Sector Presentation: Utilities

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Sector PresentationUtilities

• Aziz KhanFred LefflerMark Probst

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SP Utilities

• Market Cap - 455 Billion
• Utilities comprise 3.44 of the SP
• Sector Performance
• QTD -.21 (vs. SP -1.18)
• YTD -.11 (vs. SP 5.05)

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Industries

• Electric (Dominion, Southern, FPL)
• Foreign (Enel SpA, Endesa SA)
• Diversified (Exelon, PGE)
• Gas (National Grid, TransCanada Corp.)
• Water (Aqua America, California Water Service
  Group)

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Business Analysis

• Significant Capex
• Costs sensitive to input price swings such as
  coal and natural gas
• Electric and gas utilities are sensitive to
  weather
• Currently, demand and input prices are down

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Input Prices
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Business Trends

• Big push for nuclear
• Many coal-fire plants closed
• Many utilities have asked regulators for rate
  increases possible EPS growth

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Performance During Recessions
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Economic Outlook

• Supply
• Stable industry, even during recession
• GDP growth
• Recession unlikely
• Relatively stable and growing demand

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Economic Outlook

• Demand
• Growing population
• Energy Bill - Pushing towards 15 renewable
  energy
• Costs correlated with energy prices
• Foreign Exchange weakening dollar

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Utilities Sector
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Utilities Sector
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Revenues Sector v. SP500
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Pre-Tax Margin Sector v. SP500
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EPS Sector v. SP500
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ROE Sector v. SP500
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Utilities Sector Cash Flows
Net User of Cash
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Excelon Corp.
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Excelon Corp.
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American Electric Power
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American Electric Power
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Xcel Energy
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Xcel Energy
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Utilities Sector Valuation
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Utilities Sector Valuation
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Utilities Sector vs. SP 500
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Utilities Sector vs. SP 500
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Historical P/E Comparison
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Technical Analysis
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Technical Analysis Resistance Levels
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Decision Inputs

• Utilities in SP 3.44 vs. SIM weight of 2.26.
• The consensus estimated growth rate for the
  utilities sector is 9 compared with an estimated
  12 growth rate of the SP 500.
• Most valuation metrics indicate that the
  utilities sector is slightly overvalued.
• Historically, the utilities sector has performed
  better than most other sectors during recessions.
• Although a recession is becoming more likely,
  most economists argue that it is not imminent.

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Recommendations

• Reduce utility sector exposure by 16 bps from
  2.26 to 2.10 of the SIM portfolio.
• Based upon Septembers market value this would
  equal a reduction of approximately 40,480 in the
  sector.
• We recommend a re-evaluation of this strategy
  next quarter in the case that recession
  expectations materialize and sector valuations
  continue to fall.

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QA
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Utilities Indices