by Luis Miguel Ochoa Comments (25)

Power & Utilities Investment Banking: The Most Electrifying Group Ever?

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So far in this series on natural resources groups, we’ve covered metals and mining, alternative energy/clean technology, and oil and gas… which means there’s only one group left to tackle: power & utilities.

When you hear “utilities,” you might think “boring, predictable dividend stocks [that fall in the value category of a zephyr chart]” – but there’s a big difference between advising these companies on major deals vs. following them in the stock market.

If you want solid deal flow with exposure to all different types of transactions – and knowledge of an industry that isn’t going anywhere anytime soon – it’s hard to beat this group.

Here’s the “utility” you’ll get out of today’s interview:

  • How the power / utilities group is divided into sub-sectors
  • Key trends and valuation drivers
  • How to analyze and value a utilities / power company
  • Where to plug in for exit opportunities once you’ve unplugged from investment banking

Getting Plugged Into Utilities & Power

Q: What brought you into the energy/power coverage team?

A: At my firm, sector coverage is quite dependent on geography.

My analyst class listened to each of the various coverage teams present at our “sell day”; after some of the speakers presented, I approached the staff to follow-up with questions on deal flow and work culture.

I specifically asked about the chance to cover oil and gas, but since this was the New York office the speaker focused on electric utilities.

That ended up being the best fit for me, though I’m sure he would have more enthusiastically taken me into the group had I run up and started asking about “electric utilities” rather than “petroleum companies.”

Q: Great. So how is your universe divided up, and how much overlap is there with other natural resource groups?

A: If you’re not already familiar with the sector, “power & utilities” means “electric, gas, and water” – the services you use at home without even thinking about it.

There is some overlap with gas companies, but the rest are separate:

  • Electric: These companies produce electricity, mostly through coal-fired or nuclear processes (and increasingly natural gas).
  • Gas: These companies transport and store natural gas (midstream) and sometimes distribute it (downstream) as well.
  • Water: You know how aerospace and defense companies produce equipment, but airlines and armies actually deploy it? Here, an industrials company would manufacture the pumps required to deliver water from a reservoir to households, and a utilities company would deploy these parts and make it possible to transport water. They provide waste water and water-related services, including facility and plant management in cases where government or military customers outsource their work. In the US, the water system infrastructure is quite old and ripe for replacement – so there’s an opportunity for companies to come in and provide engineering and construction services, such as plant construction, maintenance, and expansion.
  • Diversified: Companies that provide a combination of any two or three of the above areas.

Becoming an Electric / Power Technician

Q: So what drives each sector? Most people say utilities companies are “predictable” or even “safe investments,” but there must be more to the market than that, right?

A: That’s a common claim, but there have been power crises, emergencies, and other calamities in this market so it’s not quite true. Let’s go through the key drivers by sector:

Electric: This sector is very seasonal, with peak sales in the winter and summer. Spring and autumn have lower energy demand, so companies use those time periods to invest in maintenance capital expenditures.

Residential and general (read: service and governmental) customers are very sensitive to changes in weather, while industrial customers aren’t as sensitive. Examples of customers in both segments include:

  • General: Health care, education, financial services, information technology, and military buildings
  • Industrial: Textiles, chemicals, rubber and plastics, paper, food & beverage, and auto manufacturing

It also depends on geography; imagine Washington, D.C. with many defense contractors or Houston with many oil refiners.

As for other drivers, well, just take a look at Duke Energy’s 10-K:

  • “The principal elements of competition are price and availability, terms of service, flexibility and reliability of service.”
  • “Wholesale electric prices are influenced primarily by market conditions and fuel costs.”

The supply of electricity is determined by generation plant use or overuse (read: outages). The generation plants themselves may be coal-fired or nuclear (and are increasingly powered by natural gas, due to the shale boom in North America).

Other types of plants include fossil steam and combined-cycle gas fired. Hydroelectric plants are limited by water flow, though they can provide low-cost generation.

Combined Turbine (CT) and Combined Cycle (CC) are less expensive than nuclear or coal-fired plants due to the construction and maintenance involved in the operation of these plants. Another benefit is that these two variations can quickly start and stop depending on commodity prices.

Competition is influenced by regulatory/policy changes, taxes, and environmental concerns. For example, clean air laws regulate the quality of coal burned in the process of electricity generation (companies have to minimize the sulfur content of the coal).

With prices, residential and general customers pay at a block rate. For much larger customers, billing demand dictates capacity and minimum use charges.

Revenue itself depends on market prices for energy, the price of wholesale energy vs. power generation, the demand by serviced customers, and available generation.

Think about a diversified provider’s sales mix: if natural gas prices are lower than coal prices, then sales will shift toward natural gas. But natural gas prices could still fall due to increased supply, increased production, or relatively lower demand.

If you’re really into electric utilities, I would recommend reading about the California electricity crisis between 2000-2001. It’s a good history lesson on deregulation and the manipulation of energy prices.

For the record, I am not in California, but the state does have a pretty consistent energy almanac outlining the demand and supply for energy.

With electricity, one of the key metrics is Megawatt (MW) Supply: Existing Generation – Expected Retirements + Expected Additions + Net Imports.

Water: I’m sure you know that the hotter it gets, the greater the demand for water. The same applies if you decide to expand into a giant desert.

Government mandates such as drought warnings reduce customer demand (even if they’re not all real); conservation efforts and water efficiency practices also influence water demand levels.

Growth comes from population growth, taking over new territories, and offering additional water services to existing customers.

Gas (Downstream): Demand is similarly dependent on temperature, but it is more sensitive to housing construction, general economic conditions (do you cook more at home when you can’t afford to eat outside?), and changes in governmental regulation. The supply is bought from marketers and the producers themselves.

Depending on the location, the government may control everything from prices to depreciation rates to allowable capital structures and even the conditions of service.

The government also certifies plants, ensures producers are up to standards, and determines when to conserve or expand production.

Q: You mentioned how Megawatt Supply is a key metric for electricity producers – what are some other metrics or benchmarks to look out for?

A: Cost recovery is also very important. You’re always looking at how quickly a utilities company can “earn back” the funds that it spends on capital expenditures for new plant construction, capital expenditures for maintenance following storms, and whatever they spend to meet environmental standards.

On the operations management side, the Key Performance Indicators (KPI) include plant availability, how reliable plants are, and earnings per share. “Customer satisfaction” is also on this list, but you and I both know that can mean anything.

One particularly important indicator is a measure of capacity: Peak Season Equivalent Forced Outage Rate = # Hours of Forced Outages / Total Generation Hours.

Power Up the Acquisitions

Q: This sounds like such a heavily regulated sector – what motivates strategic acquirers to seek out acquisitions?

A: If you look at it from the financing side, companies acquire other companies to increase their valuation multiples and reduce their cost of capital.

From an operating standpoint, increased scale, improved financial stability, earnings and dividends growth, and cost savings / efficiencies are important.

This is a relatively mature sector in most countries, so it’s less about finding targets with high-growth potential and more about consolidation.

Financial sponsors do participate in this space, but the share of financial vs. strategic buyers will vary depending on the season, with more deals coming from strategic buyers overall.

When it comes to the types of tasks you’ll be staffed on, expect to see a fair balance of financing and advisory assignments.

Banks with a strong presence across both of those include JPMorgan, Citi, and RBC (debt, equity, and equity-linked); advisory specialists include Morgan Stanley, Bank of America Merrill Lynch, and Credit Suisse.

Q: Thanks for sharing – what do pitch books and Fairness Opinions look like in this sector?

A: Here are some discussion materials you can take a look at. They can get pretty quantitative when you are presenting to governmental agencies:

Here’s a great example of a Fairness Opinion:

  • Niagara Mohawk Power Company: Prepared by Donaldson Lufkin & Jenrette (see page 31, beginning with “In rendering the DLJ opinion, DLJ performed a variety of financial analyses, which are summarized below”)

And even more Fairness Opinions on some substantial deals in this space:

Duke Energy / Progress Energy:

Here’s one on MidAmerican Energy / Constellation Energy, prepared by Morgan Stanley.

Exelon / Constellation Energy:

AGL Resources / Nicor:

Q: Awesome! An abundance of pitch books. You could spend hours reading through those to understand the sector, but could you summarize valuation for those who don’t have the time to comb through those?

A: Comparable public companies and precedent transactions are largely the same – you still select them in the same way and still use EV / Revenue, EV / EBITDA, P / E, and sometimes EV / EBITDAR, EV / EBIT, P / E, and P / BV.

And, of course, the DCF still works – it’s even more useful in this sector because cash flows are more predictable.

One difference is that you’ll see the dividend discount model (DDM) used more often because many utilities companies are effectively dividend stocks and consistently pay out a similar percentage of net income in the form of dividends.

According to DLJ, however, you would stay away from the DDM if the target company is “highly levered” – the logic is that interest expense might be high enough to result in lower-than-expected net income, which in turn might make dividends more difficult to estimate.

Q: Any valuation methods we haven’t covered before?

A: These aren’t completely new approaches – more like variations of existing methodologies:

Potential Pro Forma Value Creation: Compare the standalone equity value of the acquirer to the pro forma equity value of the combined entity. For the former, you would calculate the equity value based on a discounted cash flow approach.

For the latter, you would take the acquirer’s equity value and then add the target’ equity value and the net present value of efficiencies (net of transaction fees).

The “value creation” is calculated by applying the proportionate equity ownership of the acquirer’s shareholders to the new combined company.

Consolidated Discounted Cash Flow Analysis: Rather than using the cash flows for a standalone company, you would sum the cash flow generation of both parties involved in the combination, usually based on Unlevered Free Cash Flow.

Sum of the Parts Valuation: You could do this for the DCF as well as the comparable company analysis; it’s most common with diversified utilities companies (e.g. select a set of water comps for their water division, electric comps for the electric division, and so on).

In addition to all those, you might also look at the 5-year credit default spread for the public comps and see how it trended over time.

You might also do some qualitative work with a “liquidity analysis,” where you look at recent credit research notes from the various agencies and highlight the risks that might lead to debt downgrades.

Then you would end this commentary with actionable steps that the company could take in order to prevent downgrades (e.g. cut stock buy-backs and use the funds to pay off debt instead).

The Power of Exit Opportunities

Q: So what should you be reading when it comes to knowing the sector?

A: Transmission & Distribution World, DealBook, Wall Street Journal, and, to a lesser extent, The Economist.

Q: And what about exit strategies?

A: Most of my peers have sought roles at energy hedge funds or industrial-oriented private equity firms.

Unlike other sectors, very few analysts and associates go to work at electric/gas utilities or power companies – possibly because they’re seen as “less sexy” than technology companies and the like.

If you do want to go the corporate route, start-ups are the most common path (e.g. companies working on energy efficiency or improving access to water or electricity).

I only know one guy who went on to do corporate development afterward, and that was in Chicago (industrials coverage) – he moved to a company that provides parts/assemblies for energy companies.

Q: Any last words before I pull the plug on this interview?

A: Try not to go home too much earlier than your associate – help keep the lights on and boost the power/utilities sector!

About the Author

Luis Miguel Ochoa has facilitated a variety of strategic initiatives from corporate acquisitions to new market development. He earned his B.A. in economics from Stanford University where he was a member of the varsity fencing team.

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Read below or Add a comment

  1. Hi Brian, I’m wondering if at places such as Barcap, where P&U has been historically strong thanks to the Lehman bankers and their connects, the deal volume will start declining in proportion to the increase of renewables? Or would it be fair to assume that the bank’s existent Power clients, as they start diversifying their portfolios by adding renewables, will prop up the bank’s P&U group?
    Thank you.

    1. P&U will just switch to different power sources… you already see that happening. So I don’t think deal activity will change much because of that.

  2. Hi Brian,

    I’m considering moving into the Natural Resources group at my BB where they house the O&G and Power & Utilities group together. I’ve heard that certain groups pidgeon hole you due to the specialization of the industry (FIG & RE are the big two) but there seems to be more ambiguity with energy and power. Some would say that you’ll have the label of the “E&P Guy” but the skills are the same and won’t matter, while others say that if you can choose a different group. If I would plan on only being in the group for two years and am not pursuing buyside offers afterwards, how strong is the pidgeon holing with E&P? Would you put it on the same level as FIG/Real Estate IB or is it no different than any of the other coverage groups?


    1. You will be pigeonholed if you’re in the E&P team specifically. See:

      Power & Utilities is less of an issue. That article describes some of the trade-offs of O&G groups.

  3. Brian,
    As part of BIWS’ IB Interview Guide there is an Oil, Gas & Mining Q&A section. I haven’t found for Power, Utilities, Renewables. Is there any? I am recruiting for these sectors and I wanted to confirm with you. If there isn’t, do you have any advice to prepare for them?
    Many thanks in advance.

    1. We do not have a section on Power/Utilities/Renewables, only the articles on those topics on this site. My recommendation would be:

      1) Understand that ~90%+ of the questions you receive will not be industry-specific. Fundamental accounting, valuation, and M&A/LBO topics are still the most important.

      2) If you want to learn more, look up some recent deals in the sector and find Fairness Opinions or investor presentations for them to see more examples.

      1. Sounds great. Thanks Brian.

  4. Hi Brian,

    Thank you for the amazing article!

    I’m at a BB where PU is now split from energy. I’m very very torn between the two and I don’t know which one to choose when it comes to team selection. I feel that PU pigeonhole seems me less whereas energy is more technical and specialised, which I like. I’m based in London if that makes a difference.

    I have seen people starting in energy/natural resources and go on to become a generalist in mid market PE shops here in London. And I assume it will not be difficult for me to move to PU if starting in energy?

    Would really appreciate your advice!

    1. I don’t know, I don’t think there’s really a huge difference because everyone specializes in an industry as they move up. Power & Utilities is definitely more general than Oil & Gas (and Mining) because accounting/valuation/modeling is fairly standard, so I think it would be better to start out there, move into energy if you want something more technical/specialized, or if not, move to a generalist role after.

  5. Hi Brian,
    This was an excellent read. Could you please tell me the applicability of EV/BOE on utility sector. My understanding was if a Utility is more in to exploration stage EV/BOE can also be a strong multiple to value the company.

    Please share your thoughts on this.

    1. If by “BOE” you mean “Barrels of Oil Equivalent” then that is something in the Oil & Gas sector, not Utilities. EV / BOE can be a useful multiple for valuing E&P/upstream companies that are actually producing some amount of oil/gas but which may have very different cost structures. Please see our articles on oil & gas investment banking and oil & gas modeling.

  6. Hi Brian,

    I’m interviewing for an off cycle analyst role with 2 different teams at the same bank in London, however closely related – other banks may group them together. (One more general than the other, think O&G vs NatRes)

    In general, interviewing with more than one teams is fraud upon by big banks.

    I’m leaning towards telling them myself early on. How do you think I should handle it? Will it become an issue?

    1. Yes, you should tell them early on (i.e., first-round interviews), and you should probably pick the most general team unless there’s a specific reason not to. Otherwise they’ll find out pretty quickly and may be upset, especially if both groups are related.

  7. Ajay Pandey


    Thanks for the detailed explanation pertaining to valuing utility sector. I have a small question associated with the deal multiples for power companies. I would like to know about the enterprise value/capacity and equity value/capacity multiples significance associated with the power companies M&A. What conclusions can be reached out from these multiples.

    1. The same conclusions you can draw from any multiples: How highly valued is the asset relative to its operational value? Higher multiples mean a more expensive asset and lower multiples mean a cheaper asset (and likely one with lower growth expectations).

  8. Hi Luis/Brian,

    I’m considering signing up to the BIWS Financial modelling course and was wondering whether you cover any modelling for the Power/Utilities/Infrastructure sector. I’m sure general modelling for other industries is useful to know, but this coverage area is really what I’m focused on right now.

    If this is something you do not cover, can you recommend any other training providers/online resources that do?


    1. We sent a separate reply to your email, but we don’t cover power & utilities at the moment. Parts of the Oil & Gas and Real Estate courses might be relevant. I don’t know of other courses that teach this industry, but will let you know if I find anything.

  9. do bonuses in this group tend to be lower than other groups due to govts paying less in success fees than regular companies or are they comparable?

    1. Bonuses should be comparable at the junior levels.

  10. Many thanks for the artcile but I think you are missing it here in the following:

    Valuation: Main driver to look upon apart from the mentioned are Dividend Yield and EV/MW specially in precedent transactions or number of clients (Distribution) Km of transmission lines

    Exit Opps: The biggest utilities are in Europe / LatAm where they are integrated utilities + a lot of coverage analysts end working in the corporate development of these entities given that they are very active in the M&A side. Others work in funds such as First Reserve…

    1. Thanks for adding those, all good points.

  11. Thank you so much. This is exactly what I’ve been looking for.

  12. Regarding the exit opps, are these typically at the analyst level? I’m interested in pursuing an associate role in an energy/power group after an MBA, and was wondering if I could eventually transition to an energy hedge fund from there.

    1. Mostly analyst-level, yes, but it’s possible to exit from the associate level as well. One advantage you have is that since energy is so specific, sometimes there’s less competition for the roles since funds really want to see energy-specific experience.

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