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Global Utility White Paper
CONFIDENTIAL

underperformance -39%, QE2 -12%, QE3 -5%), which signals exhaustion of selling pressure as the relative value of the S&P versus utilities has stretched further. Given widespread use of QE, a similar effect can be found in other regions.

[Chart Title: UTY/SPX Post QE Announcement]
[Y-Axis Label: US Utilities Price/S&P 500 Price]
[Chart Annotations: QE1, QE2, QE3]
[Chart Text: After every QE announcement, utilities have underperformed]
[Chart Data Labels: -39%, -12%, -5%]
[Chart Footer: Source: Bloomberg Copyright 2013 Bloomberg Finance L.P. 04-Mar-2013 11:40:50]

3. Regional Structural Changes Driving Alpha Opportunity

Structural changes are occurring in all regions. Those in which Electron is currently investing or tracking closely are as follows:

• US Utilities

Of the global utility markets, we expect the US utilities market to face the strongest headwinds and be the least-attractive market for alpha generation over the next 2 years. Since the financial crisis, the US has been the best-performing region for utilities of all the developed markets, outperforming European utilities by 40% over the last 4 years, and it is the region which is only slightly underweight by investors.

The US is the most defensive of all regions because of the large weighting of regulated names. Since 2008, US utility earnings have been flat (versus a -45% decline in Europe), as consistent regulated earnings growth of 3-5% offset unregulated utility earnings declines resulting from lower power prices driven by falling natural gas prices. Notwithstanding flat earnings growth, investors have re-rated the US utility sector’s PE multiple relative to the S&P as they sought more yield in a low-yielding QE environment. Today, US utilities are close to the sector’s pre-crisis record valuation peak (trading at a 7% PE premium to the S&P 500) when investors were discounting higher earnings growth from tightening power markets (see below).

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Electron Capital Partners, LLC
For exclusive of Jeffrey Epstein
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