{Utilities Sector Analysis

Luke Friedman & Geno Frissora

Agenda

- Overview- Business Analysis- Economic Analysis- Financial Analysis- Valuation- Recommendations- Questions

Technology 21.22%

Financials 12.27%

Energy 11.13%

Health Care 13.19%

Consumer Staples 11.98%

Consumer Discretionary

7.46%

Industrials 9.78%

Utilities 3.34%

Materials 3.40%

Telecom 3.53%

SIM Weighting

Technology Financials

Energy Health Care

Consumer Staples Consumer Discretionary

Industrials Utilities

Materials Telecom

Technology19.60%

Financials14.11%

Energy11.92%

Health Care11.69%

Consumer Staples10.87%

Consumer Discretionary

10.83%

Industrials10.95%

Utilities 3.57%

Materials3.73%

Telecom2.73%

S&P Weighting

Technology Financials

Energy Health Care

Consumer Staples Consumer Discretionary

Industrials Utilities

Materials Telecom

SIM Weight vs. S&P Weight• Currently 23 basis points underweight

Utilities Overview

50.8%

32.9%

0.2% 8.6%

7.5%Industry Breakdown

Diversified Utilities

Electric Utilities

Foreign Utilities

Gas Utilities

Water Utilities

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

Utilities Overview

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

$38.74

$28.60

$28.40

$26.55 $25.26

$19.00

$17.85

$17.42

$16.63 $16.09 Largest Utilities

SO

DUK

D

EXC

NEE

AEP

FE

ED

PCG

PGN

Performance by Sector

YTD 3 mon. 6 mon. 1 year 2 year 5 year 10 year

Energy 5% 2% 18% -1% 32% 23% 165%

Materials 13% 6% 20% -4% 27% -1% 76%

Consumer Staples 0% 3% 13% 10% 22% 22% 52%

Consumer Disc. 9% 7% 25% 9% 46% 7% 40%

Utilities -3% -1% 16% 9% 21% -8% 29%Technology 11% 6% 24% 4% 32% 26% 28%

Industrials 1% 10% 26% -1% 32% -4% 28%

S&P 7% 6% 21% 2% 25% -7% 19%

Health Care 4% 6% 20% 12% 16% 4% 9%

Telecom -2% 1% 10% 1% 23% -21% -18%

Financials 13% 9% 22% -13% 6% -61% -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 AnalysisSupply 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 AnalysisDemand Factors

• 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

Strengths

• Strong dividend amongst most utilities companies• Steady growth with less volatility• Product necessity

Weaknesses

• Heavily regulated industry• Changes in technology• Aging infrastructure• Government intervention making international expansion difficult

Utilities Business AnalysisGeography and Users- Largely based on population

- Larger geographic areas have larger Energy Consumption- Areas with more manufacturing have higher consumption

9%7%

6%4%

4%4%

4%3%

3%3%

52%

Energy Consumption by StateTexas

California

Florida

Ohio

Pennsylvania

New York

Illinois

Georgia

North CarolinaMichigan

All other States

Utilities Business AnalysisFive 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 AnalysisFive 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 AnalysisRevenue Analysis

- Historically on the decline- Expected to Grow in near term

Utilities Financial AnalysisEarnings Analysis

- Historically starting to slow down- Expected to Grow in long term

Utilities Financial AnalysisReturn On Equity Analysis

- Historically decreasing last few years- Consistent Margins

Utilities Valuation Analysis

Absolute Basis High Low Median CurrentP/Trailing E 19.4 8.4 13.6 13.8P/Forward E 17.6 10.2 14.3 14.5P/B 2.5 1.1 1.6 1.6P/S 1.6 0.4 1.1 1.3P/CF 8.6 4.4 6.5 6.9

Relative to S&P High Low Median CurrentP/Trailing E 1.1 0.44 0.9 1.0P/Forward E 1.2 0.48 0.95 1.1P/B 1.0 0.4 0.7 0.7P/S 1.2 0.3 0.9 1.0P/CF 0.8 0.4 0.7 0.8

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

Utilities Valuation AnalysisPrice to Cash Flow Absolute

Utilities Technical Analysis

RecommendationIncrease 23 bp to equal weight with S&P

•Defensive sector with little volatility•Steady expected revenue growth•Good dividend stream •Good way to participate in the market in uncertain times

Potential Risks•Heavily regulated market•Aging infrastructure will need updated•Alternative energy sources could replace some demand

What questions do you have?