What is driving the increase in utility capex and what lies ahead?

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1 What is driving the increase in utility capex and what lies ahead? NARUC Accounting and Finance Subcommittee Spring Meeting Andrew Slaughter, Managing Director, Deloitte Services LP Suzanna Sanborn, Senior Manager, Deloitte Services LP March 27, 2017

2 This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation. Copyright 2017 Deloitte Development LLC. All rights reserved. 2

3 Agenda Introduction A decade of growth in utility capital spending Transmission and distribution spending takes center stage Generation spending poised to moderate, but environmental and renewable spending drivers persist Natural gas infrastructure spending grows amidst opportunities across the value chain What lies ahead? Are current spending levels sustainable and what factors will impact them? Key takeaways 3

4 Introduction Utility capex is at record levels but can it be sustained? US gas and electric utility capital expenditures more than doubled in the past decade, from $58 billion in 2007 to an all time high of $117 billion in 2016 for a group of the largest investor-owned utilities (IOUs) 1 Spending drivers include the need to: - Upgrade infrastructure due to age, severe weather, cyber and physical threats - Deploy information technology to boost system efficiency, effectiveness and resilience; accommodate new devices; and increase flexibility - Address environmental concerns and pursue a lower emission energy slate - Take advantage of burgeoning shale gas supplies These trends are poised to continue, driving ongoing high spending in coming years. But can it be sustained? What factors will impact utility capital spending programs now and in the future? 1 RRA (Regulatory Research Associates, Inc.) and SNL Energy, RRA Capital Expenditure Update, October 27, RRA and SNL Energy are offerings of S&P Global Market Intelligence. 4

6 Utility capex has grown to record levels in recent years Electric T&D 1 and natural gas infrastructure spending increased Total capex by category for the largest US investor-owned electric and gas utilities (historical and projected) Billions E 2017E 2018E Electric T&D Generation Environmental Renewables Gas Pipeline Storage/Distribution Other 1 T&D refers to transmission and distribution Sources: RRA (Regulatory Research Associates, Inc.) and SNL Energy, RRA Capital Expenditure Update, October 27, SNL Energy s RRA index includes 43 of the largest publicly traded US electric and gas companies. RRA and SNL Energy are offerings of S&P Global Market Intelligence; Deloitte analysis. Note: Historical segmentation prior to 2008 is not available. Some companies began projecting environmental and renewable expenditures separately in 2012, while others still include them in generation category. 6

7 Capital spending projections remain substantial Utilities are moving toward more regulated investments 1 Percent of total capex by category for the largest US investor-owned electric and gas utilities (historical and projected) % of total annual capex 100% 90% 80% 70% 60% 50% 40% 30% 20% $67 B $64 B $64 B $69 B $83 B $84 B $87 B $97 B $117 B $99 B $98 B 6% 4% 3% 4% 4% 4% 6% 8% 7% 7% 9% 9% 9% 8% 9% 12% 9% 13% 11% 6% 15% 19% 19% 18% 7% 7% 5% 5% 6% 4% 2% 3% 38% 47% 9% 3% 3% 48% 45% 3% 32% 31% 24% 26% 20% 20% 47% 40% 43% 39% 41% 43% 44% 42% 21% 37% 46% 47% 10% 0% E 2017E 2018E Electric T&D Generation Environmental Renewables Gas Pipeline Storage/Distribution Other 1 Regulated investments are those that state utility commissions would typically allow regulated utilities to include in rate base Source: RRA (Regulatory Research Associates, Inc.) and SNL Energy, RRA Capital Expenditure Update, October 27, SNL Energy s RRA index includes 43 of the largest publicly traded US electric and gas companies. RRA and SNL Energy are offerings of S&P Global Market Intelligence; Deloitte analysis. Segments may not total 100% due to rounding. Note: Historical segmentation prior to 2008 is not available. 7

9 T&D is top spending category and is projected to rise Transmission expenditures alone roughly tripled in 10 years 18 Major electric utility transmission spending by category $ Billion Land & Land Rights Structures & Improvements Station Equipment Towers & Fixtures Poles & Fixtures Overhead Conductors Underground Conduit Underground Conductors Roads & Trails Source: SNL Energy, FERC Form 1. SNL Energy is an offering of S&P Global Market Intelligence Note: The transmission and distribution expenditure data on this slide is not directly comparable to T&D segment estimates discussed previously due to differences in the reporting universe, timeframe, and items included 9

10 Utilities primary focus is distribution system enhancement A key goal is to achieve greater resiliency 25 Major electric utility distribution spending by category 20 $ Billion Land & Land Rights Structures & Improvement Station Equipment Storage Battery Equipment Poles & Fixtures Overhead Conductors Underground Conduit Undergrnd Conductors Line Transformers Services Meters Customer Installations Leased Property Street Lighting Source: SNL Energy, FERC Form 1. SNL Energy is an offering of S&P Global Market Intelligence Note: The transmission and distribution expenditure data on this slide is not directly comparable to T&D segment estimates discussed previously due to differences in the reporting universe, timeframe, and items included 10

11 Grid modernization aims to boost resiliency, efficiency, flexibility Deployment is in early stages; much remains to be done US smart grid spending by segment ($ billion) 6 $ Billion Smart metering Distribution automation Advanced smart grid Source: Business Council for Sustainable Energy (BSCE), Sustainable Energy in America Factbook, 2017, p BSCE sources this data from Bloomberg New Energy Finance (BNEF) and Edison Electric Institute (EEI) Note: The advanced smart grid category includes cross-cutting pilot projects, such as those involving load control, home energy management, and EV charging 11

13 Amid slow load growth, generation spending driven largely by fuel-switching: Natural gas, wind, and solar are replacing retiring capacity New generating capacity by fuel (GW) Gigawatts (GW) Natural gas Wind Solar Hydro Coal Nuclear Other Source: Federal Energy Regulatory Commission (FERC), Office of Energy Projects, Energy Infrastructure Updates from Dec Includes utility-scale plants with nameplate capacity of 1 megawatt (MW) or greater 13

14 Gas, wind and solar also dominate 5-year planned capacity Planned generating capacity in GW (top) and estimated project cost (bottom) Gigawatts (GW) $ Billions * Natural Gas Wind Solar Nuclear Other renewable Oil/other non-renewable Source: SNL Energy power projects database. Includes projects within and outside 43 company universe that are >1 MW and will put at least 50% of output on the grid. SNL Energy is an offering of S&P Global Market Intelligence *2017 data includes only projects in advanced development and under construction 14

Environmental and renewable spending projected to ease slightly But state initiatives and other drivers continue to support it Environmental spending projected to drop slightly EPA Clean Power Plan

15 Environmental and renewable spending projected to ease slightly But state initiatives and other drivers continue to support it Environmental spending projected to drop slightly EPA Clean Power Plan (CPP) likely to be targeted, but industry sees transition to cleaner energy slate as writing on the wall Industry awaits rulings on regional haze and other air regulations, coal ash, water regulations, and Endangered Species Act Renewable spending also projected to ease, but several drivers persist. State Renewable Portfolio Standard (RPS) goals and mandates; tax credits; declining costs; customer demand, portfolio diversification, etc. 15

17 Natural gas infrastructure is fastest growing spending category Utility companies are investing in upstream and midstream assets Utility gas investment nearly quadrupled from , approaching $23 billion in US natural gas production rose 38% from In this period, US gas-fired power generation rose 57% and outpaced coal s share of generation on an annual basis for the first time in Electric companies are investing in shale gas reserves, wells, and midstream infrastructure to: Take advantage of growth Access gas supplies for growing fleet of gas-fired power plants Billion cubic feet per day US natural gas production US conventional gas US shale gas RRA (Regulatory Research Associates, Inc.) and SNL Energy, RRA Capital Expenditure Update, Oct. 27, Deloitte analysis, data not available prior to EIA, Short Term Energy Outlook, February EIA, Electricity data browser, accessed on March 15,

Utilities also upgrading and expanding gas T&D infrastructure Goals are to serve new facilities and enhance safety The utility industry is spending $22 billion annually to enhance the safety of the

18 Utilities also upgrading and expanding gas T&D infrastructure Goals are to serve new facilities and enhance safety The utility industry is spending $22 billion annually to enhance the safety of the US gas transmission and distribution systems, according to the American Gas Association. 1 Other drivers for natural gas T&D infrastructure investment include: Expansion to serve new facilities Compliance with federal and state mandates Investment in a source of stable, regulated returns 1 Dave McCurdy, President and CEO, American Gas Association, remarks at USEA 12 th Annual State of the Energy Industry Forum, Washington DC, January 21, Note: This amount is spread across AGA s member companies, large and small, and is not directly comparable to segmented natural gas capex data in the previous analysis 18

20 Electric and gas industry capex nearly doubled from Company estimates/projections are substantial for and remain well above historical levels Total capital expenditures for largest US electric and gas companies historical and projected $ Billion E 2017E 2018E Source: RRA (Regulatory Research Associates, Inc.) and SNL Energy, RRA Capital Expenditure Update, October 27, SNL Energy s RRA index includes 43 of the largest publicly traded US electric and gas companies. RRA and SNL Energy are offerings of S&P Global Market Intelligence 20

21 Are current spending levels sustainable? Rate impact to customers may result in headwinds... Electric and gas base rate changes * Years Electric base rate changes ($M) Number of electric rate cases Gas base rate changes ($M) Number of gas rate cases Total base rate changes ($M) Total number of rate cases Cumulative , , ,950 1,034 From , state utility commissions decided 1,034 cases involving the revenue that regulated electric and gas utilities are permitted to collect from ratepayers This resulted in close to $36 billion in additional revenue requirements over the ten year period, including almost $30 billion for electricity customers Source: RRA (Regulatory Research Associates, Inc.), Regulatory Focus, Themes in Energy Utility Regulation, February 3, 2016, p. 3. RRA is an offering of S&P Global Market Intelligence * Base rate changes are the aggregated revenue requirements from regulatory rulings in general rate cases each year, excluding rate changes from adjustment clauses (which may include fuel and purchased power costs) or rider mechanisms 21

22 Customers may have felt less impact due to fuel rate decreases After inflation adjustment, most sectors saw prices fall in 10 years US retail electricity price increases from 2007 to 2016 Average US retail price of electricity 2007 Cts/kwh 2016 Cts/kwh Inflation-adjusted 10-year 2007 price in 2016 change % Cts/kwh 10-year change inflation-adjusted Cts/kwh Inflationadjusted 10-yr change % Residential % % Commercial % % Industrial % % Transportation % % Total all sectors % % Sources: 2007 and 2016 prices from US Energy Information Administration Electricity data browser, Average retail price of electricity, monthly; inflation-adjusted prices calculated using US Bureau of Labor Statistics inflation calculator 22

23 Natural gas prices and interest rates may impact future capex Both have been historically low and are expected to rise $ per MMBtu Henry Hub Natural Gas Spot Price Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Percent Interest on 10-year T-note 2 0 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Other factors that could impact utility capital investments in the future include tax reform, such as any potential changes to bonus depreciation rules, dividend tax rates, and corporate income tax rates 1 US EIA, Henry Hub natural gas spot price, daily, accessed March 6, US Board of Governors of the Federal Reserve System, FRED, 10-Year Treasury Constant Maturity Rate 23

25 Utility capital spending drivers will likely persist in coming years Companies may need to renew efforts to keep energy affordable US electric and gas company capital spending has nearly doubled in the past 10 years 1 Drivers include aging infrastructure, severe weather, cyber and physical threats, new technologies, environmental goals, regulatory mandates, and burgeoning shale supplies Drivers will likely continue, and several areas may require substantial additional investment, such as grid modernization and gas distribution system upgrades Utilities ability to sustain high capex levels will depend partly on how much spending is passed on to customers. So far, the impact has been softened by low natural gas prices Factors like rising gas prices and interest rates may impact utilities ability to sustain high capital spending longer term Utility investments are making US energy infrastructure safer, more reliable and environmentally responsible, but companies may need to renew efforts to keep energy affordable in future 2 1 RRA (Regulatory Research Associates, Inc.) and SNL Energy, RRA Capital Expenditure Update, May 13, John McCue et al, From growth to modernization The changing capital focus of the US utility sector, Deloitte Center for Energy Solutions, October 2016, p

27 Contact information Andrew Slaughter Managing Director Deloitte Services LP Connect with me on LinkedIn Suzanna Sanborn Senior Manager Deloitte Services Connect with me on LinkedIn 27

28 About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ( DTTL ), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as Deloitte Global ) does not provide services to clients. Please see for a detailed description of DTTL and its member firms. Please see for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting. Copyright 2016 Deloitte Development LLC. All rights reserved.

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