Morningstar - Q1 2023 - 68

Investors
The other top pick I've got is NiSource NI, a
combination electric and gas utility in the Midwest,
which has a 3.4% yield. The big growth opportunity
for NiSource is the Midwest shifting from
coal-powered generation to renewable energy, and
particularly solar and wind. We expect NiSource
will be the biggest investor in renewable energy
relative to its investment plan. That is, if you
look across every utility's capital investment plan
for the next five years, the clean energy portion
is the largest for NiSource. It's not the most
dollars spent, but it's the largest percentage share,
in the 70-plus percent range.
5,000
Also, gas continues to be a primary energy
source in their market, and safety is a
big concern in the gas distribution business.
NiSource has stakeholder buy-in to make some
large safety investments.
4,500
Lallos: What are the investments they're making
in safety?
Miller: Upgrading pipes that could be a century
old. We've seen terrible disasters with
various utilities across the country where a gas
pipeline ruptures simply because it's old and
has not been maintained.
2021
4,000
3,500
3,000
2023E
EXHIBIT 2
Electric Vehicles Will Drive Demand Morningstar forecasts that EV electricity
demand will reach nearly 3% of total U.S. electricity demand by 2032.
120
TWh
90
4%
2025E
2027E
Bischof: Alliant Energy LNT is on my list.
You give a little bit up on yield, which is right
about 3.1%, but it's a high-quality utility
with a very long history of constructive regulatory
support in Wisconsin and Iowa. In the
inflationary environment that we're in, I would
point to that.
Alliant Energy is one of the biggest
beneficiaries of the Inflation Reduction Act and
gets a lot of customer benefits from the
renewables. They just recently increased their
capital plan 40%, so we think that's going
to allow them to grow right around 7%,
in the highest quartile of utility growth.
There's been talk about a corporate minimum
tax, but they're below that threshold.
So, they get to provide all these benefits to
customers while earning a return on
those investments, and it really helps mitigate
the overall customer impact, which
regulators like.
Core
Other New
Sources
Alliant is going to be a big proponent of
renewable energy, and they still have some coal,
so they're going to continue to benefit from
that transition.
2029E
2031E
Data Centers
Electric Vehicles
EPRI Forecast
4,142
EIA
Reference Case
4,074
Lallos: You expect all the utilities you cover to raise
their dividends in 2023. Why is that?
Miller: Utilities are in the best financial shape
that I've seen in at least two decades.
They have taken advantage of low interest costs
to strengthen the balance sheet. They've
also strengthened regulatory relationships. And
their earnings growth trajectory supports
a consistent dividend payment for a long time.
This is the first time in many decades that
we haven't had a given utility here or there that
might be looking at a dividend cut or even
a flat dividend. We're seeing quality dividend
growth across the sector.
Bischof: I would toss in their portfolio mix.
Where you have seen a reduction in dividend in
the past couple years, it's usually because
the utility is moving assets out of unregulated
assets and focusing more on the regulated
assets. That's been a theme throughout
the industry. Without getting too in the weeds,
sometimes regulated utilities would have
unregulated assets, and that would present cash
flow volatility, thus potential volatility in
the dividend.
Miller: Yes, the sector's really de-risked itself.
3
Lallos: What is an example of an unregulated asset
that a utility might have exposure to?
Bischof: It would usually be merchant
generation. In some states, regulation is just for
transmission and distribution, and the
generation part of it is unregulated-so then you
have commodity risk on those assets. But in
general, there's been a significant move
away from that. Exelon EXC is the last one to
fully divest their unregulated assets. There
are only two stand-alone independent power
producers that we cover, NRG Energy NRG and
Vistra VST.
60
2
30
1
2021
Source: Morningstar Research.
2023E
2025E
2027E
2029E
2031E
Lallos: How important is the growing EV market
to utilities' growth prospects?
Miller: Small or light-duty vehicle transportation
produces almost a third of carbon
emissions in the U.S. So, if the U.S. or any
state is going to reduce their carbon emissions,
one of the first places they have to start
is by reducing emissions from vehicles. The only
68
Morningstar Q1 2023
EV Electricity Demand
Terawatt-hours
Share of Total U.S. Electricity Demand
https://www.morningstar.com/stocks/xnys/ni/quote https://www.morningstar.com/stocks/xnas/lnt/quote https://www.morningstar.com/stocks/xnas/exc/quote https://www.morningstar.com/stocks/xnys/nrg/quote https://www.morningstar.com/stocks/xnys/vst/quote
Morningstar - Q1 2023

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