Utilities Company Outlook
Utilities Sector - Michael Brajdic
Agenda
¡  Overview
¡  Discussion of Stock Analysis
¡  NRG Energy (NRG)
¡  XCEL Energy (XEL)
¡  The AES Corporation (AES)
¡  Recommendation
Utilities Sector - Michael Brajdic
Agenda
¡  Overview
¡  Discussion of Stock Analysis
¡  NRG Energy (NRG)
¡  XCEL Energy (XEL)
¡  The AES Corporation (AES)
¡  Recommendation
Utilities Sector - Michael Brajdic
Overview
¡  Over last 40 years with predicted
macroeconomic outlook (3.0% GDP, rising
inflation ~200 b.p., higher treasury yields ~100
b.p.) regulated utilities underperformed 59% of
the time, by an average of 3.5%
¡  I recommend SIM lower its position in Utilities from
3.41% to 3.00%
¡  Utilities have led the way with 13.57% YTD, and I
believe this continued growth is not plausible
Utilities Sector - Michael Brajdic
Stocks Currently Held
Security
Date Bought
Ticker
GIC Sector
Unit Cost
Market Price
Percentage
Of Assets
Beta
NRG Energy
Jun. 2012
NRG
Utilities
18.07
31.81
2.42%
0.65
XCEL Energy
Dec. 2012
XEL
Utilities
27.69
31.69
0.98%
0.14
Utilities Sector - Michael Brajdic
Plan
¡  Sell entire XCEL Energy holding (.98% of assets)
¡  Trim NRG Energy 42 b.p. to 2% of assets
¡  Buy 100b.p. of AES Corp
Utilities Sector - Michael Brajdic
New Position
Security
Date Bought
Ticker
GIC Sector
Unit Cost
Market Price
Percentage
Of Assets
Beta
NRG Energy
Jun. 2012
NRG
Utilities
18.07
31.81
2.00%
0.65
AES Corp
July 2014
AES
Utilities
15.19
15.15
1.00%
1.05
Utilities Sector - Michael Brajdic
Agenda
¡  Overview
¡  Discussion of Stock Analysis
¡  NRG Energy (NRG)
¡  XCEL Energy (XEL)
¡  The AES Corporation (AES)
¡  Recommendation
Utilities Sector - Michael Brajdic
Business Analysis
Utilities Sector - Michael Brajdic
NRG Energy
¡  Diversified Utilities Industry
¡  Energy Generation
¡  Owns and operates diverse portfolio of powergenerating facilities (18 states)
¡  Operates 88 fossil fuel and nuclear plants, 11
utility scale solar facilities, and 4 wind farms
Utilities Sector - Michael Brajdic
General Drivers
¡  Load Growth – population growth or increased
usage (Assume 1.5%-2%)
¡  Federal Policy – tax credits and emission
standards
Utilities Sector - Michael Brajdic
XCEL Energy
¡  Integrated Utilities Industry
¡  Energy Generation, Transmission, and Distribution
¡  Regulated Utility in 8 States
¡  Generates Electricity using coal, nuclear, natural
gas, hydro, solar, biomass, oil, and wind energy
sources
Utilities Sector - Michael Brajdic
Defensive Utility Drivers
¡  Capital Investment – companies earn return on
rate base
¡  State Regulatory Environment – supportive
relationship more likely to yield positive rate case
¡  Rate Cases – determines rate base, ROE, and
timing of relief
¡  Dividend Policy – constant policy, reflects visibility
of future earnings
¡  Interest Rates – inverse correlation to utility
investments
Utilities Sector - Michael Brajdic
The AES Corp
¡  Utility Networks Industry
¡  Energy Generation and Utility Networks
¡  Operates as a diversified power generation and
utility company
¡  Owns power plants to generate and sell power,
as well as distribution networks to sell electricity in
the wholesale market
Utilities Sector - Michael Brajdic
Deregulated Utility Drivers
¡  Commodity Prices – spark spread (natural gas)
and dark spread (coal)
¡  Heat Rate – relationship between natural gas and
power; shows efficiency of market
¡  Reserve Margin – measure of excess supply,
generators want low reserve margin
Utilities Sector - Michael Brajdic
One Year Performance
Relative
Utilities Sector - Michael Brajdic
Absolute
Financial Analysis
Utilities Sector - Michael Brajdic
Selected Ratios
FY 2010
NRG
XEL
AES
FY 2011
FY 2012
FY 2013
ROE
6.00%
2.42%
3.32%
-4.08%
Gross Margin
31.37%
26.48%
27.10%
28.10%
NI Margin
5.39%
2.17%
3.50%
-3.42%
ROE
9.78%
10.07%
10.43%
10.28%
Gross Margin
49.82%
51.61%
55.52%
53.26%
NI Margin
7.33%
7.89%
8.94%
8.69%
ROE
0.16%
0.93%
-17.35%
2.56%
Gross Margin
24.87%
24.01%
20.88%
20.43%
NI Margin
0.06%
0.34%
-5.31%
0.72%
Utilities Sector - Michael Brajdic
NRG Energy Consideration
¡  Highlights
¡  Owns valuable wholesale generation assets in
power-hungry states
¡  GenOn Acquisition contributing huge cash flow
¡  NRG not as exposed to natural gas price
¡  Risks
¡  Greenhouse gas emission caps erode profitability
¡  Lackluster power prices and coal plant closures
¡  Move into green energy dependent on government
incentives
Utilities Sector - Michael Brajdic
XEL Energy Consideration
¡  Highlights
¡  Raised dividend every year since 2003
¡  Strong renewable portfolio in Minnesota and
Colorado
¡  Environmental awareness in certain states drives
renewable energy
¡  Risks
¡  Low interest rates could give regulators to stall
earnings growth
¡  Emissions regulations haunt low-cost coal plants
¡  Energy-efficiency improvements could lead to
negative demand growth
Utilities Sector - Michael Brajdic
AES Corp. Consideration
¡  Highlights
¡  Utility and generation assets in 20 countries
¡  Ohio on path to deregulation
¡  Hydrological conditions driving earnings in foreign
countries
¡  Risks
¡  Overpaid for DPL acquisition
¡  Significant exposure to Foreign Exchange Market
¡  Emerging markets results in above-average political
risk
Utilities Sector - Michael Brajdic
Valuation Analysis
Utilities Sector - Michael Brajdic
NRG Energy Valuation
NRG Energy (NRG)
Analyst: Michael Brajdic
7/21/2014
Terminal Discount Rate =
9.0%
Terminal FCF Growth =
3.8%
(000s)
Year
Revenue
% Grow th
Operating Income
Operating Margin
Other Expenses
Other Expenses % of Sales
Taxes
Tax Rate
Net Income
2014E
2015E
2016E
12,650
12.00%
14,168
12.00%
15,869
12.00%
1,518
12.00%
1,700
12.00%
1,904
12.00%
2,133
2,367
2,580
2,813
3,038
3,250
3,413
3,542
12.00%
12.00%
12.00%
12.00%
12.00%
12.00%
12.00%
12.00%
(1,012)
-­‐8.00%
(1,133)
-­‐8.00%
(1,269)
-­‐8.00%
(1,244)
(1,381)
(1,505)
(1,641)
(1,772)
(1,896)
(1,706)
(1,771)
-7.00%
-7.00%
-7.00%
-7.00%
-7.00%
-7.00%
-6.00%
-6.00%
177
35%
198
35%
222
35%
311
345
376
410
443
474
597
620
35.00%
35.00%
35.00%
35.00%
35.00%
35.00%
35.00%
35.00%
329
% Grow th
1,265
10.00%
(128)
-­‐1.01%
1,277
10.09%
Add Depreciation/Amort
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
Capex % of sales
Free Cash Flow
189
NPV of Cash Flows
4,775
NPV of terminal value
7,169
Projected Equity Value
11,944
Free Cash Flow Yield
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
1,587
10.00%
(162)
-­‐1.02%
1,601
10.09%
211
237
12.00%
40%
60%
100%
28.0
25.0
32.4
28.9
8.9
8.0
7.1
9.5
8.5
7.6
36.89
16.0%
Utilities Sector - Michael Brajdic
2019E
2020E
2021E
2022E
2023E
2024E
21,503
23,439
25,314
27,086
28,440
29,521
12.00%
11.00%
9.00%
9.00%
8.00%
7.00%
5.00%
3.80%
578
40.00%
641
11.00%
699
9.00%
762
9.00%
823
8.00%
880
7.00%
1,109
26.00%
1,777
1,973
2,150
2,344
2,531
2,709
2,560
10.00%
10.00%
10.00%
10.00%
10.00%
10.00%
9.00%
1,151
3.80%
2,362
8.00%
(181)
(201)
(219)
(239)
(258)
(276)
(290)
(301)
-1.02%
-1.02%
-1.02%
-1.02%
-1.02%
-1.02%
-1.02%
-1.02%
1,422
1,578
1,720
1,875
2,025
2,167
2,275
2,362
8.00%
8.00%
8.00%
8.00%
8.00%
8.00%
8.00%
8.00%
752
834
910
991
1,071
1,146
1,103
8.00%
7.00%
-­‐3.69%
217.50%
11.00%
9.00%
9.00%
Terminal Value
36.3
31.81
$
2018E
19,728
Free Cash Yield
31.3
323.779252
Current Price
Upside/(Downside) to DCF
1,417
10.00%
(144)
-­‐1.02%
1,430
10.09%
1.84%
Current P/E
Implied equity value/share
413
12.00%
11.76%
% Grow th
Shares Outstanding
368
12.00%
2017E
17,773
850
-­‐22.95%
16,971
5.01%
Terminal P/E
14.7
Terminal EV/EBITDA
5.3
NRG Energy Valuation
Terminal Discount
Growth Rate
$ 36.89 3.40% 3.60% 3.80% 4.00% 4.20%
8.50% $ 38.70 $ 39.71 $ 40.80 $ 41.99 $ 43.30
8.75% $ 36.88 $ 37.78 $ 38.75 $ 39.80 $ 40.94
9.00% $ 35.23 $ 36.03 $ 36.89 $ 37.82 $ 38.83
9.25% $ 33.71 $ 34.43 $ 35.20 $ 36.03 $ 36.92
9.50% $ 32.32 $ 32.96 $ 33.65 $ 34.39 $ 35.19
Utilities Sector - Michael Brajdic
NRG Energy Multiples
Absolute
Valuation
High
Low
Median
Current
Target
Multiple
Target
Price
P/E
26.2474
5.5914
10.4085
9.5180
10.4
34.75
P/B
1.2695
0.4885
0.7255
1.0855
1.0
29.30
P/S
0.9469
0.4124
0.6325
0.8097
0.75
29.46
P/EBITDA
4.4828
1.7998
2.6355
3.8333
3.0
24.89
P/CF
12.1032
2.4859
4.2125
5.76
5.0
27.61
Utilities Sector - Michael Brajdic
NRG Energy Technical Analysis
Utilities Sector - Michael Brajdic
XEL Energy Valuation
Utilities Sector - Michael Brajdic
XEL Energy Valuation
Utilities Sector - Michael Brajdic
XEL Energy Multiples
Absolute
Valuation
High
Low
Median
Current
Target
Multiple
Target
Price
P/E
16.3953
13.1124
14.4498
15.9603
15
29.78
P/B
1.6571
1.2207
1.4545
1.6293
1.5
29.17
P/S
1.4176
0.9001
1.2582
1.3938
1.3
29.55
P/EBITDA
5.3813
3.6579
4.6618
5.2912
5.0
29.95
P/CF
6.6884
4.1717
5.7840
6.2331
5.9
29.99
Utilities Sector - Michael Brajdic
XEL Energy Technical Analysis
Utilities Sector - Michael Brajdic
AES Corp. Valuation
AES Corporation
Analyst: Michael Brajdic
Terminal Discount Rate =
7/21/2014
Terminal FCF Grow th =
9.5%
3.5%
(000s)
Year
Revenue
% Grow th
Operating Income
Operating Margin
Other Expenses
Other Income % of Sales
Taxes
Tax Rate
Net Equity in Earnings of Affiliates
% of Sales
Minority Interests
% of Sales
Net Income
2014E
2015E
2016E
16,916.2
6.5%
17,854.6
5.5%
18,490.9
3.6%
19,230.6
4.0%
4.2%
4.2%
4.2%
4.0%
4.0%
3.8%
3.5%
3,721.6
22.0%
4,106.6
23.0%
4,437.8
24.0%
4,615.3
4,809.2
5,011.2
5,221.6
5,430.5
5,647.7
5,862.3
6,067.5
24.0%
24.0%
24.0%
24.0%
24.0%
24.0%
24.0%
24.0%
(2,150.8)
-­‐12.7%
(2,304.1)
-­‐12.9%
(2,390.1)
-­‐12.9%
(2,480.7)
(2,584.9)
(2,693.5)
(2,806.6)
(2,918.9)
(3,035.6)
(3,151.0)
(3,286.6)
-12.9%
-12.9%
-12.9%
-12.9%
-12.9%
-12.9%
-12.9%
-13.0%
(549.8)
35.0%
(630.8)
35.0%
(716.7)
35.0%
(747.1)
(778.5)
(811.2)
(845.3)
(879.1)
(914.2)
(949.0)
(973.3)
35.0%
35.0%
35.0%
35.0%
35.0%
35.0%
35.0%
35.0%
66.6
0.4%
61.5
0.3%
37.2
0.2%
38.5
40.1
41.8
43.5
45.3
47.1
48.9
50.6
0.2%
0.2%
0.2%
0.2%
0.2%
0.2%
0.2%
0.2%
200.0
1.2%
200.0
1.1%
200.0
1.1%
230.8
240.5
250.6
261.1
271.5
282.4
293.1
303.4
1.2%
1.2%
1.2%
1.2%
1.2%
1.2%
1.2%
1.2%
887.6
2017E
2018E
20,038.2
2019E
20,879.8
2020E
21,756.8
2021E
22,627.1
2022E
23,532.2
2023E
24,426.4
2024E
25,281.3
1,033.1
1,168.2
1,195.2
1,245.4
1,297.7
1,352.2
1,406.3
1,462.5
1,518.1
1,554.8
1,446.2
8.1%
(104.2)
-­‐0.6%
2,231.8
12.5%
1,479.3
8.0%
(91.7)
-­‐0.5%
2,218.9
12.0%
1,538.4
1,603.1
1,879.2
1,958.1
2,036.4
2,353.2
2,442.6
2,780.9
% Grow th
Add Depreciation/Amort
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
Capex % of sales
Free Cash Flow
1,370.2
8.1%
(125.5)
-­‐0.7%
2,148.4
12.7%
(16.0)
143.3
336.8
8.0%
8.0%
9.0%
9.0%
9.0%
10.0%
10.0%
11.0%
(134.6)
(140.3)
(146.2)
(152.3)
(158.4)
(164.7)
(171.0)
(177.0)
-0.7%
-0.7%
-0.7%
-0.7%
-0.7%
-0.7%
-0.7%
-0.7%
2,307.7
2,404.6
2,505.6
2,610.8
2,715.2
2,823.9
2,686.9
2,780.9
12.0%
12.0%
12.0%
12.0%
12.0%
12.0%
11.0%
11.0%
291.3
303.6
525.1
547.2
569.1
827.2
1,102.9
1,377.8
% Grow th
NPV of Cash Flow s
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
3,240.77
9,590.56
12,831.32
-­‐0.15%
25%
75%
100%
12.36
14.46
5.83
6.20
10.62
12.42
5.35
5.69
Shares Outstanding
723.927523
Current Price
15.15
$ 17.72
17.0%
Implied equity value/share
Upside/(Dow nside) to DCF
Utilities Sector - Michael Brajdic
Terminal Value
9.39
10.98
5.02
5.34
23767.6
Free Cash Yield
5.80%
Terminal P/E
15.3
Terminal EV/EBITDA
4.8
AES Corp. Valuation
Growth Rate
$ 17.72
Terminal Discount
Utilities Sector - Michael Brajdic
3.00%
3.25%
3.50%
3.75%
4.00%
9.00% $ 18.41
9.25% $ 17.49
9.50% $ 16.65
9.75% $ 15.87
10.00% $ 15.14
$ 19.05
$ 18.07
$ 17.16
$ 16.34
$ 15.57
$ 19.74
$ 18.69
$ 17.72
$ 16.84
$ 16.03
$ 20.50
$ 19.37
$ 18.33
$ 17.39
$ 16.53
$ 21.33
$ 20.11
$ 19.00
$ 17.99
$ 17.07
AES Corp. Multiples
Absolute
Valuation
High
Low
Median
Current
Target
Multiple
Target
Price
P/E
27.7226
8.4588
18.2321
8.9742
11
18.56
P/B
2.6899
1.0992
1.7430
2.6207
2.3
13.29
P/S
0.7558
0.4297
0.5785
0.692
0.65
14.23
P/EBITDA
2.6325
1.4481
2.0163
2.5648
2.25
13.29
P/CF
4.9532
2.3817
3.3912
4.8258
4.0
12.55
Utilities Sector - Michael Brajdic
AES Corp. Technical Analysis
Utilities Sector - Michael Brajdic
Analyst Recommendations
Stock
Consensus
Avg. Target
1 Yr. Return
NRG
4.44
39.55
24.33%
XEL
3.19
31.90
0.66%
AES
4.33
17.25
13.86%
Utilities Sector - Michael Brajdic
Agenda
¡  Overview
¡  Discussion of Stock Analysis
¡  NRG Energy (NRG)
¡  XCEL Energy (XEL)
¡  The AES Corporation (AES)
¡  Recommendation
Utilities Sector - Michael Brajdic
Summary
Price
DCF
Multiple
Technical
Consensus
Analyst
Target
NRG
31.81
36.89
29.20
Underbought
4.44
39.55
XEL
31.69
32.94
29.68
Fairly Priced
3.19 (Hold)
31.90
AES
15.15
17.72
14.39
Fairly Priced
4.33 (Buy)
17.25
Utilities Sector - Michael Brajdic
Plan
¡  Sell entire XCEL Energy holding (.98% of assets)
¡  Trim NRG Energy 42 b.p. to 2% of assets
¡  Buy 100b.p. of AES Corp
Utilities Sector - Michael Brajdic