Utilities Sector Analysis Bharat Deore Nate Druckenmiller Chris Henschen
Agenda Overview Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recommendation Questions
Size of the Utilities Sector Utilities 3.2% S&P Sector Size As of February 4, 2011
Utilities - Industries Industry Market Cap (B) P/E ROE % Div. Yield % P/B Electric 6,953 13.5 9.7 3.57 1.52 Water 3,529 20.0 7.2 3.11 1.81 Diversified 3,402 13.6 11.8 4.38 1.85 Gas 568 16 12.5 3.73 2.87 Foreign 46 15.4 17.9 3.66 2.98
Utilities - Largest Companies Company Market Cap (B) P/E Ann. Revenue Ann. Net Income Enterprise Products Partners L.P. The Southern Company National Grid plc (ADR) 37.05 21.36 25,511 845 31.51 15.79 17,456 1,975 31.32 11.71 22,627 2,239 Exelon Corporation 28.28 11.05 18,644 2,563 TransCanada Corporation (USA) Dominion Resources, Inc. Duke Energy Corporation 26.79 19.82 9,036 1,365 25.32 8.84 15,118 2,915 23.86 19.32 12,731 1,063 Nextera Energy 23.04 11.61 15,317 1,957 Kinder Morgan Energy Partners LP 22.53 58.13 7,003 332 PG&E Corporation 18.13 16.36 13,399 1,194 American Electric Power Company 17.11 14.07 14,400 1,451 Spectra Energy Corp. 16.98 16.31 4,552 843 Public Service Enterprise Group 16.30 10.02 12,406 1,592
S&P 500 vs. SIM Weight Telecommunica on Services 2.92% Materials 3.65% S&P 500 U li es 3.26% Informa on Technology 18.97% Consumer Discre onary 10.30% Consumer Staples 10.21% Energy 12.70% Industrials 11.15% Health Care 10.70% Financials 16.13% Currently underweight 94 bps
Performance YTD Performance 5-year Performance
Business Analysis
Five Forces Analysis Industry Rivalry Low competition; geographic first-mover advantage; new capacity for higher forecasted demand or efficiency gains Suppliers Low power; highly competitive and fragmented commodity fuel industry prevents price gouging Buyers Medium power; most end users subject to prevailing regulations 37% Household, 36% Commercial, and 27% Industrial demand New Entrants Low; high barriers to entry; capital and regulation Substitutes Low; natural monopolies with enormous economies of scale Sixth Force???
Catalysts & Risks Catalysts Excessively hot/cold weather patterns Improvement in the economy, especially manufacturing Increased number of households Favorable Green Energy policies Favorable rate regulations Risks Mild temperatures New economic recession / slow economic growth High/variable commodity fuel prices Unfavorable energy policy and rate regulation
Unemployment Rate vs. GDP 15,000.0 14,900.0 14,800.0 14,700.0 14,600.0 14,500.0 14,400.0 14,300.0 14,200.0 14,100.0 14,000.0 13,900.0 11.0% 10.5% 10.0% 9.5% 9.0% 8.5% 8.0% Nominal GDP Unemployment Rate
S&P 500 vs. Sector vs. Industry 1600 1400 1200 1000 800 600 400 200 0 Year End Price Performance 2006 2007 2008 2009 2010 S&P 500 Utilities Sector Electric Utilties Industry 300 250 200 150 100 50 0
Utilities Power Generation
Natural Gas ETF Price Utilities Sector ETF (XLU) vs. Natural Gas ETF (UNG) 70 60 50 R² = 0.714 40 30 20 10 0 0 10 20 30 40 50 Utility Sector ETF Price
Oil ETF Price Utilities Sector ETF (XLU) vs. Oil ETF (USO) 120 100 80 R² = 0.6084 60 40 20 0 0 10 20 30 40 50 Utility Sector ETF Price
Coal ETF Price Utilities Sector ETF (XLU) vs. Coal ETF (KOL) 70 60 50 R² = 0.599 40 30 20 10 0 0 10 20 30 40 50 Utility Sector ETF Price
Regulation US Regulation: Clean Air Act The current administration aims to include CO2 in the CAA regulations American Climate and Energy Security Act (2009) Passed the house committee in 2009 Expected to include structured subsidies to help soften price increases Waxman-Warkey Act of 2009 Requires a progressive % of power to supply to be produced by renewables given the supplier generates more than 4GW/Year for public consumption
Effects of the Regulation Expected to shift employment away from industries hit hardest by increased costs Investments will follow into industries less affected by the regulation Could cut foreign investment if other countries don t follow suit Expected to reduce negative externalities over the long run, offsetting the higher costs to consumers Expected to reduce the growth of GDP (congressional budget office) -.2 to -3.4% depending on the stringency of the regulation Provisions in HR 2454 will directly impact the Coal Industry Direct subsidies expected to last until 2026 for the Coal Industry $4.1 billion in funding through 2019 to help those who lose employment
Financial Analysis Sector Revenue and Earnings 45.0000 40.0000 35.0000 30.0000 25.0000 20.0000 15.0000 10.0000 5.0000 0.0000 3.5000 3.0000 2.5000 2.0000 1.5000 1.0000 0.5000 0.0000 Revenues Earnings
Financial Analysis: Margins
Financial Analysis: Price/Earnings Ratio
Valuation Analysis Relative to SP500 High Low Median Current P/Trailing E 1.1 0.44 0.83 0.79 P/Forward E 1.1 0.48 0.9 0.89 P/B 1.0 0.4 0.7 0.6 P/S 1.2 0.3 0.9 0.9 P/CF 0.8 0.4 0.6 0.6 Absolute Basis High Low Median Current P/Trailing E 19.4 8.4 14.4 12.5 P/Forward E 17.8 10.2 14.5 12.9 P/B 2.6 1.1 1.8 1.4 P/S 1.6 0.4 1.1 1.1 P/CF 8.8 4.4 6.4 5.9 Utilities sector is relatively cheap on an absolute basis as well as relative to S&P P/S is in line with 10 year median
Valuation Analysis
Valuation Analysis : Across Sector Utilities Electric Utilities Gas Utilities Multi Utilities Median Current Median Current Median Current Median Current P/Trailing E 14.4 12.5 15.5 11.9 15.8 23.0 15.6 13.3 P/Forward E 14.5 12.9 14.9 12.3 15.8 18.5 14.5 13.1 P/B 1.8 1.4 2.1 1.4 2.1 2.5 16.0 15.0 P/S 1.1 1.1 1.4 1.3 1.1 0.7 0.9 1.1 P/CF 6.4 5.9 6.9 5.7 7.3 8.9 6.4 6.3
Technical Analysis XLU Utilities ETF
Summary Analysis Conclusions View Business Economic Financial Mature industry; potential gains from favorable legislation Slow growth, with gains strongly correlated to improvements in the overall economy Recent revenue decline; stable profit margin and ROE; declining net profit margin; very strong dividend yield Neutral Slightly positive Valuation Sector trading at discount Positive Neutral / Slightly positive
Recommendation Stable cash flows, strong dividend yield, consistent ROE, and low Beta for portfolio diversification Therefore Increase weight by 94bps to S&P 500 benchmark Consider moving cash reserves into sector Final weighting: Even with S&P 500 at 3.26%
Questions?