Utilities Sector Presentation Luke MacAdam
Agenda Sector Overview Business Overview Economic Analysis Financial Analysis Valuation Analysis Recommendation 2
Sector, Weight % (Difference from SIM Weight) S&P 500 Sector Weightings Energy, 7.78% (+0.41%) Consumer Staples, 9.43% (+1.04%) Industrials, 10.09% (+0.68%) Telecom, 2.27% Materials, (-0.61%) 3.13% Utilities, 2.82% (+0.88%) (-0.18%) Consumer Discretionary, 12.80% (+0.19%) Information Technology, 19.63% (-1.16%) Health Care, 15.42% (-0.74%) Financials, 16.63% (-1.13%) Utilities Sector Industries (# of companies within S&P 500 Utilities Index): Electric Utilities (13 members) Multi-Utilities (13 members) Independent Power & Renewable Electricity Producers (2 members) Gas Utilities (1 member) Water Utilities (0 members) 3
Large Market Cap Utility Companies Industry Duke Energy Corporation (DUK) National Grid (NEE) Dominion Resources Inc. (D) The Southern Company (SO) Exelon Corp American Electric Power Co. (AEP) Sempra Energy (SRP) PG&E Corp (PCG) Public Service Enterprise Group Inc. (PEG) PPL Corp Top Ten Market Cap Total Market Cap $51.91B $45.55B $40.98B $40.08B $28.11B $27.37B $24.99B $24.55B $20.96B $20.61B $325.11B Total Utilities Sector Market Cap $1.05T Top Ten Percentage of Utilities Sector 30.96% 4
Utilities Sector Performance 3 Month Performance S&P 500: +0.70% Utilities: -2.63% YTD Performance S&P 500: +1.09% Utilities: -8.15% 5
Agenda Sector Overview Business Overview Economic Analysis Financial Analysis Valuation Analysis Recommendation 6
Electric Industry Operation Source: New Zealand Ministry of Business, Innovation & Employment 7
U.S. Fuel Sources Renewables: Hydro Wind Biomass wood Biomass waste Geothermal Solar Source: EnergyPrecis 8
Customer Base - Electric 9
Customer Base - Electric US 2014 Average: 10.45 cents/kw 10
Dividend Yields High for Utilities 11
Current Business Cycle Mid Cycle: Growth peaking Credit growth strong Profit growth peaks Policy neutral Inventories, sales grow; equilibrium reached Source: Fidelity Investment 12
Industry Changes Increased EPA regulations around carbon emissions Renewable energies becoming more cost effective as they mature Consumer interaction increasing U.S. regulatory landscape dramatically shifting 13
Threat of New Entrants: Low New plants have high fixed costs & big upfront capital requirements Brand name recognition & trust from incumbents hard to overcome High when bidding for long term PPAs Increasing with deregulation of power Competitive Rivalry: High Porter s Five Forces: Utility Sector Power of Suppliers: High Small number of suppliers Significant control over generation companies Power has no substitute Inelastic short-term demand Availability of Substitutes: Low Power of Buyers: Medium Power from one company to another is no different = commodity Increasing with deregulation of power, more choices for consumers 14
Agenda Sector Overview Business Overview Economic Analysis Financial Analysis Valuation Analysis Recommendation 15
Effect on Supply: Interest Rates Source: Fidelity Investments 16
Effect on Demand: Weather 17
Agenda Sector Overview Business Overview Economic Analysis Financial Analysis Valuation Analysis Recommendation 18
Source: Fidelity Investments 19
Total Debt to Total Assets 20
Return on Equity Return on Assets 21
Operating Margin Gross Margin 22
Agenda Sector Overview Business Overview Economic Analysis Financial Analysis Valuation Analysis Recommendation 23
30 3.5 2 Absolute Valuation 12 25 20 15 10 5 3 2.5 2 1.5 1 0.5 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 10 8 6 4 2 0 S&P 500 Utilities 0 S&P 500 Utilities 0 S&P 500 Utilities 0 S&P 500 Utilities P/E P/B P/S P/EBIDTA The rectangles show the high, median, and low value of multiples compared to S&P 500 over the past 10 years. Red diamonds show current multiples. Data current as of 5/20/15 24
Relative Valuation to S&P 500 1.4 1.2 1 0.8 0.6 0.4 0.2 The rectangles show the high, median, and low relative value of multiples compared to S&P 500 over the past 10 years. Red diamonds show current relative multiples. 0 P/E P/B P/S P/EBITDA Data current as of 5/20/15 25
Agenda Sector Overview Business Overview Economic Analysis Financial Analysis Valuation Analysis Recommendation 26
Reviewing each section: Recent performance lagging (OW) Mid Business Cycle, U.S. regulatory landscape shifting (UW) Fundamentals look weak (UW) Fed s rate-tightening (UW) Valuations are favorable (OW) UNDERWEIGHT RELATIVE TO S&P 500 27
Questions? 28