Utility Stocks Presentation Jiali (Jenny) Chen Tyler Giannona1 Jason Head •
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Sector Overview Calpine Edison Interna>onal AES Recommenda>on Overview U>li>es Sector Agenda •
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Sector Overview Calpine Edison Interna>onal AES Recommenda>on Overview U>li>es Sector Agenda Portfolio Sector Weightings SIM 3% 23% 8% 8% 4% 3% 3% 18% 11% 8% 15% 9% Technology Healthcare Industrials Energy Basic Materials 19% Financials Cons. Staples Cons. Disc. Telecom U>li>es 17% 10% 15% 11% Technology Healthcare Industrials Energy Basic Materials Financials Cons. Staples Cons. Disc. Telecom U>li>es U>li>es Sector 7% 3% 3% S&P 500 Calpine Calpine Business Analysis •  Business •  Premier wholesale power producer. •  Geyser assets located in Northern California represent the largest geothermal power genera>on porMolio in the U.S. •  Key Drivers •  Natural Gas Prices •  Weather Condi>ons •  Capacity Reserve Margins Calpine •  Natural Gas and Geothermal power plants. Financial Analysis •  Profitability •  ROE: 27.5 •  Projec>ons •  Revenue Growth •  2014A: 8.030B •  2015E: 6.083B •  2016E: 6.316B •  Free Cash Flow Growth •  2014A: $0.88/share •  2015E: $2.12/share •  2016E: $2.57/share Calpine •  ROA: 7.9 Valuation Calpine •  Calpine Discounted Cash Flow Model Valuation Duke Energy •  Duke Energy Discounted Cash Flow Model Recommendation HOLD •  Catalysts •  Completed sale of underperforming assets. •  Risks •  Vola>le natural gas markets •  Unpredictable weather condi>ons •  Unfavorable Regula>on: Rate Caps Calpine •  Opera>onal Efficiency. •  Natural Gas and Geothermal power plants. Edison Interna>onal Edison International Business Analysis •  Business
•  Generator and distributor of electric power
•  100% operating revenue of SCE comes from electricity network
•  Key Drivers
•  Sustainable infrastructure investment
•  Grid technology improvement
•  Favorable regulation environment
Edison Interna>onal •  SCE (Southern California Edison) is the most important business line
Financial Analysis •  2010-2014 Edison International:
Profitability improved after EME filed for bankruptcy
Liquidity fell due to purchasing activities and capital expenditure
Efficiency is half good, half bad
Leverage slightly fluctuated
2014 DuPont Analysis with Peer Firms
•  Compared to its peer firms,
Edison International has a
relatively high profitability and
leverage level, while it has the
lowest efficiency ratio. The
high ROE ratio of the company
can best be explained by higher
capital intensity and higher net
margin.
Edison Interna>onal •
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Financial Analysis (Cont’d) •  Income Statement Projections
•  Final general rate case decision of CPUC (California Public Utilities
Commission) is not expected until sometime in 2015 and Edison
International currently recognizes revenue based on the 2014
authorized revenue requirement.
•  Operating Expenses:
•  Affected by likely increasing natural gas price from year 2015 to year
2017, purchased power and fuel cost of Edison International tends to
increase correspondingly.
•  Interest Expenses:
•  The amount of long-term debt of Edison International maturing in the
projected years 2015-2017 increases year by year. Therefore, we expect
interest expense to slightly decrease in the next three years.
Edison Interna>onal •  Operating Revenue:
Valuation •  Discounted Cash Flow Model
• The target price: $69.28, upside potential of 8.1%
• Use terminal growth rate of 2.75%
Edison Interna>onal • Use authorized cost of capital: 8%
Recommendation •  Catalyst
the next
Substantial investment on projects development over
five years, but likely rising natural gas price and increasing
10-year interest rate may partially offset the potential
profit.
•  Highly regulated, stable earnings but also limited growth
potential.
•  Target price through DCF model indicates slightly
undervalued.
•  Risks
•  Uncertainty about future general rate case and other regulation
policies.
•  Potential financing difficulty.
•  Likely operation accidents and natural disasters.
Edison Interna>onal •
HOLD
Operate in 18 countries with 6 SBUs •  U.S. •  Andes (Chile, Colombia, Argen>na) •  ‘Brazil •  MCAC (Mexico, Central America, Caribbean) •  Europe •  Asia 2 Lines of business, Power GeneraHon and UHliHes •  102 Power Genera>on Plants •  U>li>es Service 10.4 million customers Diversified Power GeneraHon PorFolio •  Gas, coal, renewables U>li>es Sector Global power company that owns and operates a diverse and growing porFolio of electricity generaHon and distribuHon businesses. Business Analysis •  Con>nued expansion into foreign markets and renewable energy sources •  Growth of energy storage •  Housing market Risks •
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Rising interest rates Commodity and foreign exchange rate risk High debt levels Extreme weather condi>ons U>li>es Sector Key Drivers Financials •  Revenue growth in 5 of the 6 SBUs •  Harsh weather hurt earnings in 3 SBUs U>li>es Sector AES Corpora>on •  ROE-­‐ 15.54% •  ROA-­‐ 4.57% •  P/E-­‐ 12.54 Valuation •  Both AES and sector undervalued compared to S&P •  Undervalued compared to industry compe>tors U>li>es Sector Relative Valuation to S&P The AES Corporation (AES)
Terminal Discount Rate =
Terminal FCF Growth =
Year
2015E
Revenue
17,746
% Grow th
Discount Rate-­‐ 9.5% Terminal Growth-­‐ 3% Terminal P/E-­‐ 12.5 AEP DCF Discount Rate-­‐ 8.5% Terminal Growth-­‐ 3% Current Price-­‐ $55.73 Target Price-­‐ $53.80 Downside-­‐ 3.5% 18,367
3.5%
Operating Income
AES 2016E
2,893
Operating Margin
Interest
Interest % of Sales
Taxes
Tax Rate
Other
Net Income
Plus/(minus) Changes WC
% of Sales
3,080
19,675
3.5%
3,187
20,315
3.3%
3,291
2020E
20,924
3.0%
3,390
2021E
21,552
3.0%
3,491
2022E
22,199
3.0%
3,596
2023E
22,865
3.0%
3,704
2024E
23,551
3.0%
3,815
2025E
24,257
3.0%
3,930
16.2%
16.2%
16.2%
16.2%
16.2%
16.2%
16.2%
16.2%
16.2%
(1,450)
(1,500)
(1,550)
(1,604)
(1,656)
(1,706)
(1,757)
(1,810)
(1,864)
(1,920)
(1,978)
-8.2%
-8.2%
-8.2%
-8.2%
-8.2%
-8.2%
-8.2%
-8.2%
-8.2%
-8.2%
-8.2%
418
428
444
459
474
488
503
518
534
550
566
29.0%
29.0%
29.0%
29.0%
29.0%
29.0%
29.0%
29.0%
29.0%
29.0%
29.0%
(250)
(250)
(250)
(250)
(250)
(250)
(250)
(250)
(250)
(250)
(250)
789
813
851
874
911
945
981
3.0%
4.7%
2.7%
4.2%
3.8%
3.8%
1,745
1,806
1,869
1,930
1,988
2,047
1,018
3.8%
2,109
1,056
3.7%
2,172
1,095
3.7%
2,237
1,136
3.7%
2,304
9.5%
9.5%
9.5%
9.5%
9.5%
9.5%
9.5%
9.5%
9.5%
9.5%
9.5%
(158)
(159)
(182)
(197)
(203)
(209)
(216)
(222)
(229)
(236)
(243)
-0.9%
Subtract Cap Ex
3.5%
2019E
16.2%
1,686
% of Sales
19,010
2018E
16.3%
% Grow th
Add Depreciation/Amort
2,975
2017E
9.5%
3.0%
1,686
-0.9%
1,745
-1.0%
1,806
-1.0%
1,869
-1.0%
1,930
-1.0%
1,988
-1.0%
2,047
-1.0%
2,109
-1.0%
2,172
-1.0%
2,237
-1.0%
2,304
Capex % of sales
9.5%
9.5%
9.5%
9.5%
9.5%
9.5%
9.5%
9.5%
9.5%
9.5%
9.5%
Free Cash Flow
631
654
669
677
707
736
766
796
828
860
893
3.6%
2.4%
1.2%
4.4%
4.1%
4.0%
4.0%
3.9%
3.9%
3.9%
% Grow th
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
4,638
5,711
10,349
6.74%
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
11.9
13.1
5.9
6.2
Shares Outstanding
Current Price
Implied equity value/share
Upside/(Downside) to DCF
Debt
Cash
Cash/share
703.0
$
$
13.31
14.72
10.6%
20,091
2,248
3.20
45%
55%
100%
Terminal Value
Free Cash Yield
11.5
12.7
5.8
6.0
11.0
12.2
5.6
5.8
14,154
6.31%
Terminal P/E
12.5
Terminal EV/EBITDA
5.1
U>li>es Sector DCF Analyst: Tyler Giannonatti
4/4/2015
Recommendation • Current Price-­‐ $13.31 • Target Price-­‐ $14.72 • Implied Upside-­‐ 10.6% • Dividend Yield-­‐ .40 (3%) U>li>es Sector Hold Recommendation Overview Company Current Price Target Price Expected Return (w/div) Current Weight Recommended Weight RecommendaHon CPN 22.81 23.72 4.0% 0 0 Leave Out DUK 78.25 79.34 1.4% 0 0 Leave Out EIX 60.52 69.28 14.5% 0 0 Leave Out PCG 52.02 89.93 13.3% 0 0 Leave Out AES 13.31 14.72 13.6% 302bps 152bps Hold AEP 55.86 53.80 -­‐4.6% 0 0 Leave out Edison Interna>onal U>lity Sector Questions?