Utilities: Company Presentation
Xingning Xu
Yingxing Ye
Jing You
Agenda
•
•
•
•
•
•
•
Portfolio Overview
NRG Stock Pitch
SO Stock Pitch
AEP Stock Pitch
SJI Stock Pitch
Recommendation Recap
Q&A
Portfolio Overview
Asset Allocation
SIM Weights
Cash,
3.01%
• S&P: 3.44%
• SIM: 3.24%
Telecom
Svc,
Utilities,
1.19%
3.24%
Materials,
2.63%
Info Tech,
18.01%
S&P 500
Telecom
Svc,
18.20%
Materials,
2.96%
Utilities, Cons Disc,
11.57%
3.44%
Cons
Staples,
10.71%
Energy,
10.98%
Info Tech,
18.20%
Industrials
, 10.22%
Health Financials,
Care, 16.17%
12.24%
Dividend
Receivable
s, 0.05%
Cons Disc,
12.30%
Cons
Staples,
12.35%
Energy,
10.23%
Industrials,
10.25%
Health
Care,
12.02%
Financials,
14.73%
Sector Presentation Recap
• SIM underweight by 20 bpt
• Recommendation: HOLD
NRG Energy
Business Overview
• Independent Power Generation Company
– Utility
– Founded in 1989
– Dual-headquartered in Princeton, NJ and Houston,TX
• 2 Major Segments
– Power Generation
– Retail
• 2 Minor Segments
– Alternative Energy
– Corporate
• Total Assets: $35.1989B
• Market Cap: $8.52B
• Current Price:
Key Statistics
• Current SIM allocation: 2.03%
• Top 5 Performer: 10.38%
KEY STATISTICS
Market Capitalization
$8.52
* in billions of $
Beta
0.71
52-Week Price Change
12.4%
52-Week High
$26.88
* As of Apr. 2, 2013
52-Week Low
$14.29
* As of Apr. 16, 2012
Divident Yield
1.0%
* Trailing Annual
Average Volume
3.40
*As of Apr. 6, 2013
P/B
0.80
P/S
0.70
P/CF
5.40
Source: Yahoo! Finance, Morningstar
2012FY Financial Performance
• EPS: $2.35 beat expectation
• 142,000 increased in retail customer count
• Initiated dividend payment to common stocks:
$0.36 per share
– Planning to increase by 33% in 2013 to $0.48
• Authorized a $200M share repurchase
• Acquisition: GenOn
• 7.2% decrease in total sales
– Weak commodity prices environment
Risks and Competitiveness
Risks
• Commodity Price
Volatility
– Input Commodity
– Output Commodity
• Weather Condition
• Regulatory Risk
• Credit Risk
Competitiveness
• Largely hedged across
commodity portfolios
• Diversified power
generation portfolios
• Leading retail business
• Largest solar power
developers
Financial Analysis: I/S
Trends in Revenue and EBIT
Total Sales
EBIT
2007
2008
2009
2010
2011
2012
2013E
2014E
Financial Analysis: DCF
• Assumptions
Terminal Discount Rate =
Terminal FCF Growth =
9.1%
1.7%
• Price Target
Current Price
Implied equity value/share
Upside/(Downside) to DCF
$ 25.35
$ 26.52
4.6%
– Range:
$24.32 - $29.79
Terminal Growth Rate
• Sensitivity Analysis
$ 26.52
1.3%
1.4%
1.5%
1.6%
1.7%
1.8%
1.9%
2.0%
2.1%
2.2%
2.3%
$
$
$
$
$
$
$
$
$
$
$
8.7%
27.26
27.48
27.71
27.94
28.18
28.43
28.69
28.95
29.22
29.50
29.79
$
$
$
$
$
$
$
$
$
$
$
8.8%
26.86
27.07
27.29
27.52
27.75
27.99
28.23
28.49
28.75
29.02
29.29
$
$
$
$
$
$
$
$
$
$
$
8.9%
26.47
26.67
26.89
27.10
27.33
27.56
27.79
28.04
28.29
28.55
28.81
$
$
$
$
$
$
$
$
$
$
$
Terminal
9.0%
26.09 $
26.29 $
26.49 $
26.70 $
26.92 $
27.14 $
27.37 $
27.60 $
27.84 $
28.09 $
28.35 $
Discount Rate
9.1%
9.2%
25.71 $ 25.35
25.91 $ 25.54
26.11 $ 25.73
26.31 $ 25.93
26.52 $ 26.13
26.73 $ 26.33
26.95 $ 26.55
27.18 $ 26.77
27.41 $ 26.99
27.65 $ 27.22
27.90 $ 27.46
$
$
$
$
$
$
$
$
$
$
$
9.3%
25.00
25.18
25.36
25.55
25.75
25.95
26.15
26.36
26.58
26.80
27.03
$
$
$
$
$
$
$
$
$
$
$
9.4%
24.66
24.83
25.01
25.19
25.38
25.57
25.77
25.97
26.18
26.40
26.62
$
$
$
$
$
$
$
$
$
$
$
9.5%
24.32
24.49
24.66
24.84
25.02
25.21
25.40
25.60
25.80
26.00
26.22
Financial Analysis: DCF
NRG
Analyst: Xingning Xu
Date: 4/7/2013
Year
2012
Revenue
8,422
% Grow th
Operating Margin
Interest and Other
Interest % of Sales
Taxes
Tax Rate
Net Income
2015E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
10,497
11,612
12,541
13,294
14,091
14,655
15,095
15,397
15,704
15,971
11.0%
11.0%
11.0%
(98)
(430)
(476)
(564)
(598)
(634)
(659)
(679)
(693)
(707)
(719)
-1.2%
-4.1%
-4.1%
-4.5%
-4.5%
-4.5%
-4.5%
-4.5%
-4.5%
-4.5%
-4.5%
% of Sales
Subtract Cap Ex
1,575
15.0%
(96)
(22)
-1.1%
-0.2%
3,396
Capex % of sales
40.3%
Free Cash Flow
(740)
% Grow th
2,624
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
2,793
3,412
6,205
2.31%
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
10.8
11.3
13.3
13.4
Shares Outstanding
234
$
$
25.35
26.52
4.6%
15,880
2,087
8.92
35,128
45.2%
20%
114
276
346
366
381
392
400
408
415
40.0%
40.0%
40.0%
40.0%
40.0%
40.0%
40.0%
40.0%
414
518
550
572
589
600
612
623
-7.7%
25.3%
6.0%
4.0%
3.0%
2.0%
2.0%
1.7%
448
-38.1%
1,742
15.0%
1,756
1,861
1,973
1,905
1,811
1,694
1,649
1,597
14.0%
14.0%
14.0%
13.0%
12.0%
11.0%
10.5%
22
(201)
(160)
(169)
(117)
(91)
(62)
(63)
(54)
0.2%
-1.6%
-1.2%
-1.2%
-0.8%
-0.6%
-0.4%
-0.4%
-0.3%
2,322
20.0%
137
142
3.8%
45.0%
55.0%
100.0%
8.2
8.6
8.1
8.2
1,757
20.0%
25.0%
-118.5%
1,727
1.7%
11.0%
13.5%
1,694
2.0%
11.0%
1,137
1,660
2.0%
11.0%
724
1,612
3.0%
11.0%
(302)
1,550
4.0%
10.0%
-70.0%
1,462
6.0%
9.0%
(327)
1,254
6.0%
8.2%
-129.8%
1,048
8.0%
862
31.7%
Plus/(minus) Changes WC
10.0%
4.2%
550
% of Sales
Debt
Cash
Cash/share
Total Assets
Debt/Assets
Working Capital % of Growth
2014E
350
% Grow th
Add Depreciation/Amort
9.1%
1.7%
2013E
24.6%
Operating Income
Current Price
Implied equity value/share
Upside/(Downside) to DCF
Terminal Discount Rate =
Terminal FCF Growth =
13.2
13.8
7.1
7.2
1,630
13.0%
373
162.0%
1,595
1,691
1,759
12.0%
12.0%
12.0%
577
611
588
54.8%
6.0%
-3.9%
1,736
11.5%
1,694
1,649
10.0%
1,597
11.0%
10.5%
10.0%
580
567
578
593
-1.2%
-2.4%
2.0%
2.6%
Terminal Value
8,152
Free Cash Yield
7.28%
Terminal P/E
13.1
Terminal EV/EBITDA
6.5
Financial Analysis: Multiple
• Relative to Industry
– Slightly expensive on Average
Relative to
High
Low
Median Current
Industry
P/Forward E
37.40
0.64
1.10 NM
P/S
62.50
0.62
1.30
4.40
P/B
1.00
0.40
0.70
0.70
P/EBITDA
3.30
0.90
1.40
1.90
P/CF
1.80
0.60
0.90
1.80
• Relative to S&P 500
– Inline
Relative to
High
Low
Median Current
S&P 500
P/Forward E
55.90
0.42
1.10 NM
P/S
76.70
0.49
1.20
4.80
P/B
0.90
0.20
0.40
0.30
P/EBITDA
1.40
0.30
0.80
0.70
P/CF
1.60
0.60
0.70
1.00
Financial Analysis: Multiple
• High Target Price: $35.43
– GenOn Acquisition + Project Completion
– High estimated 2013 sales per share
– High estimated 2013 EBITDA per share
Absolute Basis High
P/Forward E
P/S
P/B
P/EBITDA
P/CF
953.70
2.10
2.50
12.74
17.80
Low
Median
7.20
0.40
0.50
0.56
3.20
18.90
1.00
1.00
3.63
6.90
Current
668.00
0.90
0.70
5.00
7.30
Target
Multiple
19.00
0.95
0.70
3.70
7.30
Target
Estmimates per
Share
$
3.64
$
42.16
$
28.51
$
10.37
$
1.32
Average Target:
Target
Price
$
$
$
$
$
$
69.16
40.05
19.96
38.36
9.61
35.43
Recommendation
•
•
•
•
20% Multiple + 80% DCF
Target Price: $28.30 Current Price: $25.35
Upside: 11.5%
Recommendation: HOLD
Southern Company
Business Overview
 Southern Company is the premier energy company
serving the Southeast through its subsidiaries.
• Electric utilities
• Nuclear
• Fiber optics and wireless communications
 Segment
•
Traditional business: Alabama Power, Georgia
Power, Gulf Power, Mississippi Power
•
Wholesale business: Southern Power
Key Statistics

•
•
•
•
Price & Volume
Beta 0.09
Average Volume (Mil) $ 4.33
52-Week High $ 48.59
52-Week Low $ 41.75
 Share Related Items
• Diluted Shares Out (Mil) 868.97
• Market Cap. (Mil) $ 41,006.69

•
•
•
Dividend Information
Dividend Yield 4.20
Annual Dividend 1.96
Total Project Return% 5.4
Current Price: $47.36
Target Price: $50.00
Risks and Opportunities
Risks
• Weather conditions
• Regulation
• Increased of fuel
costs
• Use of derivative
contracts
• Less than expected
demand for power
• Energy price increase
Opportunities
• High dividends
• Defensive
• Nuclear power station
Financial Analysis
Income Statement Forecasting
Financial Analysis
Financial Analysis
• Sector Valuation -Inline
• Industry Valuation - Inline
Financial Analysis
• Company Valuation
Range: $42.68 – 47.34
Target Price: $50
Recommendations
•
•
•
•
30% Multiples + 70% DCF
Recommendations: SELL 135 bpt
Target Price: $50
Upside : 5.57%
American Electricity Power
Company Overview
•
founded in 1906 and headquartered in Columbus, Ohio
•
delivers electricity to more than 5 million customers in 11 states
•
ranks first among the nation’s largest electric generators with nearly 38,000
megawatts of generating capacity
•
owns the nation’s largest electric transmission system with a nearly 39,000mile network
Key Statistics
MARKET DATA
* As of
Market Cap (B)
Price/Book (mrq)
52-Week High
52-Week Low
YTD
3-Mo. Avg. Daily Volume
Beta
Dividend & Yield
Enterprise Value (B)
P/E
ROA
EPS
ROA
D/E (ttm):
Apr. 8th, 2013
$23.91
1.55
$49.24
$36.97
32.27%
2670650
0.34
1.88 (3.90%)
42.58
19.24%
3.51%
2.6
3.51%
126.19
Current Price: $49.23
Target Price: $49.50 (+0.55%)
1 Year Price History for AEP
Segment Analysis
Utility Operations
- generates electricity for sale to U.S. retail and wholesale customers
- 91.25% of the total revenue
- expect to increase in retail sales
Transmission Operations
- develops, constructs and operates transmission facilities
- expect to grow
AEP River Operations
- transports the coal and dry bulk commodities
Generation and Marketing
- non-regulated generation
Key Drivers
• Weather Conditions
• Regulation
• Commodity Price Volatility
• Financing
Opportunities
Opportunities
• Fuel type diversification plan
• Falling price of natural gas
• Development of transmission operation segment
• Excellent dividend payment history
• Excellent performance of stock in 2012
Risks
Risks
• Volatility in the financial markets
• Electric load, customer growth and the retail competition
• Weather conditions and regulation uncertainty
• Operation and maintenance costs control
• Q4 earnings down compared to the same period last year
Projected Income Statement
Projected Income Statement
EPS
SIM Analyst
Consensus
2013E
2014E
REVENUE
SIM Analyst
Consensus
$3.16
$3.13
$15.9B
$15.6B
$3.29
$3.21
$16.9B
$15.8B
• Diversification of fuel type
• Growth of transmission operation segment
• Aggressive Regulatory Strategy
• Innovation
- waste gas emission
- sustained cost reduction program
- widely deployed smart meters and automated distribution networks
Financial Analysis: DCF
Terminal Discount Rate =
Terminal FCF Growth =
Date: 2013-4-8
Year
2012E
Revenue
14,945
% Growth
2013E
15,919
6.5%
Operating Income
2,656
Operating Margin
Interest(net) and Others expense
% of Sales
Taxes
Tax Rate
3,041
2014E
16,870
6.0%
3,239
2015E
17,646
4.6%
3,388
2016E
18,441
4.5%
3,539
9.0%
2.1%
2017E
19,123
3.7%
3,667
2018E
19,697
3.0%
3,774
2019E
20,228
2.7%
3,880
2020E
20,734
2.5%
3,977
2021E
21,211
2.3%
4,067
2022E
21,665
2.1%
4,149
17.8%
19.1%
19.2%
19.2%
19.2%
19.2%
19.2%
19.2%
19.2%
19.2%
19.2%
(834)
(740)
(811)
(821)
(867)
(899)
(926)
(951)
(975)
(997)
(1,018)
-5.6%
-4.7%
-4.8%
-4.7%
-4.7%
-4.7%
-4.7%
-4.7%
-4.7%
-4.7%
-4.7%
604
794
838
886
922
955
983
34.5%
34.5%
34.5%
34.5%
34.5%
34.5%
34.5%
1,011
34.5%
1,036
34.5%
1,059
34.5%
1,080
34.5%
Equity Earnings of Unconsolidated Subsidiaries
44
Earnings
% Growth
Net Income
1,262
% Growth
Add Depreciation/Amort
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
Capex % of sales
Free Cash Flow
51
54
56
58
60
63
65
4.0%
4.0%
4.0%
4.0%
4.0%
4.0%
4.0%
1,553
1,638
1,731
1,802
1,867
1,921
1,976
2,027
2,074
2,116
5.7%
4.1%
3.6%
2.9%
2.9%
2.5%
2.3%
2.0%
1,782
1,878
1,991
2,077
2,176
2,256
2,324
2,387
2,447
2,503
2,556
11.9%
11.8%
11.8%
11.8%
11.8%
11.8%
11.8%
11.8%
11.8%
11.8%
11.8%
191
-206
-198
-162
-166
-142
-118
-109
-104
-98
-93
1.3%
-1.3%
-1.2%
-0.9%
-0.9%
-0.7%
-0.6%
-0.5%
-0.5%
-0.5%
-0.4%
1,673
1,783
1,889
1,976
2,065
2,142
2,206
2,266
2,322
2,376
2,426
11.2%
11.2%
11.2%
11.2%
11.2%
11.2%
11.2%
11.2%
11.2%
11.2%
11.2%
920
1,143
1,691
1,765
1,849
1,921
1,984
2,040
2,093
2,140
27.4%
24.2%
47.9%
4.4%
4.7%
3.9%
3.3%
2.8%
2.6%
2.2%
722
10,687
13,460
24,147
3.04%
18.8
19.1
9.3
9.4
Shares Outstanding
482
$
$
50
4.0%
5.5%
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
Current Price
Implied equity value/share
Upside/(Downside) to DCF
48
3.9%
23.0%
% Growth
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
46
4.1%
49.23
50.05
1.7%
44%
56%
100%
Terminal Value
Free Cash Yield
15.3
15.6
8.4
8.5
14.5
14.7
7.9
8.0
31,865
6.72%
Terminal P/E
15.1
Terminal EV/EBITDA
7.4
Financial Analysis: DCF
• Current Price: $49.23
• Target Price through DCF: $50.0 (+1.7%)
• Price Range: $43.0-$75.0
Terminal Discount Rate
Terminal
FCF
Growth
$ 50.05
1.1%
1.6%
2.1%
2.6%
3.1%
7.5%
58.12676
61.23078
64.91391
69.35489
74.81445
8.0%
53.58882
56.13191
59.10897
62.64145
66.90078
9.0%
46.2618
48.0271
50.0497
52.3904
55.1305
9.0%
46.2618
48.0271
50.0497
52.3904
55.1305
9.5%
43.2632
44.7546
46.4487
48.3897
50.6359
Highest Value per Share
Lowest Value per Share
SIM Analyst Value per Share
Financial Analysis: Multiple
• Relative to Industry
– Slightly more expensive
• Relative to S&P 500
– slightly more expensive
Financial Analysis: Multiple
E,S,EBITDA,CF/S is estimated high in 2013
Target Price through Multiple: $47.92 (-2.7%)
Price range: $41.7- $45.6
Average: $47.92
Recommendation
•
30% Multiple + 70% DCF
•
Target Price: $49.50 (+0.37%)
•
Bright prospect, but the price has already reflected the expectation
•
Not in SIM currently
•
Recommendation: HOLD (Don’t buy)
South Jersey Industries
Company Overview
•
was founded in 1910 and is headquartered in Folsom, New Jersey.
•
engage in the purchase, transmission, and sale of natural gas
•
operates energy-related projects, such as thermal facilities, combined heat
and power facilities and solar projects
•
it had approximately 122.7 miles of mains in the transmission systems and
6,142 miles of mains in the distribution systems. (Dec.2012)
•
served 357,306 residential, commercial, and industrial customers in
southern New Jersey.
Key Statistics
MARKET DATA
* As of
Market Cap (B)
Price/Book (mrq)
52-Week High
52-Week Low
YTD
Avg Volume (3m)
Beta
Dividend & Yield
Enterprise Value (B)
ROE
EPS
P/E
ROA
D/E (ttm):
Shares Outstanding (M)
Apr. 15th, 2013
$1.73
2.49
$58.43
$45.81
14.93%
106160
0.59
1.77 (3.00%)
2.83
13.64%
2.97
19.59
2.82%
135.89
31.4
Current Price: $58.48
Target Price: $69.0 (+18%)
Key Drivers
• Weather Conditions
• Regulation
• Commodity Price Volatility
• Infrastructure investment
• Costumer Growth
Opportunities
Opportunities
• Recently approved Accelerated Infrastructure
Replacement Program
• Cost advantage of natural gas
• Customer Growth
• Solid dividend payment history
• Earnings growing 9% annually over the next 3 years
Risks
Risks
• Volatility of financial market
• Growing competition
• Weather conditions and regulation uncertainty
• Increasing natural gas production and/or pipeline transportation disruptions
in the Marcellus region.
Financial Analysis: Multiple
E,S,CF/S is estimated high in 2013
Target Price through Multiple: $69.0 (+18%)
Price range: $58.0 - $76.0
Absolute
Valuation
High
Low
Median
Current
#Your
Target
Multiple
A.
P/Forward E
P/S
P/B
P/EBITDA
P/CF
B.
21.0
2.6
2.9
10.54
19.2
C.
13.0
0.7
1.6
3.98
7.0
D.
17.2
1.1
2.2
6.34
11.2
E.
19.2
2.6
2.6
10.13
19.2
F.
18.4
1.6
2.3
6.7
13.5
*Your
Target
E, S, B,
etc/Share
G.
3.60
42.5
32.4
8.72
5.61
Your
Target
Price
(F x G)
H.
64.08
68.00
74.52
58.42
75.74
Average: $69.0
Recommendation
•
Target Price: $69.0 (+18%)
•
Price range: $58.0 - $76.0
•
Not in SIM currently
•
Recommendation: Buy (add 135 basis points)
Consensus Opinions
Recommendation Summary
Name
NRG
SO
AEP
SJI
Recommendation
HOLD
SELL
HOLD
BUY
• Actions:
SO：Sell 135 bps
SJI: Buy 135 bps
• Q&A
Current
Target
Allocation Allocation
2.03%
2.03%
1.35%
0.00%
0.00%
0.00%
0.00%
1.35%
Current
Price
$
25.80
$
47.36
$
49.23
$
57.43
Target Price
$
28.30
$
50.00
$
49.50
$
69.00
Upside/(Do
wnside)
9.69%
5.57%
0.55%
20.15%