Utilities
Company Analysis
Bharat Deore
Nate Druckenmiller
Chris Henschen
Agenda
 Recommendation
 Sector Review
 American Electric Power (AEP)
 Public Service Enterprise Group (PEG)
 NextEra Energy (NEE)
 Summary
 Questions
Recommendation
 Class Vote – Hold Sector Weight
 Current Utility Holdings
 2.32% ($512,000) of SIM Portfolio
 All invested in Public Service Enterprise
 Recommendation
 Sell 50% PEG
 Purchase NEE ($250,000)
 Do not buy AEP
Recommendation
Sector
AEP
PEG
NEE
Summary
S&P 500 vs. SIM Weight
Telecommunica on
Services
2.92%
Materials
3.65%
S&P 500
U li es
3.26%
Consumer
Discre onary
10.30%
Informa on
Technology
18.97%
Consumer Staples
10.21%
Energy
12.70%
Industrials
11.15%
Health Care
10.70%
Financials
16.13%
• Currently underweight 94 bps
Recommendation
Sector
AEP
PEG
NEE
Summary
Utilities - Largest Companies
Company
Market Cap (B)
P/E
Ann. Revenue
Ann. Net Income
37.05
21.36
25,511
845
31.51
15.79
17,456
1,975
31.32
11.71
22,627
2,239
28.28
11.05
18,644
2,563
26.79
19.82
9,036
1,365
25.32
8.84
15,118
2,915
23.86
19.32
12,731
1,063
NextEra Energy
23.04
11.61
15,317
1,957
Kinder Morgan
Energy Partners LP
22.53
58.13
7,003
332
PG&E Corporation
18.13
16.36
13,399
1,194
American Electric
Power Company
17.11
14.07
14,400
1,451
Spectra Energy Corp.
16.98
16.31
4,552
843
Public Service
Enterprise Group
16.30
10.02
12,406
1,592
Enterprise Products
Partners L.P.
The Southern
Company
National Grid plc
(ADR)
Exelon Corporation
TransCanada
Corporation (USA)
Dominion Resources,
Inc.
Duke Energy
Corporation
Recommendation
Sector
AEP
PEG
NEE
Summary
Summary
Analysis
Conclusions
View
Business
Mature industry; potential gains
from favorable legislation
Neutral
Economic
Slow growth, with gains strongly
correlated to improvements in the
overall economy
Slightly positive
Financial
Recent revenue decline; stable
profit margin and ROE; declining
net profit margin; very strong
dividend yield
Neutral / Slightly
positive
Valuation
Sector trading at discount
Positive
Recommendation
Sector
AEP
PEG
NEE
Summary
American Electric Power
 AEP ranks among the nation's largest generators of electricity,
owning nearly 38,000 megawatts of generating capacity in the
U.S.
 AEP also owns the nation's largest electricity transmission
system, a nearly 39,000-mile network (more than all other
U.S. transmission systems combined)
 AEP's transmission system directly or indirectly serves about 10
percent of the electricity demand in the Eastern Interconnection
(the interconnected transmission system that covers 38 eastern
and central U.S. states and eastern Canada)
 AEP’s utility units operate as AEP Ohio, AEP Texas,
Appalachian Power, AEP Appalachian Power, Indiana
Michigan Power, Kentucky Power, Public Service Company of
Oklahoma, and Southwestern Electric Power Company
 AEP's generation plants are 80% coal driven
Recommendation
Sector
AEP
PEG
NEE
Summary
AEP vs. S&P Performance
Recommendation
Sector
AEP
PEG
NEE
Summary
Relative Multiple Valuation
Recommendation
Sector
AEP
PEG
NEE
Summary
Absolute Valuation
Recommendation
Sector
AEP
PEG
NEE
Summary
Growth Rate
DCF Highlights
2.75%
3.00%
3.25%
3.50%
$
$
$
$
Discount Rate
9.25%
9.50%
39.71 $ 38.08 $
40.76 $ 39.03 $
41.89 $ 40.06 $
43.13 $ 41.17 $
9.75%
36.58
37.44
38.38
39.38
Projected DCF Price: $39.03
• 9.5% Discount Rate
• 3% Growth Rate
Recommendation
Sector
AEP
PEG
NEE
Summary
American Electric Power
 Current Price: $35.62
 Valuation (Weighted): 39.00
.5 DCF + .1 P/FE + .1 P/S + .1 P/B + .1 P/EBITDA +
.1 P/CF
 Projected Upside: 9.5%
 Dividend Yield: 5.1%
 Market Cap: 17.06 Billion
 DCF: Discount Rate = 9.5% Growth Rate = 3.0%
 Recommendation: Do not add to SIM portfolio
Recommendation
Sector
AEP
PEG
NEE
Summary
Public Service Enterprise Group (PEG)
 PEG is a diversified utility company with operations primarily in the
Northeastern and Mid-Atlantic United States
 3 Primary Businesses (% of total revenue):
•
PSE&G (52.8%) - Provides electric transmission and electric
and gas distribution to residential, commercial and industrial
customers in New Jersey. Currently increasing level of
renewable generation
•
Power (45.8%) – Major wholesale energy supplier in the
Northeast with 3 main subsidiaries: Fossil, Nuclear, and Energy
Resources & Trade
•
Energy Holdings (1.42%) - Manages leveraged lease
investments and operates domestic generation projects. Also
pursuing solar and other renewable generation projects.
Recommendation
Sector
AEP
PEG
NEE
Summary
PEG :
Operating Earnings per Share by
Subsidiary
PEG vs. S&P Performance
Recommendation
Sector
AEP
PEG
NEE
Summary
Relative Multiple Valuation
Relative to
Industry
P/Trailing E
P/Forward E
P/B
P/S
P/CF
P/EBITDA
High
Low
Median
Current
2.6
1.5
3.4
19.4
1.8
2.6
0.29
0.44
0.5
1.0
0.3
0.29
0.95
0.88
1.4
1.5
1.2
0.95
0.78
0.86
1.1
1.2
1.0
0.78
Relative to
S&P 500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
P/EBITDA
High
Low
Median
Current
1.4
1.3
1.5
1.6
1.3
1.4
0.43
0.39
0.5
0.5
0.4
0.43
0.71
0.7
0.8
0.9
0.7
0.71
0.64
0.8
0.7
1.0
0.6
0.64
Recommendation
Sector
AEP
PEG
NEE
Summary
Absolute Valuation
Absolute
Valuation
High
Low
Median
Current
#Your
Target
Multiple
P/Forward E
22.8
8.3
12.4
10.2
12
3.19
38.23
P/S
2
0.6
1.3
1.3
1.3
26.74
34.76
P/B
3.6
1.4
2.2
1.7
2.2
18.89
41.56
P/EBITDA
8.42
2.51
4.49
4.15
4.49
7.97
35.77
P/CF
13.6
4.6
7.3
6.2
7.3
4.92
35.95
Recommendation
Sector
AEP
PEG
*Your
Target E,
S, B,
etc/Share
NEE
Your
Target
Price
(F x G)
Summary
DCF Highlights
Projected DCF Price: $36.79
• 9.2% Discount Rate
• 3% Growth Rate
Recommendation
Sector
AEP
PEG
NEE
Summary
Public Services Enterprise Group
 Concerns: Underfunded Pension Plan by ($800M)
 Strong Points: Consistent dividend payouts and
aggressively reducing GHG emissions
PEG
 Fundamental Value: $36.8
 Current Price: $32.42
(52Wk range 29.02 to 34.93)
 Upside: 13.5%
 Yield: 4.2%
 1YR Total Return: 11.58%
 $16.5 Billion Mkt Cap
 DCF: Discount Rate = 9.2%,
Terminal Growth = 3%
 Recommendation:
Sell 50% holding
Recommendation
Sector
AEP
PEG
NEE
Summary
NextEra Energy
 Combination of two subsidiaries
 FPL – rate-regulated utility in Florida, 4.5M customers
 $11.5B Operating Revenues, $1.6B Operating Income
 Energy Resources – clean energy operator
 $4.0B Operating Revenues, $1.0B Operating Income
 By 2013, Operating Income may exceed that of FPL
 90% of generation is clean or renewable
 When will stock outperform?
 Florida economy and housing stabilize and improve
 Alternative energy focus
 Disruptions in current energy market (Libya, S.A., Iran)
 Environmental concerns (Coal, off-shore drilling, etc.)
 Continued governmental support
Recommendation
Sector
AEP
PEG
NEE
Summary
NextEra Energy
Recommendation
Sector
AEP
PEG
NEE
Summary
NEE vs. S&P Performance
Recommendation
Sector
AEP
PEG
NEE
Summary
Relative Multiple Valuation
Recommendation
Sector
AEP
PEG
NEE
Summary
Absolute Valuation
Average Multiple Price: $63.50
Recommendation
Sector
AEP
PEG
NEE
Summary
DCF Highlights
Projected DCF Price: $64.17
• 9.5% Discount Rate
• 5.5% Growth Rate
Recommendation
Sector
AEP
PEG
NEE
Summary
NextEra Energy
 Current Price: $54.69
 Valuation (Weighted): $63.84
.5 DCF + .5 Multiple Valuation
 Projected Upside: 16.7%
 Dividend Yield: 4%
 Market Cap: $23 Billion
 DCF: Discount Rate = 9.5% Growth Rate = 5.5%
 Recommendation: Buy
Recommendation
Sector
AEP
PEG
NEE
Summary
Technical Analysis
Summary
Dupont Analysis
PEG
Revenue
Net Income
Assets
Equity
ROE
Profit Margin (Operating Efficiency)
Asset Turnover (Asset Use Efficiency)
Equity Multiplier (Financial Leverage)
AEP
14400
1451
49892
13716
10.58%
10.08%
28.86%
3.64
DCF Valuation
Terminal Discount Rate
Terminal FCF Growth Rate
Current Price
Target Price
Upside
AEP
9.50%
3%
35.62
39
9.5%
PEG
Recommendation
Sector
AEP
PEG
11793
1564
19104
9557
16.36%
13.26%
61.73%
2.00
9.20%
3%
32.42
36.79
13.5%
NEE
NEE
15643
1615
48458
12967
12.45%
10.32%
32.28%
3.74
NEE
9.50%
5.50%
54.69
63.84
16.7%
Summary
Recommendation
 Sell 50% PEG
 Purchase NEE ($250,000)
 Do not buy AEP
 For future analysis: PPL Corporation
 12B Mkt Cap
 Northeast US 5.6% dividend yield
 Forward P/E ratio 7.8
Recommendation
Sector
AEP
PEG
NEE
Summary
APPENDIX
DCF Models