SIM Sector Presentation: Utilities Sector (S5UTIL) Jaiwei Hou, Nitish Gupta, and Veronica Groebner

Outline Total Market Cap=5.5 Trillion Overview Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recommendation Total Market Cap=5.5 Trillion

Overview

Total Utilities Market Size-1.20 Trillion 3rd smallest sector in S&P 500

Industries within Sector

Business Analysis

External Factors Weather Commodity Regulation Technology

Five Forces Analysis Threat of Substitutes - Low - utility is necessity - hard to build private generator Competitive Rivalry - Low - most firms have dominated their own region - only a few firms in one area Threat of New Entry - Low - extremely high fixed costs - upfront investment Supplier Power - High - price is volatile and uncontrollable - suppliers are limited - price difference among suppliers is small Buyer Power - Low - price is set fixed - inconvenient to switch firms - must use energy

Economic Analysis

S5UTIL vs. Inflation 30 years Correlation: 0.021

S5UTIL vs. GDP 30 years Correlation: 0.080

S5UTIL vs. GDP 10 years Correlation: 0.141

S5UTIL vs. Wage Growth 20 years Correlation: 0.141

S5UTIL vs. Wage Growth 10 years Correlation: 0.091

S5UTIL vs. Oil Price 30 years Correlation: -0.019

S5UTIL vs. Oil Price 10 years Correlation: 0.277

S5UTIL vs. Unemployment 30 years Correlation: -0.214

S5UTIL vs. Unemployment 10 years Correlation: -0.415

S5UTIL vs. Federal Funds Rate 20 years Correlation: 0.083

S5UTIL vs. Federal Funds Rate 10 years Correlation: 0.160

increase in gas but decrease in electricity Warm weather S5UTIL vs. Weather What About Weather? Cold weather increase in gas but decrease in electricity Warm weather increase in electricity but decrease in gas Extreme Disasters Insurance

Financial Analysis

Return on Equity: S5UTIL vs. SPX Correlation: -0.084

Sales: S5UTIL vs. SPX Correlation: 0.132

Price to Cash Flows: S5UTIL vs. SPX Correlation: 0.297

Price Earnings Ratio: S5UTIL vs. SPX Correlation: 0.309

Price to Sales: Correlation: 0.316 S5UTIL vs. SPX 19 and 23 switch color of lines Correlation: 0.316

Price to Book: S5UTIL vs. SPX Correlation: 0.439

Earnings Per Share: S5UTIL vs. SPX Correlation: 0.434

Gross Margin: S5UTIL vs. SPX Correlation: 0.443

Price: S5UTIL vs. SPX Correlation: 0.503

Valuation Analysis

Utilities vs S&P 500 As on 12/29/2017 P/E P/B P/S P/CF Utilities S&P 5 year High 18.34 20.09 2.06 3.22 2.21 2.22 8.62 14.23 5 Year Low 14.78 13.96 1.44 2.13 1.33 1.36 6.52 9.34 5 Year Average 17.36 17.13 1.69 2.64 1.70 1.78 7.45 11.85 Current 15.85 17.44 1.68 3.08 1.87 2.09 7.05 12.61

Utilities Sector P/E, P/S, P/B & P/CF

Relative Basis S5UTIL vs. SPX Relative to SP500 High Low Median Current P/E 1.20 0.80 0.95 0.88 P/B 1.13 0.50 0.76 P/S 0.94 0.54 0.68 P/EBITDA 0.90 0.47 0.61 0.53

Electric vs Gas Utilities P/E

Performance Comparison

Technical Analysis

Recommendation

HOLD (Underweight Relative to S&P 500) Interest Rates Steady Revenue Business Models Defensive Sector Currently underweighted at 15 basis points (Maybe we should sell?) Sell off enough to be 50 basis points underweight at least

Questions?