U"li"es Company Presenta"on 11/25/2014 Collin Hart Wenying Li Ho Phil Lee Agenda •  Sector Recap •  Discussion of Stock –  NRG Energy Inc. (NRG) –  Edison Interna"onal (EIX) –  The AES Corpora"on (AES) •  Recommenda"on Sector Recap •  SIM current weight: 1.9%
•  S&P 500 current weight: 3.2%
•  Recommend: Buy to be in line with S&P 500
S&P
3.2%
3.3% 2.4% 11.7% 9.6% 19.6% 9.2% 10.4% 14.3% SIM
16.4% Consumer Discre"onary Consumer Staples Energy Financials Health Care Industrials Informa"on Technology Materials Telecommunica"on Service U"li"es 2.9% 2.5% 1.9% 21.5% 10.9% 9.6% 9.0% 6.9% 13.7% Consumer Discre"onary Energy Health Care Informa"on Technology Telecommunica"on Service 18.8% Consumer Staples Financials Industrials Materials U"li"es Recommenda"on Summary Current Price
Target Price
Target Price
Change
Recommendation
NRG Energy Inc. (NRG)
$31.68
$32.41
2.3%
HOLD
Edison International (EIX)
$62.11
$67.55
8.75%
BUY
$14.08
$17.00
20.7%
BUY
Company
The AES Corporation (AES)
NRG Energy Overview Net Genera"on Capacity : 53,000 megawaTs Retail Customers : 2.9 MM Employees : 10,000
Ticker : NRG (NYSE) Market Capitaliza"on : 10.59 B Revenue (2013) : 11.295 M
NRG Energy in Value Chain
Fuel Supply & Transport
a>on
Power Gen
era>on
• Regulated U+li+es • Renewable
Transmissio
n & Distribu
"on
Retail (Cust
omer)
• Residen+al and C&I • New Products and Services
100 power plants located in the Northwest, Chicago area, Southwest, Nevada, and California Provide electricity services to more 2.9 million homes and businesses NRG Energy Business Overview Clean Energy
•  Renewable development and opera"on pla[orm •  Innova"ve focus on sustainable
Retail
Conven>onal Genera
>on
•  2.8 M residen"al customers •  Energy management, personal power •  Residen"al solar business
•  Genera"on por[olio with over 50 GW •  Retail energy supply for commercial and industrial customers Industry-­‐Leading Clean Energy PlaXorm Genera>on Type 4% 12% 29% 55% Natural gas Coal Nuclear 3rd largest US-­‐based renewable operator and developer 1,666 MW of wind and solar capacity Wind/Solar Economic Factor Interest Rate : The yield of 10-­‐year U.S. treasuries dropped by 0.6%
U.S. 10-year Treasury Chart (year-to-date)
Energy Prices : Crude oil price 20% , Natural Gas 9% Crude Oil Price
Natural Gas Price
Stock Performance Current Price : $ 31.68 52wk Range : $26.30 -­‐ $38.09 • NRG Energy : 16.39%
• S&P500 : 14.10%
•  Utilities Sector : 15.99%
Strategic Alliance with FuelCell Energy -­‐ Bought 14.6 million shares of FuelCell -­‐ Reinforce exis>ng rela>onship with FuelCell Financial Highlights $1,570 $1,370 $1,533 $1,338 2015(E) $1,582 $1,366 $1,326 $676 2014(E) $1,613 $1,566 $605 2016(E) $1,407 $1,679 $1,493 $1,449 $732 $710 $517 2017(E) $532 2018(E) Capital Expenditure
$(670) $1,630 2019(E) FCF
2020(E) EBIT
Financial Stability and Dividend Growth
3.5% 1.5% 4Q 2012 1.7% 1.8% 1.7% 1.7% 1.7% 1.8% 1Q 2013 2Q 2013 3Q 2013 4Q 2013 1Q 2014 2Q 2014 3Q 2014 Valua>on Terminal Discount Rate =
Terminal FCF Growth =
(In millions)
9.0%
3.0%
2014(E) 2015(E) 2016(E) 2017(E) 2018(E)
2019(E)
2020(E)
2021(E)
2022(E)
2023(E)
2024(E)
Revenue
Growth rate
15,743 15,369 15,241 15,698 16,169 16,654 17,154 17,669 18,199 18,745 19,307
-­‐2.4%
-­‐0.8%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
Operating Income
Operating Margins
1,370 1,338 1,326 1,366 1,407 1,449 1,493 1,538 1,584 1,631 1,680
8.7%
8.7%
8.7%
8.7%
8.7%
8.7%
8.7%
8.7%
8.7%
8.7%
8.7%
Taxes (benefit)
Tax (benefit) rate
(405) (396) (392) (404) 432 436 441 445 450 454 459
-­‐2.6%
-­‐2.6%
-­‐2.6%
-­‐2.6%
-­‐2.6%
-­‐2.6%
-­‐2.6%
-­‐2.6%
-­‐2.6%
-­‐2.6%
-­‐2.6%
Net Income
Growth rate
538 541 538 554 571 588 606 624 643 662 682
0.5%
-­‐0.5%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
Add Depreciation/Amort
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
% of Sales
Free Cash Flow
1,602
10.2%
(1,240)
-­‐7.9%
1,570
10.0%
(670)
Current Price
$ 31.68
Implied equity value/share $ 32.41
1,564
10.2%
104
0.7%
1,533
10.0%
1,551
10.2%
36
0.2%
1,520
10.0%
1,491
9.5%
37
0.2%
1,566
10.0%
1,536
9.5%
38
0.2%
1,613
10.0%
1,582
9.5%
39
0.2%
1,582
9.5%
1,630
9.5%
40
0.2%
1,630
9.5%
1,679
9.5%
41
0.2%
1,679
9.5%
676
605
517
532
627
646
665
1,674
1,725
1,776
9.2%
9.2%
9.2%
43
44
45
0.2%
0.2%
0.2%
1,547
1,593
1,641
8.5%
8.5%
8.5%
Terminal Value 14,798
813
837
862
Recommenda>on Hold
Advantage Disadvantage Revenues and earnings will be stable Low dividend yield 3Q dividend yield increased Slightly underpriced 2 % higher PE ra>on than sector average S&P 500 will hit 2,050 by the end of 2014
NRG Energy
Comparison
P/E (TTM)
18.39
16.14 (Sector Average)
Dividend
1.8 % (2Q 2014)
4.1% (AEP)
Stock Price
$ 31.68 (Current)
$ 32.41 (Target)
The recent moves in the stock market and oil prices Edison International
Ticker: EIX
Business Analysis Market Profile
Current Price
52-Wk Range
Market Cap
Diluted Shares Outstanding (M)
$62.11 Dividend Yield
$44.74-63.51 Forward P/E
$20.52B Beta
329
2.3%
17.2
0.54
Business Analysis Edison Interna"onal, through subsidiaries, generate and distribute electric power, and invest in Energy services and technologies. Headquarter: Rosemead, CA Business Segments Southern California Edison (SCE) One of the na"on’s largest electric u"li"es Service Area: Central, Coastal, Southern California 5 million customer accounts Edison Energy Energy Services Company SoCore Energy: Solar por[olio development, commercial roocop installa"on 10 states, 100,000 solar panels on roofs na"onwide Customers: IKEA, Walgreens, Kimco Proterra: Leading manufacturer of electric-­‐drive buses and zero emission commercial vehicles Business Analysis Key Drivers:
u
u
u
u
7%-9% projected compounded annual rate base growth driven by:
u  Infrastructure reliability investment
u  California Public Policy
u  Grid technology improvements
Recent forecast capital program 2014 to 2017 for aging distribution infrastructure replacement
The extreme weather conditions have impact on demand for electric power
The smart grid technology drives efficient uses of electric power
u  Self-Healing Distribution Circuit
Risks:
u
u
u
The change of the state climate policy on greenhouse gas emission
The change of market price of coal and natural gas
Financial risk and interest rate risk
Financial Analysis Management Effec>veness Efficiency Ra>o Profitability Ra>o Valua"on Current Current Price: Price: $62.11 $62.11 Target Target Price: Price: $65.13 $67.47 Valua"on Sensitivity Analysis
Valua"on Rela>ve Valua>on Target Price: $67.62 BUY
8.75% upside AES Corpora"on Overview •  AES operates as a diversified power genera"on and u"lity company •  Opera"ons in 20 countries across 5 con"nents •  Divided into six SBU: –
–
–
–
–
–
US Andes (Chile, Colombia, Argen"na) Brazil EMEA MCAC Asia •  Diversified Genera"on Por[olio –  Includes: coal, natural gas, fuel/diesel oil, wind, hydroelectric, biomass, energy storage Business Analysis •  Growth Drivers –  Con"nued Expansion into foreign markets –  Expansion of sustainable energy sources and energy storage –  Prolonged reduc"on in crude oil prices •  Risks: –  Vola"le Commodity Prices –  Uncertain regulatory environment –  Foreign exchange exposure –  Highly levered Business Analysis •  Expansion: –  Approx. 29,000 MW genera"on Capacity –  4,700 MW under construc"on through 2018 •  Chile, Vietnam, India, SoCal –  2,400 MW MATS upgrades •  IPL (Indiana Power and Light) –  24% increases in capacity •  Energy Storage: –  Q3 wins 200 flex MW contract with SoCal Edison –  $300 million energy storage investment in Philippines Business Analysis •  Hedging Risks: Genera>on PorXolio –  Vola"le Commodity Prices •  Deriva"ves •  Diversified fuel por[olio –  Uncertain Regulatory environment •  Geographically Diverse –  Foreign Exchange –  Highly Levered •  Commitment to paying down debt •  Stable cash flows to pay obliga"ons Coal 29% 30% Natural Gas Fuel Oil 5% 36% Sustainable Contribu>on to Adjusted PTC 7.80% US 24.00% 18.80% 18.50% 19.30% Andes Brazil MCAC EMEA Asia 11.60% Financial Analysis •  Revenue growth over 5 years •  Contrac"on in 2013, mainly due to USD apprecia"on/ dry hydrology •  Slowdown acer 2010 as expansion projects completed •  Next round of expansion finished by 2018 –  7,100 MW –  Strong revenue growth expected Financial Analysis •  Guidance: –  Solid revenue growth going forward –  2016-­‐2018: 10-­‐15% FCF growth Valua"on Analysis •  Sector Mul"ples: –  Rela"ve to S&P: inline –  Absolute Basis: Slightly overvalued Valua"on Analysis •  Stock Mul"ples: –  Undervalued compared to historical averages & sector Valua"on Analysis •  DCF: –  Assump"ons: •  Terminal Growth Rate: 1.5% •  Discount Rate: 9.0% –  Implied Price: $17.14 Conclusion •  Target Price: $17.00 (Conserva"ve) –  DCF: $17.14 –  Average Mul"ple: $17.38 •  Closing Price 11/25/14: $14.08 •  Recommenda"on: BUY