wall street update gabe grosberg regulated utilities · the empire district electric company; bbb....

Wall Street Update

May 17, 2016

Gabe GrosbergDirectorRegulated Utilities

Copyright © 2016 by S&P Global. All rights reserved.

Utilities Ratings Performance & Trends

Private and Confidential 2

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


Presenter

Presentation Notes

Option 1 with Bars

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%


Presenter

Presentation Notes

Option 1 with Bars

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


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


S&P’s Corporate Ratings Criteria


The Corporate Ratings Criteria Framework


U.S. Regulated Utilities Financial and Business Risk Profile


Financial Risk Profile

Minimal

Modest

Intermediate

Significant

Aggressive

Business Risk Profile

Excellent

Strong

Satisfactory

Combining the Business and Financial Risk Profiles



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-


U.S. Regulated Utilities




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%


Combining the Business and Financial Risk Profiles




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-


Key Credit Trends in 2016


Bonus Depreciation


• 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%


• 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


Capital Expenditures


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


Source: S&P Capital IQ

Mergers and Acquisitions


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



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



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


U.S. Housing Starts



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

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)



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%)


Source: S&P Capital IQ and U.S. Energy Information Administration

Presenter

Presentation Notes

The correlation between GDP growth and electricity sales from 1995 – 2010 was roughly 0.76. The correlation between 2010 – 2015 was approximately 0.27 and statistically non-significant.

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


Source: U.S. Energy Information Administration

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


Source: U.S. Energy Information Administration

Rising Value of Utilities



-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

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



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wall street update gabe grosberg regulated utilities · the empire district electric company; bbb....

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