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