Morningstar - Q1 2023 - 67

EXHIBIT 1
right now are 2040, 2050 goals. When you
look at all of the infrastructure investment that's
needed to get to those goals, this is a long
runway of growth for utilities, perhaps more so
than any other sector.
Bischof: Perspective is key, too. We're talking
median earnings growth of 5.8%, which is good
for utilities.
Lallos: How do you find the companies that
are going to be best able to take advantage of
this opportunity?
Miller: There are two big considerations.
One is clean energy growth potential, and the
second is regulatory support. Utilities have
to have a core underlying need for infrastructure
growth, and they also have to have regulatory
approval to be able to recover those costs
from customers. Without a comprehensive
stakeholder buy-in, utilities can't grow earnings
at the rate they're projecting. We think the
utilities with the most support, the most buy-in
from stakeholders, will be the ones that
can meet their growth objectives and produce
the best total returns for shareholders.
Bischof: The clean energy utilities investing
in renewables like solar or wind are kind
of the obvious ones. But we also look to those
supporting that transition, particularly on
the transmission side, those with the underlying
infrastructure. You'll see a lot of exposure
there in our top picks, particularly Edison
International EIX.
Lallos: How certain is the regulatory support?
Is that the weak link here?
Miller: There's a wide range of regulatory
support across the country. Some states,
like California and New York, are very aggressive
about clean energy mandates and are
shifting their utility rate-making process to
support that transition. There are other
states where utilities benefit from low energy
costs and get regulatory support to build
infrastructure to offset energy costs. And
then there are some states where it is
just very difficult to pass through any kind of
customer rate increases; that's where we
think there will be less growth.
Clean Energy Transition Will Accelerate Electricity Demand Morningstar's forecast
is more bullish than most.
5,000
EPRI Forecast
4,142
4,500
EIA
Reference Case
4,074
4,000
Core
Other New
Sources
3,500
3,000
2021
2023E
2025E
2027E
2029E
Source: Morningstar Research, Energy Information Administration, Electric Power Research Institute.
2031E
Data Centers
Electric Vehicles
Lallos: What about federal regulation?
Miller: There's a big distinction here between
clean energy or overall energy regulation
and what we see at the state level in terms
of customer rate regulation. Most recently,
we've gotten a lot of federal movement
in clean energy, but the states have been
playing in that arena for a long time. Clean energy
mandates have been a part of legislation
for almost a decade in some states. Utilities
have done a good job adapting to state
regulations, and now the federal regulations
are another layer of support for clean
energy growth. Andy referenced that with
the IRA.
120
TWh
90
4%
3
60
2
Bischof: I think that the biggest thing that
the federal regulation did is it lowered costs for
renewables. That helps utilities get buy-in
from regulators at the state levels, particularly
from states that might not have been as
open to clean energy, because now you have more
favorable economics for wind and solar.
30
1
2021
2023E
2025E
Miller: That's a key point: Federal regulation
has helped lower the costs for renewable
energy and clean energy overall, if you include
electric vehicles in that.
Lallos: What are your top picks today and
what makes them the most attractive in the sector?
Miller: In our top picks, we're looking for
two components: a long-term, transparent growth
trajectory and a dividend yield that still offers
a good relative income.
Edison International operates in Southern
California and is one of the few pure-play electric
utilities with no direct fossil fuel exposure.
For ESG investors, Edison is about the best you
can get in terms of environmental exposure.
In addition to that, they're a pure-play
electric utility, so they benefit from all of the
electrification trends. That includes electric
vehicles, and it also includes electrifying space
and water heating in homes. On top of
that, California has the most aggressive clean
energy policies.
2027E
2029E
2031E
When you put all of that together, we think
Edison has a long runway of growth. They
have a lot of support for electrification, and they
don't have any of the fossil fuel exposure
that you see from a lot of other utilities. On top
of that, it has a yield above 4%, which is
one of the top yields in the industry and rivals
some of the fixed-income alternatives.
morningstar.com/products/magazine
67
EV Electricity Demand
Terawatt-hours
Share of Total U.S. Electricity Demand

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Morningstar - Q1 2023

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