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Regulatory Action: The Key Driver of Mid-Cap Utilities’ Growth

Vincent Kruger

Why Are Midsize Regulated Utilities Outshining the Biggies?

(Continued from Prior Part)

Consolidated Edison

Consolidated Edison’s (ED) return on equity has been falling since 2012, due to the policies of New York regulators. ED has seen returns of 9.2% for electric and 9.3% for gas—almost 100 basis points lower than industry average. But the company recently acquired a 12.5% stake in the Mountain Valley pipeline project, and it’s diversification into the midstream sector is a welcome move, considering the slow growth of its core electric business.

PPL Corporation

By comparison, PPL Corporation (PPL) is the only fully regulated utility (IDU) in the US that derives most of its earnings from international operations. PPL generates 65% of its earnings from UK operations, which are relatively stable, given the company’s eight-year, formula-based plan in the region.

PPL’s earnings from the UK are expected to grow by 2%, whereas its US operations are likely to grow by 12% over the next couple of years.

Edison International

The decision of California regulators to shut down its net metering plan may recharge EIX’s earnings. EIX currently earns the highest return on equity (10.5%) among integrated regulated utility (JXI) peers, and its active investment in electric grid and renewable should drive its earnings in the near future.

Xcel Energy

Meanwhile, Xcel Energy (XEL) is trying to improve earnings by reducing its regulatory lag. The regulatory lag for a utility (XLU) is the time difference between capital spending and rate recovery. According to Xcel Energy’s estimates, Minnesota has historically accounted for nearly 80% of the company’s total regulatory lag. Xcel expects its returns to improve by 50 basis points by 2018 if the issue of regulatory lag can be addressed.

Now let’s analyze debt profiles.

Continue to Next Part

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