EECS4460.2011.12.19.pptx
Power System Management
EECS 4460/5460-901
Lecture #20
Utility Business Structures and Economics
1
Investor–owned utility business structures vary widely today
Many are holding company structures
Various combinations of generation, transmission and distribution
Local distribution company structure has changed the least and is still regulated
Shareholders are the investors and they look for total return
Public power and cooperatives not so much
Fundamentally a “cost of service” business model
For public power, surplus funds can often be used elsewhere
ReCap: Business Structure Conclusions
Public Power has options for excess revenues
Co-op’s often return excess to customer/owners for example:
Regardless of the business structure, the priority for management is to support shareholder value
Shareholders are the owners of the company
Recall the Board of Director and management structure
Management must also balance customer rates, system reliability, customer service and community support.
There is increasing pressure on sustainability and the environment
There is increasing pressure on emerging technologies
Shareholder success is measured by total return
We will focus on investor-owned utilities
Measure of stock performance over time
Includes share price appreciation
Price appreciation is the difference in stock price- typically from when you bought until today
For example, you buy a stock for $50/share and it’s $55/share a year later – that’s a ten percent price appreciation over that year
And dividends paid
Dividends are payments made back to the shareholder from the profits of the company
For example, if the company makes $1.50/share in earnings, they may decide to pay the shareholders $1.00/share in a dividend payment. You own 100 shares, you get $100.
Dividends are typically paid quarterly
Dividend yield is annual dividend/share price
In the above example, if the share price is $80/share, with a $1 quarterly dividend payment, the annual yield is $4/$80 = 5%
Shareholder Total Return
Equity
An ownership interest in property
For publicly traded companies, it is capital contributed by the shareholders
They own shares of the company
The share price is the price of one share
Large companies have many million shares “outstanding” e.g. 100Million
Not the same as RATEBASE
Some Basic Financial Terms
Some Basic Financial Terms
Debt
An obligation to pay money under an agreement
Publicly traded companies are evaluated on their credit risk by rating agencies
S&P, Moody’s and Fitch provide debt ratings
AAAA… BBB+…D (default)
Utilities historically had favorable debt ratings
Lower now dues to changing business structure
Net Income
Gross income is all revenue, all sources
Net income is Gross Income minus all expenses
Expenses includes operating costs, taxes, interest etc.
Earnings
Earnings are the what the company “earns” in shareholder terms
Earnings are expressed on a PER SHARE basis
Earnings=Net Income/ Number of Shares Outstanding
Example: If a company earns $600Million in Net Income and has 300Million shares
outstanding, its earnings are $2.00 per share
Some Basic Financial Terms
Emphasis on Shareholder Returns
Total Return
Dividend Growth
An increased focus on the regulated business
Lower risk with regulated returns
Very difficult to make money in merchant generation
Transmission and Distribution Capital Emphasis
Supporting public policy of renewables and smart grid
Supporting the environmental agenda
Key Utility Strategies Today
A Sample from AEP’s latest presentations*
*54th EEI Financial Conference, November 10-12, 2019
Including company disclaimers
AEP’s Dividend Growth History
AEP’s Generation Strategy
AEP’s Environmental Update
AEP’s Capital Spend Forecast
Regardless of all the changes, utilities are still viewed as a relatively conservative investment
Merchant generation opportunities are very limited
An essential service is provided – basically a “must have” product
Many parts of the physical system are old, needing replaced - often “rate based”
While growth is limited, other new investment opportunities are there
Often considered “recession proof”
While the risk profile of the sector is being reduced by the companies, there are investment risks
Increasing interest rates may stifle capital investment
A major event can impact the company e.g. California fires
A challenging state regulatory environment
Financially, utilities are well-positioned
The Dow Jones Utility Index is a good long-term measure (1928-2012)
Some Regional Examples: DTE
A more recent look at DTE
Some Regional Examples: Duke (DUK)
Some Regional Examples: FE
Finally, Dominion Resources (D)
Dominion’s footprint and scale
November 2019 Analyst Meetings,
with disclaimers
Today’s companies are re-establishing investment platforms that can be supported by increased rate base
Recall the ratemaking fundamentals
Investors are looking for increased predictability and stability
Generation is viewed as higher risk
Many strategies fit public and political policy
There are still state-by-state variations on the political environment
The current climate for investing includes a stronger emphasis on new technologies
Renewables have strong universal support
Lower costs and improved efficiencies, especially in solar PV
Smart Meters, up to an including the Smart Grid, are benefitting from large sums of R&D money
Improved information, data management and increased control are customer priorities
Innovations in EV’s, self-driving vehicles, and storage are well-supported
Recap: Utility Financial Update
New Technologies and the Future Utility
R&D in the industry
Grid Modernization
The Smart Grid
Energy Storage
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