Utilities | Sector Analysis
This report provides an analysis of the utilities sector, with a current market size of $1,721.2 billion. It recommends a decrease of 72 basis points in the SIM portfolio weight, culminating in an overall underweight position of 150 basis points. Key drivers affecting the sector include rate regulation, weather patterns, economic growth, and green policy initiatives, while risks involve regulation changes and commodity price fluctuations. The sector has shown correlation and outperformance against the S&P, but near-term forecasts indicate a slight negative outlook.
Utilities | Sector Analysis
E N D
Presentation Transcript
Utilities|Sector Analysis 02.23.2010 Nihar Shah Michael Song
Recommendation • Decrease weight in SIM portfolio by 72 bps • Final: Underweight 150 bps
Introduction • Utilities Sector • Size: 1721.2B • Industries
S&P/SIM Weight (.78)%
S&P/Sector Performance (YTD) Outperform
Business Analysis Electric Foreign Diversified Gas Water
Utilities – Catalysts/Risks • Catalysts • Rate Regulation Increase • Weather Patterns • Improvement in Economy • Green Policy (Nuclear/Water) • Risks • Rate Regulation Neutral/Decrease • Inconsistent or over-demand • Commodity Prices • Green Policy (Electric/Diversified/Gas)
Sector vs S&P Performance Correlation: 80.93% Outperform Outperform
Economic Analysis Forecast: GDP will very slowly increase over the short term
Economic Analysis Forecast: Interest Rate will increase in the short term
Economic Analysis Forecast: Natural Gas Price will stay relatively constant in the short term
Economic Analysis Forecast: Potential for long term growth
Regulation • State commissions are responsible for determining utilities’ proper rate bases and allowable operating expenses. Individual states’ rulings often differ with regard to these determinations. They also differ in allowed accounting treatments for depreciation accruals and investment tax credits. Although rulings are often presumed to be based solely on the public interest, commissions actually seek to provide a balance between investor and consumer interests.
Green Policy (Update) • On June 26, 2009, the House of Representatives passed, by a narrow 217–205 margin, its version of a new energy bill, H.R. 2454. Included in the bill, called the American Clean Energy and Security Act, 2005–2050, were provisions for a cap-and-trade system that would incrementally reduce GHG emissions, beginning with a cap on 2012 emissions that is 3% below 2005 levels. The bill, whose principal sponsor was Henry Waxman (D.–California), also included a requirement that utilities get 15% of their electricity from renewable energy sources and, through increasing their energy efficiencies, reduce their electricity use 5% by 2020. Individual states, however, would be allowed to vary these two percentages as long as the total came to 20%.
Financial Analysis Sector
Margins Net Profit N/A
Summary Overall: Slightly negative for short term
Recommendation • Decrease weight in SIM portfolio by 72 bps • Final: Underweight 150 bps
