U"li"es Sector
Utilities Sector Analysis
November 4, 2014
Collin Hart
Wenying Li
HoPhil Lee
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Agenda
§  Sector Overview
§  Business Overview
§  Economy Analysis
§  Financial Analysis
§  Valuation Analysis
§  Recommendation
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Size of Utilities Sector
: S&P 500: 3.2% / SIM : 1.9%
S&P
2.4% 3.3% SIM
11.7% 3.2%
2.9% 2.5%
9.6% 19.6% 10.9%
9.6%
21.5%
9.2% 14.3% 1.9%
16.4% 9.0%
18.8%
6.9%
10.4% 13.7%
Consumer Discretionary
Consumer Staples
Consumer Discretionary
Consumer Staples
Energy
Financials
Energy
Financials
Health Care
Industrials
Health Care
Industrials
Information Technology
Materials
Information Technology
Materials
Telecommunication Service
Utilities
Telecommunication Service
Utilities
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Industries within the sector
Industry
Market Cap
(Billion)
Diversified Utilities
$15,726.1
Electric Utilities
$4,255.4
Gas Utilities
$2,214.9
Water Utilities
$1,672.9
Foreign Utilities
$22.7
1,672 22
2,214
Diversified Utilities
Electric Utilities
4,255
Gas Utilities
15,726
Water Utilities
Foriegn Utilities
Company
Market Cap
(Billion)
Duke Energy Corp
$58.1
NextEra Energy Inc
$44.5
Dominion Resource,
Inc
$41.5
The Southern Co
$41.5
AEP Inc
$28.5
Entergy Corp
$15.1
NRG Energy Inc
$10.1
SCANA Corp
$7.8
TECO Energy Inc
$4.6
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Utilities Sector Performance
Year-to-date
• Utilities : 19.52%
• S&P500 : 9.18%
Quarter-to-date
• Utilities : 10.59%
• S&P500 : 4.90%
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§  Sector Overview
§  Business Overview
§  Economy Analysis
§  Financial Analysis
§  Valuation Analysis
§  Recommendation
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US Electricity Demand
Source : US Energy Information Administration
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Industry Life Cycle
Introduction
Maturity
Growth
Maturity
Decline
Slow growth
Rapid increasing
demand
Little or no growth
Negative Growth
High prices
Improving profita
bility
Industry consolidation
Excess capacity
Significant Investment
Falling prices
High barrier to entry
High competition
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Porter’s Five Forces
Threat o
f New E
ntrants
LOW
•  High Fixed cost
•  Substantial upfront cost to en
ter the market
•  Brand name
•  Regulatory approval
Moderate
•  Not differentiated, commodity
•  Commercial, industrial buyer
seeking lower price
Power o
f Buyer
Riva
lry
High
•  Fierce competition to create t
he economies of scale
Substitut
Low
es
•  No substitutes,
altern
ative ways of generating utilitie
s
Power o
f Supplie
r
High
•  Dominated by a few compani
es
•  Vertically integrated
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Major Rate Increases at US Utilities
•  AEP customers in parts of Virginia, Kentucky, Ohio and West
Virginia have seen their rates increase between 48 and 88% over
the past several years; expected to continue rising by 10-35% in
the next several years
•  Rocky Mountain Power in Wyoming raised rates twice in 2011: by
2% in April and then 8% in September
•  Duke Energy in South Carolina requested a 17% residential rate
increase in 2011
•  Alaska Electric Light and Power got a 24% increase in residential
rates
•  Residential customers in New Mexico were looking at a 21% rate
hike but the state PUC capped it at 9%
Source : Lawrence Berkeley National Laboratory
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Utilities Regulation
•  The revenue requirement and rates
•  Resources acquisition
•  Security issuance
•  Service standard and quality
•  The environment
Source : US Energy Information Administration
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§  Sector Overview
§  Business Overview
§  Economy Analysis
§  Financial Analysis
§  Valuation Analysis
§  Recommendation
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Utilities vs. S&P
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Utilities vs. S&P
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Utilities vs. WTI (Oil)
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Utilities vs. WTI (Oil)
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Utilities vs. CPI
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Utilities vs. CPI
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Utilities vs. GDP Growth
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Utilities vs. GDP Growth
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•
•
•
•
Take Aways
General low-moderate correlation…
Not dependent on one economic driver
Solid defense
Limited upside/growth potential
I.E Tressel Ball
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§  Sector Overview
§  Business Overview
§  Economy Analysis
§  Financial Analysis
§  Valuation Analysis
§  Recommendation
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Gross Margin
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Operating Margin
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Profit Margin
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ROE
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Debt to Assets
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Utility FCF
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•
•
•
•
•
Take Aways
Lower direct COGS
Higher Variable costs
Highly Leveraged….
High interest payments burn cash
Lower risk = lower return
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§  Sector Overview
§  Business Overview
§  Economy Analysis
§  Financial Analysis
§  Valuation Analysis
§  Recommendation
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Absolute Basis U"li"es
Rela8ve Basis U"li"es
§  Sector Overview
§  Business Overview
§  Economy Analysis
§  Financial Analysis
§  Valuation Analysis
§  Recommendation
HOLD/UNDERWEIGH/OUTWEIGH Ra8onale: •  Defensive Sector •  Steady Revenue and Earning Growth Expected •  Significant Dividend Payout Ra"o •  S&P 500: 35.27% U"li"es: 69.62% •  Green Energy Risks: •
•
•
•
Heavy Regula"on (i.e. Environment) Raw Material Prices Safety Weather
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Ques8on？