UTILITIES
LUKE FRIEDMAN
&
GENO FRISSORA
RECAP
RECOMMENDED ADDING 23 BP TO UTILITIES
Utilities
3.34%
Utilities
3.57%
SIM Weighting
Materials
3.40%
Telecom
3.53%
Industrials
9.78%
Materials
3.73%
Technology
21.22%
Consumer
Discretionary
7.46%
Financials
12.27%
Consumer
Staples
11.98%
Energy
11.13%
Health Care
13.19%
S&P Weighting
Technology
Financials
Energy
Health Care
Consumer Staples
Consumer Discretionary
Industrials
Utilities
Materials
Telecom
Telecom
2.73%
Industrials
10.95%
Technology
19.60%
Consumer
Discretionary
10.83%
Financials
14.11%
Consumer
Staples
10.87%
Energy
11.92%
Health Care
11.69%
Technology
Financials
Energy
Health Care
Consumer Staples
Consumer Discretionary
Industrials
Utilities
Materials
Telecom
POSITIONS
Current Positions
• XEL – Xcel Energy Inc. (SELL)
• PPL – PP&L Corporation (SELL)
Recommendations
• NRG – NRG Energy Inc. (BUY)
• BIP – Brookfield Infrastructure Partners (BUY)
XCEL ENERGY INC .( X E L)
Overview
• Energy Transmission and Generation via Electricity (82% of Rev) and Natural
Gas (17% of Rev)
• Operates in 8 different states across the U.S.
• Ex. Minnesota, Colorado and New Mexico
• Operating Revenue last year of $10.3 B
• Net Income last year of $756 M
• Dividend of 4%
Supply Factors
• Potential Legislation
• Ex. Cross State Air Pollution Rule (CSAPR)
• Commodity Prices difficult to predict
Demand Factors
• General Population
• Programs to reduce domestic demand
Gross Margins
• Excellent at 50%
Performance to date has been good
X EL VS. S& P 500
• Fairly Consistent prior to August
• Room for correction
• XEL Flat-lining
X EL DISCOU NT E D CA SH FLOW A NA LYSIS
Assumptions
• 4% Revenue Growth
• 5% Earnings Growth
• Ve r y h i g h e a r m a r k e d c a p i t a l
expenditures
• Decreases Cash Flow
• Good Gross Margins
• Te r m i n a l D i s c o u n t v a l u e o f
9%
• Te r m i n a l F C F G r o w t h r a t e o f
3.5%
• I m p l i e d E q u i t y Va l u e o f 35.3%
X EL RELATIVE VALUATION
 Relatively expensive
compared to the
Industry
 Tr a d i n g a t a P r e m i u m
• Relatively
expensive
compared to the
S&P 500
• Tr a d i n g a t a
Premium
X EL A BSOLUTE VA LUAT ION
OVERPRICED!
Valuation Type
P/Forward E
P/S
P/B
P/EBITDA
P/CF
Analyst Median
Analyst Mean
DCF
Weight
12.5%
12.5%
12.5%
12.5%
12.5%
12.5%
12.5%
12.5%
Valuation
24.21
20.82
23.20
21.80
20.31
27.00
27.50
17.12
Weighted Value
3.03
2.60
2.90
2.73
2.54
3.38
3.44
2.14
22.75
P P L OVERVIEW
Overview
• Provides diversified power generation and transmission
• Operates in the Northeastern US, Montana, and the UK
• Operating Revenue last year of $3.026 B
• Net Income last year of $1.594 B
• Dividend of 5%
Fundamental Positives
• Pennsylvania State Rate Cap removed
• Low input costs due to generation operations
• Good growth opportunities from recent acquisitions
Fundamental Negatives
• Extremely high capex over the coming years
•
•
High degree of share dilution
•
•
26% of expected revenue in next two years
53% new shares issues since 2009
Goodwill of $5.179 B on balance sheet
• Representing 12% of assets
P P L VS. S& P 500
•Outperformed the S&P
•Expected mean reversion
•Likely range bound
P P L DISCO U NT E D CA SH FLOW A NA LYSIS
Assumptions
• Optimistic Revenue Forecast
with growth falling from 13% - 4%
• Earnings Growth around 5%
• Capex falling from 26.5% to 14%
• Negative Free Cash Flow
• Operating margins at 20%
• Terminal Discount value of 9.5%
• Terminal FCF Growth rate of 3%
• Implied Equity Value of $30.59
• 7.1% upside
P P L RELATIVE VALUATION
Relative to
Industry
P/Trailing E
P/Forward E
P/B
P/S
P/CF
Relative to S&P
500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
Low
Median
Current
1.5
1.5
1.6
1.7
1.8
.68
.63
1.0
.9
.8
1.1
.95
1.3
1.1
1.5
.79
.88
1.0
.9
.8
High
Low
Median
Current
1.3
1.7
1.5
2.6
1.4
.53
.49
.6
.9
.6
.95
.99
1.0
1.4
1.0
.78
.91
.7
1.0
.6
• Valuations all on low end
• Looks undervalued
• Could be due to fundamental
concerns
• Share dilution not shown by
these metrics
• More toward median levels
with S&P
• Still looks undervalued
• Share dilution not shown by
these metrics
P P L A BSOLUTE VA LUAT ION
Absolute
Valuation
A.
P/Forward E
P/S
P/B
P/EBITDA
P/CF
High
B.
21.6
3.0
3.9
9.41
15.0
Low
C.
7.4
1.1
1.4
3.32
5.1
Median
D.
12.3
1.5
2.1
6.37
9.0
Current
E.
12.2
1.3
1.5
3.71
5.9
#Your
Target
Multiple
F.
12.3
1.4
1.7
5.0
6.5
*Your
Target
E, S, B,
etc/Sha
re
G.
$2.33
$21.89
$18.97
$7.67
$4.82
Current Price =
$28.40
Discounted Cash Flows = $30.59
Implied Upside =
7.7%
Your
Target
Price
(F x G)
H.
$28.66
$30.65
$32.25
$38.35
$31.33
•Fairly Valued
•P/B distorted because of
high amount of Goodwill
•P/EBITDA does not include
interest expense
NRG OVERVIEW
Overview
• Diverse Power Generation Portfolios including
Natural Gas
• Operating Revenue last year of $8.85 B
• Net Income last year of $476 M
• Recently announced a 2% dividend for first time
Supply Factors
• Commodities, specifically Natural Gas
Gross Margins
• 32 %
UNDERVALUED!
NRG
Fairly high negative correlation with the capacity of Electric
and Natural Gas Utilities
NRG
Fairly high negative correlation with the production of Oil
and Natural Gas
NRG
Fairly high correlation with the price the firm charges for
Natural Gas
NRG VS. S& P 500
Looks to be undervalued compared to the S&P 500
NRG DISCOU NTE D CA SH FLOW A NALYSIS
Assumptions
• 0% Revenue Growth
a f t e r 2 01 2 ( E x t r e m e l y
conservative)
• Decent Gross Margins
• Price of Natural Gas
• Te r m i n a l D i s c o u n t
value of 9%
• Te r m i n a l F C F G r o w t h
rate of 3.5%
• I m p l i e d E q u i t y Va l u e
o f 6 7. 2 %
BIP OVERVIEW
Overview
• Operates in Utilities, Transports & Energy, and Timber
• Transports include: Pipelines, Rail & Port construction etc.
• Exposure to Global Infrastructure
• Operating Revenue last year of $803 M
• Net Income last year of $187 M
• Dividend of 5.1%
• Planned distribution growth of 3-7%
Income
•
•
•
•
80% of cash flow regulated or contractual
Transmits electricity to 98% of Chile
Current $600 M Australian Railroad project
419,000 acres of Timberland
•
Exports to Asia increased 47% in 2011
Growth
• $5 B of potential organic growth projects under consideration
Gross Margins
• Excellent at 48.1%
BIP VS. S& P
•Outperformed the S&P
•Reasonably new company with great
earnings potential
•Lots of room to grow
BIP DISCO U NTE D CA SH FLOW A NA LYSIS
Assumptions
•15% Revenue Growth
•2027% in 2010
•158% in 2011
•32% Operating margin
•20% Tax Rate
•Capex falling from 10% to 7%
•Dep. Rising fom 3.2% to 7%
•Terminal Disc. Rate at 11%
•Terminal FCF Growth 4%
•Implied Equity value $36.04
•20.2% upside
RECOMMENDATIONS
• NRG – ADD 232 BP
• Undervalued
• Natural Gas correlation is very high
(inexpensive)
• BIP– ADD 125 BP
• High Growth Revenues
• Undervalued due to expected growth
• Highly diversified
WHAT QUESTIONS DO YOU HAVE?