Overview of Utilities Stock Presentation in the Energy Sector
The presentation of the Utilities Stock by Samuel Conkright and Likun Fan provides insights into the energy sector, focusing on companies like Calpine Corp and Nextera Energy Inc. It covers economic factors, market data, recent news, and business analysis related to the utilities industry. Recommendations for target prices, current prices, and growth drivers are discussed, offering a comprehensive overview for investors.
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UTILITIES STOCK PRESENTATION By Samuel Conkright & Likun Fan
Overview Utility Sector Size = $1.15 Trillion SIM Utility Sector Weight = 2.24% Currently Underweight = 1.02% Calpine SIM Weight = 0.73% NextEra SIM Weight = 1.51%
SIM Utilities Recommendation Target Price Company Ticker Unit Cost Current Price Calpine Corp CPN $14.00 $10.62 $13.70 HOLD/BUY Nextera Energy Inc NEE $118.64 $129.43 $130.93 HOLD
Economic Factors GDP Interest Rate Source: Federal Reserve Bank of St. Louis Source: Federal Reserve Bank of Atlanta
Calpine Corp. Market Data: Current Price: $10.62 Target Price: $13.70 Market Capitalization: $4.172B Shares Outstanding: 359.05M 52 Week Range: $10.39 $16.07 YTD Change: -7.09% Beta: 1.22 P/E (ttm): 13.4 EPS (ttm): $.26 Average Volume (3 month): 4.66M Target Return: 29% Calpine is the largest generator of electricity from natural gas and geothermal resources in the United States with robust commercial, industrial, and residential retail operations in key markets. Based in Houston, TX, Calpine accounts for 80 power plants in operation, representing approximately 26,000 megawatts of generation capacity. Through their wholesale and retail business lines, they serve over 25 states, Canada, and Mexico. Calpine Corp. was founded in 1984, and currently represents a Fortune 500 company traded under CPN on the New York Stock Exchange.
Calpine Recent News December 1, 2016: Calpine closed on the acquisition of Noble Americas Energy Solutions, the nation s largest energy independent power supplier to commercial and industrial retail customers. February 23, 2017: Huge winter storms out West have produced significant snowpack across the coast and have increased lake levels, creating a huge opportunity for hydropower generation. This in turn decreases the need for independent power producers, such as Calpine, as utility firms don t need to supplement their power supply with increased hydropower generation. February 10, 2017: Calpine CEO Thad Hill reported of an extensive debt reduction plan in his 4Q earnings call and report. Their plan calls for $2.7 billion of committed or planned debt paydown by 2019, reducing leverage on adjusted EBITDA by 1.5x from current levels.
Business Analysis Growth Drivers: Acquisitions to Expand Retail Market Fleet Equipped to Handle Environmental Regulations Shifting Market Towards Renewable Energy Competition for PPA s
Calpine Key Risks Natural Gas Price Fluctuations Heavy Dependence on Other Utilities Regulations Catastrophe Risk Interest Rate Hikes
Financial Analysis Revenue Last Reported Year 1YR Forward Estimate 2YR Forward Estimate 3YR Forward Estimate Revenue $6.716B $5.720B $5.800B $5.470B % Growth from prior year 3.77% -14.83% 1.39% -5.69% Earnings Last Reported Year 1YR Forward Estimate 2Yr Forward Estimate 3YR Forward Estimate EPS .26 .44 .69 .79 Analyst Estimates .3 .45 .75 .81
ROE Analysis 2012 2013 2014 2015 2016 Calpine 4.8 .37 27.45 7.25 2.89 Dynergy X -15.11 -11.47 1.09 -60.63 NRG 3.32 -4.08 .81 -103.48 -29.79 AES -17.35 2.56 17.88 8.25 -38.03
Other Ratios ROA 2012 2013 2014 2015 2016 Calpine 1.17 .08 5.42 1.27 .48 Dynergy X -7.25 -3.30 .44 -10.12 NRG .95 -1.12 .36 -17.40 -2.45 AES -2.09 .28 1.94 .81 -3.10 Operating Margin 2012 2013 2014 2015 2016 Calpine 18.29 13.87 24.77 13.21 12.49 Dynergy -7.66 -21.69 -.76 1.65 -14.82 NRG 4.16 3.04 8.01 -27.53 4.27 AES 19.28 19.05 16.92 17.84 16.48
Valuation Analysis Ticker P/E P/S P/B P/CF EV/EBITDA Average 13.21 .44 1.51 4.58 10.17 Calpine 13.4 .81 1.32 6.07 10.17 Dynergy Inc 13.01 .43 .59 17.82 13.91 NRG Energy 20.42 .26 1.69 2.96 ------- AES Corp 8.70 .44 2.59 3.08 7.60
CPN Recommendation HOLD/BUY Increasing Natural Gas Prices Dependence on Competitors Increasing Alternative Energy Options Expanding Retail Platform Move Towards Renewable Energy w/ Increasing Regulations Sector Outperforms in Downturn Modern, Efficient Power Plant Fleet
Stock Data Price Price objective Date established 52-Week range Market capitalization Shares outstanding Dividend & yield Daily Avg. Volume PE ratio 129.43 USD 130.93 USD 10-Apr-17 110.49-133.28 USD 60.59B USD 465.8M 3.93 USD 1.81M 20.87 Source: Fortune Magazine
Business analysis Overview Regulated electric utility market: Florida Power & Light (FPL) 67% revenue Deregulated electric utility market: NextEra Energy Resources (NEER) 30% revenue Industry leader in renewable energy: 12/31/2016 45,900 MW generating capacity, 16% and 11% are from wind and solar production capacity Source: NEE 2016 Annual Report Source: NEE 2016 Annual Report
Business analysis Post-election stock performance Source: Bloomberg
Business analysis Key drivers Low energy prices Investments in natural gas infrastructure U.S. Natural Gas Price Forecasts (price per MMBtu) Organizations U.S. Energy Information 2017 2018 2019 $3.55 $3.73 - World Bank $3.00 $3.50 - IMF $3.00 $3.10 $3.30 Source: Market Realist Website Source: Bloomberg
Business analysis Key drivers Current administration s support of renewable energy policy incentives PTC: based on electricity generated in first 10 years of commercial operation ITC: portion of cost of facilities that are eligible for PTC Source: NEE 2016 Annual Report Renewable Energy PTC and ITC Phase-out Schedule Tax savings type 2015 2016 2017 2018 2019 2020 2021 2022 PTC 100% 100% 80% 60% 40% - - - Wind ITC 30% 30% 24% 18% 12% - - - Solar ITC 30% 30% 30% 30% 30% 26% 22% 10% Source: NEE 2016 Annual Report
Business analysis Key drivers Lower cost for wind facility installation Source: American Wind Energy Association Website
Business analysis Diversity in energy sources, business models, and strategies Regulated and deregulated Negotiation power; special programs Source: NEE 2016 Annual Report Source: NEE 2016 Annual Report
Business analysis Downsides and risks Acquisition of Oncor Growing competition from roof- top solar panel High valuation, sector PE around 18 NEE and Peers PE Ratio (TTM) NEE Entergy Corp (ETR) Exelon Corp (EXC) Public Service Enterprise (PEG) First Energy Corp (FE) Median 20.87 10.72 13.38 14.76 12.05 13.38 Source: Consumer Reports Website Source: Bloomberg
Financial analysis Revenue and earnings projection INCOME STATEMENT 2012A 2013A 2014A 2015A 2016A 2017E 2018E 2019E OPERATING REVENUES % growth rate Consensus Revenue Unadjusted earnings per share (assuming dilution) $ 14,256 $ 15,136 6.2% $ 17,021 12.5% $ 17,486 2.7% $ 16,155 -7.6% $ 17,771 10.0% 17,988 $ 18,837 6.0% 18,875 $ 19,779 5.0% 19,626 $ 4.56 $ 4.47 $ 5.60 $ 6.06 $ 6.25 $ $ 6.54 6.60 $ $ 7.02 7.09 $ $ 7.13 7.51 Consensus EPS Source: Bloomberg and Analyst estimates
Financial analysis Peer analysis 2014 NEE and Peer Key Ratios Market Cap (Billion USD) 60.60 13.66 33.15 22.61 14.02 22.61 Operating Margin 25.03% -98.13% 9.07% -8.37% -264.41% -8.37% NEE and Peers Debt/Equity Dividend Yield ROE PE Ratio (TTM) NEE Entergy Corp (ETR) Exelon Corp (EXC) Public Service Enterprise (PEG) First Energy Corp (FE) Median 121.75% 184.36% 130.06% 89.74% 361.35% 130.06% 2.69% 4.51% 3.54% 3.67% 4.56% 3.67% 12.34% -6.73% 4.37% 6.77% -66.20% 4.37% 20.87 10.72 13.38 14.76 12.05 13.38 Source: Bloomberg
Valuation DCF Valuation 2017 19.8 20.0 2018 18.5 18.7 2019 18.2 18.4 Current P/E Projected P/E Shares outstanding (assuming dilution) 466 Current price Implied equity value/share Upside/(Downside) to DCF $ $ 129.43 130.93 1.16% Source: Analyst estimates Sensitivity Analysis Sensitivity Analysis Discount Rate $ 130.93 3.0% 3.1% 3.2% 3.3% 3.4% 3.5% 3.6% 3.7% 3.8% 3.9% 4.0% 7.6% 133.31 $ 135.38 137.55 139.82 142.19 144.68 147.30 150.05 152.95 156.00 159.23 $ 7.8% 127.28 $ 129.15 131.10 133.13 135.26 137.49 139.82 142.27 144.84 147.54 150.38 $ 8.0% 121.74 $ 123.43 125.19 127.02 128.93 130.93 133.02 135.21 137.50 139.90 142.42 $ 8.2% 116.62 $ 118.16 119.75 121.41 123.13 124.93 126.81 128.77 130.82 132.97 135.22 $ 8.4% 111.89 $ 113.28 114.73 116.23 117.79 119.42 121.12 122.88 124.73 126.65 128.66 $ 8.6% 107.49 $ 108.76 110.08 111.45 112.87 114.34 115.88 117.47 119.14 120.87 122.68 $ 8.8% 103.40 $ 104.56 105.76 107.01 108.30 109.65 111.04 112.49 113.99 115.56 117.20 $ 9.0% $ $ 99.58 100.64 101.74 102.88 104.07 105.29 106.56 107.88 109.25 110.67 112.15 Terminal Growth Rate Source: Analyst estimates
Valuation NEE, Utilities sector, and S&P500 5 year historical valuation ratios PE ratio Red: NEE, Yellow: Utilities sector (S5UTIL), White: S&P 500 (SPX), Light blue: NEE/S5UTIL, Dark blue: NEE/SPX Relative PE Ratio NEE/S5UTIL NEE/SPX High 1.19 1.16 Low 1.02 0.93 Median 1.13 1.05 Current 1.14 0.96 PE Ratio NEE S5UTIL SPX High 22.06 19.12 21.75 Low 15.49 14.09 14.06 Median 18.50 16.13 17.64 Current 20.87 18.20 21.74
Valuation NEE, Utilities sector, and S&P500 5 year historical valuation ratios PB ratio Red: NEE, Yellow: Utilities sector (S5UTIL), White: S&P 500 (SPX), Light blue: NEE/S5UTIL, Dark blue: NEE/SPX Relative PB Ratio NEE/S5UTIL NEE/SPX High 1.45 0.94 Low 1.22 0.74 Median 1.28 0.84 Current 1.25 0.80 PB Ratio NEE S5UTIL SPX High 2.60 2.03 3.10 Low 1.83 1.27 2.08 Median 2.18 1.65 2.67 Current 2.49 1.99 3.09
Valuation NEE, Utilities sector, and S&P500 5 year historical valuation ratios PS ratio Red: NEE, Yellow: Utilities sector (S5UTIL), White: S&P 500 (SPX), Light blue: NEE/S5UTIL, Dark blue: NEE/SPX Relative PS Ratio NEE/S5UTIL NEE/SPX High 1.81 1.90 Low 1.36 1.32 Median 1.60 1.51 Current 1.81 1.79 PS Ratio NEE S5UTIL SPX High 3.71 2.14 2.08 Low 1.87 1.32 1.31 Median 2.61 1.61 1.74 Current 3.71 2.05 2.07
Valuation NEE, Utilities sector, and S&P500 5 year historical valuation ratios P/EBITDA ratio Red: NEE, Yellow: Utilities sector (S5UTIL), White: S&P 500 (SPX), Light blue: NEE/S5UTIL, Dark blue: NEE/SPX Relative P/EBITDA Ratio NEE/S5UTIL NEE/SPX High 1.32 0.82 Low 1.00 0.52 Median 1.10 0.69 Current 1.06 0.67 P/EBITDA Ratio NEE S5UTIL SPX High 7.51 7.08 11.29 Low 5.15 4.60 7.19 Median 6.42 5.31 9.75 Current 7.51 7.08 11.25
NEE Recommendation HOLD Interest rate hike Close to historical high valuation (High valuation for the market) Value and growth Contracted revenues and costs Lower renewable energy cost Unchanged government subsidies Potential tax cut
Conclusion Potential companies to buy PE Ratio Entergy Corp (ETR) AES Corp (AES) NRG Energy Inc (NER) PPL Corp (PPL) Just Energy Group (JE) S5UTIL High 14.00 34.61 127.33 18.02 524.30 19.12 Low 9.19 8.37 2.76 9.29 9.46 14.09 Median 11.64 11.14 17.94 14.13 23.15 16.13 Current 10.74 10.56 17.78 15.20 10.83 18.20 Relative PE Ratio to Sector Entergy Corp (ETR) AES Corp (AES) NRG Energy Inc (NER) PPL Corp (PPL) Just Energy Group (JE) High 0.89 2.28 8.40 0.98 19.58 Low 0.53 0.52 0.16 0.61 0.36 Median 0.72 0.66 1.10 0.83 0.92 Current 0.59 0.58 0.99 0.83 0.46 Dividend Yield (4/10 close price) 4.51% 5.02% 1.28% 4.08% 5.59% 4.51% Operating Margin (latest filing) -98.13% 17.01% -31.24% 38.97% 5.57% 5.57% Potential companies to buy Market Cap (Billion USD) Debt/Equity (latest filing) ROE (latest filing) PE Ratio (4/10 close price) Entergy Corp (ETR) AES Corp (AES) NRG Energy Inc (NER) PPL Corp (PPL) Just Energy Group (JE) Median 13.69 7.38 5.85 25.41 0.92 7.38 184.36% 315.69% 428.01% 194.45% NA 255.07% -6.73% -38.03% -29.79% 19.15% NA -18.26% 10.72 10.48 18.00 15.19 10.92 10.92 Source: Bloomberg
Conclusion Currently Underweight = 1.02% Calpine SIM Weight = 0.73% Calpine target price = $13.70 NextEra SIM Weight = 1.51% NextEra target price = $130.93 BUY: Calpine 27bps
Appendix NextEra DCF Model Terminal Discount Rate 8.0% Terminal Growth Rate 3.5% Year 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E Revenue $ 17,771 $ 18,837 $ 19,779 $ 20,767 $ 21,806 $ 22,678 $ 23,585 $ 24,529 $ 25,510 $ 26,530 $ 27,459 % Growth 6.0% 5.0% 5.0% 5.0% 4.0% 4.0% 4.0% 4.0% 4.0% 3.5% Operating Income 4,943 5,334 5,502 5,777 6,066 6,309 6,561 6,823 7,096 7,380 7,638 Operating Margin 27.8% 28.3% 27.8% 27.8% 27.8% 27.8% 27.8% 27.8% 27.8% 27.8% 27.8% Interest (889) (980) (1,088) (1,142) (1,090) (1,134) (1,179) (1,226) (1,275) (1,327) (1,373) % of Revenue -5.0% -5.2% -5.5% -5.5% -5.0% -5.0% -5.0% -5.0% -5.0% -5.0% -5.0% Other Income (Deduction) 333 353 371 395 414 431 448 466 485 504 522 % of Revenue 1.9% 1.9% 1.9% 1.9% 1.9% 1.9% 1.9% 1.9% 1.9% 1.9% 1.9% Taxes 1,341 1,439 1,462 1,539 1,649 1,715 1,784 1,855 1,929 2,007 2,077 Tax Rate 30.6% 30.6% 30.6% 30.6% 30.6% 30.6% 30.6% 30.6% 30.6% 30.6% 30.6% Net Income 3,047 3,269 3,323 3,490 3,741 3,890 4,046 4,208 4,376 4,551 4,710 % Growth 7.3% 1.6% 5.1% 7.2% 4.0% 4.0% 4.0% 4.0% 4.0% 3.5% Add Depreciation 3,110 3,485 3,758 5,192 5,451 5,443 5,189 4,906 4,592 4,775 4,119 % of Revenue Less Changes in NWC 17.5% (167) 18.5% 572 19.0% 430 25.0% 415 25.0% 436 24.0% 454 22.0% 472 20.0% 491 18.0% 510 18.0% 531 15.0% 549 % of Revenue Less CAPEX -0.9% 6,753 3.0% 6,216 2.2% 5,934 2.0% 4,153 2.0% 3,925 2.0% 4,082 2.0% 4,245 2.0% 4,415 2.0% 4,592 2.0% 4,775 2.0% 4,119 % of Revenue 38.0% 33.0% 30.0% 20.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 15.0% Free Cash Flow to Equity $ (429) $ (34) $ 717 $ 4,113 $ 4,831 $ 4,797 $ 4,518 $ 4,208 $ 3,866 $ 4,020 $ 4,161 Terminal Value Total FCF Equity value from terminal value Equity value from cash flows $ 92,469 96,489 $ $ $ (429) 42,831 18,183 $ (34) $ 717 $ 4,113 $ 4,831 $ 4,797 $ 4,518 $ 4,208 $ 3,866 Total Equity Value $ 61,014 2017 19.8 20.0 2018 18.5 18.7 2019 18.2 18.4 Current P/E Projected P/E Shares outstanding (assuming dilution) 466 Current price Implied equity value/share Upside/(Downside) to DCF $ $ 129.43 130.93 1.16%
