Utility Sector Jun Liu, Ran Yan, Hongda Zhang 5/28/2012 Consumer Discretionary 10.04% Dividend Receivables 0.08% Cash 3.83% Telecommunicat ion Services 1.02% Materials 3.93% Consumer Staples 10.95% S&P500: 3.50% Utility SIM Portfolio: 3.47% Utility Adjusted 3.61% 11 bps higher SIM Portfolio Energy 10.42% Financials 13.36% Health Care 13.61% Information Technology 21.91% Industrials 7.37% Portfolio Utilitie 3.47% Current Price Target Price Potential NRG Energy Inc. : Duke Energy: Calpine Corporation: 15.64 20.41 16.91 18.27 20.8 18.9 16.8% 1.9% 11.8% Recommendation Hold Hold Hold Currently Holding 25,200 shares of NRG at the unit cost of $16.88 Portfolio NRG • One of the largest power generation and retail electricity businesses in the U.S. • Operations include: energy production and cogeneration facilities, thermal energy production and energy resource recovery facilities • Its power plants provide more than 25,000 megawatts of generation capacity and its retail and thermal subsidiaries serve more than 2 million customers in 16 states. Overview Market Capitalization Shares Outstanding Preferred Dividend Yield Beta 52-Week High 52-Week Low 52-Week Change S&P500 52-Week Change 50-Day Moving Average $3.56B 227.72M 0.25% 0.64 $25.66 $14.29 -36.19% -0.78% $15.62 52-Week Stock Performance Value Drivers: Diversified portfolio of assets helps to mitigate the volatility in fuel price and in the market demand cycles fuel-type dispatch level Region Development of renewables, with a concentration in solar Differentiation in Retail Business Business Analysis Risks: Low natural gas price deteriorated operating margin Regulatory issues impose more costs Aging facilities cause low efficiency and competitive disadvantage Business Analysis Financial Analysis Valuation Analysis Valuation Analysis Recommendation: HOLD Valuation Analysis Duke Energy 150+ year of service 18680 employees $57 billion in assets 35,000 megawatts of owned capacity 50,000 square miles of service territory 4.5 million customers Overview Business Analysis Current Price 21.96 52-Wk High 22.12 52-Wk Low 16.87 Dividend 1.00 Dividend Yield 4.86% Shares Outstanding 1.34 Billion Market Capitalization 28.72 Billion 12 Month Graph 10 Year Graph Stock • Driver • Growing population/4.5 million customers • Sustainability • Risk • Climate change • Economics downturn/unemployment Drivers and risks Valuation Terminal Discount Rate: 9.25% Terminal FCF Growth Rate: 1.75% Implied Stock Price: $20.8 Terminal Discount Rate FCF Growth Rate 21 1% 1.5% 2% 2.5% 3% 4% 7.5% 26.08 27.61 29.42 31.58 34.23 37.53 8.0% 23.87 25.13 26.59 28.32 30.40 32.94 Valuation 8.5% 21.97 23.01 24.21 25.62 27.28 29.27 9.0% 20.31 21.18 22.18 23.34 24.69 26.28 9.5% 18.85 19.59 20.43 21.39 22.50 23.79 10.0% 17.56 18.19 18.91 19.71 20.64 21.70 10.5% 16.41 16.96 17.57 18.25 19.02 19.91 Valuation Valuation Recommendation: HOLD Valuation Analysis Calpine Corporation • Largest independent wholesale power generation company • Headquarter in Houston, Texas • Operates natural gas-fired and geothermal power plants • 93 Power Plants • 4 business segment (West, Texas, North and Southeast) • 28,000 megawatts Business Overview • • • • • • Current stock price: $16.91 52 week range: $12.7-19.03 Market Cap: 8.16 B Share outstand: 478M Beta: 1.04 Dividend Yield: N/A • Target Price: $18.90 Upside Potential : 11.8% • Recommendation: Hold Stock Overview Catalysts • Electricity price Increasing; Demand<Supply; Favorable Market heat rate • Natural gas price Lower price lower cost • Increasing capacity 2 New Plants; Add capacity to 3 Plants • Updated technology update turbine program • Efficiency & Clean & Flexibility • 11.8% upside valuation Catalysts & Risks Natural Gas Price Risk • Revenue risk One single customer: 10% of revenue • Regulation risk Compliance cost • Fluctuation in commodity price • Credit risk Credit rating B1; Heavy debt • Competition from other sources of power Alternative energy • Weather conditions Catalysts & Risks CPN ERG DUK GEN Industry Market Cap 8.16B 3.56B 29.38B 1.38B 2.52B Employees 2,101 5,193 18,249 3,103 2,060 TTM Revenue 6.54B 8.95B 14.20B 3.52B 2.30B TTM EBITDA 1.55B 1.45B 5.26B 770.00M 550.00M 14.62% 3.70% 22.51% 11.70% 13.65% TTM P/E 83.3 15.33 19.7 N/A 16.14 PEG (5 yr Expected) 8.12 1.77 4.34 -0.69 2.27 TTM Operating Margin • NRG Energy, Inc. [NYSE: NRG] • Duke Energy Corporation [NYSE: DUK] • GenOn Energy, Inc. [NYSE: GEN] Competitors Revenue & Income 9,000 8,000 7,000 6,000 5,000 4,000 3,000 Revenue 2,000 Net Income 1,000 (1,000) Revenue Net Income 2009 2010 2011 2012E 2013E 2014E 6,463 145 6,545 31 6,800 (189) 7,086 162 7,355 260 7,612 300 Financial Analysis 3 Year Peer's Average Average Profitability Ratios Return on Assets 2009 2010 2011 0.80% 0.20% -1.10% 0.00% 1.78% Return on Equity 3.40% 0.70% -4.30% -0.10% 5.07% Operating Margin 16.20% 13.80% 11.80% 13.90% 7.64% 2.30% 0.50% -2.80% 0.00% 6.84% 2009 2010 2011 3 Year Average Peer's Average Total Asset Turnover 0.4 0.4 0.4 0.4 0.3 Receivables Turnover 8.2 9.2 10.7 9.4 8.7 2009 2010 2011 3 Year Average Peer's Average Current Ratio 1.5 1.9 1.7 1.7 1.6 Quick Ratio 1.0 1.1 0.9 1.0 1.0 Financial Leverage 3.7 3.7 4.0 3.8 2.8 Debt/Equity 2.0 2.2 2.4 2.2 0.9 Profit Margin Efficiency Ratios Liquidity Ratios Financial Analysis DuPont Analysis 2009 2010 2011 Peer's Average ROE 3.40% 0.70% -4.30% 5.07% Profit Margin 2.30% 0.50% -2.80% 6.84% Total Asset Turnover 0.4 0.4 0.4 0.3 Financial leverage 3.7 3.7 3.7 2.8 Financial Analysis Terminal Discount Rate 9.00% Terminal FCF Growth Rate 2.00% Terminal FCF growth rate Discount Rate 7.5% 8.0% 8.5% 9.0% 9.5% 10.0% 10.5% 1% 21.01 19.26 17.75 16.44 15.28 14.27 13.36 1.50% 22.23 20.26 18.58 17.14 15.88 14.77 13.79 2% 23.67 21.43 19.54 17.93 16.55 15.34 14.28 Valuation-DCF 2.50% 25.39 22.81 20.66 18.86 17.31 15.98 14.82 3% 27.51 24.47 21.99 19.93 18.20 16.72 15.44 DCF Valuation of Calpine Coporation (CPN) Terminal Discount Rate= Terminal FCF Growth= 9.00% 2.00% Year 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E Revenue 7072 4.00% 7369 4.20% 7701 4.50% 8086 5.00% 8611 6.50% 9119 5.90% 9575 5.00% 9958 4.00% 10257 3.00% 10462 2.00% 1112 15.72% 1291 17.52% 1411 18.32% 1544 19.10% 1636 19.00% 1714 18.80% 1771 18.50% 1842 18.50% 1898 18.50% 1935 18.50% 930 13.15% 969 13.15% 1013 13.15% 970 12.00% 990 11.50% 1021 11.20% 958 10.00% 896 9.00% 923 9.00% 942 9.00% 20 11.00% 35 11.00% 44 11.00% 63 11.00% 71 11.00% 76 11.00% 90 11.00% 104 11.00% 107 11.00% 109 11.00% 162 287 77.18% 354 23.63% 511 44.20% 575 12.50% 617 7.31% 724 17.43% 842 16.24% 867 3.00% 885 2.00% 566 8.00% (9.75) (0.14%) 781 11.04% 590 8.00% (19.60) (0.27%) 962 13.05% 616 8.00% (21.89) (0.28%) 770 10.00% 606 7.50% (44.47) (0.55%) 566 7.00% 603 7.00% (61.57) (0.72%) 431 5.00% 547 6.00% (59.18) (0.65%) 456 5.00% 479 5.00% (52.66) (0.55%) 479 5.00% 498 5.00% (43.82) (0.44%) 498 5.00% 513 5.00% (33.85) (0.33%) 513 5.00% 523 5.00% (23.02) (0.22%) 523 5.00% 31 59 89.11% 252 324.80% 509 101.57% 639 25.64% 635 (0.56%) 694 9.20% 817 17.69% 848 3.80% 871 2.79% 3212.11 5362.51 8574.62 0.39% 37.46% 62.54% 100% Terminal value Free Cash Yield Terminal P/E Terminal EV/EBITDA 12695 6.86% 14.35 9 49.98 53.01 10.28 10.58 28.21 29.92 9.17 9.43 Debt Cash Cash/share Total Assets Debt/Assets Working Capital % of Growth 10419 1252 2.62 17271 42.00% 11% % Grow th Operating Income Operating Margin Interest and Other Interest % of Sales Taxes Tax Rate Net Income % Grow th Add Depreciation/Amort % of Sales Plus/(minus) Changes WC % of Sales Subtract Cap Ex Capex % of sales Free Cash Flow % Grow th NPV of Cash Flows NPV of terminal value Projected Equity Value Free Cash Flow Yield Current P/E Projected P/E Current EV/EBITDA Projected EV/EBITDA Shares Outstanding Current Price Implied equity value/share Upside/(Downside) to DCF 478 16.91 17.93 0.06 Analyst: Date: 22.82 24.20 8.51 8.75 Hongda Zhang 5/27/2012 Relative to Industry High Low Median Current P/Trailing E P/Forward E P/B P/S P/CF 44.4 25.5 2.3 2.9 3.7 0.18 1.3 0.6 0.8 0.2 4.3 3.6 0.9 1.8 1.6 44.4 7.4 2.3 2.9 3.7 Relative to S&P 500 High Low Median Current 45.5 31.3 0.19 0.94 3 2.9 45.5 6.4 0.9 1.1 1.6 0.4 0.4 0.2 0.6 0.8 0.8 0.9 1 1.6 P/Trailing E P/Forward E P/B P/S P/CF Higher than Industry and S&P500 Valuation-Multiple Multiples P/Forward E High Low Median Current Target Multiple Target E, S, B, etc/Share Target Price 388.8 11.2 39.4 85.9 76.75 0.34 26.10 P/S 1.4 0.2 0.9 1.3 1.45 14.6 21.17 P/B 2 0.6 1.3 2 2 8.93 17.86 P/EBITDA 6.46 0.96 3.46 6.46 6.21 2.83 17.57 P/CF 14.6 1.3 7.9 14.6 14.55 1.25 18.19 Average Price 10 year data. Currently trading high. Expect mean reverse Valuation-Multiple 20.18 Valuation Method P/Forward E P/S P/B P/EBITDA P/CF DCF Target Price Weights 26.10 21.17 17.86 17.57 18.19 17.93 0.1 0.05 0.05 0.1 0.1 0.6 Value per Share Target Price: $18.90 Current Price: $16.91 Upside Potential : 11.8% Recommendation: Hold Valuation Weighted Value 2.61 1.06 0.89 1.76 1.82 10.76 $ 18.90