-

tire universe of companies.

Total aggregate industry-wide cash dividends paid to

common shareholders rose by $1.3 billion, or 7.3%, during

the first nine months of 2017 compared to the year-ago peri-

od. On a calendar-year basis, dividends increased by $1.4

billion, or 6.0%, to $23.8 billion in 2016 from $22.5 billion in

2015. From 2003 through 2016, total industry-wide cash div-

idends rose 94%, to $23.8 billion from $12.3 billion.

Dividend Tax Treatment Unchanged

On December 22, 2017, the Tax Cuts and Jobs Act was

signed into law, maintaining pre-existing tax rates for divi-

dends and capital gains. Continued low dividend tax rates

remain an important element in the industry’s ability to at-

tract capital for investment. Maintaining parity between divi-

dend and capital gains tax rates is crucial to avoid creating a

disadvantage for companies that rely on a strong dividend to

attract investors.

The top tax rate for both dividends and capital gains is

20 percent for couples earning more than $479,000

($425,800 for singles). For taxpayers below these income

thresholds, dividends and capital gains will continue to be

taxed at the current rates of 15 percent and 0 percent, de-

pending on a filer’s income level. A 3.8 percent Medicare tax

that was included in the 2010 health care legislation is also

applied to all investment income for couples earning more

than $250,000 ($200,000 for singles).

0

5

10

15

20

25

30

COMMENTARY Electric utilities filed 12 new rate cases in Q4 2017, a number

consistent with the increased pace of quarterly filings since

the industry’s restructuring nearly 20 years ago. Along with 23

decided cases, it was a busy quarter for rate regulation, as the

fourth quarter often is. The average awarded return on equity

(ROE) in Q4 was 9.73%, a level little changed from recent

quarters. The average requested ROE was 10.33%. Declining

interest rates since the early 1980s have resulted in a long-

term secular decline in both requested and approved ROEs.

Average regulatory lag, at 6.91 months, was considerably be-

low the industry’s approximate ten-month long-term average

since restructuring. However, this does not appear to indicate

a change in a trend, but instead results from an unusual num-

ber of special cases. Average regulatory lag will likely contin-

ue to hold near the ten-month average unless state commis-

sions accelerate the speed of rate case decisions.

Filed Cases in Q4 2017

Broadly speaking, the primary reason for rate case filings is the recovery of capital expenditures (capex), and this was the case in Q4. The second and third most common reasons for filings are utilities’ desire to establish rate mechanisms and to recover operation and maintenance (O&M) expenses; this was not the pattern in Q4. Instead, electric utilities’ desire to

Q4 2017

Rate Case Summary

I. U.S. Electric Output (GWh)

1

HIGHLIGHTS

Electric utilities filed 12 new rate cases in Q4 2017.

Along with 23 decided cases, it was a busy quarter for

rate regulation.

The average awarded return on equity (ROE) in Q4

was 9.73%, a level little changed from recent quarters.

The average requested ROE was 10.33%.

Electric utilities’ desire to recover expenses related to customer service and customer experience initiatives was the most frequently cited broad reason for filings after recovery for capex. This was followed by expenses relat-ed to the evolution in electric utility business models and utilities’ desire to recover for declining sales.

Q4’s low average regulatory lag, at 6.91 months, result-ed from an unusual number of special cases.

I. Number of Rate Cases Filed (Quarterly)




II. Average Awarded ROE (Quarterly)

Source: S&P Global Market Intelligence / Regulatory Research Assoc. and EEI Rate

Department

%

Source: S&P Global Market Intelligence / Regulatory Research Assoc. and EEI

9

10

11

12

13

14

recover expenses related to customer service and customer experience initiatives was the second most frequently cited broad reason for filings. This was followed by expenses re-lated to the evolution in electric utility business models and utilities’ desire to recover for declining sales.

These drivers are largely related. While recovery of in-vestments in generation plants and distribution and trans-mission infrastructure are mainstay drivers of case filings, growth in the use of renewable generation and other emerg-ing technologies are increasingly driving capex and other spending. Some of these new technologies allow customers to generate electricity and offer greater control over electric-ity use. This has fostered interest in new industry business models. Consequently, electric utilities are proposing to build and recover for the infrastructure that allows custom-ers to have that control and that creates a better customer experience. Yet these technologies often allow customers to use less central-station electricity and therefore reduce utility electricity sales. New Electric Utility Business Model Initiatives Public Service Colorado has embarked upon an Advanced Grid and Intelligence Initiative, which includes infrastruc-ture investments and other costs related to improving productivity. These include costs related to Colorado’s Clean

Air Clean Jobs Act. The Act requires the state’s electric utili-ties to convert or retrofit coal plants to gas ― or retire them up to the lesser of 900 megawatts or 50% of the utility’s coal assets by January 1, 2018. In Q4, the company filed for a four-step increase to recover the associated costs, explain-ing the rate increases would “fund investments to better integrate renewable energy, boost grid reliability, offer cus-tomers more information for greater control over their en-ergy budget, reduce system fuel and energy costs, and put in place technology to keep costs low over the long term.”

Similarly, Narragansett Electric in Rhode Island pro-posed a Power Sector Transformation Plan (PSTP) con-sistent with the state’s Power Sector Transformation Initia-tive (PSTI). The PSTI responds to the state governor’s di-rective that stakeholders collaborate to create a “more dy-namic regulatory framework” that enables a “cleaner, more affordable, and more reliable energy system for the 21st century and beyond.” A report issued by stakeholders pro-poses shifting the traditional electric utility business model to a more performance-based model, aligning incentives with customer demand and public policy. Recommendations included multi-year rate plans and budget and revenue caps to incentivize cost savings. The company’s PSTP has four main components: investments in advanced metering, grid modernization, electric vehicle infrastructure, and energy storage and solar demonstration projects. In its initial com-ment on the company’s proposal, the commission said, “As Rhode Island navigates the transition from an old one-way energy system to a new one, based as much on information as infrastructure, we need to consider fresh solutions, new partners and bring the best know-how in the world to our doorstep.”

Maui Electric in Hawaii filed to “Maintain the quality of electric service to customers, improve customer service and achieve transformational and State energy policy goals.” Miscellaneous Emera Maine filed in Q4 to remove a 50-basis-point ROE reduction ordered in its last rate case for management ineffi-ciencies associated with the company’s billing system, cus-


2 RATE CASE SUMMARY


III. Average Requested ROE (Quarterly)


Department

V. 10-Year Treasury Yield (1/1980 — 12/2017)


IV. Average Regulatory Lag (Quarterly)

%

% U.S. Investor-Owned Electric Utilities

Months U.S. Investor-Owned Electric Utilities


Department

10

11

12

13

14

5

10

15

20

25

0

4

8

12

16

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

Q1 1989 4 NA 15.26 9.21 NA

Q2 1989 4 NA 13.30 8.77 NA

Q3 1989 14 NA 13.65 8.11 NA

Q4 1989 13 NA 13.47 7.91 NA

Q1 1990 6 12.62 13.00 8.42 6.71

Q2 1990 20 12.85 13.51 8.68 9.07

Q3 1990 6 12.54 13.34 8.70 9.90

Q4 1990 8 12.68 13.31 8.40 8.61

Q1 1991 13 12.66 13.29 8.02 11.00

Q2 1991 17 12.67 13.23 8.13 11.00

Q3 1991 15 12.49 12.89 7.94 8.70

Q4 1991 12 12.42 12.90 7.35 10.70

Q1 1992 6 12.38 12.77 7.30 8.90

Q2 1992 15 11.83 12.86 7.38 9.61

Q3 1992 11 12.03 12.81 6.62 9.00

Q4 1992 12 12.14 12.36 6.74 10.10

Q1 1993 6 11.84 12.33 6.28 8.87

Q2 1993 7 11.64 12.39 5.99 8.10

Q3 1993 5 11.15 12.70 5.62 11.20

Q4 1993 9 11.04 12.12 5.61 10.90

Q1 1994 15 11.07 12.15 6.07 13.40

Q2 1994 10 11.13 12.37 7.08 9.28

Q3 1994 11 12.75 12.66 7.33 11.80

Q4 1994 4 11.24 13.36 7.84 9.26

Q1 1995 10 11.96 12.44 7.48 12.00

Q2 1995 10 11.32 12.26 6.62 10.40

Q3 1995 8 11.37 12.19 6.32 9.50

Q4 1995 5 11.58 11.69 5.89 10.60

Q1 1996 3 11.46 12.25 5.91 16.30

Q2 1996 9 11.46 11.96 6.72 9.80

Q3 1996 4 10.76 12.13 6.78 14.00

Q4 1996 4 11.56 12.48 6.34 8.12

Q1 1997 4 11.08 12.50 6.56 13.80

Q2 1997 5 11.62 12.66 6.70 18.70

Q3 1997 3 12.00 12.63 6.24 8.33

Q4 1997 4 11.06 11.93 5.91 12.70

Q1 1998 2 11.31 12.75 5.59 10.20

Q2 1998 7 12.20 11.78 5.60 7.00

Q3 1998 1 11.65 NA 5.20 19.00

Q4 1998 5 12.30 12.11 4.67 9.11

Q1 1999 1 10.40 NA 4.98 17.60

Q2 1999 3 10.94 11.17 5.54 8.33

Q3 1999 3 10.75 11.57 5.88 6.33

Q4 1999 4 11.10 12.00 6.14 23.00

Q1 2000 3 11.08 12.10 6.48 15.10

Q2 2000 1 11.00 12.90 6.18 10.50

Q3 2000 2 11.68 12.13 5.89 10.00

Q4 2000 8 12.50 11.81 5.57 7.50

Q1 2001 3 11.38 11.50 5.05 24.00

Q2 2001 7 10.88 12.24 5.27 8.00

Q3 2001 7 10.78 12.64 4.98 8.62

Q4 2001 6 11.57 12.29 4.77 8.00

Q1 2002 4 10.05 12.22 5.08 10.80

Q2 2002 6 11.41 12.08 5.10 8.16

Q3 2002 4 11.25 12.36 4.26 11.00

Q4 2002 6 11.57 11.92 4.01 8.25

Q1 2003 3 11.49 12.24 3.92 10.20

Q2 2003 10 11.16 11.76 3.62 13.60

NA = Not available / Source: S&P Global Market Intelligence/ Regulatory Research Assoc. and EEI Rate Department

RATE CASE SUMMARY 4

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

Q3 2003 5 9.95 11.69 4.23 8.80

Q4 2003 10 11.09 11.57 4.29 6.83

Q1 2004 5 11.00 11.54 4.02 7.66

Q2 2004 8 10.64 11.81 4.60 10.00

Q3 2004 6 10.75 11.35 4.30 12.50

Q4 2004 5 10.91 11.48 4.17 14.40

Q1 2005 4 10.55 11.41 4.30 8.71

Q2 2005 12 10.13 11.49 4.16 13.70

Q3 2005 8 10.84 11.32 4.21 13.00

Q4 2005 10 10.57 11.14 4.49 8.44

Q1 2006 11 10.38 11.23 4.57 7.33

Q2 2006 18 10.39 11.38 5.07 8.83

Q3 2006 7 10.06 11.64 4.90 8.33

Q4 2006 12 10.38 11.19 4.63 8.11

Q1 2007 11 10.30 11.00 4.68 9.88

Q2 2007 16 10.27 11.44 4.85 9.82

Q3 2007 8 10.02 11.13 4.73 10.80

Q4 2007 11 10.44 11.16 4.26 8.75

Q1 2008 7 10.15 10.98 3.66 7.33

Q2 2008 8 10.41 10.93 3.89 10.80

Q3 2008 21 10.42 11.26 3.86 10.60

Q4 2008 6 10.38 11.21 3.25 11.90

Q1 2009 13 10.31 11.79 2.74 11.10

Q2 2009 22 10.55 11.01 3.31 9.13

Q3 2009 17 10.46 11.43 3.52 10.90

Q4 2009 14 10.54 11.15 3.46 9.69

Q1 2010 16 10.45 11.24 3.72 10.00

Q2 2010 19 10.12 11.12 3.49 9.00

Q3 2010 12 10.27 11.07 2.79 12.40

Q4 2010 8 10.30 11.17 2.86 10.90

Q1 2011 8 10.35 11.11 3.46 10.80

Q2 2011 15 10.24 11.06 3.21 12.00

Q3 2011 17 10.13 10.86 2.43 8.64

Q4 2011 10 10.29 10.66 2.05 7.60

Q1 2012 17 10.84 10.57 2.04 10.50

Q2 2012 16 9.92 10.66 1.82 11.40

Q3 2012 8 9.78 10.68 1.64 8.20

Q4 2012 12 10.05 10.69 1.71 8.65

Q1 2013 21 10.23 10.48 1.95 8.24

Q2 2013 16 9.77 10.40 2.00 11.80

Q3 2013 4 10.06 10.85 2.71 6.55

Q4 2013 10 9.90 10.46 2.75 8.14

Q1 2014 9 10.23 10.22 2.76 11.30

Q2 2014 25 9.83 10.48 2.62 7.83

Q3 2014 8 9.89 10.48 2.50 8.67

Q4 2014 16 9.78 10.47 2.28 7.42

Q1 2015 10 10.37 10.29 1.97 11.80

Q2 2015 21 9.73 10.30 2.17 7.74

Q3 2015 6 9.40 10.35 2.22 10.00

Q4 2015 11 9.62 10.33 2.19 9.44

Q1 2016 14 10.26 10.39 1.92 9.45

Q2 2016 27 9.57 10.55 1.75 10.50

Q3 2016 12 9.76 10.57 1.56 9.62

Q4 2016 17 9.57 10.38 2.13 7.54

Q1 2017 10 9.89 10.24 2.44 9.04

Q2 2017 21 9.63 10.32 2.26 8.89

Q3 2017 13 9.66 10.18 2.24 11.30

Q4 2017 12 9.73 10.33 2.37 6.91


RATE CASE SUMMARY 5

tomer service and reliability. The company says it has made improvements to address these issues and is filing partly to recover for investments made related to customer experience and service levels and to recover costs relating to the roll-off of amortizations of employee medical plan savings.

Virginia Electric & Power filed to recover expenditures associated with universal solar generation plants. Otter Tail Power filed in North Dakota partly to increase the residential customer charge from $8.00 to $17.70. The company also wants to launch a residential time of day rate class. Connecti-cut Light & Power’s filing included a request to reopen the case to address changes in federal health care or tax laws.

Decided Cases in Q4 2017

Return on Equity In Potomac Electric Power’s case in Maryland, the company had requested an ROE of 10.1% and the commission award-ed 9.5%, saying, in each of its previous four cases, the com-pany “requested an ROE of 10.10% or greater. Each time we declined to adopt the Company’s recommendation in view of the economic and risk factors faced by the Company at the time. This time is no different. . . . Interest rates have generally declined over the last decade. Once again, the Company predicts that interest rates will increase, however, . . . economists have been forecasting that interest rates would increase for the past ten years, and they have been wrong. . . . interest rates went up and down between Case No. 9418 and this case, and are now somewhat higher. The resultant increase however cannot be correctly described as significant. . . . Thus, although market conditions may have changed, they do not support an increase in authorized ROE. . . . [The 9.5% ROE is] both adequate and appropriate for Pepco, considering the low level of risk associated with its electric distribution service in Maryland and the current capital market environment.”

In Tampa Electric’s case, a settlement stipulates, but for a few certain circumstances, that the company must freeze rates until after 2021. The settlement specifies a range for ROE between 9.25% and 11.25%. If the 30-year U.S. Treas-ury bond yield stays at or above 4.6039% for six months or more any time before the end of 2021, the range shifts up-ward to 9.5% to 11.5%. If the ROE falls outside that range, stakeholders can petition to change rates.

Commonwealth Edison and Ameren Illinois in Q4 com-pleted their seventh rate case under their formula rate plans. The commission granted each company an 8.4% ROE, among the lowest ROEs awarded to utilities in the last 35 years.

The order in Nevada Power’s rate case allows the com-pany to retain earnings associated with earned ROEs be-tween the allowed 9.4% and 9.7%, and requires the company to share equally with customers any earnings greater than 9.7%. The commission said the 9.4% ROE would keep the company financially healthy and “Future financial benefits may flow to [the company], such as savings through possible

refinancing of its debt at a lower rate in 2018 and 2019 or from the ‘Tax Cuts and Jobs Act’ recently passed by the United States Congress.” New Technology Investments Pepco’s settlement in Maryland requires the company to build or buy 700 kW of solar generation at a price capped at $1,650 per kilowatt with recovery to start January 1, 2019 at a 10.5% ROE. The settlement allows the company to initiate a 50 megawatt battery storage project at costs capped at $2,300 per kilowatt. The company will recover those costs in its next rate case. The settlement also requires the company to deploy a minimum of 530 electric vehicle charging sta-tions at an investment of up to $8 million, to be recovered over four years after 2021.

Tampa Electric’s settlement allows the company to im-plement a solar base rate adjustment mechanism allowing it to install and receive recovery for 600 megawatts of photo-voltaic solar generation at a maximum $122.3 million reve-nue requirement, not to exceed $1,500 per kilowatt, by the end of 2021. If the installed cost is less than this amount, the company must share 75% of savings with customers.

NSTAR Electric’s decision in Massachusetts allows the company to recover $45 million in investments to accelerate the development of electric vehicle infrastructure and up to $55 million to construct both a five-megawatt and a 12-megawatt energy storage facility. The commission said “grid modernization is vital for maintaining and improving the reliability of the electric system and offers potential savings to customers. . . . The Department remains committed to ensuring that electric distribution companies implement ap-propriate grid modernization technologies and practices to enhance reliability, reduce costs, empower customers to bet-ter manage usage, and support a cleaner, more efficient elec-tric system. . . . These investments should not only enable the market for energy storage in Massachusetts, but also pro-vide data that will be critical in evaluating future energy stor-age deployments as part of Massachusetts’ clean energy future.” Federal Tax Reform El Paso Electric’s settlement includes a mechanism to adjust for changes in corporate income taxes, requiring the compa-ny to record as a regulatory liability the difference between income taxes reflected in the approved revenue requirement and the taxes calculated using the new rate. The company is required to file a tariff within 120 days of the law’s enact-ment for accrued liability refund over a 12-month period. Within 90 days of the end of each fiscal year, the company must update and file the refund factor to reflect any over- or under-recovery until reconciliation in the next base rate case. Southwestern Electric Power’s order in Texas and Tampa Electric’s settlement contain similar conditions.

Duke Energy Florida’s settlement stipulates the compa-ny is to retain 40% of the impacts of federal tax reform,


RATE CASE SUMMARY 6

which accelerates depreciation of a coal project, and refund the remaining 60% to customers. If the cumulative liability is less than $200 million, the company must distribute to cus-tomers the excess deferred taxes over five years. If the liabil-ity is more, the company must distribute the excess over ten years. Miscellaneous The Maryland commission allowed Potomac Electric Power to include post-test-year reliability investments in rate base, saying “[the commission] adheres to a historic test period methodology in setting rates. However, in past rate cases, we have recognized an exception to allow recovery of post-test-year reliability plant investments made and placed into ser-vice prior to evidentiary hearings, and generally including no more than three months of post-test-year reliability plant additions. In order to accept a post-test-year adjustment, the Commission has also required the Company to demonstrate that such investments meet objective standards for safety and reliability, have not generated additional utility revenues, and will provide service to existing rather than new custom-ers.” The commission found that improvement in the com-pany’s reliability metrics over the past several years supported including these investments in rate base. The commission rejected post-test-year investments it determined did not meet these criteria.

Duke Energy Florida’s settlement increased rates to re-flect $1.1 billion in grid modernization investments intended to enhance reliability, reduce outages, shorten restoration time, support the growth of renewable energy and emerging technologies, install advanced metering infrastructure, and upgrade company systems. The settlement required the com-pany to discontinue a nuclear project resulting in an impair-ment charge of $135 million in Q3 2017. The company’s court case with the nuclear plant contractor is ongoing.

Tampa Electric’s settlement freezes rates until the end of 2021, with a few certain exceptions, such as allowing the company to recover storm costs on an expedited basis up to $4 per 1,000 kilowatthours. Additional cost recovery would be subject to hearing.

NSTAR Electric’s decision in Massachusetts allows the company to consolidate Western Massachusetts Electric into NSTAR Electric. The commission said the proposed merger would “provide net savings to ratepayers, long-term strate-gies that will assure a reliable, cost-effective energy delivery system, potential further improvements in customer service and service quality, and increased financial integrity of NSTAR Electric as the surviving entity.”

A settlement increased El Paso Electric’s residential cus-tomer charge from $6.90 to $8.25 per month; the company had requested $10.85. New customers with an expected load of greater than 400 kilowatts must take service under the company’s time-of-use rates, with a one-time opportunity to opt out after one year. Customers who opt out will pay the lower of time-of-use rates or standard service rates for the introductory year. Residential customers who generate elec-tricity have the choice of a $30 monthly minimum bill, a time-of-use rate or a demand charge. Under the time-of-use rate option, the customer would pay the greater of total base rate charges (including the customer charge) or a minimum bill of $26.50. Under the demand charge option, the custom-er would pay the customer charge, a monthly demand charge of $3.16 per kilowatthour based on monthly peak and me-tered demand, and time of use energy charges. The settle-ment applies similar changes to the rates of generating cus-tomers in the small general service class. The company will not be able to change rates for generating customers beyond those changes applying to all customers for a minimum of three years. Customers who applied to be generating custom-ers before the order date are exempt from minimum bill pro-visions for 20 years.


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