Jared Myers &Wenhao Zhou
Fall Quarter 2011
November 8, 2011
Agenda

Overview

Business Analysis

Economic Analysis

Financial Analysis

Valuation

Recommendations

Questions - Comments
Overview
Utilities Sector Consists of 5 different Industries:

Diversified Utilities: Involve the installation of infrastructure for utility
companies to generate, transmit, distribute all types of utilities

Electric Utilities: Companies that generate, transmit, and distribute
electricity to corporations, factories, personal homes, and recreational
areas.

Gas Utilities: Companies involved in the generation, transmission, and
distribution of natural gas t corporations, factories, personal homes, and
recreational areas

Water Utilities: Companies involved in the transmission and distribution
of clean water for consumption and the correct disposal of waste water

Foreign Utilities: A non domestic corporation providing utility
generation, transmission, and distribution to an end consumer
Overview
Description
Market Cap (B)
Utilities Sector
P/E
ROE
%
17380.6 15.55 9.74
9050.7
5378.8
1630.9
1276.9
43.3

Diversified Utilities
Electric Utilities
Gas Utilities
Water Utilities
Foreign Utilities
Market Cap: 17.3 Trillion
13.9 11.1
15.6 7.1
22 11.7
18.9 8.2
11.4 24.4

Market Cap as % of S&P500:
3.7% or 419.95 B

Currently 114 bps underweight
Dividend
Yield %
4.05
P/B
YTD Total
Return QTD Total Return
1.88
11.24
2.84
4.2
1.8
3.8 1.35
4.77 2.98
3.09 1.99
4.52 38.28
8.21
13.94
10.85
9.01
11.73
7.68
15.39
8.17
5.59
9.3
Overview
Sector Performance
Performance Data (%)
(as of 1-Nov-2011)
Total Return
Name
YTD
S&P 500
Sector
Cyclical
— Basic Materials
— Consumer Cyclical
— Financial Services
— Real Estate
Defensive
— Consumer Defensive
— Healthcare
— Utilities
Sensitive
— Communication Services
— Energy
— Industrials
— Technology



1-Week
4-Week
13-Week
1-Year
3-Year
5-Year
-1.53
-0.87
7.83
-4.8
4.97
10.36
-0.18
-9.53
-13.14
1.82
-18.81
2.85
6.78
6.41
5.61
11.24
-1.11
-3.88
1.48
-5.48
0.01
-0.83
1.06
-1.31
-1.36
0.86
-0.55
-1.08
-0.06
-0.45
-0.92
-2.97
-0.85
-0.6
-0.86
10.16
16.34
10.43
8.44
9.53
3.14
2.87
3.9
1.75
10.11
2.32
14.41
10.81
9.13
-9.05
-14.57
-3.77
-12.47
-6.03
-0.55
-0.33
-1.87
2.84
-5.6
-8.95
-11.02
-5.92
-2.13
-1.17
-1.4
9.89
-9.73
5.15
9.2
10.23
8.14
12.98
6.58
1.31
17.5
2.53
4.49
6.56
13.75
23.08
-4.19
14.51
8.41
11.29
9.92
10.52
12.63
18.84
15.87
11.23
18.45
-8.34
2.96
2.38
-15.23
-2.78
1.98
6.32
2.47
3
2.22
0.96
7.8
0.66
5.1
Utilities: Up 2.84% QTD and 11.24% YTD
S&P 500: Down -4.8% QTD and -1.53% YTD
Highest of any Sector YTD and QTD
Overview
Largest Utilities Companies in the S&P 500
Company
Industry
Market
Cap (B)
S&P 500
Southern Company (SO)
Exelon Corporation (EXC)
Dominion Resources, Inc. (D)
Duke Energy Corporation (DUK)
NextEra Energy, Inc. (NEE)
FirstEnergy Corp. (FE)
American Electric Power Co., I (AEP)
PG & E Corp. (PCG)
Public Service Enterprise Grou (PEG)
Xcel Energy Inc. (XEL)
Electric Utilities
Diversified Utilities
Electric Utilities
Electric Utilities
Electric Utilities
Electric Utilities
Electric Utilities
Diversified Utilities
Diversified Utilities
Electric Utilities
17380.6
36.6B
28.9B
28.7B
26.9B
23.4B
18.8B
18.7B
16.7B
16.5B
12.2B

SIM owns only once stock :
Public Service Enterprise Group (PEG)
P/E
Dividend
ROE % Yield % P/B
15.55
9.74
17.42 NA
12.01 17.05
17.4 14.38
13.13
9.31
12.58 12.88
25.79
5.25
12.95 10.54
15.49
9.23
9.73 16.82
14.67
10.3
4.05
4.4
4.7
3.8
4.9
3.9
4.9
4.8
4.2
4.1
4
1.88
2.15
2.01
2.46
1.19
1.57
1.45
1.34
1.41
1.63
1.45
YTD Total
Return
-1.53
17.9
9.5
24.15
20.04
11.73
28.88
14.17
-11.74
9.74
13.94
QTD Total
Return
-4.88
11.18
6.24
8.96
15.93
8.57
11.53
11.46
1.64
13.06
15.93
Business Analysis
Sector Life Cycle

Utilities: In Mature phase of the business life cycle
Electric Power
Natural Gas Distribution


Business Analysis
External
Factors
Weather Related Issues

Infrastructure damage

Power outages

Seasonal Changes
Regulation

Supply Factors
Further discouragement of CO2 emissions & price increases by PUC’s

Increasing Cost of Fossil Fuels

Decreasing Cost of Natural Gas

Decreasing Wind & Solar Costs


Further investments in alternative energy
Demand Factors
Increased recovery of the Housing Sector

Consumer Demand & Discretionary Income

Increase recovery of Industrial Development

Technology

National Smart Grid research and developments
Business Analysis
Five Forces

Threat of Suppliers


Threat of Buyers


Helps to explain the mature phase and low volatility
within the industry
Low
Rivalry


High
Threat of Substitutes


Medium
Barriers to Entry


Medium
Low
Business Analysis
Industry Revenue
Electric Power Transmission in the US
REVENUE GROWTH
Revenue $ million Growth %
2004
2005
2006
2007
2008
2009
2010
2011
301,281.50
312,975.00
324,401.30
327,368.30
339,866.10
332,172.00
341,263.00
342,923.70
-0.2
3.9
3.7
0.9
3.8
-2.3
2.7
0.5

Actual growth of 1.6% vs 1.1% expected from 2004-2011

Negative growth in 2009 due to housing crisis & recession

Revenue expected to grow annually from 2011-2016 at 2.8%
Business Analysis
Geography

Population and Sector
Establishments highly correlated

Highest regions due to electricity
intensive industries such as steel
production and automobile
manufacturing
Economics Analysis
•The correlations between the
performance of utilities sector and
some major economic indicators are
close to zero.
Economics Analysis
Economics Analysis
Economics Analysis
Other Energy
Electricity Sources Percentages
Sources, 5.10% Petroleum,
0.70%
Nuclear, 18.80%
Coal, 43.30%
Natural Gas,
23.40%
Hydroelectrice
Conventional,
8.70%
Economics Analysis
• The prices of Coal and
Natural Gas, two major
sources of electricity,
are both below its tenyear average and
currently going down
• The electricity
sources are shifting to
renewable energy,
which is costly, while
the unit cost of
renewable energy is
decreasing
• Overall future cost is
going down
Financial Analysis
• Revenue grows slowly or even declines
according to the historical data
• Forecast: slight growth or stay the same
Financial Analysis
• Earnings per share grow slowly in history.
Current trend is going down.
• Forecast: slight growth or stay the same
Financial Analysis
• ROE slightly decreased in recent years
• Margins are stable in the past ten years
Valuation Analysis
Utilites Sector
Absolute Basis
P/Trailing E
P/Forward E
P/B
P/S
P/CF
Median
Current
13.2
13.8
13.1
14.3
1.5
1.6
1.2
1.2
6.5
6.9
Relative to SP500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
Median
Current
0.94
1.1
1.0
1.1
0.8
0.8
1.0
1.0
0.7
0.8
Electric Utilities

The sector is relatively expensive
on the absolute basis

In line on the relatively basis
Diversified Utilities
Xcel Energy
Absolute Basis
P/Trailing E
P/Forward E
P/B
P/S
P/CF
Median
12.6
12.8
1.6
1.4
6.4
Current
13.2
13.9
1.6
1.4
6.9
Median
13.5
13.4
1.6
1.1
6.4
Current
14.4
14.3
1.7
1.3
6.9
Median
Relative to SP500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
Median
0.95
1.0
0.8
1.2
0.7
Current
1.0
1.1
0.8
1.2
0.8
Median
0.92
0.96
0.7
0.8
0.7
Current
1.1
1.1
0.8
1.1
0.8
PEG
1
1
0.9
0.9
0.9
Current
1.1
0.99
0.9
0.9
1.1
Median
11.5
1.3
2.1
4.37
7.1
Current
13.8
1.4
1.7
4.06
6.7
Median
0.86
0.93
0.5
0.6
0.6
Current
1.2
1.2
0.8
1
0.8
Median
0.73
0.78
0.8
0.9
0.8
Current
0.86
1.1
0.8
1.2
0.8
Recommendation
Increase SIM investment in Utilities by 50bps to bring portfolio weight to
3.07%
Reasoning:

Defensive stocks with recent positive return history and positive forecast

Economic Growth


# of Households & discretionary income


slight but positive manufacturing growth in 2012
slight but positive in 2012 (biggest threat)
Value of Utilities Construction:

Better transmission lines mean less costs; infrastructure investments look positive

Small chance of further deregulation

American Recovery and Reinvestment Act of 2009

Currently, $724.8 B invested in ARRA act through Tax Benefits, Contracts, Grant, Loans and Entitletments; 5.7%
or 115.2 B invested in Energy Alternatives and Power Transmission

2012 Budget increased to 840B for ARRA

Approximately $6.6B to be invested in power transmission, infrastructure, and alternative energy in 2012
Questions – Comments - Suggestions