Download Jared Myers &Wenhao Zhou

Jared Myers &Wenhao Zhou
Fall Quarter 2011
November 29, 2011
Agenda

Recap

Xcel Energy (XEL)



Business Analysis

Financial Analysis

Valuation
Public Service Enterprise Group (PEG)

Business Analysis

Financial Analysis

Valuation
PPL Corporation

Business Analysis

Financial Analysis

Valuation

Recommendation

Appendix

Questions - Comments
Sector Recap
Description
Market Cap (B)
Utilities Sector
P/E
ROE
%
17380.6 15.55 9.74
9050.7
5378.8
1630.9
1276.9
43.3

Diversified Utilities
Electric Utilities
Gas Utilities
Water Utilities
Foreign Utilities
Market Cap: 17.3 Trillion
13.9 11.1
15.6 7.1
22 11.7
18.9 8.2
11.4 24.4

Market Cap as % of S&P500:
3.7% or 419.95 B

Currently 114 bps underweight
Dividend
Yield %
4.05
P/B
YTD Total
Return QTD Total Return
1.88
11.24
2.84
4.2
1.8
3.8 1.35
4.77 2.98
3.09 1.99
4.52 38.28
8.21
13.94
10.85
9.01
11.73
7.68
15.39
8.17
5.59
9.3
Sector Recap
Sector Performance
Performance Data (%)
(as of 1-Nov-2011)
Total Return
Name
YTD
S&P 500
Sector
Cyclical
— Basic Materials
— Consumer Cyclical
— Financial Services
— Real Estate
Defensive
— Consumer Defensive
— Healthcare
— Utilities
Sensitive
— Communication Services
— Energy
— Industrials
— Technology



1-Week
4-Week
13-Week
1-Year
3-Year
5-Year
-1.53
-0.87
7.83
-4.8
4.97
10.36
-0.18
-9.53
-13.14
1.82
-18.81
2.85
6.78
6.41
5.61
11.24
-1.11
-3.88
1.48
-5.48
0.01
-0.83
1.06
-1.31
-1.36
0.86
-0.55
-1.08
-0.06
-0.45
-0.92
-2.97
-0.85
-0.6
-0.86
10.16
16.34
10.43
8.44
9.53
3.14
2.87
3.9
1.75
10.11
2.32
14.41
10.81
9.13
-9.05
-14.57
-3.77
-12.47
-6.03
-0.55
-0.33
-1.87
2.84
-5.6
-8.95
-11.02
-5.92
-2.13
-1.17
-1.4
9.89
-9.73
5.15
9.2
10.23
8.14
12.98
6.58
1.31
17.5
2.53
4.49
6.56
13.75
23.08
-4.19
14.51
8.41
11.29
9.92
10.52
12.63
18.84
15.87
11.23
18.45
-8.34
2.96
2.38
-15.23
-2.78
1.98
6.32
2.47
3
2.22
0.96
7.8
0.66
5.1
Utilities: Up 2.84% QTD and 11.24% YTD
S&P 500: Down -4.8% QTD and -1.53% YTD
Highest of any Sector YTD and QTD
Previous Recommendation
Increase SIM investment in Utilities by 150bps to bring portfolio weight to
4.07%
Reasoning:

Defensive stocks with recent positive return history and positive forecast

Economic Growth


slight but positive manufacturing growth in 2012
# of Households & discretionary income

slight but positive in 2012 (biggest threat)
Recommendation:

Invest 150bps in PPL Corporation and 100bps in Xcel Energy

Sell 100 bps of Public Service Enterprise Group (PEG)
Sector Recap
Largest Utilities Companies in the S&P 500
Company
Industry
Southern Company (SO)
Exelon Corporation (EXC)
Dominion Resources, Inc. (D)
Duke Energy Corporation (DUK)
NextEra Energy, Inc. (NEE)
FirstEnergy Corp. (FE)
American Electric Power Co., I (AEP)
**PPL Corporation
PG & E Corp. (PCG)
Public Service Enterprise Grou (PEG)
Xcel Energy Inc. (XEL)
Electric Utilities
Diversified Utilities
Electric Utilities
Electric Utilities
Electric Utilities
Electric Utilities
Electric Utilities
Diversified Utilities
Diversified Utilities
Diversified Utilities
Electric Utilities

Market
Cap (B)
P/E
36.6B
28.9B
28.7B
26.9B
23.4B
18.8B
18.7B
16.8B
16.7B
16.5B
12.2B
Dividend
LT
Net Profit
ROE % Yield % Debt/Equity P/B Margin % (mrq)
17.42 NA
12.01 17.05
17.4 14.38
13.13
9.31
12.58 12.88
25.79
5.25
12.95 10.54
11.03 14.11
15.49
9.23
9.73 16.82
14.67
10.3
SIM owns only one stock :
Public Service Enterprise Group (PEG)

Talking today about PEG, Xcel Energy, and PPL Corporation
4.4
4.7
3.8
4.9
3.9
4.9
4.8
4.8
4.2
4.1
4
114.96
101.53
166.01
83.67
144.97
148.3
130.54
167.37
113.2
84.54
117.24
2.15
2.01
2.46
1.19
1.57
1.45
1.34
1.55
1.41
1.63
1.45
16.88
11.35
10.06
12.55
14.64
4.59
9.75
14.23
9.83
13.08
11.95
Xcel Energy Inc.
Xcel Energy
Business Analysis

Electricity and Natural Gas Utility Subsidiaries company

Operations in 8 Western and Midwestern States

Serve 3.4 M electricity customers and 1.9 M natural gas customers


Electricity Revenues of $8.5 B and Natural Gas of $1.8 B in 2010
Operating Revenues of $10.3 B and Net Income of $756 M in 2010

Xcel Energy is the #1 Wind energy provider in the United States and #7 in Solar
energy

Considered a ‘Pioneer’ in Smart Grid technology with their Smart Grid City
project in Boulder, Colorado
Xcel Energy
Supply Factors

Regulation and Infrastructure Investments

Discouragement of CO2 emissions & PUC’s $ increase

Increasing Costs of Electricity generation from Coal

Nuclear Energy expansion – poor public opinion

Decreasing Wind & Solar Costs w/storage capabilities
Demand Factors

Increased recovery of the Housing Sector

Consumer Demand & Discretionary Income

Increased consumer electricity usage

Technology

Sodium Sulfur Battery for Wind and Solar Energy Storage
External Factors

Weather Related Issues


Infrastructure damage , power outages, seasonal changes
Smart Grid City and Curtailment Cost issues
Xcel Energy
Xcel Energy Revenue Growth vs. Industry
Electric Power Transmission in the U.S.
Revenue Growth %
Year
2006
2007
2008
2009
2010
2011
Industry
Revenue $ Millions Growth %
324,401
3.70%
327,368
0.90%
339,866
3.80%
332,172
-2.30%
341,263
2.70%
342,923
0.50%
Xcel Energy
Revenue $ Millions Growth %
9,840,304
2.2%
10,034,170
2.0%
11,203,156
11.7%
9,644,303
-13.9%
10,310,947
6.9%
10,859,846
5.3%

Since 2006 revenue has grown by 1.6%
annually

Since 2006 revenue has grown by 2.4%
annually

Revenue expected to grow annually from
2011-2016 at 2.8% for the industry

Revenue expected to grow annually from
2011-2016 at 3.9% for Xcel Energy
Xcel Energy
Total Return (%)
Name
YTD
1-Week
4-Week
13-Week
1-Year
3-Year
5-Year
S&P 500
-1.53
-0.87
7.83
-4.8
4.97
10.36
-0.18
Utilities
11.24
-0.45
1.75
2.84
12.98
10.52
3
Xcel Energy
10.33
-0.32
2.11
5.95
10.84
17.41
6.34
Xcel Energy
Relative Valuation
Relative to
Industry
High
Low
Median
Current
P/Trailing E
P/Forward E
P/B
P/S
P/CF
1.9
1.2
1.7
11.2
1.1
0.55
0.49
0.5
0.7
0.3
1.0
1.0
0.9
0.9
0.9
1.1
0.99
0.9
0.9
1.1
Relative to S&P
500
High
Low
Median
Current
P/Trailing E
1.3
0.18
0.86
1.2
P/Forward E
1.2
0.20
0.93
1.2
P/B
0.8
0.2
0.5
0.8
P/S
1.0
0.1
0.6
1.0
P/CF
0.9
0.1
0.6
0.8

Xcel Energy
Absolute Valuation
Projected DCF Price: $28.87

9.5% Discount Rate and 3% Terminal Growth Rate
Absolute
Valuation
High
A.
P/Forward E
P/S
P/B
P/EBITDA
P/CF
B.
17.2
1.2
1.7
4.86
7.5

Low
C.
3.5
0.2
0.4
0.87
1.4
Median
D.
13.8
0.9
1.4
3.93
5.9
Current
#Your
Target
Multiple
E.
14.4
1.2
1.5
4.67
7.5
F.
14.2
1.1
1.5
4.55
7.2
*Your
Target
E, S, B,
etc/Shar
e
G.
1.74
22.32
18.02
5.56
3.85
Your
Target
Price
(F x G)
H.
24.70
24.55
27.03
25.30
27.27
Weighted Valuation : $27.79
(.65 * 28.87) + (.07 * 24.70) + (.07 * 24.55) + (.07 * 27.03) + (.07 * 25.30) + (.07 * 27.27)




Projected Upside: 11.4%
Dividend Yield: 4%
Market Cap: 12.2 B
Recommendation: Purchase 100bps of Xcel Energy
Public Service Enterprise Group Inc.
Public Service Enterprise Group
Business Analysis

Electricity and Natural Gas holding company (PSE&G), a merchant power
generation owner (PSEG Power) and an energy investment firm (Energy Holdings)

Operations primarily based in New Jersey, Pennsylvania, NY, and Connecticut


Serve 2.2 M electricity customers and 1.8 M natural gas customers

Operating Revenues of $11.7 B and Net Income of $1.5 B in 2010
Received the 2010 EEI Edison Award


The Edison Award honors “distinguished leadership, innovation and contribution to the
advancement of the electric industry for the benefit of all.”
Investing $277 M in Energy Efficiency Programs

Include Hospital Efficiency Programs, Direct Install for Municipal Government, and Direct Install for
Small Businesses in NJ
Public Service Enterprise Group
Supply Factors

Regulation, regulation of suppliers, and Infrastructure
Investments

Discouragement of CO2 emissions & PUC’s $ increase

Increasing Costs of Electricity generation from Coal

Nuclear Energy expansion – poor public opinion
Demand Factors

Increased recovery of the Housing Sector

Consumer Demand & Discretionary Income

Increased consumer electricity usage

Highly correlated with NJ economy
External Factors

Weather Related Issues

Infrastructure damage , power outages, seasonal changes
Public Service Enterprise Group
Public Service Enterprise Group
Relative Valuation
Relative to
Industry
High
Low
Median
Current
P/Trailing E
P/Forward E
P/B
P/S
P/CF
2.6
1.5
3.4
19.4
1.8
0.4
0.44
1.0
1.0
0.6
0.95
0.9
1.4
1.4
1.2
0.75
0.97
1.0
1.1
1.0
Relative to S&P
500
High
Low
Median
Current
P/Trailing E
1.4
0.43
0.73
0.86
P/Forward E
1.3
0.39
0.78
1.1
P/B
1.3
0.5
0.8
0.8
P/S
1.6
0.5
0.9
1.2
P/CF
1.3
0.4
0.8
0.8

Public Service Enterprise Group
Absolute Valuation
Projected DCF Price: $34.58

9.5% Discount Rate and 2.5% Terminal Growth Rate
Absolute
Valuation
High
A.
P/Forward E
P/S
P/B
P/EBITDA
P/CF
B.
19.0
2.0
3.6
8.42
13.6




Low
C.
6.8
0.6
1.4
2.51
4.6
Median
D.
11.5
1.3
2.1
4.37
7.1
Current
#Your
Target
Multiple
E.
13.8
1.4
1.7
4.06
6.7
F.
13.5
1.4
1.8
4.4
7.1
Weighted Valuation : $34.80 ( 0.65*34.58 + 0.35*35.20)
Projected Upside: 11.5%
Dividend Yield: 4.4%
Recommendation: Sell 100 bps
*Your
Target
E, S, B,
etc/Shar
e
G.
2.57
24.32
20.25
8.14
4.93
Average
Your
Target
Price
(F x G)
H.
34.70
34.05
36.45
35.82
35.00
35.20
Pennsylvania Power & Light Corporation
PPL Corporation
Business Analysis

Energy and Utility holding company operating in 4 segments; Kentucky Regulated,
International Regulated, Pennsylvania Regulated, and Supply

Operations primarily based NE and NW U.S. and the United Kingdom


Serve 5.3 M customers in the U.S. and 7.7 M in the UK

Operating Revenues of $8.5 B and Net Income of $1.04 B in 2010
PPL Project Earth – Employees donating time to tutor school children, clean up
creek beds and campaign for charities


Awarded 17 J.D. Power & Associates Awards for customer satisfaction – most among any utility co.
Clean Energy

Invested $1.5 B to install “scrubbers” to reduce sulfur dioxide at coal-fired
power plants

Increasing Hydroelectric dams; specifically in Holtwood, PA from 50 to 109
MW

Purchasing wind energy in Pennsylvania and WV creating 132 MW of
renewable energy
PPL Corporation
Supply Factors

Regulation and Infrastructure Investments

Discouragement of CO2 emissions & PUC’s $ increase

Increasing Costs of Electricity generation from Coal

Further Investments in Wind & Renewable Energies
Demand Factors

Increased recovery of the Housing Sector

Consumer Demand & Discretionary Income

Increased consumer electricity usage

Both the U.S. economy and the UK economy
External Factors

Weather Related Issues

Infrastructure damage , power outages, seasonal changes
PPL Corporation
PPL Corporation
Relative Valuation
Relative to
Industry
High
Low
Median
Current
P/Trailing E
P/Forward E
P/B
P/S
P/CF
1.5
1.5
1.6
1.7
1.8
0.68
0.63
1.0
0.9
0.8
1.1
0.97
1.3
1.2
1.5
0.79
0.88
1.0
1.2
0.9
Relative to S&P
500
High
Low
Median
Current
P/Trailing E
1.3
0.53
0.96
0.86
P/Forward E
1.7
0.49
1.0
1.0
P/B
1.5
0.6
1.0
0.8
P/S
2.6
0.9
1.4
1.5
P/CF
1.4
0.5
1.0
0.7

PPL Corporation
Absolute Valuation
Projected DCF Price: $35.44

9.5% Discount Rate and 2.5% Terminal Growth Rate
Absolute
Valuation
High
A.
P/Forward E
P/S
P/B
P/EBITDA
P/CF
B.
21.6
3.0
3.9
9.41
15.0




Low
C.
7.4
1.1
1.4
4.17
5.1
Median
D.
15.1
1.6
2.2
6.57
9.4
Current
#Your
Target
Multiple
E.
12.4
1.7
1.6
4.36
6.3
F.
13.5
1.6
1.9
5.5
7.5
Weighted Valuation : $34.89 ( 0.65*35.44 + 0.35*33.86)
Projected Upside: 18.2%
Dividend Yield: 4.9%
Recommendation: Buy 150 basis points
*Your
Target
E, S, B,
etc/Shar
e
G.
2.4
17.56
18.66
6.85
4.74
Average
Your
Target
Price
(F x G)
H.
32.51
28.10
35.45
37.68
35.55
33.86
Valuation Analysis




Weighted Valuation : $27.79 (.65 * 28.87) + (.35 * 25.77)
Projected Upside: 11.4%
Dividend Yield: 4%
Recommendation: Purchase 100bps of Xcel Energy

Weighted Valuation : $34.80 ( 0.65*34.58 + 0.35*35.20)
Projected Upside: 11.5%
Dividend Yield: 4.4%
Recommendation: Sell 100 bps

Weighted Valuation : $34.89 ( 0.65*35.44 + 0.35*33.86)

Projected Upside: 18.2%

Dividend Yield: 4.9%

Recommendation: Buy 150 basis points



Recommendation
Increase SIM investment in Utilities by 150bps to bring portfolio weight to
4.07%
Recommendation:

Invest 150bps in PPL Corporation and 100bps in Xcel Energy

Sell 100 bps of Public Service Enterprise Group (PEG)
Appendix
DCF Models
Xcel Energy, Inc.
Analyst: Jared Myers
Date: 10/17/2011
Year
2011E
Revenue
10,859,846
% Grow th
1,748,435
Operating Margin
Interest and Other
Interest % of Sales
Taxes
11,162,292
% of Sales
2,064,913
15,295,104
3.7%
2,141,315
15,784,547
3.2%
2,209,837
16,258,084
3.0%
2,276,132
16,745,826
3.0%
2,344,416
(497,381)
(509,001)
(463,457)
(493,582)
(522,209)
(548,320)
(570,801)
(591,921)
(610,862)
(629,188)
(648,063)
-4.6%
-4.6%
-3.9%
-3.9%
-3.9%
-3.9%
-3.9%
-3.9%
-3.9%
-3.9%
-3.9%
385,479
31.0%
858,001
959,957
390,920
31.0%
870,113
1.4%
1,065,831
404,469
31.0%
900,270
3.5%
204,065
423,745
31.0%
943,175
4.8%
202,407
444,932
31.0%
990,334
5.0%
212,527
463,175
31.0%
1,030,937
4.1%
221,241
480,312
31.0%
1,069,082
3.7%
229,427
495,682
31.0%
1,103,292
3.2%
236,768
510,553
31.0%
1,136,391
3.0%
243,871
525,869
31.0%
1,170,483
3.0%
251,187
8.1%
8.6%
8.9%
1.6%
1.5%
1.5%
1.5%
1.5%
1.5%
1.5%
1.5%
(80,571)
(10,586)
(28,467)
(124,352)
(117,396)
(106,264)
(90,709)
(84,888)
(75,766)
(73,161)
(75,356)
-0.1%
167,434
1.5%
1,428,677
8.3%
6,873,205
7,132,584
14,005,790
10.91%
14.4
16.7
7.4
8.1
485,100
$
$
4.1%
14.0%
1,319,607
Shares Outstanding
1,983,586
14,749,377
14.0%
% Grow th
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
5.0%
2021E
14.0%
1.3%
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
1,889,129
14,168,470
2020E
14.0%
-0.7%
Free Cash Flow
5.8%
2019E
14.0%
141,178
Capex % of sales
1,798,320
13,493,781
2018E
14.0%
879,648
Subtract Cap Ex
6.5%
2017E
14.0%
2.2%
Plus/(minus) Changes WC
1,724,491
12,754,046
2016E
14.1%
839,457
% of Sales
7.3%
2015E
14.4%
% Grow th
Add Depreciation/Amort
11,975,630
2014E
15.7%
32.9%
Net Income
1,752,480
2013E
9.5%
3.0%
16.1%
411,597
Tax Rate
Debt
Cash
Cash/share
Total Assets
Debt/Assets
Working Capital % of Growth
2012E
2.8%
Operating Income
Current Price
Implied equity value/share
Upside/(Downside) to DCF
Terminal Discount Rate =
Terminal FCF Growth =
24.94
28.87
15.8%
7,399,514
108,437
0.22
27,387,690
27.0%
15%
-0.2%
227,537
1.9%
1,461,144
2.3%
49%
51%
100%
-1.0%
165,803
1.3%
837,439
-42.7%
-0.9%
188,913
1.4%
867,345
3.6%
-0.8%
212,527
1.5%
912,780
5.2%
-0.6%
221,241
1.5%
964,736
5.7%
-0.6%
229,427
1.5%
1,007,129
4.4%
-0.5%
236,768
1.5%
1,047,997
4.1%
-0.5%
243,871
1.5%
1,082,996
3.3%
Terminal Value
Free Cash Yield
14.1
16.3
7.1
7.9
13.9
16.1
6.9
7.6
-0.5%
251,187
1.5%
1,115,486
3.0%
17,676,167
6.31%
Terminal P/E
15.1
Terminal EV/EBITDA
9.6
Questions – Comments - Suggestions