DW Flashcards

Question

What are PNW’s peers

Answer 1

Alliant Energy, El Paso electric and Tucson electric power

Answer 2

PNW’s peers are trading at 20.8x P/E

Answer 3

EBITDA Interest coverage: 5.4x Debt / EBITDA: 4.0x FFO / Debt: 22%

Answer 4

The acquisition multiple was 12.1x-13.6x 2019 EBITDA from 10%-30% premiums.

Answer 5

Very mature industry that has experienced significant consolidation in the last decade. Very few IPOs, last one was Bloom IPO in 2018 and it’s gone horribly since, that said—bloom is a fuel cell company so not truly comparable to your standard vertically integrated utility. More recently due to COVID the industry has faced unique supply chain disruptions as many renewable energy supplies come from Asia—specifically countries that were hit heavy by COVID. Additionally, though many services / processes can be done remotely, the industry does require a large portion of its workforce to ensure reliable delivery of energy, gas and water. Looking ahead, decarbonization and investment in renewable energy will define the next decade of the industry. Players who’re making early investments in renewables stand to benefit greatly as the secular tailwind intensifies.

Answer 6

PNW has a $8.2 Bn market cap and is a top 30-35 utility by size

Answer 7

1) market / jurisdiction focus 2) financial (great returns potential) 3) strategic (renewable portfolio enhancement)

Answer 8

—Opportunity to meaningfully expand Fortis’s Arizona market share —PNW is dominant in Phoenix and Maricopa county. This is significant b/c Phoenix is triple the size of Tucson(Fortis’s primary Arizona market) and Maricopa county is the fastest growing county in the U.S. and is responsible for PNW’s unmatched retail customer growth of 2.5%. —PNW commands 63% market share compared to Fortis’s 22%

Answer 9

—Outstanding returns potential relative to small-midcap peers in both Arizona and U.S. —PNW has 56% Equity/Cap ratio making it highest in state. Fortis has 50% Equity/Cap —PNW’s ROE is 10% compared to national average of 9.6% —PNW earns a return of .8% on the delta between the original cost and fair value of its assets, no other utility in the state exceeds .5%

Answer 10

—PNW has a fat superior renewables portfolio relative to Fortis’s own in AZ —Renewables are 50% of PNW’s portfolio, but only 7% of Fortis’s —Holds true in the long term: PNW expected to reach 65% by 2030, Fortis expected to reach 30% —Given the significant near term and long term delta in renewable capacity, Fortis could attain far greater Renewable Electricity Production Tax Credits -Arizona’s renewable portfolio standards mandate that Fortis would have to double its renewable capacity before 2025, PNW exceeded that standard years ago and will continue to be well ahead of it

Answer 11

Canadian Electric and gas distribution company that offers regulated utility services across Canada and in the U.S and Caribbean with a market cap of $25 Bn (top 15 utility by size) and revenue of $9 Bn

Answer 12

Fortis was engaged in aggressive roll up strategy over past 6 years and management identified acquisition risk as a key concern. Mitigating factor: we ran several cases including a “break even” and “maintain ratings” case at 10% 20% and 30% premiums. We priced in Mandatory converts (4.1% cost of debt) as well to give client confidence that we could pursue accretive transaction while offering control premiums that target shareholders would be unlikely to refuse.

Answer 13

Fortis mgmt was concerned about the regulated exposure of its asset portfolio—over 90% portfolio was regulated Mitigating factors: —Though Emera has a similarly highly regulated portfolio, a majority of these assets were in highly favorable jurisdictions with little to no history of negative regulatory outcomes. —PNW possessed a more balanced portfolio with over 25% of its portfolio composed of unregulated assets. Moreover, PNW has been and continues make significant investments in EV charging infrastructure that will only augment the unregulated portion of its portfolio