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Utilities Stock Presentation
By Samuel Conkright & Likun Fan
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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%
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SIM Utilities Company Ticker Unit Cost Current Price Calpine Corp CPN
Target Price Recommendation Calpine Corp CPN $14.00 $10.62 $13.70 HOLD/BUY Nextera Energy Inc NEE $118.64 $129.43 $130.93 HOLD
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Economic Factors GDP Interest Rate
Source: Federal Reserve Bank of St. Louis Source: Federal Reserve Bank of Atlanta
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Source: California Energy Commission
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Calpine Corp. Market Data: Current Price: $10.62 Target Price: $13.70 Market Capitalization: $4.172B Shares Outstanding: M 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.
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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.
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Business Analysis Growth Drivers: Acquisitions to Expand Retail Market
Fleet Equipped to Handle Environmental Regulations Shifting Market Towards Renewable Energy Competition for PPA’s
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Calpine Key Risks Natural Gas Price Fluctuations
Heavy Dependence on Other Utilities Regulations Catastrophe Risk Interest Rate Hikes
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Financial Analysis Revenue Last Reported Year 1YR Forward Estimate
$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
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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 -29.79 AES -17.35 2.56 17.88 8.25 -38.03
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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
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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 Dynergy Inc 13.01 .43 .59 17.82 13.91 NRG Energy 20.42 .26 1.69 2.96 AES Corp 8.70 2.59 3.08 7.60
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Sensitivity Analysis
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CPN Final Price
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CPN Recommendation HOLD/BUY Expanding Retail Platform
Move Towards Renewable Energy w/ Increasing Regulations Sector Outperforms in Downturn Modern, Efficient Power Plant Fleet Increasing Natural Gas Prices Dependence on Competitors Increasing Alternative Energy Options
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Source: Fortune Magazine
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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/ ,900 MW generating capacity, 16% and 11% are from wind and solar production capacity Source: NEE 2016 Annual Report Source: NEE 2016 Annual Report
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Business analysis Post-election stock performance Source: Bloomberg
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Business analysis Key drivers Low energy prices
Investments in natural gas infrastructure Source: Market Realist Website Source: Bloomberg
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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 Source: NEE 2016 Annual Report
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Business analysis Key drivers
Lower cost for wind facility installation Source: American Wind Energy Association Website
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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
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Business analysis Downsides and risks Acquisition of Oncor
Growing competition from roof-top solar panel High valuation, sector PE around 18 Source: Consumer Reports Website Source: Bloomberg
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Financial analysis Revenue and earnings projection
Source: Bloomberg and Analyst estimates
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Financial analysis Peer analysis Source: Bloomberg
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Valuation DCF Valuation Sensitivity Analysis Source: Analyst estimates
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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
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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
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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
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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
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NEE Recommendation HOLD Interest rate hike
Value and growth Contracted revenues and costs Lower renewable energy cost Unchanged government subsidies Potential tax cut Interest rate hike Close to historical high valuation (High valuation for the market)
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Conclusion Potential companies to buy Source: Bloomberg
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Conclusion Currently Underweight = 1.02% Calpine SIM Weight = 0.73% Calpine target price = $13.70 NextEra SIM Weight = 1.51% NextEra target price = $ BUY: Calpine 27bps
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Appendix Calpine DCF Model
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Appendix NextEra DCF Model
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