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 S&P: 3.44% SIM: 3.24% Telecom Svc, 1.19% Materials, 2.63% Info Tech, 18.01% Cash, 3.01% SIM Weights Utilities, 3.24% Dividend Receivable s, 0.05% Cons Disc, 12.30% Cons Staples, 12.35% Telecom Svc, 18.20% Materials, 2.96% S&P 500 Utilities, 3.44% Cons Disc, 11.57% Cons Staples, 10.71% Energy, 10.98% Industrials, 10.25% Health Care, 12.02% Financials, 14.73% Energy, 10.23% Info Tech, 18.20% Industrials, 10.22% Health Financials, Care, 16.17% 12.24%
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
Terminal Growth Rate Financial Analysis: DCF Assumptions Terminal Discount Rate = 9.1% Terminal FCF Growth = 1.7% Price Target Current Price $ 25.35 Implied equity value/share $ 26.52 Upside/(Downside) to DCF 4.6% Sensitivity Analysis Range: $24.32 - $29.79 Terminal Discount Rate $ 26.52 8.7% 8.8% 8.9% 9.0% 9.1% 9.2% 9.3% 9.4% 9.5% 1.3% $ 27.26 $ 26.86 $ 26.47 $ 26.09 $ 25.71 $ 25.35 $ 25.00 $ 24.66 $ 24.32 1.4% $ 27.48 $ 27.07 $ 26.67 $ 26.29 $ 25.91 $ 25.54 $ 25.18 $ 24.83 $ 24.49 1.5% $ 27.71 $ 27.29 $ 26.89 $ 26.49 $ 26.11 $ 25.73 $ 25.36 $ 25.01 $ 24.66 1.6% $ 27.94 $ 27.52 $ 27.10 $ 26.70 $ 26.31 $ 25.93 $ 25.55 $ 25.19 $ 24.84 1.7% $ 28.18 $ 27.75 $ 27.33 $ 26.92 $ 26.52 $ 26.13 $ 25.75 $ 25.38 $ 25.02 1.8% $ 28.43 $ 27.99 $ 27.56 $ 27.14 $ 26.73 $ 26.33 $ 25.95 $ 25.57 $ 25.21 1.9% $ 28.69 $ 28.23 $ 27.79 $ 27.37 $ 26.95 $ 26.55 $ 26.15 $ 25.77 $ 25.40 2.0% $ 28.95 $ 28.49 $ 28.04 $ 27.60 $ 27.18 $ 26.77 $ 26.36 $ 25.97 $ 25.60 2.1% $ 29.22 $ 28.75 $ 28.29 $ 27.84 $ 27.41 $ 26.99 $ 26.58 $ 26.18 $ 25.80 2.2% $ 29.50 $ 29.02 $ 28.55 $ 28.09 $ 27.65 $ 27.22 $ 26.80 $ 26.40 $ 26.00 2.3% $ 29.79 $ 29.29 $ 28.81 $ 28.35 $ 27.90 $ 27.46 $ 27.03 $ 26.62 $ 26.22
Financial Analysis: DCF NRG Analyst: Xingning Xu Terminal Discount Rate = 9.1% Date: 4/7/2013 Terminal FCF Growth = 1.7% Year 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E Revenue 8,422 10,497 11,612 12,541 13,294 14,091 14,655 15,095 15,397 15,704 15,971 % Grow th 24.6% 10.0% 8.0% 6.0% 6.0% 4.0% 3.0% 2.0% 2.0% 1.7% Operating Income 350 862 1,048 1,254 1,462 1,550 1,612 1,660 1,694 1,727 1,757 Operating Margin 4.2% 8.2% 9.0% 10.0% 11.0% 11.0% 11.0% 11.0% 11.0% 11.0% 11.0% Interest and Other (98) (430) (476) (564) (598) (634) (659) (679) (693) (707) (719) Interest % of Sales -1.2% -4.1% -4.1% -4.5% -4.5% -4.5% -4.5% -4.5% -4.5% -4.5% -4.5% Taxes (327) (302) 114 276 346 366 381 392 400 408 415 Tax Rate -129.8% -70.0% 20.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% Net Income 550 724 448 414 518 550 572 589 600 612 623 % Grow th 31.7% -38.1% -7.7% 25.3% 6.0% 4.0% 3.0% 2.0% 2.0% 1.7% Add Depreciation/Amort 1,137 1,575 1,742 1,756 1,861 1,973 1,905 1,811 1,694 1,649 1,597 % of Sales 13.5% 15.0% 15.0% 14.0% 14.0% 14.0% 13.0% 12.0% 11.0% 10.5% 10.0% Plus/(minus) Changes WC (96) (22) 22 (201) (160) (169) (117) (91) (62) (63) (54) % of Sales -1.1% -0.2% 0.2% -1.6% -1.2% -1.2% -0.8% -0.6% -0.4% -0.4% -0.3% Subtract Cap Ex 3,396 2,624 2,322 1,630 1,595 1,691 1,759 1,736 1,694 1,649 1,597 Capex % of sales 40.3% 25.0% 20.0% 13.0% 12.0% 12.0% 12.0% 11.5% 11.0% 10.5% 10.0% Free Cash Flow (740) 137 142 373 577 611 588 580 567 578 593 % Grow th -118.5% 3.8% 162.0% 54.8% 6.0% -3.9% -1.2% -2.4% 2.0% 2.6% NPV of Cash Flows 2,793 45.0% NPV of terminal value 3,412 55.0% Terminal Value 8,152 Projected Equity Value 6,205 100.0% Free Cash Flow Yield 2.31% Free Cash Yield 7.28% Current P/E 10.8 8.2 13.2 Terminal P/E 13.1 Projected P/E 11.3 8.6 13.8 Current EV/EBITDA 13.3 8.1 7.1 Terminal EV/EBITDA 6.5 Projected EV/EBITDA 13.4 8.2 7.2 Shares Outstanding 234 Current Price $ 25.35 Implied equity value/share $ 26.52 Upside/(Downside) to DCF 4.6% Debt 15,880 Cash 2,087 Cash/share 8.92 Total Assets 35,128 Debt/Assets 45.2% Working Capital % of Growth 20%
Financial Analysis: Multiple Relative to Industry Slightly expensive on Average Relative to Industry High Low Median Current 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 S&P 500 High Low Median Current 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 Low Median Current Target Multiple Target Estmimates per Share Target Price P/Forward E 953.70 7.20 18.90 668.00 19.00 $ 3.64 $ 69.16 P/S 2.10 0.40 1.00 0.90 0.95 $ 42.16 $ 40.05 P/B 2.50 0.50 1.00 0.70 0.70 $ 28.51 $ 19.96 P/EBITDA 12.74 0.56 3.63 5.00 3.70 $ 10.37 $ 38.36 P/CF 17.80 3.20 6.90 7.30 7.30 $ 1.32 $ 9.61 Average Target: $ 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 Current Price: $47.36 Beta 0.09 Target Price: $50.00 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
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 39,000- mile network
Key Statistics MARKET DATA * As of Market Cap (B) Apr. 8th, 2013 $23.91 Price/Book (mrq) 1.55 52-Week High $49.24 52-Week Low $36.97 YTD 32.27% 3-Mo. Avg. Daily Volume 2670650 Beta 0.34 Dividend & Yield 1.88 (3.90%) Current Price: $49.23 Target Price: $49.50 (+0.55%) 1 Year Price History for AEP Enterprise Value (B) 42.58 P/E 19.24% ROA 3.51% EPS 2.6 ROA 3.51% D/E (ttm): 126.19
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 REVENUE SIM Analyst Consensus SIM Analyst Consensus 2013E $3.16 $3.13 $15.9B $15.6B 2014E $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 = 9.0% Date: 2013-4-8 Terminal FCF Growth = 2.1% Year 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E Revenue 14,945 15,919 16,870 17,646 18,441 19,123 19,697 20,228 20,734 21,211 21,665 % Growth 6.5% 6.0% 4.6% 4.5% 3.7% 3.0% 2.7% 2.5% 2.3% 2.1% Operating Income 2,656 3,041 3,239 3,388 3,539 3,667 3,774 3,880 3,977 4,067 4,149 Operating Margin 17.8% 19.1% 19.2% 19.2% 19.2% 19.2% 19.2% 19.2% 19.2% 19.2% 19.2% Interest(net) and Others expense (834) (740) (811) (821) (867) (899) (926) (951) (975) (997) (1,018) % of Sales -5.6% -4.7% -4.8% -4.7% -4.7% -4.7% -4.7% -4.7% -4.7% -4.7% -4.7% Taxes 604 794 838 886 922 955 983 1,011 1,036 1,059 1,080 Tax Rate 34.5% 34.5% 34.5% 34.5% 34.5% 34.5% 34.5% 34.5% 34.5% 34.5% 34.5% Equity Earnings of Unconsolidated Subsidiaries Earnings 44 46 48 50 51 54 56 58 60 63 65 % Growth 4.1% 3.9% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% Net Income 1,262 1,553 1,638 1,731 1,802 1,867 1,921 1,976 2,027 2,074 2,116 % Growth 23.0% 5.5% 5.7% 4.1% 3.6% 2.9% 2.9% 2.5% 2.3% 2.0% Add Depreciation/Amort 1,782 1,878 1,991 2,077 2,176 2,256 2,324 2,387 2,447 2,503 2,556 % of Sales 11.9% 11.8% 11.8% 11.8% 11.8% 11.8% 11.8% 11.8% 11.8% 11.8% 11.8% Plus/(minus) Changes WC 191-206 -198-162 -166-142 -118-109 -104-98 -93 % of Sales 1.3% -1.3% -1.2% -0.9% -0.9% -0.7% -0.6% -0.5% -0.5% -0.5% -0.4% Subtract Cap Ex 1,673 1,783 1,889 1,976 2,065 2,142 2,206 2,266 2,322 2,376 2,426 Capex % of sales 11.2% 11.2% 11.2% 11.2% 11.2% 11.2% 11.2% 11.2% 11.2% 11.2% 11.2% Free Cash Flow 722 920 1,143 1,691 1,765 1,849 1,921 1,984 2,040 2,093 2,140 % Growth 27.4% 24.2% 47.9% 4.4% 4.7% 3.9% 3.3% 2.8% 2.6% 2.2% NPV of Cash Flows 10,687 44% NPV of terminal value 13,460 56% Terminal Value 31,865 Projected Equity Value 24,147 100% Free Cash Flow Yield 3.04% Free Cash Yield 6.72% Current P/E 18.8 15.3 14.5 Terminal P/E 15.1 Projected P/E 19.1 15.6 14.7 Current EV/EBITDA 9.3 8.4 7.9 Terminal EV/EBITDA 7.4 Projected EV/EBITDA 9.4 8.5 8.0 Shares Outstanding 482 Current Price $ 49.23 Implied equity value/share $ 50.05 Upside/(Downside) to DCF 1.7%
Financial Analysis: DCF Current Price: $49.23 Target Price through DCF: $50.0 (+1.7%) Price Range: $43.0-$75.0 Terminal FCF Growth Terminal Discount Rate $ 50.05 7.5% 8.0% 9.0% 9.0% 9.5% 1.1% 58.12676 53.58882 46.2618 46.2618 43.2632 1.6% 61.23078 56.13191 48.0271 48.0271 44.7546 2.1% 64.91391 59.10897 50.0497 50.0497 46.4487 2.6% 69.35489 62.64145 52.3904 52.3904 48.3897 3.1% 74.81445 66.90078 55.1305 55.1305 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 Apr. 15th, 2013 Market Cap (B) $1.73 Price/Book (mrq) 2.49 52-Week High $58.43 52-Week Low $45.81 YTD 14.93% Avg Volume (3m) 106160 Beta 0.59 Dividend & Yield 1.77 (3.00%) Current Price: $58.48 Target Price: $69.0 (+18%) Enterprise Value (B) 2.83 ROE 13.64% EPS 2.97 P/E 19.59 ROA 2.82% D/E (ttm): 135.89 Shares Outstanding (M) 31.4
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 *Your Target E, S, B, etc/share Your Target Price (F x G) A. B. C. D. E. F. G. H. P/Forward E 21.0 13.0 17.2 19.2 18.4 3.60 64.08 P/S 2.6 0.7 1.1 2.6 1.6 42.5 68.00 P/B 2.9 1.6 2.2 2.6 2.3 32.4 74.52 P/EBITDA 10.54 3.98 6.34 10.13 6.7 8.72 58.42 P/CF 19.2 7.0 11.2 19.2 13.5 5.61 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 Recommendation Current Allocation Target Allocation Current Price Target Price Upside/(Do wnside) NRG HOLD 2.03% 2.03% $ 25.80 $ 28.30 9.69% SO SELL 1.35% 0.00% $ 47.36 $ 50.00 5.57% AEP HOLD 0.00% 0.00% $ 49.23 $ 49.50 0.55% SJI BUY 0.00% 1.35% $ 57.43 $ 69.00 20.15% Actions: SO:Sell 135 bps SJI: Buy 135 bps Q & A