{
Luke Friedman & Geno Frissora

Utilities
3.34%
Industrials
9.78%
Consumer
Discretionary
7.46%
•
Currently 23 basis points underweight
SIM Weighting
Materials
3.40%
Telecom
3.53%
Technology
21.22%
Utilities
3.57%
Industrials
10.95%
S&P Weighting
Materials
3.73%
Telecom
2.73%
Consumer
Staples
11.98%
Health Care
13.19%
Financials
12.27%
Energy
11.13%
Consumer
Discretionary
10.83%
Consumer
Staples
10.87%
Health Care
11.69%
Technology
Energy
Consumer Staples
Industrials
Materials
Financials
Health Care
Consumer Discretionary
Utilities
Telecom
Technology
Energy
Consumer Staples
Industrials
Materials
Technology
19.60%
Financials
Health Care
Consumer Discretionary
Utilities
Telecom
Financials
14.11%
Energy
11.92%

Diversified Utilities
Electric Utilities
Foreign Utilities
Gas Utilities
Water Utilities
Industry Breakdown
7.5%
8.6%
0.2%
50.8%
32.9%
Industry
Diversified Utilities
Electric Utilities
Foreign Utilities
Gas Utilities
Water Utilities
Total
Percentage Market Cap
50.8%
32.9%
0.2%
8.6%
7.5%
8,708.50
5,637.80
35.10
1,474.50
1,292.20
100.0% 17,148.10

Largest Utilities
$16.09
$38.74
$16.63
$17.85
$17.42
$19.00
$28.60
$28.40
$25.26
$26.55
Company
Southern Co.
Duke Energy
Dominion Resources Inc.
D
Exelon Corp
NextEra
American Electric Power AEP
FirstEnergy Corporation
Consolidated Edison
Pacific Gas and Electric
EXC
NEE
FE
ED
PCG
Progress Energy
Ticker Market Cap (Billions) Rank
SO
DUK
38.74
28.6
PGN
28.4
26.55
25.26
19
17.85
17.42
16.63
16.09
7
8
9
5
6
3
4
1
2
10
NEE
AEP
FE
ED
SO
DUK
D
EXC
PCG
PGN

Energy
Materials
YTD 3 mon.
6 mon.
1 year 2 year 5 year 10 year
5% 2% 18% -1% 32% 23% 165%
13% 6% 20% -4% 27% -1% 76%
Consumer Staples
Consumer Disc.
Utilities
Technology
Industrials
S&P
Health Care
Telecom
Financials
0% 3%
9% 7%
-3% -1%
11%
1%
7%
4%
-2%
6%
10%
6%
6%
1%
13% 9%
13%
25%
16%
24%
26%
21%
20%
10%
22%
10%
9%
9%
4%
-1%
2%
12%
1%
-13%
22% 22%
46% 7%
21% -8%
32%
32%
25%
16%
23%
26%
-4%
-7%
4%
-21%
6% -61%
52%
40%
29%
28%
28%
19%
9%
-18%
-43%

Utilities Business Analysis
Product Life Cycle
Mature
- Lowered Costs as a result of production volume
- Higher Sales Volume
- High Competition among firms

Utilities Business Analysis
External Factors
- Potential Supply Shortages
- Commodity Price Fluctuations
- Weather Conditions
- Ex. Temperature Changes affect power generation and supply
- Infrastructure Concerns
- Damage to Utilities production and distribution
- Ex. Power Outages

Utilities Business Analysis
Supply Factors
- CO2 Emissions will influence future
- EPA Regulations
- Legislation – Cap and Trade for instance
- Cross-State Air Pollution Rule (CSAPR)
- Political Instability (Investment Decisions going forward)
- Cost of Commodities
- Natural Gas and Fossil Fuels Volatility
- Difficult to Predict and therefore represents an unknown
- Potential Competition
- Alternative Energy Sources
- Ex. Solar and Wind
- Political Influence
- Subsidies for alternative energy sources from Government

Utilities Business Analysis
•
Programs to reduce domestic demand
•
Advertising campaigns to limit energy use
•
Moderating growth in developed economies
•
More energy efficiencies
•
More conservative use
•
Strong growth in emerging economies
•
Could increase demand

Utilities Business Analysis
•
Strong dividend amongst most utilities companies
•
Steady growth with less volatility
•
Product necessity
•
Heavily regulated industry
•
Changes in technology
•
Aging infrastructure
•
Government intervention making international expansion difficult

Utilities Business Analysis
Geography and Users
- Largely based on population
- Larger geographic areas have larger Energy Consumption
- Areas with more manufacturing have higher consumption
Texas
Energy Consumption by State
California
Florida 9%
7%
Ohio
Pennsylvania
New York 52%
Illinois
Georgia
North
Carolina
Michigan
All other
States
6%
4%
3%
3%
3%
4%
4%
4%

Utilities Business Analysis
Five Forces Analysis
Threat of New Entry (Low)
- High Fixed Costs
- Upfront Capital
- Regulatory Approval
- Brand Name Recognition is difficult to build
Supplier Power (Low)
- Dominated by handful of firms
- Significant power over generational companies
- Leverage reduced due to wide spread of players (small shares)
Buyer Power (High)
- Power Treated as a commodity
- Highly competitive pricing and service
- Commercial buyers have significant leverage

Utilities Business Analysis
Five Forces Analysis (continued)
Substitutes (Low)
- Power is a necessity, therefore little substitute
- Power is inelastic, not much change due to price
- No alternative to Natural gas, but alternative ways to generate
Competitive Rivalry (High)
- Very competitive
- Fight for Market Share for economies of scale
- Mainly competitive in the form of lowered prices
- Profitability drops

Utilities Economic Analysis

Utilities Economic Analysis

Utilities Economic Analysis

Utilities Financial Analysis
Revenue Analysis
- Historically on the decline
- Expected to Grow in near term

Utilities Financial Analysis
Earnings Analysis
- Historically starting to slow down
- Expected to Grow in long term

Utilities Financial Analysis
Return On Equity Analysis
- Historically decreasing last few years
- Consistent Margins

Utilities Valuation Analysis
Absolute Basis High
P/Trailing E 19.4
P/Forward E
P/B
17.6
2.5
P/S
P/CF
1.6
8.6
Relative to S&P High
P/Trailing E 1.1
P/Forward E
P/B
1.2
1.0
P/S
P/CF
1.2
0.8
Low
0.44
0.48
0.4
0.3
0.4
Low
8.4
10.2
1.1
0.4
4.4
Median
13.6
14.3
1.6
1.1
6.5
Median
0.9
0.95
0.7
0.9
0.7
Current
13.8
14.5
1.6
1.3
6.9
Current
1.0
1.1
0.7
1.0
0.8

Utilities Valuation Analysis
Price to Book Absolute (top) vs. Relative to S&P (bottom)

Utilities Valuation Analysis
Price to Cash Flow Absolute

Utilities Technical Analysis

Recommendation
•
Defensive sector with little volatility
•
Steady expected revenue growth
•
Good dividend stream
•
Good way to participate in the market in uncertain times
•
Heavily regulated market
•
Aging infrastructure will need updated
•
Alternative energy sources could replace some demand