11/19/2013
Utilities Sector
Sector Recap
• SIM Current Weight: 3.84%
• S&P 500 Current Weight: 3.14%
• Recommend: Sell to be in line with S&P 500
Recommendation Summary
Ticker
Current Price
Current Weight Recommended Adjusted
Adjustment
Weight
NRG
$27.12
2.11%
0
2.11%
SJI
$56.68
1.4%
-1.4%
0
XEL
$28.60
0
1.0%
1.0%
PCG
$41.00
0
0
0
Utilities
N/A
3.51%
-0.4%
3.11%
NRG Energy, Inc.
Ticker: NRG
Overview
• Wholesale and retail
Electric Utility Company
serving sixteen states
• Has over 47,000
megawatts of generating
capacity, including solar
and thermal sources
• Serves over 2 million
customers for retail
electricity and thermal
systems
Business Analysis
Current Price
$27.12
Dividend Yield
1.77%
52 Week Range
$19.38 - $30.28
Market Cap.
$8.77 B
Rating
Hold
• Key Drivers
– Solar Energy – NRG has divisions that support solar power for both
commercial and residential use
– Electric Vehicles – eVgo is a private network of fueling stations for electric
vehicles
– Clean Coal – Petra Nova is a division that focuses on reducing the carbon
intensity of existing coal-fueled generation
– NRG supplies a lot of electricity to Texas, which is one of the largest growing
states in the U.S.
• Risks
– While NRG is well-diversified across many types of energy sources, a high
proportion of these energy sources are risky and volatile
– It is unclear how well electric vehicles will do in the future, and even if NRG’s
network of charging stations will be utilized
– Coal has been on the decline recently, which could hurt NRG’s clean coal
business
1
11/19/2013
NRG Energy Inc. (NRG)
Analyst: Clark Seiling
Terminal Discount Rate =
Date: 10/7/13
Financial Analysis
2013E
Revenue
11,825
% Grow th
1,711
Operating Margin
2010
2011
2012
ROE
24.9%
13.1%
6%
2.5%
7.4%
Net Income
Net Profit Margin
16.5%
1.5%
-0.8%
-5.1%
25%
Add Depreciation/Amort
Op. Margin
12.7%
15.4%
15.8%
16.8%
18.1%
Leverage
2.49
2.04
2.34
2.57
2.51
2,324
3.0%
2,394
2020E
14,765
3.0%
2,466
2021E
15,207
2,540
3.0%
2,616
2023E
16,134
3.0%
2,694
16.7%
16.7%
16.7%
605
603
602
603
622
640
659
679
700
721
742
5.1%
4.8%
4.7%
4.6%
4.6%
4.6%
4.6%
4.6%
4.6%
4.6%
387
426
428
556
572
589
607
625
644
663
683
35.0%
35.0%
35.0%
35.0%
35.0%
35.0%
35.0%
35.0%
35.0%
35.0%
35.0%
719
792
795
851
906
960
9.1%
0.4%
7.0%
6.5%
6.0%
1,121
% of Sales
1,195
1,210
1,246
1,351
1,392
1,013
5.5%
1,505
1,064
5.0%
1,550
1,106
1,673
9.5%
9.5%
10.0%
10.0%
10.5%
10.5%
11.0%
11.0%
(48)
(10)
(10)
(10)
(10)
(10)
(10)
(10)
(10)
-0.1%
-0.4%
1,720
13.7%
-0.1%
1,741
13.7%
-0.5%
1,771
13.5%
-0.5%
1,757
13.0%
-0.5%
1,740
-0.5%
1,792
12.5%
12.5%
-0.5%
1,772
12.0%
-0.5%
1,825
214
219
254
316
491
602
716
832
944
2.4%
13.8%
19.6%
35.6%
18.6%
15.9%
13.9%
11.9%
3,526
35%
6,632
65%
Projected Equity Value
10,157
100%
% Grow th
11.5%
1,056
10.6%
Terminal Value
2.38%
Shares Outstanding
-0.5%
1,801
12.0%
NPV of terminal value
Projected EV/EBITDA
1,723
9.5%
(10)
13.7%
Current EV/EBITDA
3.5%
9.5%
1,616
Projected P/E
1,145
4.0%
NPV of Cash Flows
Free Cash Yield
12.5
11.3
11.3
14.1
12.8
12.8
8.0
7.5
7.4
8.4
7.9
7.8
4.6%
1,179
3.0%
1,855
11.5%
(10)
-0.5%
1,855
11.5%
1,169
9.6%
17,201
6.80%
Terminal P/E
14.6
Terminal EV/EBITDA
6.8
323
Current Price
$
27.76
Implied equity value/share
$
31.45
Upside/(Downside) to DCF
2022E
15,664
3.0%
16.7%
Current P/E
13.3%
Recommendation and Target Price
P/Forward E
P/S
P/B
High
953.7
2.1
2.5
Low
7.2
.4
.5
Median
18.7
1.0
.9
Current
17.4
.9
.9
P/EBITDA
9.32
.56
3.7
4.9
P/CF
17.8
3.2
7.1
10.2
NRG: to Sector
P/Trailing E
P/Forward E
P/B
P/S
High
37.4
62.5
1.0
3.3
Low
.64
.62
.4
.9
Median
1.1
1.3
.7
1.4
Current
NM
1.4
.7
1.5
NRG: Absolute
2,256
2019E
14,334
3.0%
16.7%
% of Sales
Free Cash Flow Yield
Valuation: Multiples
13,917
3.0%
16.7%
Free Cash Flow
Debt/Equity
2,191
13,512
16.7%
Plus/(minus) Changes WC
Capex % of sales
1,825
3.0%
2018E
16.7%
% Grow th
Subtract Cap Ex
13,118
1.2%
3.0%
2017E
14.3%
Interest % of Sales
Tax Rate
1,821
12,736
2016E
14.5%
Taxes
Profitability
12,580
2015E
14.5%
Interest and Other
2009
2014E
6.0%
Operating Income
2008
10.00%
Terminal FCF Growth =
Year
• Rating: Hold
– Well-diversified in solar, green, thermal, clean coal
and electric vehicles
– Risky stock because of uncertainty surrounding
energy sources and recent volatility
• Target Price: $31.45
• Projected Return: 16%
• Recommendation: No change
Overview
South Jersey Industries, Inc.
Ticker: SJI
• Natural Gas Utility
serving the seven
southern counties in
New Jersey
• Serves customers
through utility and
nonutility services
• Serves over 340,000
customers with natural
gas in southern New
Jersey
Current Price
$56.68
Dividend Yield
3.16%
52 Week Range
$47.16 - $62.28
Market Cap.
$1.8 B
Rating
Sell
2
11/19/2013
Business Analysis
Financial Analysis
• Key Drivers
– Nonutility business has seen an increase in
competition from retailers and large financial
institutions
– Natural gas prices have come down due to hydraulic
fracturing in the United States
• Risks
2008
2009
2010
2011
2012
ROE
15.5%
10.9%
11.9%
14.9%
13.5%
Net Profit Margin
8.1%
10.5%
8.9%
18.6%
12.8%
Op. Margin
12.7%
15.4%
15.8%
16.8%
18.1%
1.1
1.0
1.23
1.2
1.31
Profitability
Leverage
– Relatively small area covered, but this means that any
changes to the population in this region could have a
large affect on SJI
– Decline in revenue for nonutility business may
continue
Debt/Equity
South Jersey Industries (SJI)
Analyst: Clark Seiling
Terminal Discount Rate =
Date: 11/12/13
Terminal FCF Growth =
Year
2013E
Revenue
754,000
% Grow th
2014E
806,000
6.5%
Operating Income
125,908
Operating Margin
16.7%
Interest and Other
9,053
Interest % of Sales
1.2%
Taxes
23,447
Tax Rate
20.1%
Net Income
92,325
% Grow th
134,591
16.7%
8,368
1.0%
25,326
20.1%
99,814
7.5%
Add Depreciation/Amort
55,089
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
16.7%
7,631
0.9%
27,351
20.1%
107,878
7.5%
68,960
7.5%
78,033
30,904
20.1%
124,087
7.0%
87,580
16.7%
9,240
0.9%
32,604
20.1%
132,153
6.5%
97,530
16.7%
9,702
0.9%
34,234
20.1%
140,082
6.0%
107,796
4.5%
188,121
16.7%
10,138
0.9%
35,775
20.1%
147,786
5.5%
112,647
2021E
1,171,532
4.0%
195,646
16.7%
10,544
0.9%
37,206
20.1%
154,437
4.5%
123,011
2022E
1,212,536
3.5%
202,493
16.7%
10,913
0.9%
38,508
20.1%
159,842
3.5%
133,379
3.0%
208,568
16.7%
11,240
0.9%
39,663
20.1%
164,637
3.0%
8.5%
9.0%
9.5%
10.0%
10.0%
10.5%
11.0%
11.0%
(4,603)
(4,626)
(4,649)
(4,673)
(4,696)
(4,719)
(4,743)
-0.5%
-0.5%
-0.5%
-0.5%
-0.5%
-0.5%
-0.5%
-0.5%
17.6%
14,176
426,153
146,540
17.0%
25,741
44.9%
16.5%
37,947
32.2%
155,698
16.0%
51,366
26.1%
159,128
15.5%
65,929
22.1%
161,695
15.0%
81,534
19.1%
157,706
14.0%
98,055
16.8%
152,299
13.0%
120,453
18.6%
145,504
12.0%
142,997
15.8%
137,380
11.0%
159,894
10.6%
29%
71%
100%
Terminal Value
0.57%
20.4
151,475
Free Cash Yield
18.9
17.4
15.7
14.5
13.4
15.7
14.5
13.3
13.3
12.3
11.3
P/Forward E
P/B
P/S
High
19.7
2.9
2.8
Low
13.9
1.8
.7
Median
16.4
2.3
1.1
Current
16.9
2.4
2.8
P/EBITDA
11.7
4.77
6.4
11.7
P/CF
21.2
8.2
11.3
19.4
SJI: to Sector
P/Trailing E
P/Forward E
P/B
P/S
High
1.9
2.9
1.5
2.8
Low
.5
.65
.6
.5
Median
.95
.94
1
1.1
Current
.81
.73
.9
2.5
SJI: Absolute
137,380
(4,580)
141,856
Valuation: Multiples
2023E
1,248,912
8.0%
1,022,388
Shares Outstanding
20.1%
115,969
0.9%
180,020
2020E
1,126,473
-0.5%
1,448,541
Projected EV/EBITDA
29,155
16.7%
8,758
5.0%
(4,557)
NPV of terminal value
Projected P/E
0.9%
171,448
2019E
1,077,965
7.5%
24.5%
Current EV/EBITDA
16.7%
8,262
162,510
5.5%
-0.5%
17.6%
Current P/E
153,311
6.0%
3.0%
2018E
1,026,633
(4,232)
Projected Equity Value
2,533,711
6.31%
Terminal P/E
15.4
Terminal EV/EBITDA
10.1
31,980
Current Price
$
Implied equity value/share
$
Upside/(Downside) to DCF
143,943
6.5%
973,112
9.50%
7.3%
10,704
Free Cash Flow Yield
6.5%
918,030
2017E
-0.5%
% Grow th
NPV of Cash Flows
862,000
2016E
(3,884)
132,827
Capex % of sales
Free Cash Flow
60,450
2015E
58.86
45.30
-23.0%
Recommendation and Target Price
• Rating: Sell
– Stock is overvalued based on DCF and Multiple
Analysis
– Growing competition in nonutility business and
this can be seen in recent decline of revenue
• Target Price: $45.30
• Projected Return: -21%
• Recommendation: Sell 140 basis points
Xcel Energy, Inc.
Ticker: XEL
3
11/19/2013
Overview
• Electric Utility serving eight
states: Colorado, Michigan,
Minnesota, New Mexico,
North Dakota, South Dakota,
Texas, and Wisconsin
• Has over 17,000 megawatts of
generating capacity, including
two nuclear facilities
• Serves over 3.3 million
customers for electricity with
over 50% of its electric
revenues coming from whole
sales and industrial consumers
Business Analysis
• Key Drivers
Current Price
$28.60
Dividend Yield
3.9%
52 Week Range
$25.84 - $31.79
Market Cap.
$14.25 B
Rating
Hold
– Recently approved for addition of 750 megawatts of wind production
– Currently under approval process for an additional 1,900 megawatts of
renewable energy
– Recently approved for additional transmission lines to support the growth in
generation
– Remains on schedule for its emission reduction targets
• Risks
– Continued scrutiny by regulators regarding emissions which is especially
concerning as nearly 47% of XEL’s production was generated by coal fired
plants
– Certain municipalities are considering options to turn distribution into a
municipal owned function
– Continued pressures by Federal Government to reduce costs and emissions
– Current Rate Cases remain under consideration by Public Utility Commissions,
if rate increases are not approved then margins of newer projects will
significantly shrink
Financial Analysis
2008
2009
2010
2011
Valuation: DCF
2012
XEL
Saaransh Mahna
Profitability
Terminal Discount Rate =
11/7/2013
Terminal FCF Growth =
Year
ROE
9.5%
9.4%
9.7%
10%
14.9%
Revenue
2013
6.06%
6.45%
5.32%
5.47%
5.49%
Op. Margin
12.7%
15.4%
15.8%
16.8%
18.1%
.92
1.08
.83
.89
.77
.73
.86
.66
.71
2.53
2.5
2.34
2.48
2.51
2020
2021
2022
3,816,362 $
3.00%
3,930,853 $
3.00%
4,048,779
3.00%
1,995,439 $
67.46%
2,093,953 $
66.79%
2,143,447 $
65.11%
2,271,828 $
67.00%
2,339,983 $
67.00%
2,410,183 $
67.00%
2,482,488 $
67.00%
2,556,963 $
67.00%
2,633,672 $
67.00%
2,712,682
67.00%
$
590,003 $
19.95%
634,021 $
20.22%
653,833 $
19.86%
667,985 $
19.70%
688,025 $
19.70%
708,666 $
19.70%
729,926 $
19.70%
751,823 $
19.70%
774,378 $
19.70%
797,609
19.70%
$
509,754 $
34%
526,518 $
34%
541,590 $
34%
545,307 $
34.00%
561,666 $
34.00%
578,516 $
34.00%
595,871 $
34.00%
613,747 $
34.00%
632,160 $
34.00%
Net Income
% of Sales
$
Free Cash Flow
933,414
4.21%
1.57%
944,860 $
30.14%
995,423 $
30.24%
1,026,052.64 $
30.26%
1,055,320.79 $
30.22%
1,085,421.59 $
30.17%
1,116,378.65 $
30.13%
1,148,216.25 $
30.09%
1,180,959.37 $
30.04%
1,214,633.68
30.00%
754,238 $
25.50%
823,007 $
26.25%
880,617 $
26.75%
905,341 $
26.70%
951,710 $
27.25%
1,000,046 $
27.80%
1,050,426 $
28.35%
1,102,929 $
28.90%
1,157,636 $
29.45%
1,214,634
30.00%
1,039,931
1,055,266
1.47%
NPV of Cash Flows
948,023
1,058,536
11.66%
1,090,292
3.00%
1,123,001
3.00%
1,156,691
3.00%
1,191,392
3.00%
1,062,829
1,179,248
1,193,904
1,208,377
1,222,644
1,236,680
0.72%
10.95%
1.24%
1.21%
1.18%
1.15%
1,227,134
651,125
34.00%
895,682
898,487 $
30.38%
% Grow th
3.00%
1,250,457
1,263,948
3.00%
1,263,948
1.11%
1.08%
Terminal Value
19,286,907
Free Cash Yield
0.065533981
7,146,523
NPV of terminal value
7,607,068
Projected Equity Value
14,753,591
Free Cash Flow Yield
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
Shares Outstanding
Current Price
2019
3,705,206 $
3.00%
$
% Grow th
Debt/Equity
2018
3,597,288 $
3.00%
Capex % of sales
Leverage
3.00%
3,492,512 $
3.00%
Interest % of Sales
Subtract Cap Ex
9.75%
3,390,789 $
3.00%
Add Depreciation/Amort
$
Quick Ratio
2017
3,292,028 $
5.00%
Tax Rate
.99
2016
3,135,265 $
6.00%
Operating Margin
Interest and Other
Taxes
Liquidity
Current Ratio
Operating Income
2015
2,957,797 $
% Grow th
Net Profit Margin
2014
$
0.515607897
7.30%
15.9
15.3
15.0
16.5
15.8
15.6
4.9
4.7
4.5
5.1
4.8
4.7
Terminal P/E
15.3
Terminal EV/EBITDA
5.2
497,570
$
Implied equity value/share
$
28.63
29.65
Upside/(Downside) to DCF 0.035671935
Debt
Cash
Cash/share
Valuation: Multiples
0.15
Recommendation and Target Price
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
16.8
16.7
1.7
1.5
8.1
Low
11.6
10.3
1.1
.7
5.0
Median
14.6
13.9
1.4
1.1
7.0
Current
14.7
14.8
1.5
1.3
7.3
XEL: to Sector
P/Trailing E
P/Forward E
P/B
P/S
High
1.2
1.2
1.0
1.0
Low
.9
.9
.8
.8
Median
1.1
1.0
.9
.9
Current
.9
.9
.9
.9
XEL: Absolute
76,670
• Rating: Hold
– Strong dividends with indications of growth
– Positive outlook with new renewables
• Target Price: $29.65
• Projected Return: 3.57%
• Recommendation: Add 100 basis points
4
11/19/2013
Overview
• PG&E is a multi-utility
serving Northern
California’s gas and
electric needs.
• The utility serves nearly
10 million people with
over $52 billion in assets
• The utility has 7,640
megawatts of its own
generating capacity,
however buys more than
50% of its electricity from
contractors
Pacific Gas & Electric
Ticker: PCG
Business Analysis
Current Price
$41.02
Dividend Yield
4.4%
52 Week Range
$39.40 - $48.50
Market Cap.
$18.43 B
Rating
Sell
Financial Analysis
• Key Drivers
– As over 65% of revenue comes from residential and commercial electric
consumption, PCG should benefit from Northern California’s rapidly expanding
population
– Natural gas prices continue to drop, which should drive up margins in the
natural gas distribution business
– As most of its utility owned electricity generation comes from low-to-no
emission facilities, it remains unaffected by EPA emission regulations
• Risks
– PCG recently settled its civil case regarding the San Bruno Pipeline explosion,
however criminal charges and upgrades to facilities remain a key concern
– PCG remains exposed fluctuations in natural gas prices for both its electricity
generation facilities as well as its distribution services
– Challenges remain with pending rate cases with the California Public Utilities
Commission in order to justify system expansions
Valuation: DCF
2008
2009
2010
2011
2012
ROE
15.22%
12.48%
10.33%
7.33%
6.52%
Net Profit Margin
14.58%
7.83%
7.01%
2.28%
-.24%
Op. Margin
16.1%
17.4%
16.74%
13.03%
11.3%
Current Ratio
.84
.83
.77
.84
.82
Quick Ratio
.78
.78
.72
.78
.75
3.36
3.16
3.08
3.11
3.01
Profitability
Liquidity
Leverage
Debt/Equity
Recommendation and Target Price
PCG
Saaransh Mahna
Date: 9/23/2013
Year
Revenue
2012E
$
Operating Income
3.00%
2016E
2017E
2019E
2020E
19,371.95
3.00%
2,618.21 $
15.00%
2,677.90 $
15.00%
2,745.39 $
15.00%
2,821.16 $
15.00%
2,905.79
15.00%
$
(520.01) $
-3.46%
641.27 $
4.16%
677.76 $
4.17%
700.49 $
4.17%
718.44 $
4.20%
733.10 $
4.20%
749.81 $
4.20%
768.71 $
4.20%
789.92 $
4.20%
813.62
4.20%
$
237.00 $
22%
599.91 $
34%
704.34 $
34%
750.50 $
34%
628.12 $
34.00%
640.94 $
34.00%
655.55 $
34.00%
672.07 $
34.00%
690.62 $
34.00%
711.34
34.00%
1,970
17,852.68 $ 18,302.57 $
2.28%
2.52%
1,165
1,367
1,457
1,219
1,244
1,273
1,305
1,341
-40.90%
17.41%
6.55%
-16.31%
2.04%
2.28%
2.52%
2.76%
2,272.00 $
15.11%
2,326.64 $
15.11%
2,457.63 $
15.11%
2,539.21 $
15.11%
2,651.39 $
15.50%
2,705.48 $
15.50%
2,767.17 $
15.50%
2,836.90 $
15.50%
2,915.20 $
15.50%
3,002.65
15.50%
$
(4,624.00) $
30.75%
(2,841.12) $
18.45%
(2,750.98) $
16.92%
(2,583.92) $
15.38%
(2,583.92) $
15.11%
(2,583.92) $
14.80%
(2,583.92) $
14.47%
(2,583.92) $
14.12%
(2,583.92) $
13.74%
(2,583.92)
13.34%
Capex % of sales
Free Cash Flow
(382)
% Grow th
NPV of Cash Flows
650
1,074
1,412
1,287
1,366
1,456
1,558
270.3%
-65.2%
-31.5%
8.9%
-6.1%
-6.6%
-7.0%
1,672
1,800
-7.3%
-7.6%
Terminal Value
27,460
6,500
NPV of terminal value
10,831
Projected Equity Value
17,330
Free Cash Flow Yield
-2.13%
Free Cash Yield
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
Shares Outstanding
9.1
15.4
13.1
8.8
14.9
12.7
5.1
4.2
3.9
4.9
4.1
3.7
425
Current Price
$
42.13
Implied equity value/share
$
40.78
0.065533981
Terminal P/E
15.3
Terminal EV/EBITDA
5.6
• Rating: Sell
– Profitability and ROE continue to shrink year-overyear
– Challenging regulatory environment in California
– Majority of its highest revenue segment (electricity
generation) is subcontracted out to other producers,
resulting in thinner margins
• Target price: $40.78
• Projected Return: -1%
• Recommendation: Do nothing
-0.032101733
Debt
6,125
Cash
3,936
Cash/share
1,381
3.00%
$
% of Sales
Upside/(Downside) to DCF
2021E
18,807.72 $
2.76%
2,565.86 $
15.00%
% Grow th
17,105.76 $ 17,454.72 $
1.80%
2.04%
2018E
2,907.84 $
17.31%
Tax Rate
Subtract Cap Ex
Terminal FCF Growth =
2,749.35 $
16.91%
Net Income
Add Depreciation/Amort
2015E
2,405.71 $
15.62%
Interest % of Sales
Taxes
2014E
1,687.34 $
11.22%
Operating Margin
Interest and Other
2013E
9.75%
$
% Grow th
15,035.00 $ 15,396.57 $ 16,263.39 $ 16,803.30 $
2.40%
5.63%
3.32%
Terminal Discount Rate =
5.54
5
11/19/2013
Recommendation Summary
Ticker
Current Price
Current Weight Recommended Adjusted
Adjustment
Weight
NRG
$27.12
2.11%
0
2.11%
SJI
$56.68
1.4%
-1.4%
0
XEL
$28.60
0
1.0%
1.0%
PCG
$41.00
0
0
0
Utilities
N/A
3.51%
-0.4%
3.11%
6