Energy Industry Opportunities and Challenges

Transcription

1 Energy Industry Opportunities and Challenges Accounting Leadership Conference & Chief Audit Executives Conference Richard McMahon Jr. Vice President, Energy Supply and Finance June 27, 2017

2 Discussion Outline I. Financial Results II. Grid Mod III. Tax Reform IV. Energy Supply V. FERC VI. ESG VII. Security (Cyber & Physical) 2

3 I. Financial Results

4 Financial Highlights as of Stock Performance Dividends EEI Index DJIA S&P NASDAQ YTD 6.1% 5.2% 6.1% 9.8% 1-year 7.5% 19.9% 17.2% 21.4% 5-year 79.3% 77.5% 86.7% 91.2% 10-year 99.9% 117.8% 106.3% 144.1% Yield = 3.4% All companies paying a dividend 40 of 44 companies increased dividend in 2016 Credit Ratings Strengthening BBB+ Average Outlook 85% Stable or Positive Note: Stock returns are total returns, ending , (i.e., include dividends) except for NASDAQ, which is price appreciation only. Source: EEI Finance Department, S&P Global Market Intelligence. 4

5 Industry Capital Expenditures $130 B $120 B $110 B $100 B $90 B $80 B $70 B $60 B $50 B $40 B $30 B Notes: Actuals Total company spending of U.S. Investor-Owned Electric Utilities, consolidated at the parent or appropriate holding company. Projections based on publicly available information and extrapolated for companies reporting fewer than three projected years (0.1% of the industry for 2018 and 2019). Source: EEI Finance Department, company reports, S&P Global Market Intelligence (April 2017). Projections (August 2016) Projections (April 2017) 5

6 Projected Functional CapEx $120 B 2015P 2016P as of September 2015 as of August 2016 $108.6 B $120.8 B To be updated summer 2017 $100 B $42.0B 35% $80 B $35.3B 32% Generation Distribution $60 B $28.7B 26% $32.0B 26% Transmission Gas-Related $40 B $20 B $0 B $19.3B 18% $20.8B 17% $13.3B 12% $17.9B 15% $5.7B 5% $3.4B 3% $6.2B 6% $4.7B 4% Environment Other Notes: Total company functional spending of U.S. Investor-Owned Electric Utilities. 2015P total does not sum to 100% due to rounding. Projections based on publicly available information and extrapolated for companies not reporting functional detail (1.3% and 0.7% of the industry for 2015 and 2016, respectively). Source: EEI Finance Department, company reports, S&P Global Market Intelligence (August 2016). 6

7 The Electric Power Industry in America SUPPORTS 7 Million + JOBS 2,662,000 4,418,000 DIRECTLY PROVIDED INDUCED 491,000 ELECTRIC POWER INDUSTRY EMPLOYEES 756,000 1,415,000 CONTRACTORS & SUPPLY CHAIN INVESTMENT 678,000 INDUCED: ELECTRIC POWER INDUSTRY EMPLOYEES 959,000 INDUCED: CONTRACTORS & SUPPLY CHAIN 445,000 INDUCED: PUBLIC-SECTOR 2,336,000 INDUCED: ECONOMY-WIDE RIPPLE EFFECTS The U.S. electric power industry supports more than 7 million jobs. This includes nearly 2.7 million jobs directly provided through electric power industry employees, contractors and supply chain, and investments, and an additional 4.4 million induced jobs, including 445,000 public-sector jobs though tax revenue. Each job directly provided by the industry supports an additional 1.7 jobs throughout U.S. communities.

8 US Electric IOUs Rating History % 13% 8% 6% 12% 24% 23% A or higher A- 16% 25% 29% 40% BBB+ BBB 9% 18% 21% 18% 10% 8% 2% BBB- Below BBB- BBB Average Industry Credit Rating is Increasing BBB+ Source: EEI Finance Department. 8

9 II. Grid Mod

10 We Are Individualizing Customer Solutions PRESENT PAST Source: The Edison Foundation Institute for Electric Innovation, Thought Leaders Speak Out: Key Trends Driving Change in the Electric Power Industry, December

11 State Initiatives to Evolve the Grid New York: Reforming the Energy Vision (REV) California: Distributed Resource Plans Hawaii: Power Supply Improvement Plan Illinois: Energy Infrastructure Modernization Act, NextGrid regulatory proceeding Maryland: PC44 grid modernization proceeding Minnesota: e21 Initiative Massachusetts: Grid Modernization Plan Ohio: PowerForward Grid modernization proceeding Source map: GTM Research 11

12 Building the Smarter Energy Infrastructure Customers Want Projected: $52.8 Billion Invested in the Energy Grid in 2016 Source: The Edison Foundation Institute for Electric Innovation 12

13 Energy Storage: No Longer Aspirational Energy storage can be deployed in all parts of the energy grid, and has applications in all parts of the value chain. Enhance Electric Company Operations Provide Grid Support Optimize Power System Enhance Customer Experience Alleviate high energy prices through time shifts Reduce the need for new generation Regulate frequency Reduce spinning, non-spinning, and supplemental reserve requirements Voltage support Black start electricity restoration Defer transmission and distribution upgrades Relieve electricity congestion Higher power quality and reliability Retail electric energy time shift FERC REGULATED STATE REGULATED T&D END USE Source: Adapted from DOE/EPRI Handbook, EEI (graphic) 13

14 Micro Grids Are Evolving and Utility Partnerships Are Emerging Source Data: GTM Research Picture: Northwestern grid supported micro grid 14

15 The Smart City Revolution Street Lighting Smart Buildings Smart Transportation Distributed Energy Resources Monitoring & Sensing 15

16 III. Tax Reform

17 Industry s Tax Reform Priorities EEI Tax Reform Principles Maintain Interest Deductibility for Corporate Debt Maintain Deductibility for State & Local Taxes Maintain Tax Normalization and Address Excess Deferred Taxes Keep Dividend Tax Rates Low and on Par with Capital Gains Tax Rates 17

18 Interest Deductibility Impacts Customers Advocacy Messaging Utilities are uniquely regulated Utilities are the most capital-intensive industry Utility capital structure is about ½ debt, ½ equity Losing interest deductibility negatively impacts customers We will not eliminate the interest deduction for small businesses, real estate purchases or utilities. d Kevin Brady (R-Texas) House Ways & Means Committee Chairman June

19 IV. Energy Supply

20 Transformation Drivers Low Natural Gas Prices Environmental regulations Declining Technology Costs Diversification State and Federal Public Policies Financial Incentives Customer Demand New Technologies and Business Models 20

21 Low Natural Gas Prices Driving Fuel Switching Increased coal to gas switching when the price of gas drops below the price of Central Appalachia coal. The ability to substitute between coal and gas units also moderates gas demand as well. Source: U.S. Energy Information Administration, SNL 21

22 Our National Fuel Mix Is Changing 2006 National Energy Resource Mix 2016 National Energy Resource Mix (Preliminary) Source: U.S. Department of Energy, Energy Information Administration Chart percentages are based on net generation data. 22

23 Electric Companies Use a Diverse Mix of Fuels to Generate Electricity *Includes generation by agricultural waste, landfill gas recovery, municipal solid waste, wood, geothermal, non-wood waste, wind, and solar. ** Includes generation by tires, batteries, chemicals, hydrogen, pitch, purchased steam, sulfur, and miscellaneous technologies. Sum of components may not add to 100% due to independent rounding. Source: U.S. Department of Energy, Energy Information Administration, Power Plant Operations Report (EIA-923); 2014 preliminary generation data. April by the Edison Electric Institute. All rights reserved. 23

24 U.S. Power Sector Carbon Dioxide Emissions Declining 1/3 of U.S. power generation comes from zero-emissions sources and another 1/3 from natural gas Coal-to-gas fuel switching has been a key factor in driving down power sector emissions As of 2016, industry CO 2 emissions were nearly 25 percent below 2005 levels Trajectory will continue based on current trends Power Sector Carbon Emissions ( ) Source: Source: Developed from U.S. Energy Information Administration, Monthly Energy Review, March

25 Current Generation Focus on Renewables and Natural Gas Capacity Additions and Retirements Announcements of New Generating Capacity (2016) Announced retirements ( ) Source: EEI; Velocity Suite, ABB Enterprise Software. Data as of March

26 We Are Adding More Non-Hydro Renewable Resources to the Mix 26

27 Pipeline Congestion Is Improving Winter gas pipeline congestion residential and commercial peak season November 2014 March 2015 November 2010 March 2011 Average capacity utilization of compressor stations and pipeline segments. Source: ABB, The Velocity Suite 27

28 Opposition Groups Fighting Natural Gas on Multiple Fronts 28

29 The Value of Fuel Diversity: The January 2014 Polar Vortex Fuel diversity helps to protect consumers from contingencies such as fuel unavailability and fuel price fluctuations A variety of generation sources helped maintain reliability during the Polar Vortex Image Source: NASA Record storage withdrawals helped meet increased demand for natural gas. Dual-fueled generators were able to rely on oil during times of gas pipeline constraints. The nuclear fleet operated at 95% capacity at the height of the polar vortex. (NEI) Coal plants, many currently slated for retirement, were employed to help meet demand. Regional wind generation was strong, providing PJM with 3,500 MW while electricity prices averaged more than $500/MWh. (AWEA) 29

30 The Value of U.S. Power Supply Diversity The study examines the risks to a diversified electricity portfolio and finds: [A] combination of factors tightening environmental regulations, depressed wholesale power prices, and unpopular opinions of coal, oil, nuclear, and hydroelectric power plants is currently moving the United States down a path toward a significant reduction in power supply diversity. The study quantifies the impact of a reduced fuel and technology diversity profile in America s electric sector, concluding: Electricity supply in the reduced diversity case increases average wholesale power prices by about 75 percent and retail power prices by 25 percent Electricity price impacts would reduce U.S. gross domestic product by nearly $200 billion Price impacts would also lead to roughly one million fewer jobs The typical household s annual disposable income would decline by about $2,100 30

31 V. FERC

32 Current Commissioners Acting Chairman LaFleur (D) Commissioner Honorable (D) leaving at end of term Vacant Vacant 2020 Vacant 2021 Current Nominees Neil Chatterjee Senior Advisor for Mitch McConnell Rob Powelson Chair of Pennsylvania PUC Kevin McIntyre Partner, Jones Day 32

33 Wholesale Markets 33

34 State Policies and Wholesale Markets Technical Conference held May 1-2, 2017 to discuss how the competitive wholesale markets can select resources of interest to state policy makers while preserving the benefits of regional markets and economic resource selection. (Docket No. AD ) Current market structure is not achieving outcomes desired by policymakers: Concerns about reliance on gas Concerns about loss of nuclear units No recognition of environmental stewardship objectives Questions raised: Who is responsible for resource adequacy Should the markets accommodate or achieve state policies 34

35 VI. ESG / Sustainability

36 Why Regulated Electric Companies Are Different Sector Beta vs. S&P500 Consumer Discretionary 1.13 Consumer Staples 0.76 Energy 0.99 Financials 1.07 Health Care 0.94 Industrials 1.02 Materials 1.24 Technology 1.03 Utilities Low Movement Relative to Market High Source: AltaVista Research LLC (April 2016). US Electric IOUs Credit Rating History 9% 7% 4% 13% 11% 14% 13% 25% A or higher 26% 24% A- 19% BBB+ 35% 22% 23% 27% BBB BBB- 13% 20% 25% 20% Below BBB- 20% 12% 6% 8% 4% BBB Industry Average is Improving BBB+ $130 B $120 B $110 B $100 B $90 B $80 B $70 B $60 B $50 B $40 B $30 B Industry Investment Actuals Projected Source: EEI, company reports, S&P Global Market Intelligence (April 2017). National Fuel Mix P Source: Department of Energy, Energy Information Administration. Note: Chart percentages are based on net generation data. 36

37 Electric Company Reporting on ESG / Sustainability Number of Companies and Level of Reporting Keyword Occurrence in Report Titles (out of 38 reports) Report Content Comprehensive 38 76% None 6 12% Minimal 6 12% Sustainability Responsibility Environment Citizenship Commitment Stewardship Accountability 9 (21%) 5 (12%) 3 (7%) 1 (2%) 1 (2%) 1 (2%) Number of Reports 23 (53%) Social 46% Economic 17% Environment 37% Number of Reports Year of Most Recent Report (comprehensive reports) Number of Companies Using a Common Reporting Framework GRI 21 55% [None] 17 45% Number of Reports < 20 8 < 40 Length of Reports (by page count) 11 < 60 7 < < 125 Page Count < < > 175 Note: Data is current as of August

38 Standardized ESG / Sustainability Metrics will Inform Investors EEI has initially identified 5 areas of focus based on a review of our member company ESG/Sustainability Reports and discussions with investors Qualitative ESG/Sustainability Governance Transition Strategy Management and oversight of ESG / Sustainability. Practices, programs, and initiatives designed to support the company s transition to an increasingly sustainable energy future. Quantitative Utility Portfolio Emissions Resources An Excel-based data reporting template that is customized for electric utilities to include metrics on owned and/or purchased generation data by technology/resource type, energy efficiency, reliability, grid modernization, transmission and distribution, as well as other metrics related to emissions, environmental stewardship, and natural and human resources. Note: data for these areas should include as much historical, current, and forward-looking information as is appropriate. 38

39 Shareholder Activism Results of IOU Shareholder Proposals in % Pass Fail 70% 60% 50% 40% 30% 20% 10% ExxonMobil** OXY** PPL 0% Proxy Access (3) Emissions Reporting (2) Renewables (2) Two Degree Scenario (9) Political Spending (5*) Other (2) 9 of the 23 (39%) shareholder proposals were related to Two Degree reporting. Despite being the first year many were introduced, the Two Degree proposals received significant votes in favor and was accepted by shareholders of one member company. Notes: Source: *Only four results charted because one proposal was withdrawn prior to shareholder meeting after discussion with company. **ExxonMobil and Occidental Petroleum had Two Degree shareholder proposals pass in XOM and OXY are shown for information only and not included otherwise. Member Company Survey, Proxy Monitor, SEC. 39

40 Stakeholder Outreach Investors Continue to expand Related Trade Groups API, IPIECA (petroleum) AGA, APPA, NRECA (electric & gas) Credit Rating Agencies Moody s, S&P, Fitch Members and EEI Proxy Services Institutional Shareholder Services (ISS), Glass, Lewis & Co, Egan-Jones Proxy Services, etc. ESG Data Providers Sustainalytics, MSCI, Bloomberg, RobecoSAM, etc. Interest Groups Ceres, SASB, etc. 40

41 VII. Security

42 How Industry & Government Work Together to Protect Critical Infrastructure Purpose The ESCC is the principal liaison between the electric sector and the federal government for coordinating efforts to prepare for, and respond to, national-level disasters or threats to critical infrastructure

43 Cross-Sector Coordination Interdependences across lifeline sectors (Communications, Downstream Natural Gas, Financial Services, Transportation, & Water) Focus on communications sector Development of the Strategic Infrastructure Coordination Council (SICC) 43

44 Cyber Mutual Assistance A New Approach Not just reactive CMA Coordinator Senior level expert Open to all electric generation, transmission, distribution, and downstream natural gas entities Currently, 117 members Participants reimbursed for costs incurred while providing emergency cyber assistance Voluntary program NDA required 44

45 Recap I. Financial Results II. Grid Mod III. Tax Reform IV. Energy Supply V. FERC VI. ESG VII. Security (Cyber & Physical) 45

46 Richard McMahon Jr. Vice President, Energy Supply and Finance