Utilities Company Presentation
Luke MacAdam
Agenda
Sector Recap
Review Current Holding
Review Alternative Suggestions
Financial Analysis & Valuations
Recommendation
Questions & Class Vote
2
Sector Presentation Recap
Recommend Underweighting Utilities
Compared to S&P 500
• Defensive Sector
• U.S. in Mid-Business Cycle
• Weak Fundamentals
• Fed’s Rate-Tightening
• Shifting U.S. Regulatory Landscape
3
S&P 500 Sector Weightings
Sector, Weight % (Difference from SIM Weight)
Energy, 7.78%
(+0.41%)
Consumer
Staples, 9.43%
(+1.04%)
Telecom, 2.27%
(-0.61%)
Materials,
3.13% Utilities, 2.82%
(-0.18%)
(+0.88%)
Information
Technology,
19.63% (-1.16%)
Financials,
16.63%
(-1.13%)
Consumer
Discretionary,
12.80%
(+0.19%)
Health Care,
15.42%
(-0.74%)
Current Utility Holding:
The AES Corporation
Industry: Electric Utilities
Shares Owned: 22,000
SIM Weight: 3.00%
Industrials,
10.09%
(+0.68%)
4
Company Overview
• Global power company headquartered
out of Arlington, Virginia
• Provide energy to customers from 18
countries on 4 continents; only 24% of
contributions are from U.S.
• Two main lines of business: power
generation, power distribution
• Generation capacity of 35 GW w/
additional 7,000 MW under construction
• Recognized as world leader in lithium
ion batteries for energy storage
Ticker
AES
Operating Revenues
$17.1B
Generating Capacity
35 GW
Employees
18.5K
52 Week High
$15.29
52 Week Low
$11.53
Current Price
$12.79
Market Cap
8.73B
Beta
0.95
5
Recent Changes
• Exited 10 markets where growth was
limited since September 2011
• Involved in a share buyback program
the past few years, reducing shares
outstanding from 778 million in 2011 to
682 million currently
• Dividends have increased from
$0.05/quarter to $0.10/quarter starting
in 2015 to further entice investing
• Continued expansion in emerging
markets overseas
Oil,
Diesel,
PET Coke
5%
Fuel Types
Renewables
23%
Coal
38%
Gas
34%
6
S&P 500 Utilities Sector Components
7
P/E Below Industry Average
Source: E*TRADE Financial Corporation (July 22, 2015)
8
P/S Below Industry Average
Source: E*TRADE Financial Corporation (July 22, 2015)
9
Profit Margin Below Industry Average
Source: E*TRADE Financial Corporation (July 22, 2015)
10
Price/Cash Flow Below Industry Average
Source: E*TRADE Financial Corporation (July 22, 2015)
11
Underperformed S&P 500 Last 52 Weeks
Source: E*TRADE Financial Corporation (July 22, 2015)
12
Commonalities:
 Components of S&P 500 Utilities Sector
 Price to Earnings (TTM) below Industry Average
 Price to Sales (TTM) below Industry Average
 Price to Cash Flow (TTM) below Industry Average
 Profit Margin (TTM) below Industry Average
 Underperformed the S&P 500 Last 52 Weeks
Source: E*TRADE Financial Corporation (July 22, 2015)
13
Company Overview
• Headquartered out of Chicago, Illinois
• Does business in 48 states, Washington
D.C. and Canada (Constellation)
• Participates in every stage of energy
delivery: generation, transmission,
distribution
• Largest owner and operator of nuclear
power plants in the U.S.
• Operates regulated utilities in IL
(ComEd), PA (PECO), MD (BGE)
Ticker
EXC
Operating Revenues
$27.4B
Generating Capacity
32 GW
Employees
29K
52 Week High
$38.93
52 Week Low
$30.66
Current Price
$30.91
Market Cap
26.62B
Beta
0.36
14
Recent Changes
• Heavily involved in expansion by M&A
activity: Merged with Constellation
Energy Group in 2012, Merger with
Pepco Holdings ongoing
Fuel Types
• Continues expansion of nuclear and
renewable energy generation
• Using new technologies to help create
competitive advantage (e.g. all
regulated utilities subsidiaries installing
smart meters)
Oil
7%
Renewables
8%
Gas
24%
Coal
6%
Nuclear
55%
15
Company Overview
• Headquartered out of New Orleans,
Louisiana
• Operates in two segments: utilities &
wholesale commodities (non-utility
nuclear)
• Does utilities business in Arkansas,
Louisiana, Mississippi and Texas
• Second largest nuclear power
generator in the U.S. behind Exelon
Ticker
ETR
Operating Revenues
$12.5B
Generating Capacity
30 GW
Employees
13K
52 Week High
$69.06
52 Week Low
$92.02
Current Price
$69.21
Market Cap
12.42B
Beta
0.36
16
Recent Changes
• Purchased 6 nuclear plants from 19992007 when most investors did not
believe in the value of nuclear plants
Fuel Types
• Nuclear Vermont Yankee plant closes at
the end of 2014 due to lack of public
support for nuclear energy
• New York nuclear plant faces
relicensing and could have same fate
as Vermont plant
Renewables
0.6%
Coal
8.8%
Nuclear
34.9%
Gas/Oil
55.7%
17
Performance Over Last Year
S&P 500
Dow Jones
Utility Avg
+5.09%
-0.13%
-3.26%
-9.35%
-15.91%
18
Alternatives Comparison
S&P 500
Utilities Index
Variables
P/E
10.47x
12.85x
12.09x
16.08x
P/S
0.54x
0.92x
1.03x
1.55x
P/B
2.23x
1.16x
1.24x
1.63x
P/CF
3.37x
4.61x
3.37x
6.54x
ROE
23.59%
9.70%
8.34%
9.99%
ROA
2.45%
2.67%
1.90%
2.72%
Debt to Assets
53.69x
26.01x
30.28x
35.62x
Dividend Yield
2.35%
4.00%
4.74%
3.79%
BEst Div. Yld.
3.21%
4.00%
4.77%
3.89%
Source: Bloomberg (July 28, 2015)
19
Relative Valuation to S&P Utilities Index
3
4
3
1.6
3.5
2.5
1.8
2.5
1.4
3
2
2
2.5
1.2
1
1.5
2
1.5
0.8
1.5
1
1
0.6
1
0.5
0.4
0.5
0.5
0
0.2
0
0
0
AES EXC ETR
AES EXC ETR
AES EXC ETR
AES EXC ETR
P/E
P/B
P/S
P/EBIDTA
The rectangles show the high, median, and low value of multiples compared to S&P 500
Utilities Index over the past 10 years. Red diamonds show current multiples.
Data current as of 7/27/15
20
Financial Analysis
Catalysts
• Share buybacks boosting EPS,
shows faith from AES
• Focusing on emerging overseas
markets for expansion, lots of
room for growth
• Increasing dividend
($0.40/share/year)
• Weather in Brazil normalizing
• Energy storage solution can
create unique future opportunity
Risks
• Expansion to emerging markets
lead to increased economical &
political uncertainty
• Foreign currency fluctuations
always a risk
• Dayton Power & Light in
unregulated market - customers
have no switching costs
• Significant ongoing
development, tying up capital
21
Discounted Cash Flow Model
22
Financial Analysis
Catalysts
• Nuclear plants are low cost, with
little emissions and can run
during all seasons
• With only a small portion of
assets in fossil fuels, increased
regulations help Exelon
• Acquisition of Constellation
Energy helps diversify outside of
Eastern/Midwest markets
Risks
• Future projects are regulated,
limiting upside
• Nuclear plants require ongoing
political endorsing to reduce
public opposition
• Reduced dividend in 2013
23
Discounted Cash Flow Model
24
Financial Analysis
Catalysts
• Nuclear plants are low cost, with
little emissions and can run
during all seasons
• Industrial boom in Mississippi
Delta region expected to
continue at 6.2% earnings
growth over next 5 years
• Attractive dividend
• Stronger balance sheet
Risks
• Nuclear plants require ongoing
political endorsing to reduce
public opposition
• Arkansas’ regulatory framework
remains a challenge, ROE
below industry average
• Not well diversified as regulated
utilities = 90% of earnings
• Severe weather can have huge
impact on cash flows
25
Discounted Cash Flow Model
26
Valuation Comparison
Projections
Upside/Downside
23.6%
16.2%
-5.2%
Future Div. Yield
3.2%
4.0%
4.8%
Total Upside
26.8%
20.2%
-0.4%
Recommendation
BUY
BUY
HOLD
Recommendation: Retain AES, however reduce holding 28 bps
from 3.00% to 2.72% due to economic climate
27
Questions?
28