Utilities Sector Presentation
Yifeng Su, Graham Kauffman, Scott McVey, Tianning Li
The Ohio State University, Fisher College of Business
Agenda






Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
2
Valuation
Analysis
Recommend
-ation
S&P Sector Breakdown
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Recommend
-ation
Industries within Sector
Industry
Electric Utilities
Gas Utilities
Independent Power Producers & Energy Traders
Multi-Utilities
Weight within Sector Average P/E
56.04%
15.354
1.16%
19.275
3.89%
14.305
38.91%
20.432
Industry
Electric Utilities
Gas Utilities
Independent Power Producers & Energy Traders
Multi-Utilities
Market Cap
$284,760,398,848
$5,888,021,504
$19,790,573,568
$197,719,312,896
Total Industry Market Capitalization in S&P 500
$508,158,306,816
Total S&P 500 Market Capitalization
Overview
Business
Analysis
Economic
Analysis
$17,132,640,000,000
Financial
Analysis
Valuation
Analysis
Recommend
-ation
Largest Utility Companies
Company
 Duke Energy
 Dominion Resource Inc.
 NextEra Energy
 Southern Co.
Overview
Business
Analysis
Economic
Analysis
Market Cap.
 49.2 Billion
 39.5 Billion
 39.3 Billion
 37.2 Billion
Financial
Analysis
Valuation
Analysis
Recommend
-ation
YTD Performance
Annualized Returns
1 Year 3 Year
5 Year
Total Returns
S&P 500 Utilities
S&P 500
Overview
11.39%
21.64%
Business
Analysis
14.57%
15.92%
Annualized Returns (Std Dev)
1 Year 3 Year
5 Year
15.63%
21.59%
Economic
Analysis
Financial
Analysis
6
12.78%
11.49%
13.28%
16.55%
Valuation
Analysis
14.48%
17.83%
Recommend
-ation
3 Month and QTD Performance
Annualized Returns
1 Year 3 Year
5 Year
Total Returns
S&P 500 Utilities
S&P 500
Overview
11.41%
20.28%
Business
Analysis
13.08%
14.88%
Annualized Returns (Std Dev)
1 Year 3 Year
5 Year
16.51%
22.05%
Economic
Analysis
Financial
Analysis
7
12.77%
11.45%
13.35%
16.59%
Valuation
Analysis
14.50%
17.88%
Recommend
-ation
Business Analysis
 Mature stage of lifecycle
 Room to grow in Solar, Wind, and Other
Renewable sources
 Defensive stock, does better in recession
 Passing Regulations
 Foreign Affect
 Oil/Coal/Other Resources Price changes
 Import/Export Policies
 Taxes
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
8
Valuation
Analysis
Recommend
-ation
Factors that affect Utilities
 External
 Regulations- Include pollution allowance which
can cause lower profit margins
 Weather- Helps determine demand for utilities
including heating and cooling
 Supply/Demand
 Foreign import prices
 Substitutes
 Location
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
9
Valuation
Analysis
Recommend
-ation
Porter’s Five Forces Analysis





Barriers to Entry: High
 Large set up costs
 High incumbency advantage
 Passing Regulations
Buyer Power: Low
 Have to use local power source
 Exception may be a large consumer
Supplier Power: High
 At the mercy of oil, coal, and other natural resource prices
 Future may include solar, wind, and other renewable resources
Threat of Substitutes: Low but growing
 Not practical to attempt to create their own energy source
 Potential in near future for personal solar or wind power generation
Rivalry: Low
 Geographic borders have basically determined which energy source or
utility company a consumer must use
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
10
Valuation
Analysis
Recommend
-ation
Economic Analysis
 Utility sector has a correlation of 0.57 with S&P 500.
 Utility sector has the highest correlation with energy sector.
Correlation: Utility vs. S&P 500 and other Sectors
1.00
0.90
0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00
SPX Index
Overview
S5ENRS
Index
S5COND
Index
Business
Analysis
S5HLTH
Index
S5INFT
Index
Economic
Analysis
S5CONS
Index
Financial
Analysis
11
S5MATR
Index
S5TELS
Index
Valuation
Analysis
S5FINL
Index
S5INDU
Index
Recommend
-ation
Economic Analysis

Compared to other sector, Utility sector has the lowest
correlation with S&P 500
Correlation: Sectors vs. S&P 500
1.00
0.90
0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00
S5UTIL
Index
Overview
S5ENRS
Index
S5COND
Index
Business
Analysis
S5HLTH
Index
S5INFT
Index
Economic
Analysis
S5CONS
Index
S5MATR
Index
Financial
Analysis
12
S5TELS
Index
Valuation
Analysis
S5FINL
Index
S5INDU
Index
Recommend
-ation
Economic Analysis
 Utility sector is highly correlated to electricity price
Correlation: Utility vs. other indices
1.0
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
GDP
Overview
Business
Analysis
XOI Index
(Oil index)
Economic
Analysis
Financial
Analysis
13
DJUSEU Index
(Electricity index)
Valuation
Analysis
Recommend
-ation
Economic Analysis
 Regression：
Rutility-Rf=β(Rm-Rf)
S&P 500
Overview
Business
Analysis
Economic
Analysis
10-year treasury bond
Financial
Analysis
14
Valuation
Analysis
Recommend
-ation
Economic Analysis
CAPM (2000-2013)
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.577314685
R Square
0.333292245
Adjusted R Square
0.320712854
Standard Error
0.077436882
Observations
55
ANOVA
df
Regression
Residual
Total
Anormalies
Beta
Overview
SS
MS
F
Significance F
1 0.158877095 0.158877095 26.49510057 3.9448E-06
53 0.317812949 0.005996471
54 0.476690045
Coefficients Standard Error
t Stat
P-value
Lower 95%
Upper 95%
-0.01082105 0.011027458 -0.98128196 0.330912036 -0.03293932 0.011297233
0.605720773 0.117676483 5.147339174 3.9448E-06 0.369691643 0.841749903
Business
Analysis
Economic
Analysis
Financial
Analysis
15
Valuation
Analysis
Recommend
-ation
Economic Analysis
CAPM (2009-2013)
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.544497741
R Square
0.29647779
Adjusted R Square
0.257393223
Standard Error
0.052470469
Observations
20
ANOVA
df
Regression
Residual
Total
Anormalies
Beta
Overview
SS
MS
F
Significance F
1 0.020884148 0.020884148 7.585546185 0.013055171
18 0.049556703 0.00275315
19 0.07044085
Coefficients Standard Error
t Stat
P-value
Lower 95%
Upper 95%
-0.01676052 0.011880262 -1.41078719 0.175356717 -0.04172002 0.008198983
0.384822274 0.139722637 2.754187028 0.013055171 0.091275907 0.67836864
Business
Analysis
Economic
Analysis
Financial
Analysis
16
Valuation
Analysis
Recommend
-ation
Financial Analysis
Basic Financial Performance (2013)
Name
Sales Growth (%)
Gross Margin (%) Operating Margin (%)
Return on Equity (%)
Median of the sector
6.01
61.38
18.18
8.85
Average of the sector
6.51
57.55
18.25
7.97
25.35
62.66
21.94
6.48
Dominion Resources Inc/VA
0.21
57.52
25.27
15.28
NextEra Energy Inc
6.17
67.24
23.39
11.18
Southern Co
3.33
65.06
25.89
8.62
Exelon Corp
5.96
56.91
14.65
7.72
Duke Energy Corp
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
17
Valuation
Analysis
Recommend
-ation
Financial Analysis - Margins
Gross Margin
Operating Margin
70.0%
20.0%
18.0%
16.0%
14.0%
12.0%
10.0%
Utility
8.0%
S&P 500
6.0%
4.0%
2.0%
0.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
2008
2009
2010
2011
2012
2013
2008
2014
Net Profit Margin
12.0%
2009
2010
2011
2012
2013
2014
Return on Equity
18.0%
16.0%
14.0%
12.0%
10.0%
Utility
8.0%
S&P 500 6.0%
4.0%
2.0%
0.0%
10.0%
8.0%
6.0%
4.0%
2.0%
2008
0.0%
2008
2009
Overview
2010
2011
2012
Business
Analysis
2013
2009
2010
2011
2012
2013
2014
2014
Economic
Analysis
Financial
Analysis
18
Valuation
Analysis
Recommend
-ation
Financial Analysis
Cash Flow of the Utility Sector
 Utility sector is a cash user
 Utility companies usually have high level of debt
 Interest rates are an important factor affecting utility companies
Cash From
Operations
Capital
Expenditures
2009
2010
2011
2012
2013
2014
23.64
30.78
30.1
31.89
30.8
30.92
31.39
-30.47 -28.01 -27.63 -29.24 -33.43
Free Cash Flow
Overview
2008
-6.92
Business
Analysis
2.41
2.23
Economic
Analysis
1.76
Financial
Analysis
19
-3.65
Valuation
Analysis
-32.1 -32.11
-1.14
-0.78
Recommend
-ation
Valuation Analysis
 3 Mo Return of 9.31%
 6 Mo Return of 9.76%
 1 Year Return of 6.98%
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
20
Valuation
Analysis
Recommend
-ation
Historical Multiple Comparison
 P/E is below that of the overall market
 P/EBITDA is below the market average
 Dividend yield is significantly above the market average
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
21
Valuation
Analysis
Recommend
-ation
Valuation Analysis
 P/E has steadily grown since the bottom of financial crisis but
we expect that the earnings of firms will start to grow faster
than the price, resulting in a small decrease of P/E in the
coming years.
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
22
Valuation
Analysis
Recommend
-ation
Valuation Analysis
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
23
Valuation
Analysis
Recommend
-ation
Valuation Analysis
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
24
Valuation
Analysis
Recommend
-ation
Performance vs. S&P 500
 The utility sector has underperformed the overall S&P 500 for
the past 12 months significantly with returns of 7.5% for the
year vs 24% for the S&P 500. Since 2005 however they have
outperformed the market.
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
25
Valuation
Analysis
Recommend
-ation
Valuation vs. S&P 500
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
26
Valuation
Analysis
Recommend
-ation
Technical Analysis
 Resistance levels on the bottom at 186 and at the top of 210.
 Has not really tested either of these levels in the past 3 months.
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
27
Valuation
Analysis
Recommend
-ation
Recommendations
 Hold; but lower position to S&P
Allocation Level
 Sector is defensive
 We expect that the market will continue to rise




Underperforms in bull markets
Significant dividend returns
Steady revenue and earnings growth expected
Begin to research firms investing in alternative
green energy
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
28
Valuation
Analysis
Recommend
-ation
Recommendations
 Risks




Heavy Regulation
Exposure to international energy markets
Security
Growth in alternative energy
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
29
Valuation
Analysis
Recommend
-ation
Questions
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
30
Valuation
Analysis
Recommend
-ation