Wells-Fargo-Dec-6-2012.pdf

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December 6, 2012
Equity Research
Observations From Our Utility Panels
Takeaways From The 11th Annual Pipeline, MLP and E&P, Services and
Utility Symposiums

• We hosted four topical panel discussions featuring executives from the electric,
natural gas, and water utility sectors at our December 5 Utility Symposium in
New York City. The following bullet points highlight key takeaways from each
panel. Please see pages 2-4 for more in-depth discussions.
• Post-Election Policy Update--Panelists were optimistic that dividend tax
rates would maintain parity with capital gains rates going forward and, in any
event, do not anticipate changes to dividend policies in response to near-term tax
rate dynamics. Shifting to environmental policy, panelists are not expecting
meaningful change in the course of environmental regulation and continue to
expect EPA to drive the rules. We did not sense imminent concerns around
potential carbon regulation.
• New Commodity Landscape--Panelists generally expect natural gas prices to
remain stable with an upward bias, at least for the near term, though some
executives expressed concern that volatility could return in the long term.
Separately, the combination of new gas and oil plays and aging infrastructure is
driving growth opportunities for both regulated utilities and energy-related
nonutility segments, such as midstream E&P.
• New Demand Landscape--Though it varies to some degree by region and
company, sales growth is clearly being challenged by the tepid economy and
energy efficiency/conservation efforts. While panelists touted positive economic
indicators and promising commercial and industrial expectations, residential
usage remains flat at best. In light of lackluster demand trends, along with
potential pressure on allowed ROEs and the need to keep rate increases in check,
managing O&M expense remains a key focus among utility executives, many of
whom highlighted attrition related to an aging work force as a key source of cost
controls.
• State Of The Grid--Panelists agreed that FERC remains supportive of the
transmission build-out based on recent orders and thus do not expect any major
policy changes that would alter investment incentives. With that said, they expect
FERC will be more selective when granting ROE adders and instead stick to some
of the structural incentives. Asked if successful completion of the ITC/ETR
transaction would likely spur additional transmission divestitures, panelists
agreed that while it may catch the attention of some utility boards, it takes a
unique set of circumstances to move forward with such action.

Utilities

Neil Kalton, CFA, Senior Analyst
[phone] /
[e-mail] Akers, CFA, Senior Analyst(314) 875-2040 /
[e-mail]
Jonathan Reeder, Associate Analyst
[phone] /
[e-mail]
Glen F. Pruitt, Associate Analyst
[phone] /
[e-mail]
WELLS FARGO SECURITIES, LLC
Utilities EQUITY RESEARCH DEPARTMENT

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Discussion

Post-Election Policy Update Panel Takeaways

On Wednesday, December 5, we hosted the “Post-Election Policy Update” panel featuring Jeff Sterba (CEO,
AWK), Art Beattie (CFO, SO), Bruce Williamson (CEO, CNL), Tom Webb (CFO, CMS), and Jimmy Addison
(CFO, SCG).

Key takeaways include:

• Tax Implication--Panelists seemed optimistic that the dividend tax rate will maintain parity with
capital gains rates. Should that not be the case, it likely wouldn’t cause a near-term change to each
utility’s dividend policy, but could cause reevaluation over the long run if Congress makes it clear that,
for the longer term, paying dividends will be penalized. A few of the panelists that have recently met
with politicians noted that the message on dividend taxes varies depending on the counterpart and
that the political environment remains toxic. Bottom line, while there is general optimism that
dividend tax policy will ultimately be reasonable, it could be a bumpy road to get there…think after
Christmas according to CMS.

• Environmental Regulations--Since the EPA has been driving policy of late, much to the chagrin of
some panelists, the key focus is on educating the EPA of the facts and data to help develop rules that
the industry can comply with without undue disruption and minimizing impact on customer bills and
economic development. Panelists do not necessarily expect the Obama administration to try to tackle
carbon in the second term and highlighted (1) the lack of large-scale, cost effective, commercially
available solutions and (2) the inherent shift away from coal driven by low natural gas prices, along
with existing EPA mandates.

• Fuel Diversity--The administration still remains supportive of nuclear and the panelists stressed the
need to maintain a balanced portfolio that doesn’t overly rely on one fuel, particularly gas, which
likely won’t stay as cheap as it is now, and could return to its volatile ways.

The New Commodity Landscape Panel Takeaways

On Wednesday, December 5, we hosted the “New Commodity Landscape” panel consisting of David L. Goodin
(President and CEO of MDU’s Utilities and CEO Designate), Brian Bird (CFO and Treasurer, NWE), Sean
Trauschke (VP & CFO, OGE), and Kevin Hadlock (EVP & CFO, STR).

Key takeaways include:

• Gas Prices--Panelists agreed that natural gas prices are likely to remain stable with an upward bias;
however, one panelist differed in his view that volatility would likely return in the long term. Several
executives on other panels also alluded to a potential return in gas price volatility, largely citing past
swings in gas prices. Separately, some panelists expressed concerns about potentially tighter frac’ing
regulations on the state and federal level.

• Benefits Of Low Commodity Environment--Panelists across the board are realizing the benefits
of lower gas prices in the form of lower customer bills, which creates a more receptive environment in
which to invest in capital projects. Further, the regulated utilities are benefiting from economic
activity spurred by energy development in their regions, most notably MDU in the Bakken. Lastly, for
companies with midstream involvement, new shale plays are driving opportunities to invest in gas
and oil infrastructure.

• Generation Impacts--Not surprisingly, panelists expressed a clear predisposition towards gas
capacity additions in light of the low gas price environment and EPA mandates. That said, many
executives (across all the panels) continue to highlight the value of fuel diversity. Separately, some
panelists indicated that support for renewables has waned, to some degree, due to low gas prices,
which impacts both renewable investment opportunities as well as related transmission projects.

• Aging Infrastructure--In addition to infrastructure opportunities spurred by the new commodity
landscape, panelists have been actively engaged in infrastructure investments aimed at reliably and
WELLS FARGO SECURITIES, LLC
Observations From Our Utility Panels EQUITY RESEARCH DEPARTMENT

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safely operating electric and gas systems. Several companies, including STR and NWE, have received
enhanced recovery mechanisms in support of such investment.

The New Demand Landscape Panel Takeaways

On Wednesday, December 5, we hosted the “New Demand Landscape” panel that included Dave Smelter (CFO,
WTR), Jim Shay (CFO, GXP), Darrel Anderson (CFO, IDA), Joe Rigby (CEO, POM), and Maria Pope (CFO,
POR).

Key takeaways include:

• Load Growth--Usage growth continues to be challenged by the economy and energy efficiency, which
in most cases has offset customer growth. While companies are seeing positive economic indicators
in their service territories, it does not appear that those improvements have translated into
meaningful sales growth at this point. Among customer classes, there was general agreement that
residential usage is flat at best as panelists pointed to more energy-efficient appliances, lighting
improvements, and extreme weather, which can skew underlying sales trends. However, we detected
more optimism on the commercial and industrial fronts. The impacts of both energy efficiency and
the economy vary quite a bit on a regional/company basis. For example, some companies that have
been investing in energy efficiency for some time indicated that the low hanging fruit has already been
picked and driving incremental efficiencies at a reasonable cost is becoming increasingly challenging
(most notably IDA).

• O&M--Given (1) the lackluster demand growth picture, (2) potential downward pressure on allowed
ROEs, and (3) the need to keep rate increases in check while investing heavily in rate base, managing
O&M expenses remains a key focus among utility executives. Taking advantage of an aging workforce
through attrition was a common theme, along with technological advancements and process
improvements in areas such as sourcing and financial systems.

• ROEs And Regulatory Trends--Panelists recognized the downward pressure on allowed ROEs, but
suggested it might be near trough levels. In terms of earned ROEs, with the exception of POM, which
continues to aggressively pursue regulatory enhancements, most panelists seemed pleased with the
trend toward reduced regulatory lag and credited regulator education in many cases. Separately,
panelists stressed the value of infrastructure investments, particularly in light of heightened customer
expectations. With the long-term trajectory for bills likely pointing upward given investment needs,
executives emphasized the value of reliable electric service and the need to communicate that message
to customers.

The State Of The Grid Panel Takeaways

On Wednesday, December 5, we hosted the “State of the Grid: Transmission Plans, Process and Policy” panel
featuring Lisa Barton (EVP of Transmission, AEP), Cameron Braedy (CFO, ITC), Jim Judge (CFO, NU) and
Teresa Mogenson (EVP of Transmission, XEL).

Key takeaways include:

• Transmission Policy--Panelists agreed that FERC remains supportive of the transmission build-out
based on recent orders and do not expect any major policy changes. With that said, they expect FERC
will be more selective when granting ROE adders and instead stick to some of the non-ROE
incentives, such as cash recovery of CWIP and abandonment recovery. Panelists believe that FERC
takes a consistent and long-term view toward setting ROEs and is cognizant that negative signals
could chill transmission investment. The executives would be surprised if the New England base ROE
challenge results in a downward adjustment as the current 11.14% remains within a range of
reasonableness.
• Regional Transmission Support--While ROE challenges and socialized costs have caused some
tension on the local level, panelists aren’t seeing a shift in support for transmission investment as the
benefits are real and investment is necessary to both maintain reliability and support generation
portfolio shifts and fuel optionality. Further, transmission represents a relatively small portion of
WELLS FARGO SECURITIES, LLC
Utilities EQUITY RESEARCH DEPARTMENT

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customers’ overall bills and thus continuing to encourage the development of beneficial projects
remains strong.

• Growth Opportunities--Assuming completion of the ITC/ETR deal, panelists do not expect a wave
of additional transmission system divestitures to follow. These are more one-off type opportunities
where the dynamics have to be just right for it to make sense--i.e. the owners of the system, regulators
and customers jointly benefit. Instead, the opportunities lie more in new project development where
the panelists believe today’s major players will continue to dominate the development landscape.
Panelists believe RTOs will increasingly assign projects to developers who can offer the best all-in
solution rather than focusing solely on low cost.

Required Disclosures

Additional Information Available Upon Request

I certify that:
1) All views expressed in this research report accurately reflect my personal views about any and all of the subject securities or issuers discussed; and
2) No part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed
by me in this research report.

Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions.
Wells Fargo Securities, LLC’s research analysts receive compensation that is based upon and impacted by the overall profitability
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STOCK RATING
1=Outperform: The stock appears attractively valued, and we believe the stock's total return will exceed that of the market over the
next 12 months. BUY
2=Market Perform: The stock appears appropriately valued, and we believe the stock's total return will be in line with the market
over the next 12 months. HOLD
3=Underperform: The stock appears overvalued, and we believe the stock's total return will be below the market over the next 12
months. SELL
SECTOR RATING
O=Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months.
M=Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months.
U=Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months.
VOLATILITY RATING
V = A stock is defined as volatile if the stock price has fluctuated by +/-20% or greater in at least 8 of the past 24 months or if the
analyst expects significant volatility. All IPO stocks are automatically rated volatile within the first 24 months of trading.

As of: December 6, 2012
49% of companies covered by Wells Fargo Securities, LLC
Equity Research are rated Outperform.
Wells Fargo Securities, LLC has provided investment banking
services for 43% of its Equity Research Outperform-rated
companies.
49% of companies covered by Wells Fargo Securities, LLC Wells Fargo Securities, LLC has provided investment banking
services for 33% of its Equity Research Market Perform-rated

WELLS FARGO SECURITIES, LLC
Observations From Our Utility Panels EQUITY RESEARCH DEPARTMENT

5

Equity Research are rated Market Perform. companies.
2% of companies covered by Wells Fargo Securities, LLC
Equity Research are rated Underperform.
Wells Fargo Securities, LLC has provided investment banking
services for 21% of its Equity Research Underperform-rated
companies.

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