RBC Capital Markets, LLC Shelby Tucker, CFA (Analyst) Sean He (Associate) (212) 428-6462 (212) 858-7110 [email protected] [email protected] Insoo Kim, CFA (Associate) David Emami (Associate) (212) 905-2995 (212) 618-2668 [email protected] [email protected]
January 4, 2016 2016 U.S. Power & Utility Best Ideas Exhibit 1: Target changes and 2018 estimates Implied Prior Price New Price Total FY18 EPS Portfolio Ticker Target Target Return Estimate AEP $ 62.00 $ 64.00 13.7% $ 4.22 Turning Defensive; IPPs/YieldCos Require Patience AES $ 12.00 $ 12.00 29.6% $ 1.34 Switching to a more defensive stance in 1H16. After a disappointing year BKH $ 52.00 $ 55.00 21.9% $ 3.71 CNP $ 21.00 $ 21.00 19.8% $ 1.26 during which the Philadelphia Utility index (UTY) was down 9.8% (versus CMS $ 38.00 $ 40.00 14.1% $ 2.33 EQUITY RESEARCH EQUITY the S&P 500 down 0.7%), we believe we have found a better entry point ED $ 68.00 $ 67.00 8.3% $ 4.30 for defensive utilities. P/E multiples have come down from their peak a D $ 78.00 $ 75.00 14.7% $ 4.53 year ago and trade at a 4% discount to the SPX versus a 14% premium a DUK $ 81.00 $ 84.00 22.3% $ 5.17 year ago. Gas utilities (LDCs) are experiencing higher P/E valuations over EIX $ 69.00 $ 72.00 24.8% $ 4.32 ETR $ 74.00 $ 78.00 19.1% $ 5.35 other utilities, driven by merger activity. We are upgrading Black Hills to EXC $ 33.00 $ 32.00 19.7% $ 2.90 Outperform from Sector Perform to add to our list of stocks with defensive FE $ 39.00 $ 39.00 27.5% $ 2.74 characteristics; a successful implementation to ratebase gas reserves this LG $ 57.00 $ 63.00 9.3% $ 3.57 year should de-risk Black Hills’ earnings. It joins Edison International and NEE $ 128.00 $ 125.00 23.3% $ 7.06 PNM Resources as one of our top defensive names. On the other hand, we PCG $ 58.00 $ 59.00 14.3% $ 3.93 PNM $ 32.00 $ 36.00 20.4% $ 2.16 are downgrading The Laclede Group to Sector Perform from Outperform, PNW $ 66.00 $ 68.00 9.3% $ 4.41 due to its outperformance in 2015. Among diversified utilities, we favor PPL $ 36.00 $ 37.00 12.8% $ 2.56 NextEra Energy. PEG $ 44.00 $ 43.00 15.2% $ 3.03 SRE $ 122.00 $ 119.00 29.6% $ 6.13 Disappointed in generators, but willing to be patient. Being more positive SO $ 49.00 $ 53.00 17.9% $ 3.32 on generators early last year did not pan out as several macro events UTL $ 36.00 $ 37.00 7.0% $ 2.11 XEL $ 38.00 $ 40.00 15.0% $ 2.47 impacted the independent power producers (IPPs) and deregulated utilities. Low gas prices should pressure the group, but generators have Prior Price New Price Total FY18 EBITDA strong free cash positions for the next three years. The case for adding Ticker Target Target Return Estimate ABY $ 32.00 $ 32.00 74.8% $ 1,346 generators in a portfolio over the near term is hard to make. But once CPN $ 22.00 $ 21.00 45.1% $ 2,234 we get past the May PJM auction, a potential recovery in crude price – DYN $ 29.00 $ 24.00 79.1% $ 1,149 critical for market psychology – could turn sentiment around. We favor HIFR $ 34.00 $ 24.00 34.6% $ 278 FirstEnergy among the deregulated utilities and Dynegy among the IPPs. NYLD.A $ 16.00 $ 16.00 21.2% $ 1,133 PEGI $ 29.00 $ 29.00 45.8% $ 587 Source: RBC Capital Markets estimates YieldCos on the mend. YieldCos finished the year on a stronger note, supported by Congress’ extension of renewable tax credits. If the YieldCos’ stock prices can get back to the underlying value of the existing assets, drop down opportunities might be feasible again. Abengoa Yield provides the best value, in our view. A more conservative way to invest in YieldCos is through Pattern Energy.
Technical analysis turning more bullish near-term. We have included an analysis by our U.S. Technical Analyst, Rob Sluymer, starting on page 16. He is seeing a shift to market weight from underweight for electric utilities, and overweight for multi- and gas utilities; IPPs remain weak but are oversold near-term.
Introducing 2018 EPS; updating price targets using 2017 estimates. We expect 2018 earnings to grow by 6.9% over 2017, primarily due to ratebase growth. Our price targets have changed as we are rolling our valuation over to 2017 earnings. We have decreased our target P/E multiple for traditional defensive utilities to 15.4x from 15.5x. This is a 7.8% discount to the firm 16.7x P/E target for the S&P 500. Our target UTY is set at 615 for the year.
Priced as of prior trading day's market close, EST (unless otherwise noted). All values in USD unless otherwise noted. For Required Conflicts Disclosures, see Page 91. 2016 U.S. Power & Utility Best Ideas Portfolio
Table of contents
Investment Summary ...... 3
Earnings and Valuation Revisions ...... 4
Five Questions of Interest for 2016...... 7 Do power and utility stocks untangle from macro events? ...... 7 How supportive are regulators/politicians willing to be? ...... 8 Are generators dead money? ...... 9 Will M&A pick up in 2016 where it left off in 2015? ...... 11 Can YieldCos succeed? ...... 13
Shelby’s Utility Focus List (ShuFL) ...... 15
Technical Outlook...... 16
Valuation and Price Target Impediments...... 20
Company profiles ...... 32
January 4, 2016 2 2016 U.S. Power & Utility Best Ideas Portfolio
Investment Summary Recapping 2015. The electric utility sector, as represented by the Philadelphia Utility Index (UTY, 606.61), posted a poor 2015 down 9.8% versus the S&P 500 (SPX, 2,099.93) down 0.7%. The performance compares much more favorably with master limited partnerships (MLPs), as the Alerian MLP index (AMZ, 289.76) was down 36.9%; the UTY still underperformed the MSCI US REIT index (RMZ, 1,100.94), which is down 1.5% in 2015. The weak 2015 performance followed a year during which utilities outperformed the SPX by nearly 1,200 basis points (bps). On a relative basis, utilities now trade at a 2.8% and 3.9% 2015 and 2016 P/E discount to the SPX, using our U.S. Equity Strategist Jonathan Golub’s estimates of $118.75. and $124, respectively. Jonathan has set his S&P 500 12-month target at 2,225; we have reduced our UTY 12-month target to 615, down from 620.
Setting our P/E valuation at 15.4x for 2016, slightly down from 15.5x. Starting on page 4, we elaborate on how we derive our new P/E multiple. We use a dividend-discount model (DDM) with variables reflecting our secular view of the market. A DDM calculation that captures today’s market variables would suggest that the group should trade at a 20.1x P/E, or a 30% premium over our current target P/E multiple, primarily due to the low 10-year Treasury yield (2.23%). If demand for high yielding stocks grows in the face of a persistently low 10-year Treasury rate, the group could easily trade back to the 20%-30% premium over the SPX that it enjoyed a couple of years ago. Our 15.4x target P/E is at a 7.8% discount to Jonathan Golub’s target 2017 P/E for the S&P 500 – a discount that is mostly in line with its historical average. We are introducing a target P/E for gas local distribution companies (LDCs) of 16.6x. While we believe LDCs should trade at a premium to electric utilities, we also believe that their current higher valuation reflects a takeout premium. We are reducing our EV/EBITDA multiples for generators to reflect the persistent weakness in commodity prices.
Regulated utilities poised to perform better in 2016. We are rolling out 2018 estimates while switching to a valuation based on 2017 estimates from 2016. On an earnings per share basis, we expect defensive utilities to grow EPS 5.2% for 2018 over 2017, supported by continued rate base growth. Our regulated utilities’ price target increase by a nominal 4.9% supported by moving to 2017 estimates, though it is partially offset by the lower targeted P/E for the electric utility group. Among our top defensive/diversified names for the year, we would focus on NextEra Energy, Edison International, and newly upgraded Black Hills Energy.
Value of deregulated utilities and IPPs attractive but fundamentals require patience. Turning positive on generators at the beginning of 2015 was our most disappointing call for the year. Many of the positive catalysts that we expected did occur, but the energy tempest was too much to bear. While we would still argue that commodity-sensitive utilities offer an attractive value proposition, we can no longer assume that commodity prices will turn around in the next 3-6 months. We would still buy IPPs/deregulated utilities but would suggest that investors need to be patient with these stocks in 2016. Our best ideas for generators are FirstEnergy and Dynegy.
YieldCo could come back from the dead. Challenges remain for YieldCo, including a difficult high yield market and a poor stock currency. But the extension of renewable tax credits has infused new life in the group, which could push stock valuation closer to allowing the acquisition of more dropdowns. Our favorite name remains Abengoa Yield. For those seeking less risk (including headline risk), Pattern Energy would be a better choice.
January 4, 2016 3 2016 U.S. Power & Utility Best Ideas Portfolio
Earnings and Valuation Revisions Introducing 2018 earnings estimates for coverage universe We are introducing 2018 earnings estimates for our entire coverage universe, as shown in Exhibit 2. We are also updating our estimates for 2015-2017. We expect the sector to grow earnings per share by 6.9% from 2017 to 2018. Broken down by sub-group, we forecast that the defensive utilities will grow EPS by 5.7%, the deregulated group by 3.7%, and the diversified group by 11.3%. The largest increase we forecast will come from Dominion (up 18%), while we think the biggest drop in earnings will be from FirstEnergy (down 7.4%).
Exhibit 2: Earnings update, including introduction of 2018 estimates
FY15 EPS Est. FY16 EPS Est. FY17 EPS Est. FY18 EPS Est. Company Name Ticker FY14 EPS Prior New Prior New Prior New Prior New American Electric Power AEP $ 3.43 $ 3.72 $ 3.72 $ 3.75 $ 3.69 $ 3.88 $ 3.97 N/A $ 4.22 AES Corp. AES $ 1.30 $ 1.19 $ 1.19 $ 1.11 $ 1.08 $ 1.24 $ 1.21 N/A $ 1.34 Black Hills BKH $ 2.93 $ 3.00 $ 2.93 $ 3.23 $ 2.63 $ 3.36 $ 3.50 N/A $ 3.71 CenterPoint Energy CNP $ 1.20 $ 1.08 $ 1.08 $ 1.12 $ 1.12 $ 1.19 $ 1.18 N/A $ 1.26 CMS Energy CMS $ 1.77 $ 1.89 $ 1.89 $ 2.01 $ 2.01 $ 2.15 $ 2.16 N/A $ 2.33 Consolidated Edison ED $ 3.89 $ 4.01 $ 4.01 $ 4.05 $ 4.05 $ 4.16 $ 4.16 N/A $ 4.30 Dominion Resources D $ 3.43 $ 3.68 $ 3.68 $ 3.87 $ 3.84 $ 3.96 $ 3.84 N/A $ 4.53 Duke Energy DUK $ 4.55 $ 4.58 $ 4.57 $ 4.72 $ 4.68 $ 5.10 $ 4.94 N/A $ 5.17 Edison International EIX $ 4.55 $ 3.75 $ 3.82 $ 3.68 $ 3.75 $ 3.97 $ 4.04 N/A $ 4.32 Entergy Corp. ETR $ 5.83 $ 5.96 $ 5.83 $ 4.79 $ 5.08 $ 5.28 $ 5.13 N/A $ 5.35 Exelon Corp. EXC $ 2.39 $ 2.51 $ 2.50 $ 2.67 $ 2.65 $ 2.73 $ 2.70 N/A $ 2.90 FirstEnergy Corp. FE $ 2.56 $ 2.73 $ 2.71 $ 2.80 $ 3.03 $ 2.64 $ 2.96 N/A $ 2.74 Laclede Group* LG $ 3.05 $ 3.21 $ 3.19 $ 3.35 $ 3.37 $ 3.46 $ 3.50 N/A $ 3.57 NextEra Energy NEE $ 5.30 $ 5.64 $ 5.64 $ 6.36 $ 6.06 $ 6.52 $ 6.43 N/A $ 7.06 PG&E Corp. PCG $ 3.50 $ 3.04 $ 3.04 $ 3.68 $ 3.68 $ 3.71 $ 3.71 N/A $ 3.93 PNM Resources PNM $ 1.49 $ 1.59 $ 1.60 $ 1.62 $ 1.62 $ 1.94 $ 1.94 N/A $ 2.16 Pinnacle West Capital Corp. PNW $ 3.58 $ 3.79 $ 3.83 $ 4.01 $ 3.99 $ 4.22 $ 4.19 N/A $ 4.41 PPL Corp. PPL $ 2.45 $ 2.21 $ 2.21 $ 2.30 $ 2.35 $ 2.40 $ 2.45 N/A $ 2.56 Public Service Enterprise Group PEG $ 2.76 $ 2.93 $ 2.93 $ 2.97 $ 2.98 $ 2.99 $ 2.92 N/A $ 3.03 Sempra Energy SRE $ 4.71 $ 5.07 $ 5.07 $ 5.35 $ 5.31 $ 5.79 $ 5.76 N/A $ 6.13 Southern Co. SO $ 2.80 $ 2.86 $ 2.89 $ 2.93 $ 2.95 $ 3.19 $ 3.19 N/A $ 3.32 Unitil UTL $ 1.79 $ 1.88 $ 1.88 $ 1.94 $ 1.97 $ 2.04 $ 2.05 N/A $ 2.11 Xcel Energy XEL $ 2.03 $ 2.11 $ 2.09 $ 2.21 $ 2.21 $ 2.34 $ 2.34 N/A $ 2.47
FY14 FY15 EBITDA Est. FY16 EBITDA Est. FY17 EBITDA Est. FY18 EBITDA Est. Company Name Ticker EBITDA Prior New Prior New Prior New Prior New Abengoa Yield ABY $ 307 $ 647 $ 647 $ 831 $ 831 $ 1,105 $ 1,105 N/A $ 1,346 Calpine Corp. CPN $ 1,949 $ 1,989 $ 1,970 $ 1,919 $ 1,888 $ 2,035 $ 2,000 N/A $ 2,234 Dynegy DYN $ 347 $ 876 $ 875 $ 1,226 $ 1,159 $ 1,187 $ 1,173 N/A $ 1,149 InfraREIT HIFR $ 118 $ 127 $ 127 $ 182 $ 182 $ 241 $ 241 N/A $ 278 NRG Yield NYLD.A $ 455 $ 710 $ 710 $ 851 $ 852 $ 976 $ 976 $ 1,133 $ 1,133 Pattern Energy Group PEGI $ 198 $ 249 $ 249 $ 391 $ 391 $ 484 $ 484 N/A $ 587
Source: Company reports, RBC Capital Markets estimates; * LG’s 2015 EPS is actual
Resetting forward P/E While a number of valuation methodologies exist in the marketplace, we favor the use of the price-to-earnings ratio for regulated assets. We find that most utility assets have predictable earnings patterns, similar balance sheets within its sector compared to other sectors, and regulatory mechanisms to recognize future benefits through existing earnings. Furthermore, given utilities’ propensity to pay a steady and healthy dividend, we find ourselves drawn to the dividend-discount model (DDM). In Exhibit 3, we show what drove our P/E calculation in early 2015. January 4, 2016 4 2016 U.S. Power & Utility Best Ideas Portfolio
Exhibit 3: For 2015, our DDM variables led to a 15.5x target P/E multiple…
Sustainable P/E Calculation Cost of Equity Calculation Absolute P/E Calculation Market Premium 5.6% Dividend Payout Ratio 65.0% Regulated Utility Beta 0.55 Dividend/Share Growth (g) 3.0% 10-Yr Treasury 4.25% RBC's Sustainable P/E 15.5x Return on Equity (k) 7.3%
Source: Company reports, Bloomberg, FactSet, RBC Capital Markets estimates
In Exhibit 4, we have calculated the theoretical P/E of a regulated utility given today’s conditions, which still include a sub-2.5% risk free rate (represented by the 10-year Treasury at 2.3%) and today’s high equity market premium (7%). The other variables (beta, payout ration, and dividend growth) are derived from a peer group of defensive utilities. All these lead to a 19.9x P/E multiple, which represents nearly a 30% premium to where the defensive utilities currently trade on 2017 estimates.
Exhibit 4: …current market conditions suggest a 19.9x P/E…
Cost of Equity Calculation Absolute P/E Calculation Market Premium 7.00% Dividend Payout Ratio 60.2% Regulated Electric Beta 0.62 Dividend/Share Growth (g) 3.5% 10-Yr Treasury 2.31% Snapshot P/E 19.9x Return on Equity (k) 6.63%
Source: Company reports, Bloomberg, FactSet, RBC Capital Markets estimates
To derive our new valuation – compared to last year’s target - we have adjusted the expected market return to match up with current market conditions and the group beta since our last valuation calculation in January 2015, as shown in Exhibit 5. According to Bloomberg, the expected market return for the U.S. is 9.31%. Using our assumed 4% 10-year Treasury yield, we derive a 5.3% equity market premium. We note that a number of utilities are growing their dividend faster than 3% but are maintaining our conservative 3% dividend growth expectation. We’ve also increased our beta to 0.63 from 0.55 to get it closer to historic levels.
Exhibit 5: …our normalized view of a low growth utility for 2016 is 15.4x forward P/E
Sustainable Electric/Multi-Utility P/E Calculation Cost of Equity Calculation Absolute P/E Calculation Market Premium 5.31% Dividend Payout Ratio 65.0% Regulated Electric Beta 0.63 Dividend/Share Growth (g) 3.0% 10-Yr Treasury 4.00% RBC's Sustainable P/E 15.4x Return on Equity (k) 7.35%
Source: Company reports, Bloomberg, FactSet, RBC Capital Markets estimates
January 4, 2016 5 2016 U.S. Power & Utility Best Ideas Portfolio
We are introducing a separate P/E multiple for natural gas local distribution companies (LDCs). The gas utility sub-sector has historically traded at a higher P/E multiple than its electric brethren. The premium has been due to higher retail investor ownership, higher inherent growth rate (as many companies have a toe in the midstream space), or, more recently, takeout expectations. We expect a higher dividend growth for gas LDCs (3.5% versus 3% for electric utilities). We expect the LDC beta to be lower, at 0.61. In Exhibit 6, we lay out the P/E framework that suggests that a conservatively growing LDC should trade at a 16.6x forward P/E multiple.
Exhibit 6: Normalized forward P/E for gas LDCs stands at 16.6x
Sustainable Gas Utility P/E Calculation Cost of Equity Calculation Absolute P/E Calculation Market Premium 5.31% Dividend Payout Ratio 60.0% Gas LDC Beta 0.61 Dividend/Share Growth (g) 3.5% 10-Yr Treasury 4.00% RBC's Sustainable P/E 16.6x Return on Equity (k) 7.24%
Source: Company reports, Bloomberg, Thomson Reuters, RBC Capital Markets estimates
In Exhibit 7, we display our new price targets. For the regulated utilities, we have now moved to 2017 as a base for valuation purposes. For deregulated and diversified utilities, the non- electric utility operations are typically valued using an EV/EBITDA multiple.
Exhibit 7: Valuation update using 2017 P/E multiples for electric utility operations
Current Prior New EPS Prior 2016 Prior Price New 2017 New Price Div. Potential Company Name Ticker Price Rating Rating 2016E 2017E P/E Target Target P/E Target Target Yield Return American Electric Power AEP $ 58.27 Sector Perform Sector Perform $ 3.69 $ 3.97 16.8x $ 62.00 16.1x $ 64.00 3.84% 13.7% AES Corp.* AES $ 9.57 Outperform Outperform $ 1.08 $ 1.21 11.1x $ 12.00 9.9x $ 12.00 4.18% 29.6% Black Hills* BKH $ 46.43 Sector Perform Outperform $ 2.63 $ 3.50 19.8x $ 52.00 15.7x $ 55.00 3.49% 21.9% CenterPoint Energy* CNP $ 18.36 Outperform Outperform $ 1.12 $ 1.18 18.8x $ 21.00 17.8x $ 21.00 5.39% 19.8% CMS Energy CMS $ 36.08 Sector Perform Sector Perform $ 2.01 $ 2.16 18.9x $ 38.00 18.5x $ 40.00 3.22% 14.1% Consolidated Edison ED $ 64.27 Sector Perform Sector Perform $ 4.05 $ 4.16 16.8x $ 68.00 16.1x $ 67.00 4.05% 8.3% Dominion Resources* D $ 67.64 Sector Perform Sector Perform $ 3.84 $ 3.84 20.3x $ 78.00 19.5x $ 75.00 3.83% 14.7% Duke Energy DUK $ 71.39 Outperform Outperform $ 4.68 $ 4.94 17.3x $ 81.00 17.0x $ 84.00 4.62% 22.3% Edison International EIX $ 59.21 Outperform Outperform $ 3.75 $ 4.04 18.4x $ 69.00 17.7x $ 72.00 3.24% 24.8% Entergy Corp.* ETR $ 68.36 Sector Perform Sector Perform $ 5.08 $ 5.13 14.6x $ 74.00 15.2x $ 78.00 4.97% 19.1% Exelon Corp.* EXC $ 27.77 Outperform Outperform $ 2.65 $ 2.70 12.5x $ 33.00 11.9x $ 32.00 4.47% 19.7% FirstEnergy Corp.* FE $ 31.73 Outperform Outperform $ 3.03 $ 2.96 12.9x $ 39.00 13.2x $ 39.00 4.54% 27.5% Laclede Gas LG $ 59.41 Outperform Sector Perform $ 3.37 $ 3.50 16.9x $ 57.00 18.0x $ 63.00 3.30% 9.3% NextEra Energy* NEE $ 103.89 Outperform Outperform $ 6.06 $ 6.43 21.1x $ 128.00 19.4x $ 125.00 2.96% 23.3% PG&E Corp. PCG $ 53.19 Sector Perform Sector Perform $ 3.68 $ 3.71 15.8x $ 58.00 15.8x $ 59.00 3.42% 14.3% PNM Resources PNM $ 30.57 Outperform Outperform $ 1.62 $ 1.94 19.8x $ 32.00 18.5x $ 36.00 2.62% 20.4% Pinnacle West PNW $ 64.48 Sector Perform Sector Perform $ 3.99 $ 4.19 16.5x $ 66.00 16.2x $ 68.00 3.88% 9.3% PPL Corp.* PPL $ 34.13 Sector Perform Sector Perform $ 2.35 $ 2.45 15.3x $ 36.00 15.1x $ 37.00 4.42% 12.8% Public Service Ent. Grp.* PEG $ 38.69 Sector Perform Sector Perform $ 2.98 $ 2.92 14.8x $ 44.00 14.7x $ 43.00 4.03% 15.2% Sempra Energy* SRE $ 94.01 Outperform Outperform $ 5.31 $ 5.76 23.0x $ 122.00 20.7x $ 119.00 2.98% 29.6% Southern Co. SO $ 46.79 Sector Perform Sector Perform $ 2.95 $ 3.19 16.6x $ 49.00 16.6x $ 53.00 4.64% 17.9% Unitil UTL $ 35.88 Underperform Underperform $ 1.97 $ 2.05 18.3x $ 36.00 18.3x $ 37.00 3.90% 7.0% Xcel Energy XEL $ 35.91 Sector Perform Sector Perform $ 2.21 $ 2.34 17.2x $ 38.00 16.9x $ 40.00 3.56% 15.0%
Current Prior New EBITDA Prior 2016 Prior Price New 2017 New Price Div. Potential Company Name Ticker Price Rating Rating 2016E 2017E EV/EBITDA Target EV/EBITDA Target Yield Return Abengoa Yield* ABY $ 19.29 Outperform Outperform $ 831 $ 1,105 10.3x $ 32.00 5.9x $ 32.00 8.92% 74.8% Calpine * CPN $ 14.47 Outperform Outperform $ 1,888 $ 2,000 9.9x $ 22.00 8.7x $ 21.00 0.00% 45.1% Dynegy* DYN $ 13.40 Outperform Outperform $ 1,159 $ 1,173 8.2x $ 29.00 7.3x $ 24.00 0.00% 79.1% InfraREIT HIFR $ 18.50 Outperform Outperform $ 182 $ 241 11.2x $ 34.00 8.6x $ 24.00 4.86% 34.6% NRG Yield* NYLD.A $ 13.91 Sector Perform Sector Perform $ 852 $ 976 9.8x $ 16.00 9.0x $ 16.00 6.18% 21.2% Pattern Energy Group* PEGI $ 20.91 Outperform Outperform $ 391 $ 484 5.2x $ 29.00 4.3x $ 29.00 7.12% 45.8%
* Target price not derived from P/E multiple methodology; therefore P/E target are implied Source: Company reports, RBC Capital Markets estimates. Priced as of market close December 31, 2015.
January 4, 2016 6 2016 U.S. Power & Utility Best Ideas Portfolio
Five Questions of Interest for 2016 Do power and utility stocks untangle from macro events? In our 2015 outlook, we focused on industry-specific issues, purposely steering away from broader market macro drivers, though we recognized up front the influence that macro factors have on the group. Unfortunately, macro factors influenced the sector more than we had expected, for both regulated and deregulated companies. In our opinion, the most pressing factors for 2016 are anticipated interest rate hikes, the direction of commodity prices, and the state of bond markets in the first half of the year. In some cases, we believe that macros will continue to dominate (commodity prices, bond markets); in others less so (interest rate hikes, presidential election). Unfortunately, the answer to the question posed is a resounding “no”. A defensive utility stock is an equity investment that helps an equity portfolio gain defensive characteristics regardless of the stock’s fundamental minutia. We expect a generalist portfolio manager to buy and sell Duke, Southern based on a broader market dynamic taking place at that time.
Pressure on utility stocks from future rate hikes should lessen. Now that the Federal Reserve Board has started its tightening policy, the proverbial monkey is finally off the utility sector’s back. Though we expect more Fed hikes to come – our Chief Economist, Tom Porcelli, is calling for four modest rate hikes in 2016 – the anticipation of the first hike seems to be the most damaging. To wit, the group dropped from a 30% P/E forward premium relative to the S&P 500 four years ago to a slight discount currently. Make no mistake: the pressure will still be on. But we believe the persistent underweighting of the sector in portfolios will diminish, which we believe will provide better support for the group, particularly the defensive utilities.
Commodity prices should stabilize though not improve. Of all the drivers that have impacted the sector the greatest, commodities ranked among the first. This is particularly true for deregulated utilities and independent power producers. While we would expect these stocks to be affected by weakness in power and natural gas prices, we were somewhat surprised to find a correlation with crude prices despite the latter being a negligible contributor to power price dynamics. What was more surprising was that independent power producers were more correlated with crude prices than they were with spark spread, a proxy for gas plant’s gross margin. We believe that part of the reason for the correlation was the amount of redemptions that were hitting energy funds, a number of which owned IPP stocks. We expect commodity gyrations to continue to affect the commodity-sensitive power names, even if spark spreads were to improve. We will have more on this topic when we tackle the investment case from generators later in this report. From a macro point of view, our Energy team expects a second half recovery of crude, though a natural gas recovery is further down the road.
Potential bankruptcies in high yield bond market could impact IPP stocks further. While IPPs are flush with cash flows due to improving capacity prices and low capital spending program, their bonds and, to a lesser extent, their stock would be – and have already been – impacted by a tumultuous high yield market. Our forecasts suggest that IPP credit metrics are likely to improve through 2018, leading us to believe that their current bond weakness is linked to fund flows. However, a weak bond market limits the amount of capital available to purchasers of generation assets. This, in turn, could reduce the value per kW of various power plants at a time when there is over 10 GW of capacity on the market. Reduced asset values lead to lower inherent stock value.
January 4, 2016 7 2016 U.S. Power & Utility Best Ideas Portfolio
How supportive are regulators/politicians willing to be? State versus Federal Jurisdiction. Two cases we are watching closely in 2016 are FERC vs. Energy Power Supply Association (challenging FERC Order 745) and CPV Maryland vs. PPL EnergySupply (challenging contracts between state utilities and power plant developers). We expect the Supreme Court’s decision under both cases to set precedent for determining a clear dividing line between what is deemed state versus federal jurisdiction in our country’s electricity market. In our view, these decisions could have a read-through on outcomes from the potential challenges against the legality of the Ohio PPA settlement agreements reached by FirstEnergy and AEP and other possible quasi-regulated contracts that may be discussed.
In FERC vs. EPSA, EPSA has challenged the legality of FERC Order 745, which sets rules for how demand response (DR) is compensated in organized wholesale energy markets. EPSA has argued that DR should operate under state jurisdiction as the product deals with retail customers, whereas FERC has argued that the federal agency should have the jurisdiction over DR given its authority to regulate wholesale electricity pricing under the Federal Power Act. A prior ruling in 2014 by the D.C. Circuit vacated the FERC Order 745 in favor of EPSA, but the Supreme Court took up FERC’s petition for a writ of certiorari to rehear the case. Oral arguments were heard in October 2015 with a ruling expected in 2016.
Also occurring in October, the Supreme Court took up the CPV Maryland vs. PPL EnergySupply case, in which PPL EnergySupply argues that Maryland utility regulators circumnavigated FERC authority over wholesale power markets and offered make-whole contracts to generation developers to incentivize new builds. The U.S. Court of Appeals had originally affirmed the ruling of the U.S. District Court in this case, finding that the Maryland contracts had potential implications on wholesale energy and capacity prices, which interferes with FERC jurisdiction over wholesale rates. We believe a similar challenge could be made against the Ohio PPAs if the Supreme Court were to side with these prior rulings.
The states’ initial plans to Clean Power Plan (CPP) drafts due. On August 3, 2015, the Environmental Protection Agency comply with CPP are due (EPA) released the final CPP rules, which calls for a 32% reduction in carbon emissions by September 6, 2016, but legal 2030 from 2005 levels. The states must submit an initial plan or an initial submittal with an action from opponents could extension request by September 6, 2016. On September 6, 2017, states with extensions must potentially result in a stay of submit their progress update. The deadline for filing the state plan for states that receive the rule. extensions is September 6, 2018.
Twenty-seven states and various utilities/industry groups have since brought forth legal challenges to the rule, including a request to the D.C. Circuit Court of Appeals to stay the rule until the court decides on EPA’s authority to create and implement the CPP. We expect the court in 1H16 to rule on the motion to stay, which would keep the fate of many coal plants in limbo.
We believe the Low Carbon Will Illinois nuclear plants receive support? Since the Illinois House passed HR 1146 that Portfolio Standard (LCPS), if supports continued operation of nuclear plants, the legislature has yet to pass a final bill that passed, could contribute would provide an earnings boost to Exelon’s struggling nuclear fleet. Exelon has delayed by $0.15-$0.25 in EPS benefit one year its decision whether to shut down its Byron, Quad Cities, and Clinton nuclear plants for Exelon. to see through the outcome of the state’s initiative. The currently proposed program, called Low Carbon Portfolio Standards (LCPS), is a market-based solution that would require the state’s two investor-owned utilities (IOUs), ComEd and Ameren, to purchase low-carbon credits on electricity generated and distributed from clean generation including nuclear, wind, solar, clean coal, and hydro. The LCPS, if passed, would run through year-end 2021 or when the state formulates a plan to comply with the Clean Power Plan (CPP).
January 4, 2016 8 2016 U.S. Power & Utility Best Ideas Portfolio
Given the recent settlements in Ohio to “re-regulate” some of its coal generation to keep them from closing, we believe there is a modest chance that Illinois ultimately passes a modified version of the LCPS, which could contribute $0.15-$0.25 in EPS benefit for Exelon.
Michigan Energy Law pushed back to 2016. Despite the expected resolution in 2015, the Michigan legislature failed to send a final energy law to Governor Snyder’s desk prior to year- end 2015. The potential changes to the 2008 energy law include renewable standards, Retail Open Access (ROA), and a creation of a new Integrated Resource Plan (IRP) process. The proposed renewable standards call for 30% renewables by 2025. Given 10% of generation currently comes from renewables, the remaining 20% would be divided equally between energy efficiency (1% per year) and 10% additional renewable generation. Regarding ROA, the House and Senate bills present minor differences but generally call for choice customers to contract both energy and capacity with a three- or five-year stay-out period. Finally, Michigan would create an IRP process to replace the existing Certificate of Necessity (CON) process, as well as shortening the base rate case process from 12-months (with a 6-month interim rate implementation) to 10 months with no interim rates.
We expect the proposed ROA changes to result in a return of at least a portion of the ROA customer base, creating a need for additional capacity for CMS Energy. We note management has already identified the 700 MW Thetford gas plant (construction postponed) as the most immediate opportunity to fill the gap, which could further boost rate base growth for the utility.
Net metering policy discussions heating up. In 2015, several strong solar states like California, Arizona, and Nevada heavily debated to set appropriate net metering policies. Solar advocates support retail rates currently in place, while the utilities believe the rates should be lowered to wholesale rates given the solar customers’ continued use of their grid without providing other services that typically warrant full retail rates. In California, the California Public Utilities Commission (CPUC) recently released a Proposed Decision (PD) that would allow net-metered customers to maintain retail rates, but would be charged a fixed grid access charge. In Nevada, the Public Utilities Commission of Nevada (PUCN) just ruled to lower net-metered rates from retail to wholesale prices, even for existing solar customers. Finally, in Arizona, the Arizona Corporation Commission (ACC) has created a generic docket to consider both the cost to serve and value of solar; Arizona Public Service (APS), the utility under Pinnacle West (PNW), have called for a higher grid access charge with a lower energy charge to make technology agnostic to rate structure. Are generators dead money? Heading into 2015, we were in the camp that potentially robust PJM Capacity Performance results would generate positive momentum for the independent power producers (IPPs) despite our view that natural gas and power price recoveries were not likely to materialize. While both of these factors played out, the overly bearish view on IPPs stemming from low natural gas prices vastly outweighed the uplift in cash flow potential we saw from the capacity markets, causing a steep drop in the equity values of the entire peer group. With no imminent catalysts in sight, the high yield market in flux, the risk of potential generation re- regulation, and spot natural gas prices holding below $2.00/mmbtu as we experience one of the warmest winters on record, we wonder whether IPPs will be dead money despite the apparent value opportunity.
Gas plants are structural winners. Despite the lowest natural gas price in years, we continue to believe that natural gas plants are the structural winner of the power generation space in this decade. While renewables and battery storage will undoubtedly pose a long-term threat to conventional fossil fuel generation, core competitive generation markets have been and January 4, 2016 9 2016 U.S. Power & Utility Best Ideas Portfolio
are becoming more and more reliant on natural gas-fired generation as a source for power. Data made available by the EIA indicates that through September 2015, gas generation has contributed 32.5% of our power generation, representing an 18% year over year increase; in competitive generation markets where information was readily available (i.e., ERCOT and PJM), we saw market share increases of 20-30% from gas generation.
Exhibit 8: Gas generation has contributed to 32.5% of our YTD electricity
ERCOT PJM Contiguous U.S. Through Sept 2014 2015 % Change 2014 2015 % Change 2014 2015 % Change Coal 36.8% 28.4% -23% 44.2% 38.5% -13% 39.3% 34.4% -13% Nuclear 11.3% 11.7% 4% 33.7% 34.3% 2% 19.1% 19.3% 1% Gas 40.8% 48.8% 20% 17.6% 23.0% 31% 27.6% 32.5% 18% Renewable 10.3% 10.5% 2% 3.6% 3.5% -3% 12.9% 12.8% -1% Other 0.8% 0.6% -25% 0.9% 0.7% -22% 1.1% 1.1% -6%
Source: ERCOT, Monitoring Analytics, EIA, RBC Capital Markets estimates
From a financial perspective, the resilience of natural gas generation earnings in low natural gas price environments is underappreciated by investors in our view. Despite natural gas prices falling ~20% in 2015, forward spark spreads have shown greater perseverance as the decline has been more limited, suggesting that fuel costs are falling quicker than power prices (in fact, we actually saw PJM-West spark spreads improve throughout 2015). At the same time, gas generation is picking up significantly more volume as we highlighted above, helping to offset any compression seen in sparks. Consequently, we believe both DYN and CPN are both able to persevere through a “lower-for-longer” commodity cycle as they both derive a majority of their EBITDA from their gas plants.
Exhibit 9: Change in 2016 regional forward spark spreads over the course of 2015
28
26
24
22
20
18
16
14
12
10 1/1/15 4/1/15 7/1/15 10/1/15
PJM-W/Tetco M3 Houston/Houston Ship Channel NP-15/PG&E Gate Mass Hub/Algonquin Gate
Source: SNL, RBC Capital Markets estimates
What is a coal plant worth? Given a few coal asset transactions with either undisclosed or weaker-than-expected valuations, we believe investors are finding it increasingly difficult to assign value to coal assets. As the number of environmental regulations pile up and natural gas prices continue to fall, there is a growing concern that the asset lives of coal plants (and consequently their intrinsic values) are on the decline. While not all coal plants are created equal (different geographies, environmental controls, fuel costs, etc.), we believe at least January 4, 2016 10 2016 U.S. Power & Utility Best Ideas Portfolio
$150/kW of intrinsic value exists for scrubbed coal plants receiving capacity payments using today’s forward curves and highly conservative asset life and cost of capital assumptions. However, the market is seemingly unwilling to give even this much credit to these coal assets at sub-$2.00/mmbtu natural gas prices, which has caused more heavily coal-exposed generation operators to underperform in our view.
So…are IPPs dead money for the year? We continue to remain Outperform on DYN and CPN as we believe there is a clear dislocation between where the public market is valuing these assets and the intrinsic value of these portfolios, and we expect to see a rationalization of this discrepancy. However, we are not expecting a substantial recovery in the first half of 2016, as current forecasts call for unfavorable winter weather, which we believe will keep many investors on the sidelines. We also see limited catalysts beyond the capacity auctions, with PJM being the highlight in May (we expect results here to underwhelm relative to last year’s auction). We do urge investors to be opportunistic though, as positive weather forecasts and gas price spikes could provide a quick jolt to these equities. We do expect a recovery in the back half of the year, as our Energy team forecasts an improving commodity price environment that should pivot investor sentiment towards higher beta energy stocks, including the IPP group. Will M&A pick up in 2016 where it left off in 2015?
Exhibit 10: M&A relatively active during 2015
Date Buyer Target/Seller Value Assets Description ($ mm) ($ mm)
10/26/2015 Duke Energy Piedmont Natural Gas 6,700.0 4,951.4 Duke Energy agreed to acquire Piedmont Natural Gas for $60 per share in an all cash deal, with the assumption of $1.7 billion of debt. Canadian power producer Emera has agreed to purchased Tampa based TECO for $27.55 per share in an all cash deal. After closing, 71% 9/4/2015 Emera Inc. TECO Energy 6,500.0 8,726.0 of the combined companies earnings will come from the United States. TECO had around 700,000 electric customers and around 863,000 gas customers.
Southern Company agreed to acquire AGL Resources for $66/share in Southern 8/24/2015 AGL Resources 11,920.0 15,113.0 an all cash transaction. The combined company will have approximately Company 9 million customers and be the largest utility in the United States by rate base, with a rate base of over $50 Billion. Hunt Consolidated has agreed to purchase EFH Corp.'s 80% stake in Oncor Electric Delivery, a T&D utility based in Dallas, Texas. The merger Hunt 8/10/2015 Oncor/EFH Corp. 18,500.0 N/A is conditional upon successfully converting Oncor into a REIT. The Consolidated merger is also subject to approval by the PUCT, IRS, NRC and the bankruptcy court. Talen Energy Corporation agreed to acquire MACH Gen, a 2,500 MW Talen Energy combined-cycle natural gas plant portfolio, for $1.175 billion inclusive 7/20/2015 MACH Gen 1,175.0 N/A Corporation of any assumed debt. The plants are located in New York, Massachusetts, and Arizona.
Iberdrola USA agreed to acquire UIL Holdings for $52.75 per share, including $10.50 per share of cash, for a total of ~$4.7 billion. The 2/25/2015 Iberdrola USA UIL Holdings Corp 4,700.0 8,300.0 combined company will have a rate base of $8.3 billion, and a renewable portfolio of about 6,500 MW. The yet-to-be named new company is contemplating bringing a YieldCo to market.
Source: SNL, RBC Capital Markets
January 4, 2016 11 2016 U.S. Power & Utility Best Ideas Portfolio
M&A in 2015 did not disappoint. In our 2015 outlook, we assumed that mergers and acquisitions would be steady. We were not disappointed. We continue to believe that the power and utility sector remains ripe for consolidation, although we had not foreseen the appetite that electric utilities might have for natural gas local distribution companies. Southern’s announced acquisition of its local gas utility, AGL Resources (GAS, Not Rated) was immediately followed by Duke Energy’s announced merger with Piedmont Natural Gas (PNY, Not Rated). On the deregulated side, the market for assets was weaker than 2014, as continued depressed commodity prices and even more depressed stock prices limited the appeal of appropriate transactions. We list in Exhibit 10 on the prior page all the deals that were announced last year.
Expect to go back to electric-on-electric mergers. We do not believe that the Southern and Duke acquisition of their respective local gas utility is a sign that other electric utilities are going to rush into buying more gas LDCs. Rather, we expect a return to electric-on-electric, with either mergers of equal or larger utilities acquiring smid cap utilities. Take-out candidates that would not surprise us include Alliant, ALLETE, Great Plains Energy, PNM, and Unitil, to name a few.
O&M costs management good incentive to merge. We believe that regulated utilities will continue to merge in the coming years, as a means to reduce incremental cost pressure. After the collapse of the independent power business around 2002-2003, the electric utility focused its investment efforts around wires and pipes. Ten years later, capital spending programs have soared. Yet demand has not matched up with incremental investments, causing base rates to increase over the years. Lower electricity prices, through lower natural gas prices, have more than offset the base increase. As a result, customer bills have remained reasonable. Regulators have been able to balance the pricing needs of ratepayers with return needs of investors. Exhibit 11 shows the trend that consumer bills have held by customer class.
Exhibit 11: Customer bills remain low, which affords breathing room
13 10
12 9
11 8 Commodity Prices That Rose... 10 7
Price Price ($/mcf) 9 6 …and Fell... …Falling Again 8 5
Price (cent/kWh) Price 7 4
6 3 …Troughed Below $3... 5 2
4 1
Residential Commercial Industrial Natural Gas
Source: U.S. Energy Information Administration
While we do not expect natural gas to recover materially over the next few years, we believe that the benefit of incrementally lower power prices is coming to an end. We also believe that large capital spending budgets will continue for a few years. A combination of increasing
January 4, 2016 12 2016 U.S. Power & Utility Best Ideas Portfolio
base (infrastructure) rates and lack of savings from fuel cost reduction will put more pressure on customer bills. This, in turn, could challenge regulators as they try to manage rate increases. One of the tools available to corporations to control operating and maintenance costs is a merger or acquisition of a fellow utility, which can provide management an opportunity to extract more O&M cost savings than what would be available on a stand- alone basis.
Cost savings is not the only reason for M&A activity in regulated space. We expect infrastructure funds, including Canadian funds and companies, to consider smid to small cap U.S. utilities, as they have done in 2013-2015. Key characteristics that buyers will seek out are likely to be organic growth and strongly telegraphed rate base growth. Within our smid- cap coverage universe, Unitil has the best organic growth driven by gas customer addition – although its valuation already seems to reflect it – while PNM Resources has one of the best earnings growth through 2019 due to rate base growth. Can YieldCos succeed? It has been another rough ride for YieldCos. As seen in Exhibit 12, 2015 was yet again a tough year for YieldCos as a space. A number of factors weighed on the group, including the energy sector sell-off (particularly in MLP land), valuation concerns during the summer, the general lack of liquidity and corresponding high volatility, as well as some company-specific events. The stock weakness in SunEdison/Terraform Power/Terraform Global complex should not be understated, as Terraform was once the leading YieldCo by market capitalization.
Exhibit 12: YieldCo relative performance, 2015
60% 40% 20% 0% -20% -40% -60% -80%
ABY NYLD.A PEGI NEP TERP
Source: FactSet
Dividend yield attractive. As shown in Exhibit 13, many of the YieldCos are sporting a dividend yield north 6% (versus the broad utility space average of 3.8%). Most YieldCos plan on aggressively growing their dividend in 2016, despite tough market conditions. As seen in our comp table, YieldCos currently trade at an average dividend yield of 8.4%, compared to regulated utilities that trade at 3.9%, and deregulated utilities at 3.4%. Looking out to 2016, we expect dividend increases to boost the average yield to 10.5%, all else being equal. Even if we assumed a generous 5% dividend growth rate for the defensive utilities, they are trading at a 4.1% 2016 dividend yield. We believe that investors will require some patience with the YieldCo model.
January 4, 2016 13 2016 U.S. Power & Utility Best Ideas Portfolio
Exhibit 13: YieldCos still planning to grow their dividend per share by 10%+
Share Price Market Enterprise EV / 2016E EV / 2017E Debt / 2016E Dividend Yield 15-'16 Div Stated Avg. PPA Company 29-Dec-15 Cap ($MM) Value ($MM) EBITDA EBITDA EBITDA Current 2015 2016 Growth Growth Term NextEra Energy Partners (NEP)* $29.97 $3,953 $7,186 11.0x 8.6x 4.9x 3.1% 3.3% 4.4% 31% 12-15% 21 NRG Yield (NYLD) $14.74 $2,620 $5,203 6.6x 5.8x 6.1x 5.8% 5.6% 6.5% 16% 15% 15 Abengoa Yield (ABY) $19.11 $1,906 $8,238 9.9x 7.5x 7.6x 8.4% 9.6% 11.8% 23% 12-15% 23 TerraForm Power (TERP)* $12.19 $1,667 $4,859 8.7x 7.0x 5.7x 11.5% 11.1% 13.3% 20% 20% 16 Pattern Energy (PEGI) $20.99 $1,628 $3,350 13.5x 8.6x 8.2x 7.1% 6.8% 7.5% 10% 12-15% 16 TerraForm Global (GLBL)* $5.43 $963 $2,489 6.5x 4.5x 4.0x 20.3% 20.3% 24.3% 20% 20% 19 8point3 Energy Partners (CAFD)* $16.25 $318 $756 10.6x 5.7x 6.1x 2.7% 2.7% 5.8% 116% 12-15% 17 Average 9.5x 6.8x 6.1x 8.4% 8.5% 10.5% 34% 18
Source: FactSet; RBC Capital Markets estimates. * Not covered by RBC Capital Markets, numbers based on consensus estimates
Model still work-in-progress. We do not expect YieldCos to rely exclusively on investors’ willingness to pay fair value for the existing portfolio. We believe that 2016 will bring in a fresh look at how a YieldCo should be structured. The initial intent was for YieldCos to pay as large a dividend as possible to maximize the stock price. This would ensure that the YieldCo could avail itself of a strong currency for acquisitions. It also presumed that capital markets would be open to YieldCos at attractive costs. In this new world order, YieldCos could benefit from retaining more cash flow for funding purposes, so as not to be as dependent on capital markets. It would also allow for smooth dividend increases that are not tied to delayed drop- down, as we see in the case of NRG Yield. Ultimately, we believe that a 60%-70% dividend payout ratio of cash available for distribution (CAFD) insures some financial flexibility without sacrificing too much in stock price.
Asset sale unlikely. We do not expect YieldCos to monetize existing assets to “prove up” the value of their portfolio. Some have suggested that such an action would “mark-to-market” the portfolio, thus allowing investors to gage the fair value of the portfolio. We believe that pruning might occur, though it would only make sense if the company had CAFD flexibility. A dividend payout of 90% would be hard pressed to maintain its dividend per share unless the selling price is so much better than the CAFD contribution of the underlying asset.
January 4, 2016 14 2016 U.S. Power & Utility Best Ideas Portfolio
Shelby’s Utility Focus List (ShuFL) We are updating our ShuFL in light of our recent changes. NextEra Energy tops our Best Plays list followed by FirstEnergy, Edison International, and Black Hills. Both FirstEnergy and Black Hills benefit from a de-risking of their earnings/cash flow, as they become more regulated.
For our Defensive Plays list, Edison International is at the top of the list, followed by Black Hills, PNM Resources, and Duke. FirstEnergy is too levered to be considered on the defensive list.
Unitil remains at the top of our Least Favorite list. Consolidated Edison remains the run-up.
Exhibit 14: Best Plays for 2016 are NextEra; Top Defensive Edison; Least Favorite Unitil
Last Dividend Price Total Implied Name Ticker Rating Price Yield Target Return NextEra Energy, Inc. NEE Outperform $103.89 3.0% $125.00 23.3% FirstEnergy FE Outperform $31.73 4.5% $39.00 27.5% Edison International EIX Outperform $59.21 3.2% $72.00 24.8% Black Hills BKH Outperform $46.43 3.5% $55.00 21.9%
Defensive Plays Last Dividend Price Total Implied Name Ticker Rating Price Yield Target Return Edison International EIX Outperform $59.21 3.2% $72.00 24.8% Black Hills BKH Outperform $46.43 3.5% $55.00 21.9% PNM Resources PNM Outperform $30.57 2.6% $36.00 20.4% Duke Energy DUK Outperform $71.39 4.6% $84.00 22.3%
Least Favorite Plays Last Dividend Price Total Implied Name Ticker Rating Price Yield Target Return Unitil Corp. UTL Underperform $35.88 3.9% $37.00 7.0% Consolidated Edison ED Sector Perform $64.27 4.0% $67.00 8.3%
Source: Factset; RBC Capital Markets estimates. Priced as of market close December 31, 2015. Note: Total Return is a projection
January 4, 2016 15 2016 U.S. Power & Utility Best Ideas Portfolio
Technical Outlook Robert Sluymer, CFA (Technical Analyst) (212) 858-7066; [email protected]
S&P 500 COMPOSITE The longer-term real price trend for the S&P remains intact with the late Q3 2015 lows at 1867 key support and 2135 key resistance. We remain positive on equity markets into Q1 and would need to see the relative performance of stocks vs bonds (bottom panel) break its multi-year uptrend/below the Q3 2015 relative performance lows to become more cautious. Exhibit 15: S&P 500 Index Weekly Chart
S&P 500 Uptrend intact and consolidating under resistance near S&P 2100
Stocks vs Bonds relative uptrend remains intact
Source: Updata, Bloomberg, Trend & Cycle
S&P 1500 UTILITIES After stalling in early 2015, the Utility Index consolidated over the past year to its long-term uptrend near 230. We expect the index to recovery from current levels, but would note that long-term relative performance trends remain negative – Supports underweighting Utilities.
January 4, 2016 16 2016 U.S. Power & Utility Best Ideas Portfolio
Exhibit 16: S&P 1500 Utilities Index Weekly Chart
S&P 1500 Utilities Consolidating to uptrend support
...while relative performance remains in an established downtrend
Source: Updata, Bloomberg, Trend & Cycle
S&P 1500 Multi-Utilities Similar to the S&P 1500 Utility Index, the S&P Multi-Utility Index has consolidated to its long- term uptrend, supporting further upside in H1 2016. On a relative performance basis, Multi- Utilities are pulling back within a long-term uptrend, supporting an overweight position within the sector.
Exhibit 17: S&P 1500 Multi-Utilities Index Weekly Chart
Multi-Utilities Consolidating to uptrend support
Relative performance uptrend intact
Source: Updata, Bloomberg, Trend & Cycle
January 4, 2016 17 2016 U.S. Power & Utility Best Ideas Portfolio
S&P 1500 ELECTRIC UTILITIES Electric Utilities have also consolidated to their long-term uptrend, which suggests a further upside recovery. Relative performance is in the very early stages of reversing a longer-term relative performance downtrend and from a technical perspective, this supports a tactical shift from underweight to market weight.
Exhibit 18: S&P 1500 Electric Utilities Index Weekly Chart
Electric Utilities Consolidating to uptrend support
Relative performance is just beginning to reverse a longer-term downtrend
Source: Updata, Bloomberg, Trend & Cycle
S&P 1500 GAS UTILITIES The S&P 1500 Gas Utility index also remains in an established long-term uptrend while relative performance versus the Utility sector is pausing within a longer-term uptrend. Key relative performance ‘support’ is at the 2014-2015 highs. Remain overweight within the sector.
January 4, 2016 18 2016 U.S. Power & Utility Best Ideas Portfolio
Exhibit 19: S&P 1500 Gas Utilities Index Weekly Chart
Gas Utilities Real price uptrend intact
Relative performance versus the Utility sector pausing within a longer- term uptrend
Source: Updata, Bloomberg, Trend & Cycle S&P 1500 Independent Power Utilities The S&P 1500 Independent Power’s real and relative price profiles broke important longer- term support in 2015, reinforcing the negative longer-term technical pattern for IPP’s. While an oversold counter-trend rebound would not be surprising, there is no meaningful technical evidence to support overweighting the IPP group beyond a short-term trade.
Exhibit 20: S&P 1500 Independent Power Utilities Index Weekly Chart
IPP Utilities Downtrend intact but becoming oversold
…while relative performance remains in a downtrend versus the sector at new lows
Source: Updata, Bloomberg, Trend & Cycle
January 4, 2016 19 2016 U.S. Power & Utility Best Ideas Portfolio
Valuation and Price Target Impediments Abengoa Yield (ABY) Valuation Our $32 price target is derived using a sum-of-the-parts valuation approach. We conduct a DCF on the existing portfolio, using a 7.6% discount rate (derived by adding 450 bps spread to the risk free rate in every country ABY operates and taking a CAFD-weighted average). We value the backlog through a DCF using a 9.1% discount rate. We derive the discount rate by adding 150 bps to the discount rate for the existing portfolio. We then sum the value of the existing portfolio to the value of backlog to derive our price target. Given current market realities, we did not think a valuation approach that derives the majority of its value from the backlog such as a dividend discount model is appropriate.
Price Target Impediments Financial distress at Abengoa SA threatening ROFO list visibility. Inability to manage country risk in Abengoa Yield's far-flung geographies can cause investors to lose confidence in the stock if investors lose faith in management's ability to preserve the binding PPA agreements. Inability to finance accretive acquisitions. A setback in the ramp-up of Solana and Mojave that delays the expected increase to run- rate EBITDA. Pursuit of non-contracted or short-dated projects that could decrease the valuation multiple investors are willing to pay for the stock.
American Electric Power (AEP) Valuation Our price target of $64 is based on a 5% premium to the industry target average P/E multiple of 15.4x on our 2017 EPS estimate of $3.97. We assign the premium to reflect an improved regulatory environment in most of AEP's service areas, a visible long-term earnings growth profile in its transmission segment, as well the benefit from PJM's Capacity Performance auctions for AEP Generation Resources (AGR).
Price Target Impediments Management fails to find a buyer (at a suitable prices) for the Ohio generation assets. AEP Generation Resources (AGR) fails to secure long term PPAs. Lack of improvement in retail load growth. Less visibility on major regulatory growth drivers longer term. Less than constructive rate case decisions at the various utilities.
AES Corp (AES) Valuation Our price target of $12 is derived from a sum-of-the-parts valuation analysis applying various EV/EBITDA multiples to each SBU's 2017 implied EBITDA estimate. We apply higher multiples to the US, Andes, and Asia SBUs (8.8x, 7.0x, and 8.5x, respectively) to reflect the businesses' growing and stable earnings platform. We apply a 5.5x multiple to the Brazil SBU's EBITDA estimate to reflect Brazil's lowered demand growth forecast, continued hydrological conditions, as well as adverse currency moves. Finally, we apply a 7.0x multiple to both MCAC and Europe SBUs to reflect modest growth in the region. The resulting weighted average EV/EBITDA multiple is 7.3x.
January 4, 2016 20 2016 U.S. Power & Utility Best Ideas Portfolio
Price Target Impediments Geopolitical risk in various countries could cause uncertainty for local AES businesses. AEP Generation Resources (AGR) fails to secure long term PPAs. Continued poor hydrology conditions in the Andes, Brazil, and MCAC SBUs could negatively affect earnings. Foreign currency exposure could create translation volatility. Less than constructive rate case decisions at the various utilities. With a medium- to longer-term contract life average of seven years, less than favorable re-contracted terms could negatively affect earnings.
Black Hills Corp (BKH) Valuation Our price target is $55 using sum-of-the-parts analysis. For the regulated Electric and Gas Utilities segments (including SourceGas and COSG), we apply a P/E multiple to the segments' 2017 net income estimates. We apply the industry average P/E of 15.4x for the electric utilities and 16.6x for the gas utilities. For the Power Generation segment, we apply a 9x EV/EBITDA multiple to our 2017 EBITDA estimate to reflect the mostly contracted nature of the assets.
For the Oil and Gas segment, we apply the PV10 value of the company’s proved reserves. We also apply a PV10 value to the undeveloped acreage in the Piceance and San Juan basins, using a $3.25/Mcf natural gas price applied to our estimated proved reserves. Finally, for the Coal Mining segment, we apply a 7.5x EV/EBITDA multiple to our 2017 EBITDA estimate; we believe this is an average trading multiple for coal producers.
Price Target Impediments Oil and gas prices drop from current levels, further lowering the value of the E&P business. The SourceGas acquisition is not accretive. The Cost of Service Gas program is rejected by most or all of the state commissions. Rate base growth at the utilities slows.
Calpine Corp (CPN) Valuation We arrive at our valuation of $21 per share for Calpine based on 2017E adjusted EBITDA of $2,000 million and a 8.0x EV/EBITDA multiple. We apply a premium 8.0x EV/EBITDA multiple to Calpine due to the higher intrinsic value of its generation fleet, consisting of geothermal and natural gas plants.
We add $1.522 billion to the enterprise value based on the net present value of existing federal and state net operating losses (NOLs). As of December 31, 2014, Calpine had $6.9 billion of outstanding federal NOLs and $4.0 billion of state NOLs. We apply the NOLs to estimated taxable income. We assume a 35% federal income tax rate, a 3% state income tax rate, and a 10% discount rate on the cash benefit of the avoided income tax expense.
Lastly, we estimate $11.195 billion of debt and $675 million of cash & cash equivalents in 2017 to arrive at our equity value.
Our $21 price target implies a 2017E FCF per share yield of 13.6%.
January 4, 2016 21 2016 U.S. Power & Utility Best Ideas Portfolio
Price Target Impediments Pending environmental mandates are remanded or delayed. Power market M&A valuations fall. Recovery of power and natural gas prices fail to materialize. Inability to utilize NOLs. Additional renewables push California gas generation further down the dispatch curve.
CenterPoint Energy (CNP) Valuation Our $21 price target is based on sum-of-the-parts analysis. We apply the industry average 15.4x P/E multiple to our FY17 EPS estimate of $0.86 for the electric utility, gas utilities, and gas services segments. For CenterPoint's equity interest in Enable Midstream, we now revise our valuation of CenterPoint's equity stake in Enable from an EV/EBITDA measure to separate equity value of the general partner (GP) and limited partner (LP). Both the GP and LP valuations are based on a multi-stage dividend discount model (DDM), with distribution growth assumptions of 2.5% (two years), 2.9% (next five years), with the growth converging to 1% in perpetuity afterwards. We also assume a discount rate of 9.5% for the LP and 9% for the GP. This results in a $7.32 and $0.30 per share value for the LP and GP, respectively.
Price Target Impediments Continued low oil prices forces Enable to further cut distributions to CenterPoint, jeopardizing the company's ability to grow earnings and dividends 4-6% annually. Lower-than-expected distribution growth at Enable due to low commodity prices. Customer growth at the utilities slow.
CMS Energy (CMS) Valuation Our price target of $40 is based on our 2017 EPS estimate of $2.16 and a P/E multiple of 18.5x. We apply a 20% premium to the industry target average P/E multiple of 15.4x because we believe the constructive regulatory and seemingly supportive legislative environment bode well for the utility ahead of the Michigan energy law changes.
Price Target Impediments Deterioration of constructive regulatory environment leads to less than favorable rate case decisions. Future capacity addition plans (construction, upgrade, acquisition) incur higher costs than expected, which are not approved for recovery. Michigan implements increased retail competition, with the worst-case scenario being full competition.
Consolidated Edison (ED) Valuation Our price target for ConEd is $67, which we derive by applying a 16.1x P/E to our 2017 basic EPS estimate of $4.15. The P/E multiple is at a 5% premium our target "low growth" P/E multiple (15.4x) for the defensive utilities.
Price Target Impediments If the company is able to successfully slow down the growth in O&M expense, it will surpass our expectations. January 4, 2016 22 2016 U.S. Power & Utility Best Ideas Portfolio
Poor results from ConEd's unregulated units could hurt earnings. An adverse finding regarding CECONY's responsibility in the East Harlem gas explosion could pressure ED's stock price.
Dominion Resource (D) Valuation We utilize a sum-of-the-parts valuation method applying a P/E multiple to VEPCO and EV/EBITDA multiples to the other businesses based on 2017 earnings.
We apply a premium 17.7x P/E multiple to VEPCO for a constructive legislation in Virginia and low ROE risk. The multiple is a 15% premium to our 15.4x regulated group average.
We apply EV/EBITDA multiples of 11.0x to Gas Distribution, and 13.0x to Gas Transmission. We use a premium multiple for Gas Transmission to capture Dominion's fast-growing midstream presence in the Utica and Marcellus shales and our expectation for further growth. We apply 6.0x EV/EBITDA multiple to Retail. Finally, we apply an 8.0x EV/EBITDA multiple to "Open" EBITDA at Merchant Generation (excluding solar), which assumes no hedging, and 13.0x EV/EBITDA on the merchant solar assets.
We value the Cove Point liquefaction project at ~$8 per share and the potential Atlantic Coast Pipeline & Supply Header projects at ~$3 per share using a 13.0x EV/EBITDA multiple.
We value the LP units of Dominion Midstream (DM, $30.66, Outperform) at ~$3 per share based on a $41 RBC price target (covered by TJ Schultz). The valuation is derived using a multi-stage distribution discount model (DDM) that is based on our distribution estimates over our forecast period followed by the medium term (five-year) growth rate of 22.0%. We arrive at ~$8 per share for Dominion's GP interest in Dominion Midstream using the net present value of future after-tax GP distributions, assuming a discount rate of 8% and a perpetual growth rate of 2% for the terminal value.
Price Target Impediments Development activity in the Marcellus and Utica Shales declines or halts, impacting project growth in the natural gas transmission segment negatively. Delays in build out of Cove Point or approval process of Atlantic Coast Pipeline. Commodity prices continue to be depressed and the merchant generation earnings are pressured. Increased cost of capital for Dominion Midstream and making it more difficult for Dominion Resources to recycle capital towards new projects. Virginia regulatory environment turns less constructive.
Duke Energy (DUK) Valuation Given the concerns around the international segment, we have started using a sum-of-the- parts approach, in order to give the international segment a lower multiple. To reach our $84 price target, we apply a 17.7x P/E multiple to adjusted Utility, Commercial, Parent and Other 2017E earnings of $4.44. Our target multiple is at a 15% premium to our 2016 group target multiple of 15.4x. Under this approach, we value the Utility, Commercial, Parent and Other segments at $77/share. We apply a 10.0x P/E multiple to our 2017E international segment earnings of $0.50 for a value of $5/share.
January 4, 2016 23 2016 U.S. Power & Utility Best Ideas Portfolio
We believe that Duke deserves a premium multiple for its heavy portfolio weight of regulated and contracted earnings, average growth, constructive regulatory environments, and being one of the most liquid defensive names.
Price Target Impediments Usage growth does not materialize or usage declines. Capital expenditures are lower than planned and earnings growth slows as a result. PNY Merger synergies are less than expected and fail to offset rising expenses as expected. Change in International segment outlook due to a lower oil price, which reduces earnings at National Methanol Company, or a prolonged drought in Brazil, which also reduces earnings at the hydroelectric facilities.
Dynegy Inc. (DYN) Valuation We arrive at our $24 price target by applying a 7.5x EV/EBITDA on our 2017E adjusted EBITDA (excluding Brayton Point) of $1,128 million. The 7.5x multiple is a blended average applying 6.0x to IPH, 6.0x to CoalCo, 8.0x to GasCo, and 7.5x to Corporate. We add $45 million to reflect the NPV of 2017E Brayton Point cash flow before its retirement. Finally, we calculate a 2017E net debt balance of $6,407 million. Our $24 price target implies a 2017E FCF per share yield of 18.5%.
Price Target Impediments Recovery of power and natural gas prices fails to materialize. Power market M&A valuations fall. Additional environmental regulations add to environmental compliance costs. Higher coal or fuel transportation costs make assets less economic. Additional subsidies/contracts given to competing generation resources.
Edison International (EIX) Valuation We apply a 17.7x P/E multiple to our 2017E core EPS of $4.04 to arrive at our $72 price target. The 17.7x P/E multiple is a 15% premium to our group average of 15.4x. This premium is premised on SCE's supportive regulatory environment and above-average long-term rate base, earnings, and dividend growth outlook.
Price Target Impediments Negative change in California regulatory environment. Unplanned reductions in the capital spending program. SONGS settlement is reopened.
Entergy (ETR) Valuation Our $78 price target is derived by using a sum-of-the-parts valuation. We apply a 13.9x P/E multiple to the sum of the Utility, Parent and Other 2017E net income. Our multiple is at a 10% discount to our target average group multiple of 15.4x. We believe Entergy deserves a discounted multiple despite recent strong load growth, which shows some signs of slowing, on account of less constructive, but improving, regulation. We value Entergy Wholesale Commodities using a 5.0x EV/EBITDA multiple on 2017E adjusted EBITDA. We apply a lower
January 4, 2016 24 2016 U.S. Power & Utility Best Ideas Portfolio
multiple than the typical 6.0–8.0x due to ongoing regulatory risk with the Indian Point nuclear license renewal, and the persistent low power prices.
Price Target Impediments Power prices decline from our current expectations and margins compress at the unregulated wholesale segment. Unregulated nuclear plants do not receive license extensions and/or additional nuclear plants shut-down. Sales growth is lower than our expectations. The utilities are not able to earn the allowed ROEs. Entergy is required to supplement the unregulated nuclear decommissioning trust funds. Investors are concerned that Entergy will attempt another structural reorganization.
Exelon Corp (EXC) Valuation Our $32 price target uses a sum-of-the-parts analysis. For PECO, ComEd and BGE, we apply the industry average P/E multiple of 15.4x to the utilities’ 2017E net income. For Exelon Generation (ExGen), we apply a 7.5x multiple to its 2017 “open” EBITDA, which reflects the potential value of selling all of its output at the spot price. Finally, we calculate the net present value (NPV) of the value of existing hedges for 2015–2017, which represents an additional cash benefit to the company.
Price Target Impediments Further deterioration or non-recovery of forward power curves leads to non-profitable power plant economics. The proposed acquisition of Pepco Holdings is ultimately rejected in 1Q16. Less-than-expected merger synergies are realized or delayed further than forecasted. Unfavorable turn in regulatory environment in Illinois and Maryland. EDF put price is higher than expected. Ratings agencies downgrade parent/sub to non-investment grade.
FirstEnergy Corp (FE) Valuation Our $39 price target is based on a sum-of-the-parts analysis. We break FirstEnergy into three major segments: regulated utilities, transmission, and competitive energy services. For the regulated utilities segment, we value the segment by applying a P/E multiple on our 2017 net income estimate. We apply the target industry average P/E multiple of 15.4x to reflect a net neutral regulatory environment across the utilities. We apply a 5% premium P/E multiple on the transmission segment to reflect the higher allowed ROE's as well as the segment's robust rate base growth. For the competitive energy services (CES), we apply a 7.0x EV/EBITDA multiple to our 2017E EBITDA to reflect positive contributions from PJM's Capacity Performance revenues, but also the negative impact of lower gas and power prices.
Price Target Impediments Ohio PPA proposal is rejected by the state commission. Less-than-expected O&M savings pressures earnings further. Competitive retail margins are compressed further from lower power prices. Management issues a significantly larger amount of bulk equity than anticipated. S&P and/or Moody's downgrades FirstEnergy to below investment grade.
January 4, 2016 25 2016 U.S. Power & Utility Best Ideas Portfolio
InfraREIT Inc. (HIFR) Valuation Our price target of $24 is based on a target yield approach. We view the defensive regulated utilities as HIFR’s closest peer group (although we acknowledge that this comparison is not ideal). To reach our PT, we apply a 25% discount to the 3.8% implied dividend yield of regulated utilities at our target P/E multiple of 15.4x. This implies a target yield for stand- alone HIFR 5.1%. We believe this discount is merited despite HIFR’s above-average rate-base and dividend growth given their heightened regulatory risk associated with the REIT structure, as well as technical pressures, which we expect to persist such as significant insider selling and the lack of natural core holders. Our $24 PT does not assign any value to the possibility that HIFR eventually acquires Oncor, as we believe there will not be clarity around HIFR’s involvement in any potential transaction during our 12-month investment horizon
Price Target Impediments Inability to apply the REIT structure outside of Texas. Hunt fails to acquire Oncor. InfraREIT receives a negative rate case decision that lowers revenues. Sharyland encounters delays or cost overruns in the construction of its footprint projects. Slowdown in the Texas economy hinders organic growth.
The Laclede Group (LG) Valuation We derive our $63 price target by applying an 18x P/E multiple on our 2017 earnings per share estimate of $3.50. We use a dividend discount model that suggests that a 3.5% growing gas utility should be valued at 16.6x. Our main assumptions for our DDM model are: 5.31% market premium, 4% risk free rate, 0.61 beta, 3.5% dividend growth, and 65% dividend payout ratio. We then apply an 8.5% premium to reflect Laclede's promising takeout profile.
Price Target Impediments Inability to deliver cost savings Weakness in utility stocks Negative regulatory decisions.
NextEra Energy (NEE) Valuation We value NextEra Energy at $125 using a sum-of-the-parts valuation. We apply an 18.5x P/E multiple to Florida Power & Light 2017E earnings. We apply a premium multiple to FPL due to its strong rate base growth, clean portfolio, constructive regulatory environment, absence of new plant development risk, and potential upside to the capital investment plan. Our defensive group average is a 15.4x P/E multiple. At Energy Resources, we apply EV/EBITDA multiples to 2016E EBITDA of 10x to contracted wind, 12x for contracted other, and 9x for new investment, 7x to other businesses (supply-related and trading), and 7.0x to gas infrastructure. On the hedged wind and merchant segments, we apply a 7x EV/EBITDA multiple to 2015E "open" EBITDA. We also add the net present value of tax credits beyond 2015 to the Energy Resources enterprise value. We apply a 14.5x P/E multiple to Lone Star Transmission expected 2017 net income of $34 million. And we incorporate a $2 value for
January 4, 2016 26 2016 U.S. Power & Utility Best Ideas Portfolio
the potential Florida Pipeline Project. Given the weakness of the YieldCo sector, we are not including NEE’S IDR distributions in our valuation.
Price Target Impediments Lower-than-expected load growth would reduce earnings growth Failure to execute on any of the potential growth projects at FPL. A negative change in the Florida regulatory environment could limit FPL's earnings ability and reduce the multiple we apply to FPL earnings. Impairment of NEP’s ability to acquire contracted wind projects from NEER Delays in EPA regulation might reduce the "green premium."
NRG Yield (NYLD) Valuation Our base price target of $16 is derived from a sum-of-the-parts valuation, taking the present value of the future levered cash flows of NYLD's existing asset portfolio and its identified growth backlog. We discount the cash flows of the existing portfolio at 6.5% given the long- term, contracted nature of these assets. We discount the cash flows of the growth backlog at 7.5% as we believe these assets warrant a higher discount rate due to greater development, execution, and capital markets risk. We assume useful lives of assets to be 30 years post commercial operation date (50 years for thermal energy). We assume a ~10% CAFD yield on future drop-downs and a long-term tax rate of 35%. Our price target implies a 5.9% yield on our 2016E dividend per share of $0.94.
Price Target Impediments Failure to acquire assets in an accretive manner to support CAFD growth. Output volatility from unforced outages or variability in renewable production. Higher cost of capital led by weakness in investor sentiment towards YieldCos. Geographic and counterparty risk from concentration of assets in California and off- taken by SCE and PG&E.
Pattern Energy (PEGI) Valuation Our base case price target of $29.00 is based on a sum-of-the-parts valuation using the DCF approach. We derive the value of the existing portfolio using a 6.5% discount rate and the value of the backlog using a 7.5% discount rate (applied a 100bps spread to reflect execution and capital markets risks). Our price target is derived by adding the two values together and implies an 8.4% equity IRR, which is in line with its peers.
Price Target Impediments Acquisitions, including drop-downs from PEG LP, are predicated on a reasonably robust stock price. Absent that, the company will find it harder to deliver accretive growth. Management's inability to grow the dividend at least 10% a year. Inability to find accretive power projects to facilitate growing cash flow per share. Pursuit of non-contracted or short-dated projects could decrease the valuation multiple that investors are willing to pay for the stock. A meaningful departure from a "clean" generation fleet may affect the stock's value. A large sell-off from PEG LP, Pattern's largest shareholder, could dampen the stock price.
January 4, 2016 27 2016 U.S. Power & Utility Best Ideas Portfolio
PG&E Corporation (PCG) Valuation Our price target for PG&E is $59. We assign a 15.8x P/E multiple on PG&E’s 2017 earnings. The P/E multiple is reflective of a 2.5% premium to our target peer group 2017 P/E. Our multiple takes into account the possibility for additional headline risks at PCG associated with ongoing investigations from both the CPUC and federal fronts.
Price Target Impediments Additional fines or penalties that are unexpected related to ex parte communications or safety-related matters. An unconstructive decision in the Gas Transmission & Storage case could make investors question the commitment that regulators have to infrastructure investment in California. Unplanned reductions in the capital spending program.
Pinnacle West (PNW) Valuation Our $68 price target is based on our 2017 earnings estimate of $4.19 per share. We apply a 6% premium to the peer group target P/E multiple of 15.4x to account for an increasingly constructive regulatory environment in Arizona, as well as management's plan to grow dividends 5% annually, up from 4% prior. This premium is lower than the previous 7.5% level due to increasing concerns regarding load growth trends.
Price Target Impediments Load growth continues to struggle. ACC lowers APS's allowed ROE significantly in the next rate case. Retail electric competition discussions resurface and result in deregulation in Arizona. Higher operating costs versus expectations during the rate case stay-out period.
PNM Resources (PNM) Valuation Our $36 price target reflects an 18.5x P/E multiple applied to 2017 estimated earnings of $1.94. We apply a 20% premium to PNM Resources over the 15.4x group average P/E. We believe that PNM Resources deserves the premium due to continued above-average earnings and dividend growth through 2019, an improving regulatory environment in New Mexico, and also because PNM Resources is a potential acquisition target.
Price Target Impediments Less-than-favorable decision in PNM general rate case. M&A activity slows. Continued negative load growth at PNM.
PPL Corp. (PPL) Valuation We apply a sum-of-the-parts valuation to reach our $37 price target. We apply a 16.2x P/E multiple to our 2017E adjusted net income at the U.S. segments. Our 16.2x P/E is a 5% premium to our group average of 15.4x due to above-average rate base growth at both utilities.
January 4, 2016 28 2016 U.S. Power & Utility Best Ideas Portfolio
We apply a 14.2x P/E multiple to our 2017E adjusted net income at the U.K. segment, which is a 5% premium to our U.K. regulated group average of 13.5x. We assign this premium as PPL operates the only distribution network that received fast-tracking status in Ofgem's RIIO- ED1 control period. Lastly, we apply a 15.0x P/E to Parent net income.
Price Target Impediments Any negative change in regulatory environment in Pennsylvania, Kentucky, or the United Kingdom, which reduces earned returns or creates regulatory uncertainty. Rate base growth is lower than expected if planned projects in Kentucky and Pennsylvania are canceled or delayed. Load growth slows or energy efficiency more than offsets any load growth pressuring margins. Lower RPI forecasts or lower GBP/USD FX rates.
Public Service Enterprise Group (PEG) Valuation Our price target of $43 is based on a sum-of-the-parts analysis, in which we apply a P/E multiple to PSE&G and an EV/EBITA multiple to PSEG Power. For PSE&G, we apply a 5% premium to the industry average P/E multiple of 15.4x to reflect a constructive regulatory environment and long-term visibility in rate base growth. For PSEG Power, we carve out our estimate of BGS incremental benefit and apply a 4x EV/EBITDA multiple. In our view, BGS contracts provide a steady and consistent method to minimize earnings volatility, although the BGS impact is decreasing. We also estimate "open" EBITDA for PSEG Power. In other words, we estimate the value of PSEG Power's output if it were to sell at spot price. We apply a 7.5x EV/EBITDA multiple on the "open" EBITDA estimate to reflect the positive impact of PJM Capacity Performance revenues as well as the positive gas basis of its gas generation fleet. Another component of PSEG Power valuation is the in- or out-of-money hedges it utilizes. Once we calculate whether the hedges are "in- or out-of-money", we calculate a net present value to include in our valuation.
Price Target Impediments Deterioration of constructive regulatory and/or legislative environment in NJ. Sustained low power prices from lack of power demand. Marcellus gas price basis difference narrows, reducing Power's margin benefit. PSEG is heavily penalized by the FERC regarding the historical over-collection of fossil unit revenues.
Sempra Energy (SRE) Valuation We use a sum-of-the-parts valuation to arrive at our $119 price target. We apply a P/E multiple of 17.7x to our 2017E SDG&E EPS, which is a 15% premium to our regulated electric group average of 15.4x. We apply a 17.4x P/E to our 2017E SoCalGas EPS, which is a 5% premium to our regulated gas group average of 16.6x. Lastly, we apply a P/E multiple of 12.5x on 2017E South American utilities EPS.
We apply EV/EBITDA multiples of 11.0x to our 2017E EBITDA for IEnova, 12.0x for US Natural Gas, and 13.0x for US Renewables. We use a 17.5x 2017E P/E multiple for the IEnova joint ventures. These premium multiples reflect our expectations for higher growth and increased investment opportunities in long-term contracted assets at these segments.
January 4, 2016 29 2016 U.S. Power & Utility Best Ideas Portfolio
We add ~$23/share in value for Cameron liquefaction trains 1-3. The $23 value reflects three liquefaction trains totaling 1.7 bcf/d of nameplate capacity with a 13.0x EV/EBITDA multiple applied to Sempra's proportionate EBITDA. We add ~$6/share to reflect a 50% probability of a two-train expansion at Cameron and ~$2/share to reflect a 20% probability for a two-train liquefaction facility at ECA.
Price Target Impediments Delays with the liquefaction project construction. Liquefaction expansion opportunities at Cameron and Energia Costa Azul are not pursued. Negative change in California regulatory environment. IEnova midstream projects are delayed or canceled. IEnova is unable to win additional projects. Lower than expected load growth in Chile and Peru. Aliso Canyon gas leak worsens.
Southern Company (SO) Valuation To reach our $53 price target, we apply a 16.6x P/E multiple to our 2017 earnings estimate of $3.19. Our target multiple of 16.6x represents a 7.5% premium to our regulated utility group average of 15.4x. We apply a premium multiple to Southern Company for constructive regulation, growing industrial sales, sound utility operations, increasing gas infrastructure leverage, and superior management team. However, 7.5% is lower than the premium that we have applied to Southern in the past due to construction risk in Mississippi and Georgia.
Price Target Impediments Cost overruns or delays in construction might limit recovery on costs and lead to additional equity needs. Regulatory hurdles may cause the AGL Resources acquisition to be rejected, causing SO to miss our 2017 estimates. A negative change in the regulatory environments could limit the utilities' earning ability. A negative change in nuclear sentiment in the US could adversely delay construction and limit growth. Economic growth and development in the territories are slower than expected. Income stocks are no longer as attractive as interest rates rise.
Unitil (UTL) Valuation Our $37 price target is derived from applying an 18.3x P/E multiple to our 2017 earnings estimate of $2.05 per share. Our multiple is at a 10% premium to our target P/E multiple (16.6x) for gas utilities (LDCs) and a 20% premium to electric utilities. Our higher multiple reflects Unitil’s organic growth platform and attractive takeout characteristics.
Price Target Impediments Higher than expected operation and maintenance would reduce earnings, thus potentially reducing the stock price. Negative outcome from rate cases that were recently filed could impact the stock price. Severe weather conditions could reduce demand, which might affect the stock price. A dividend cut would lead to a lower stock price; we do not foresee a reason for such an action. January 4, 2016 30 2016 U.S. Power & Utility Best Ideas Portfolio
Xcel Energy (XEL) Valuation We derive our $40 price target by applying a 16.9x P/E multiple to Xcel’s 2017 earnings (a 10% premium to our target defensive P/E of 15.4x). Our premium multiple is justified by the company’s ability to grow the dividend 5%+, in our view. Furthermore, a return to a more constructive rate-making in Minnesota should support continued 5–6% EPS growth through 2018, which at the upper end of management's guidance.
Price Target Impediments Adverse regulatory decisions at Xcel's two main states, Colorado and Minnesota A material slowdown in the capital spending program, which could dramatically cut earnings growth A dividend cut or even a lack of growth of the dividend (which seems highly unlikely)
January 4, 2016 31 2016 U.S. Power & Utility Best Ideas Portfolio
Company profiles
January 4, 2016 32 2016 U.S. Power & Utility Best Ideas Portfolio
Shelby G. Tucker, CFA David Emami Managing Director Associate RBC Capital Markets +1.212.428.6462 +1.212.618.2668 [email protected] [email protected] Abengoa Yield (ABY); Outperform; $32 Price Target; 74.8% Potential Return
Stock Price: $19.29 Market Cap. ($mm): 1,933 Daily Volume ('000): 2,004 52-wk Price Range: $13.51-$38.84 Shares Out. (mm): 100.22 Dividend: $1.720 2017 Consensus EV/EBITDA: 7.0x Float: 50.9% Dividend Yield: 8.9% Volatility/Beta: - Short Interest: 14.5% Risk To Dividend: Medium
Investment Thesis We believe that Abengoa Yield will outperform its peers due to its attractive asset portfolio and compelling valuation. While we acknowledge that the financial struggles of ABY's sponsor cast doubt on the viability of ABY's growth pipeline, we believe the current equity value reflects a discount to the fair value of the existing portfolio. The potential resolution of ABY's sponsor's troubles, either through a sale of their ABY stake, a court-ordered restructuring or alternative methods should serve as the catalyst which causes investors to return to ABY. We note that the current dividend (~$1.72/share) would represent a payout of less than 60% of cash available for distribution (CAFD). We believe that as a result of this lower-than-average payout ratio, the dividend is not at risk, and investors will be compensated while they wait for resolution of Abengoa SA's problems.
($ in millions) 2015E 2016E 2017E 2018E Key Metrics 2015E 2016E 2017E 2018E Revenues 808 1,039 1,381 1,682 P/CAFD (x) 9.4 6.9 6.6 6.2 Adjusted EBITDA 647 831 1,105 1,346 EV/EBITDA (x) 8.4 8.8 7.3 6.0 EBIT 506 689 949 1,190 FCF Yield -12.7% 14.4% 20.7% 25.4% RBCCM CAFD/share 2.06 $2.79 $2.91 $3.09 Dividend Yield 8.6% 11.1% 12.5% 14.4% CAFD Growth 111.5% 35.4% 16.2% 14.4% Credit Metrics Dividend/Share $1.66 $2.15 $2.42 $2.79 FFO Cov. (x) 0.6 2.8 2.8 2.8 Dividend Payout 80.5% 77.0% 83.0% 90.0% FFO/Debt -2.3% 10.1% 11.7% 14.4% Street EBITDA $617.9 $761.2 $962.9 N/A Debt/Capital 48.0% 49.1% 49.4% 49.3%
Investment Positives Investment Risks - Visible 19.9% 5-year dividend growth outlook with current pipeline of ROFO -Sponsor overhang due to Abengoa SA's impending stake sale designated and other eligible assets if Abengoa recovers -Difficulty accessing capital markets potentially delaying or preventing acquisitions due to - Geographically and technologically diverse asset portfolio high cost of capital - Best in class PPAs (avg. remaining life of 23 yrs vs industry avg of 19) - Sponsor risk- financial duress of EIG or Abengoa may jeopardize growth prospects - Proven development track record of sponsor company - Cross default provisions exist, placing cash flows from ABY's assets at risk in the event of - Valuation is compelling default from ABY's sponsor
Potential Catalysts Calendar of Events - Abengoa SA restructuring 1H16 Abengoa SA equity issuance? - 2015 dividend increase -1Q16: increase dividend ? Increase 2016 DPS guidance - 1H16: Hire CFO Increasing long-term dividend guidance growth - Late 2016: refinance term facility and update 2016 DPS guidance Announce 3rd party acquisition
150 Company Description 140 Abengoa Yield is a dividend growth-orientated company which owns and operates solar, wind and conventional power generation in the United States, Mexico, Spain 130 and electric transmission lines in Latin America. Each of ABY's projects has a 120 contract to sell all of its production pursuant to a long-term, fixed -power price 110 contract, with a credit-worthy counterparty. The weighted average remaining life 100 of these Purchase Power Agreements (PPAs) is approximately 23 years. 90 80 CEO: Santiago Seage 70
week Relative Performance Relative week CFO: N/A - 60 52 IR Contact: Leire Perez 50 Phone: +34 954 937111 12/31/14 2/28/15 4/30/15 6/30/15 8/31/15 10/31/15 12/31/15 Headquarters: Madrid, Spain ABY UTY SPX Website: www.abengoayield.com Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15.
January 4, 2016 33 2016 U.S. Power & Utility Best Ideas Portfolio
Abengoa Yield Shelby Tucker; +1.212.428.6462 Summary Financial Statements David Emami; +1.212.618.2668 Millions of Dollars Except for Per Share Amounts Fiscal Year Ending December 31 Summary Income Statement 2014A 2015E 2016E 2017E 2018E Revenues 443 808 1,039 1,381 1,682 Operation and Maintenance (23) (66) (85) (113) (137) General and Administrative (121) (77) (77) (77) (77) Depreciation (126) (141) (143) (156) (156) Operating Income 173 525 735 1,035 1,312 Adjusted EBITDA 307 647 831 1,105 1,346 EBIT 186 506 689 949 1,190 Interest Expense (210) (228) (298) (394) (482) EBT (25) 278 391 555 707 Income Taxes (4) (84) (117) (166) (212) Adjusted Net Income (29) 195 274 388 495 Net Income - Common Shareholders (3) 180 252 358 456 Cash Available For Distribution 98 206 279 325 371 Basic Shares Outstanding 80.0 100.2 100.2 111.5 120.0 Diluted Shares Outstanding 80.0 100.2 100.2 111.5 120.0 Diluted Earnings Per Share ($0.04) $1.79 $2.52 $3.21 $3.80 EPS Growth N/A N/M 40.4% 27.6% 18.5% Dividend Per Share $0.5492 $1.6584 $2.1472 $2.4159 $2.7852 Dividend Growth n/a 202.0% 29.5% 12.5% 15.3% CAFD Payout Ratio 90.0% 80.5% 77.0% 83.0% 90.0% Summary Statement of Cash Flow 2014A 2015E 2016E 2017E 2018E Net Income (29) 450 252 358 456 Cash interest paid 126 (228) (298) (394) (482) Change in Working Capital (68) 7 - - - Cash Flow from Operations (146) 237 544 720 875 Funds From Operations (FFO) (78) 230 544 720 875 Capital Expenditures (123) (50) (50) (50) (50) Sale (Purchase of Assets) (222) (799) (53) (409) (403) Cash Flow from Investing (345) (849) (103) (459) (453) Short/Long-Term Debt, net 3,469 5,380 5,386 6,147 6,092 Common Issuance/Buyback, net - 662 - 306 245 Common Dividend (44) (166) (215) (269) (334) Cash Flow from Financing 272 928 (402) (152) (327) Summary Balance Sheet 2014A 2015E 2016E 2017E 2018E Cash and Equivalent 354 663 708 817 911 Current Assets 735 1,531 1,923 2,651 2,874 Net Properties, Plant, and Equipment 6,725 9,566 9,823 11,101 11,101 Other Long-Term Assets 504 558 585 235 235 Total Assets 7,964 11,655 12,405 14,084 14,212 Short-Term Debt (incl. Current Maturities) 331 575 423 423 423 Other Current Liabilities 250 267 315 412 412 Current Liabilities 581 876 855 1,002 1,048 Long-Term Debt 3,492 5,467 5,671 6,540 6,580 Other Long-Term Liabilities 1,675 1,710 1,710 1,710 1,710 Common Equity 1,840 2,278 2,943 3,576 3,618 Liabilities and Shareholders' Equity 7,964 11,656 12,405 14,084 14,212 Total Capitalization 7,964 11,656 12,405 14,084 14,212 Operations Statistics Total Generation Owned: The company's current portfolio consists of 1,536 MW of generation assets, of which 80% is renewables, 1,099 miles of elect ric transmission lines, two water desalination facilities and a financial asset related to ABY's investment in Brazilian electric transmission lines.
Source: Company reports; RBCCM estimates; FactSet Priced as of market close ET, 12/31/15.
January 4, 2016 34 2016 U.S. Power & Utility Best Ideas Portfolio
Shelby G. Tucker, CFA Insoo Kim, CFA Managing Director Associate RBC Capital Markets +1.212.428.6462 +1.212.905.2995 [email protected] [email protected] American Electric Power (NYSE: AEP); Sector Perform; $64 Price Target; 13.3% Potential Return
Stock Price: $58.27 Market Cap. ($mm): 28,600 Daily Volume ('000): 3,106 52-wk Price Range: $52.29-$65.38 Shares Out. (mm): 490.8 Dividend: $2.030 2017 Consensus P/E: 15.0x Float: 100.0% Dividend Yield: 3.5% Volatility/Beta: 0.21x Short Interest: 1.1% Risk To Dividend: Low
Investment Thesis We are encouraged by the improved regulatory environment in the various regulated jurisdictions for AEP, as well as signs of improving load growth. Although we continue to be concerned longer-term with muted forward power curves, the de-regulated Ohio generation fleet stands to benefit from the PJM Capacity Performance auction results as well as Ohio Power's recently settled purchase power agreement (PPA) rider. We expect management's plans to sell the non-PPA Ohio assets to be dilutive to earnings but could result in a valuation uplift from becoming fully regulated. We currently expect the company to achieve around 5.5% EPS CAGR from 2014 to 2018, which assumes the PPA is approved by the Ohio commission and with ongoing operations of the merchant generation business.
(millions) 2015E 2016E 2017E 2018E Key Metrics 2015E 2016E 2017E 2018E Gross Margins 11,007 10,524 10,870 11,092 P/E (x) 15.7 15.8 14.7 13.8 EBITDA 5,626 5,786 6,146 6,493 EV/EBITDA (x) 8.6 8.8 8.4 8.1 EBIT 3,559 3,592 3,837 4,068 FCF Yield -4.6% -7.2% -2.7% -2.1% RBCCM EPS $3.72 $3.69 $3.97 $4.22 Dividend Yield 3.7% 3.9% 4.1% 4.4% EPS Growth 8.6% -0.8% 7.7% 6.2% Credit Metrics Dividend/Share $2.15 $2.27 $2.40 $2.55 FFO Cov. (x) 5.8 5.3 5.4 5.4 Dividend Payout 57.8% 61.5% 60.4% 60.4% FFO/Debt 21.7% 18.3% 18.7% 19.1% Street EPS $3.73 $3.71 $3.89 $4.15 Debt/Capital 53.2% 54.6% 54.6% 54.3%
Investment Positives Investment Risks - Leading developer of long-distance transmissions - Low gas prices suppress economics for AEP Generation Resources. - Proactive in regulatory actions to minimize regulatory lag - Lack of improvement in retail load growth. - Above 5% compounded earnings growth through 2018 with similar level of dividend - Less visibility of major regulatory growth drivers longer-term. growth - Less than constructive rate case decisions at the various utilities.
Potential Catalysts Calendar of Events - Ohio commission approves the proposed PPA. - 1Q16: Final decision in Ohio for proposed PPA - Management decides to divest its deregulated generation assets in an accretive - May 2016: PJM Capacity Performance auction manner. - Load growth continues to exceed expectations. - Successful implementation of cost cutting and revenue enhancement programs.
110 Company Description American Electric Power (AEP) is one of the largest electric utilities in the 105 country, serving more than 5 million customers in 11 states. AEP owns about 38,000 MWs of generation and the largest transmission systems in the U.S., 100 covering about 40,000 miles of network.
95
90
CEO: Nick Akins week Relative Performance Relative week
- 85 CFO: Brian Tierney
52 IR Contact: Bette Jo Rozsa 80 Phone: +1.614.716.2840 12/31/14 2/28/15 4/30/15 6/30/15 8/31/15 10/31/15 12/31/15 Headquarters: Columbus, OH AEP UTY SPX Website: www.aep.com Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15. January 4, 2016 35 2016 U.S. Power & Utility Best Ideas Portfolio
American Electric Power Co. Shelby Tucker; +1.212.428.6462 Summary Financial Statements Insoo Kim; +1.212.905.2995 Millions of Dollars Except for Per Share Amounts Fiscal Year Ending December 31, Summary Income Statement 2014A 2015E 2016E 2017E 2018E
Gross Margins 10,726 11,007 10,524 10,870 11,092 Operation and Maintenance (4,586) (4,618) (3,902) (3,855) (3,701) Depreciation (1,929) (2,067) (2,194) (2,310) (2,425) Operating Income 3,296 3,366 3,399 3,644 3,875 EBITDA 5,368 5,626 5,786 6,146 6,493 EBIT 3,439 3,559 3,592 3,837 4,068 Interest (885) (899) (945) (977) (1,023) EBT 2,554 2,660 2,647 2,859 3,044 Income Taxes (965) (923) (918) (992) (1,056) Continuing Net Income 1,675 1,823 1,812 1,951 2,072 Net Income - GAAP 1,675 1,827 1,816 1,955 2,076 Adjusted Net Income 1,675 1,823 1,812 1,951 2,072 Basic Shares Outstanding 489 490 491 491 491 Diluted Shares Outstanding 489 490 491 491 491 Diluted Earnings Per Share 3.43 3.72 3.69 3.97 4.22 EPS Growth 6.1% 8.6% -0.8% 7.7% 6.2% Dividend Per Share $2.0300 $2.1500 $2.2700 $2.4000 $2.5500 Dividend Growth 4.1% 5.9% 5.6% 5.7% 6.3% Dividend Payout Ratio 59.3% 57.8% 61.5% 60.4% 60.4% Summary Statement of Cash Flow 2014A 2015E 2016E 2017E 2018E Net Income 1,638 1,823 1,812 1,951 2,072 Depreciation & Amortization (incl. Nuclear) 2,073 2,211 2,338 2,454 2,569 Change in Working Capital 128 - - - - Cash Flow from Operations 4,613 4,326 4,045 4,300 4,536 Funds From Operations (FFO) 4,485 4,326 4,045 4,300 4,536 Capital Expenditures (4,134) (4,585) (4,988) (3,888) (3,888) Sale (Purchase of Assets) (59) 400 - - - Cash Flow from Investing (4,406) (4,285) (5,088) (3,988) (3,988) Short/Long-Term Debt, net 876 1,450 2,394 1,234 935 Common Issuance/Buyback, net 73 100 100 100 100 Common Dividend (998) (1,058) (1,115) (1,178) (1,252) Cash Flow from Financing (162) (25) 994 (195) (449) Summary Balance Sheet 2014A 2015E 2016E 2017E 2018E Cash and Equivalent 163 178 130 247 346 Current Asset 4,478 4,544 4,409 4,587 4,727 Gross Properties, Plant, and Equipment 64,305 68,890 73,878 77,766 81,654 Net Properties, Plant, and Equipment 44,117 46,635 49,429 51,008 52,471 Regulatory Assets 4,264 4,264 4,264 4,264 4,264 Total Asset 59,633 62,179 64,838 66,595 68,197 Short-Term Debt (incl. Current Maturities) 3,849 2,217 2,952 2,323 2,898 Current Liabilities 7,967 6,335 7,070 6,441 7,016 Regulatory Liabilities 3,892 4,087 4,291 4,505 4,731 Long-Term Debt 16,181 17,908 19,302 20,935 21,183 Preferred Stock/Hybrids - - - - - Common Equity 16,820 17,685 18,483 19,356 20,276 Liabilities and Shareholders' Equity 59,633 62,179 64,838 66,595 68,197 Total Capitalization 36,850 37,811 40,737 42,613 44,356 Operations Statistics Total Generation Owned: 40.2 GW, 7.2 GW of Ohio generation assets unregulated Total Utility Customers: 5.3 Million Electric States with Utility Operations: AR, IN, KY, LA, MI, OH, OK, TN, TX, VA and WV Non-Regulated Activities: River Transportation (MEMCO) Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15. January 4, 2016 36 2016 U.S. Power & Utility Best Ideas Portfolio
Shelby G. Tucker, CFA Insoo Kim, CFA Managing Director Associate RBC Capital Markets +1.212.428.6462 +1.212.905.2995 [email protected] [email protected] AES Corp (NYSE: AES); Outperform; $12 Price Target; 30.0% Potential Return
Stock Price: $9.57 Market Cap. ($mm): 6,439 Daily Volume ('000): 5,988 52-wk Price Range: $8.76-$14.02 Shares Out. (mm): 672.9 Dividend: $0.440 2017 Consensus P/E: 7.7x Float: 99.7% Dividend Yield: 4.6% Volatility/Beta: 1.22x Short Interest: 1.9% Risk To Dividend: Low
Investment Thesis AES Corp. is currently taking the necessary steps to shed its non-core assets and exit out of several countries, as well as using the proceeds to invest in high growth projects in core countries. However, AES has continued to be under pressure given continued bad hydrology conditions and adverse foreign exchange impacts. With the recent cut to 2016-2018 earnings growth guidance, we believe the "value trap" scenario could play out near-term until the macro headwinds recover. Starting in 2017, the company should begin to reap the benefits of its various international investments.
($ in millions) 2015E 2016E 2017E 2018E Key Metrics 2015E 2016E 2017E 2018E Revenues 14,642 14,569 15,153 15,509 P/E (x) 8.0 8.9 7.9 7.2 EBITDA 4,406 4,309 4,535 4,749 EV/EBITDA (x) 6.6 6.9 6.6 6.6 EBIT 3,062 2,873 3,007 3,129 FCF Yield -0.9% -1.9% 0.6% 2.8% RBCCM EPS $1.19 $1.08 $1.21 $1.34 Dividend Yield 4.2% 4.6% 5.0% 5.5% EPS Growth -8.4% -9.4% 12.5% 10.2% Credit Metrics Dividend/Share $0.40 $0.44 $0.48 $0.53 FFO Cov. (x) 2.8 2.8 2.9 3.0 Dividend Payout 33.6% 40.8% 39.5% 39.6% FFO/Debt 12.8% 12.2% 12.9% 13.0% Street EPS $1.21 $1.12 $1.24 $1.30 Debt/Capital 73.5% 73.6% 73.9% 74.3%
Investment Positives Investment Risks - Positive and increasing FCF position - The various foreign currencies continues to depreciate. - Annual stock buybacks and dividend growth program - Continued poor hydrological conditions negatively impact earnings. - Various new construction projects with a 15% expected average ROE - New generation projects fail to earn the expected ROE's. - Earnings largely from medium-to-long-term contracts and utilities - AES faces an increase in geo-political risk at the various operational countries. - Unregulated power plants are not able to renegotiate favorable contract terms at expiration.
Potential Catalysts Calendar of Events - The current rainy season is favorable for AES's hydro fleet. - 1H16: Resolution of Maritza receivables issue in Bulgaria - Additional non-core assets are sold at favorable terms. - 1H16: Expected completion of Cochrane coal plant in Chile - May 2016: PJM Capacity Performance auction
Company Description 110 AES Corporation is a global power generation and utility company and operate in six major Strategic Business Units (SBUs): United States, Andes (Chile, 100 Colombia, Argentina), Brazil, MCAC (Mexico, Central America and Carribean), EMEA (Europe, Middle East and Africa), and Asia. 90
80
CEO: Andres Ricardo Gluski week Relative Performance Relative week
- 70 CFO: Thomas M. "Tom" O'Flynn
52 IR Contact: Ahmed Pasha 60 Phone: +1.703.682.6451 12/31/14 2/28/15 4/30/15 6/30/15 8/31/15 10/31/15 12/31/15 Headquarters: Arlington, VA AES UTY SPX Website: www.aes.com Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15. January 4, 2016 37 2016 U.S. Power & Utility Best Ideas Portfolio
AES Corp Shelby Tucker; +1.212.428.6462 Summary Financial Statements Insoo Kim; +1.212.905.2995 Millions of Dollars Except for Per Share Amounts Fiscal Year Ending December 31, Summary Income Statement 2014A 2015E 2016E 2017E 2018E Revenues 17,146 14,642 14,569 15,153 15,509 Cost of Goods Sold (12,813) (10,334) (10,424) (10,819) (11,012) Operation and Maintenance Depreciation (1,245) (1,344) (1,436) (1,528) (1,620) Operating Income 3,088 2,964 2,708 2,806 2,876 EBITDA 4,292 4,406 4,309 4,535 4,749 EBIT 3,047 3,062 2,873 3,007 3,129 Interest Expense (1,471) (1,403) (1,375) (1,386) (1,405) EBT 1,576 1,659 1,498 1,621 1,724 Income Taxes (419) (498) (479) (519) (552) Continuing Net Income 1,176 1,177 1,034 1,119 1,189 Net Income attributable to AES - GAAP 769 824 724 783 832 Adjusted Net Income attribuable to AES 941 824 724 783 832 Basic Shares Outstanding 720 689 668 642 619 Diluted Shares Outstanding 724 692 671 645 622 Diluted Earnings Per Share 1.30 1.19 1.08 1.21 1.34 EPS Growth 0.8% -8.4% -9.4% 12.5% 10.2% Dividend Per Share $0.2000 $0.4000 $0.4400 $0.4800 $0.5300 Dividend Growth 25.0% 100.0% 10.0% 9.1% 10.4% Dividend Payout Ratio 15.4% 33.6% 40.8% 39.5% 39.6% Summary Statement of Cash Flow 2014A 2015E 2016E 2017E 2018E Net Income 1,147 1,177 1,034 1,119 1,189 Depreciation & Amortization 1,245 1,344 1,436 1,528 1,620 Change in Working Capital (1,022) - - - - Cash Flow from Operations 1,791 2,521 2,471 2,647 2,809 Funds From Operations (FFO) 2,813 2,521 2,471 2,647 2,809 Capital Expenditures (2,544) (2,300) (2,300) (2,300) (2,300) Sale (Purchase of Assets) 1,117 97 - - - Cash Flow from Investing (656) (2,029) (2,126) (2,300) (2,300) Short/Long-Term Debt, net 108 (240) (22) 727 (92) Common Issuance/Buyback, net (308) (424) (420) (420) (420) Common Dividend (144) (277) (294) (308) (328) Cash Flow from Financing (734) (1,041) (836) (101) (940) Summary Balance Sheet 2014A 2015E 2016E 2017E 2018E Cash and Equivalent 1,539 991 500 746 315 Current Asset 7,826 7,169 6,667 7,004 6,628 Gross Properties, Plant, and Equipment 31,329 33,609 35,909 38,209 40,509 Net Properties, Plant, and Equipment 25,151 26,206 27,220 28,127 28,926 Regulatory Assets 3,784 3,903 4,054 4,189 4,308 Total Asset 38,966 40,843 41,356 42,599 43,022 Short-Term Debt (incl. Current Maturities) 2,133 2,422 973 792 775 Current Liabilities 6,997 6,743 5,361 5,361 5,449 Other Liabilities 5,841 8,379 8,655 9,117 8,668 Long-Term Debt 18,725 18,195 19,803 20,530 21,230 Minority Interest 3,053 3,053 3,053 3,053 3,053 Common Equity 4,272 4,395 4,405 4,460 4,544 Liabilities and Shareholders' Equity 38,966 40,843 41,356 42,599 43,022 Total Capitalization 28,183 28,065 28,234 28,835 29,602 Operations Statistics Total Generation Owned: 28,600 MW Total Utility Customers: DPL: 693,000; IPL: 477,000; Brazil: 8.0 million; El Salvador: 1.3 million States/Countries with Utility Operations: US: Indiana, Ohio; Brazil; El Salvador Non-regulated Activities: Merchant/Contracted assets in 21 countries Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15. January 4, 2016 38 2016 U.S. Power & Utility Best Ideas Portfolio
Shelby G. Tucker, CFA Insoo Kim, CFA Managing Director Associate RBC Capital Markets +1.212.428.6462 +1.212.905.2995 [email protected] [email protected] Black Hills Corp. (NYSE: BKH); Outperform; $55 Price Target; 21.8% Potential Return
Stock Price: $46.43 Market Cap. ($mm): 2,376 Daily Volume ('000): 594 52-wk Price Range: $36.81-$53.37 Shares Out. (mm): 51.2 Dividend: $1.560 2017 Consensus P/E: 14.2x Float: 98.8% Dividend Yield: 3.4% Volatility/Beta: 0.78x Short Interest: 9.6% Risk To Dividend: Low
Investment Thesis We expect Black Hills to grow earnings at a 6% CAGR through 2018 (with 2014 as the base), incorporating the pending SourceGas acquisition and proposed Cost of Service Gas (COSG) program. While we expect 2016 earnings to be dilutive post-SourceGas deal completion (given partial-year earnings contribution from SourceGas), we believe Black Hills will be able to achieve at least moderate earnings accretion in 2017, with an additional boost if COSG is approved in 2H16. Given the increasing regulated make-up of the company, we believe the shares should trade more in-line with its regulated peers, leading to significant upside potential from current levels.
($ in millions) 2015E 2016E 2017E 2018E Key Metrics 2015E 2016E 2017E 2018E Revenues 1,559 1,628 1,732 1,770 P/E (x) 15.9 17.7 13.3 12.5 EBITDA 435 495 572 596 EV/EBITDA (x) 8.9 11.8 10.1 9.1 EBIT 280 356 431 452 FCF Yield -6.3% 0.5% 2.4% 3.8% RBCCM EPS $2.93 $2.63 $3.50 $3.71 Dividend Yield 3.5% 3.6% 3.7% 3.9% EPS Growth -0.3% -10.1% 33.0% 6.0% Credit Metrics Dividend/Share $1.62 $1.68 $1.74 $1.81 FFO Cov. (x) 6.1 4.7 4.2 4.5 Dividend Payout 55.4% 63.9% 49.8% 48.8% FFO/Debt 27.2% 15.8% 14.1% 17.2% Street EPS $2.98 $3.08 $3.26 $3.55 Debt/Capital 55.9% 66.3% 65.1% 57.8%
Investment Positives Investment Risks - Rate base growth in various jurisdictions to drive future earnings. -Oil and gas prices continue to drop, further lowering the value of the E&P business. - Potential growth and stability in the E&P business, especially with implementation -Cost of Service Gas (COSG) program is rejected, or the Mancos assets are not approved of upcoming file of Cost of Service Gas program. for the program. - Stable Power Generation and Coal Mining operations. -Rate base growth slows at the electric/gas utilities due to lack of significant investment - Above-average economic condition in service areas. opportunities. - Stable and increasing dividend.
Potential Catalysts Calendar of Events -Cost of Service Gas program is approved, with Mancos Shale assets as part of the -1Q16: Expected close of SourceGas acquisition program. -2H16: Expected final decision of Cost of Service Gas (COSG) proposal -SourceGas acquisition proposal is approved and results in earnings accretion in -4Q16: Expected completion of Colorado's $65 million, 40MW simple cycle gas plant 2017. -4Q16: Expected completion of the $53 million Teckla/Osage/Lange transmission line -Load growth at the electric and gas utilities is higher than expected.
110 Company Description
Black Hills Corp. is a diversified energy company headquartered in Rapid City, 105 S.D. The utilities serve approximately 769,000 electric and gas customers in 100 eight states. Oil and Gas explores and produces oil and natural gas in the Rocky 95 Mountain region; Power Generation generates and sells electricity to other 90 utilities; Coal Mining produces coal in the company owned coal mine in 85 Wyoming. 80 CEO: David R. Emery 75
week Relative Performance Relative week CFO: Richard Kinzley - 70 52 IR Contact: Jerome E. Nichols 65 Phone: +1.605.721.1171 12/31/14 2/28/15 4/30/15 6/30/15 8/31/15 10/31/15 12/31/15 Headquarters: Rapid City, SD BKH UTY SPX Website: www.blackhillscorp.com Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15. January 4, 2016 39 2016 U.S. Power & Utility Best Ideas Portfolio
Black Hills Corp. Shelby Tucker; +1.212.428.6462 Summary Financial Statements Insoo Kim; +1.212.905.2995 Millions of Dollars Except for Per Share Amounts Fiscal Year Ending December 31, Summary Income Statement 2014A 2015E 2016E 2017E 2018E Revenues 1,394 1,559 1,628 1,732 1,770 Cost of Goods Sold (582) (708) (726) (756) (766) Operation and Maintenance (359) (376) (366) (364) (368) Depreciation (145) (156) (139) (141) (144) Operating Income 264 275 351 427 447 EBITDA 414 435 495 572 596 EBIT 270 280 356 431 452 Interest Expense (73) (78) (148) (153) (150) EBT 198 202 209 279 303 Income Taxes (67) (67) (73) (96) (103) Continuing Net Income 131 135 136 183 200 Net Income - GAAP 131 135 136 183 200 Adjusted Net Income 131 135 136 183 200 Basic Shares Outstanding 44 46 52 52 54 Diluted Shares Outstanding 45 46 52 52 54 Diluted Earnings Per Share $2.93 $2.93 $2.63 $3.50 $3.71 EPS Growth 17.2% -0.3% -10.1% 33.0% 6.0% Dividend Per Share $1.5600 $1.6200 $1.6800 $1.7400 $1.8100 Dividend Growth 2.6% 3.8% 3.7% 3.6% 4.0% Dividend Payout Ratio 53.2% 55.4% 63.9% 49.8% 48.8% Summary Statement of Cash Flow 2014A 2015E 2016E 2017E 2018E Net Income 131 135 136 183 200 Depreciation & Amortization (incl. Nuclear) 145 156 139 141 144 Change in Working Capital (54) 2 (12) (11) (6) Cash Flow from Operations 323 405 537 472 516 Funds From Operations (FFO) 377 403 549 483 523 Capital Expenditures (398) (479) (450) (334) (334) Sale (Purchase of Assets) - - 100 - - Cash Flow from Investing (401) (479) (1,649) (334) (334) Short/Long-Term Debt, net 140 509 525 - (379) Common Issuance/Buyback, net 3 257 58 3 302 Common Dividend (70) (75) (87) (91) (98) Cash Flow from Financing 91 691 496 (88) (175) Summary Balance Sheet 2014A 2015E 2016E 2017E 2018E Cash and Equivalent 21 639 23 73 80 Current Assets 454 1,100 504 575 595 Gross Properties, Plant, and Equipment 4,563 5,042 5,492 5,826 6,160 Net Properties, Plant, and Equipment 3,205 3,529 3,840 4,033 4,224 Regulatory Assets 258 263 268 274 279 Total Assets 4,246 5,218 4,937 5,206 5,421 Short-Term Debt (incl. Current Maturities) 350 205 530 504 125 Current Liabilities 651 541 874 858 485 Other Liabilities 973 1,089 (681) (517) (334) Long-Term Debt 1,268 1,916 2,966 2,992 2,992 Minority Interest - - - - - Common Equity 1,354 1,671 1,779 1,874 2,278 Liabilities and Shareholders' Equity 4,246 5,218 4,937 5,206 5,421 Total Capitalization 2,971 3,792 5,274 5,369 5,395 Operations Statistics Total Generation Owned: 1,369MW (Coal, Natural Gas, Oil) Total Utility Customers: 202,000 Electric and 567,000 Gas States with Utility Operations: CO, IA, KS, MT, NE, SD, WY Non-regulated Activities: IPP (Power Generation), E&P (Oil and Gas), Coal Mining Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15. January 4, 2016 40 2016 U.S. Power & Utility Best Ideas Portfolio
Shelby G. Tucker, CFA Sean He Managing Director Associate RBC Capital Markets +1.212.428.6462 +1.212.858.7110 [email protected] [email protected] Calpine (NYSE: CPN); Outperform; $21 Price Target; 45.1% Potential Return
Stock Price: $14.47 Market Cap. ($mm): 5,164 Daily Volume ('000): 4,225 52-wk Price Range: $11.75-$23.51 Shares Out. (mm): 356.84 Dividend: $0.000 2017 Consensus EV/EBITDA: 8.0x Float: 94.2% Dividend Yield: 0.0% Volatility/Beta: 0.93x Short Interest: 4.8% Risk To Dividend: N/A
Investment Thesis We are reiterating our Outperform rating on Calpine with a $21 price target. While the PJM Capacity Performance (CP) auctions delivered positive results to the independent power producers as we had hoped for, overwhelmingly negative sentiment towards market conditions in ERCOT coupled with rapidly declining natural gas prices and weaker-than- expected 2016 earnings guidance have dragged Calpine's equity value down over the course of 2015. As we look ahead, we do anticipate ERCOT improving on the capacity supply side behind potential coal retirement announcements and project cancellations, which should improve sentiment towards CPN. From a financial perspective, we forecast FCF generation potential of ~$4.00+ per share in 2018 as CP benefits roll in; at current valuations, this represents a FCF yield of close to 28%.
($ in millions) 2015E 2016E 2017E 2018E Key Metrics 2015E 2016E 2017E 2018E Revenues 5,195 4,952 5,219 5,578 P/E (x) 17.9 22.1 12.7 7.0 Adjusted EBITDA 1,970 1,888 2,000 2,234 EV/Adjusted EBITDA (x) 9.3 9.2 8.2 7.1 EBIT 933 862 986 1,212 FCF Yield 7.0% 9.7% 10.8% 15.7% RBCCM EPS $0.81 $0.65 $1.14 $2.07 Dividend Yield 0.0% 0.0% 0.0% 0.0% EPS Growth 7.2% -19.2% 73.8% 82.0% Credit Metrics Dividend/Share $0.00 $0.00 $0.00 $0.00 FFO Cov. (x) 2.6 2.6 2.9 3.4 Dividend Payout 0.0% 0.0% 0.0% 0.0% FFO/Debt 9.1% 8.8% 10.6% 13.4% Street EBITDA 1,989 1,910 2,056 2,211 Debt/Capital 79.4% 78.8% 78.9% 79.1%
Investment Positives Investment Risks - Young and "clean" gas and geothermal generation portfolio - Spark spreads weaken - Dual-fuel flexibility in PJM and ISO-NE provides fleet reliability - Additional renewables push California gas generation further down dispatch curve as - $6.9 billion in federal NOLs (as of 12/31/2014) contracts expire - Share repurchases - Power market M&A valuations fall - Organic plant expansions - Pending environmental mandates are remanded or delayed - Inability to utilize NOLs
Potential Catalysts Calendar of Events - Monetization of remaining Southeast and/or contracted assets - 1Q16: Expected closing of Granite Ridge Energy Center acquisition - Capacity expansion / turbine modernization on existing infrastructure - 2/16: ISO-NE Forward Capacity Auction 10 (2019/2020 delivery year) - Texas coal retirements ahead of environmental compliance dates - 5/16: PJM 2019/2020 RPM Auction
110 Company Description Calpine is one of the largest independent power producers in the U.S owning 100 and operating nearly 27,000 MW of generation. Calpine is positioned as a clean power company and operates mostly natural gas-fired and geothermal plants. 90 Calpine does not hold coal or nuclear plants. The company serves customers in 19 states and Canada through its wholesale power operations and retail 80 businesses. 70 CEO: Thad Hill
week Relative Performance Relative week CFO: Zamir Rauf
- 60
52 IR Contact: Bryan Kimzey 50 Phone: +713.830.8777 12/31/14 3/31/15 6/30/15 9/30/15 12/31/15 Headquarters: Houston, Texas CPN UTY SPX Website: www.calpine.com Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15. January 4, 2016 41 2016 U.S. Power & Utility Best Ideas Portfolio
Calpine Shelby Tucker; +1.212.428.6462 Summary Financial Statements Sean He; +1.212.858.7110 Millions of Dollars Except for Per Share Amounts Fiscal Year Ending December 31, Summary Income Statement 2014A 2015E 2016E 2017E 2018E Revenues 8,030 5,195 4,952 5,219 5,578 Cost of Goods Sold (4,892) (2,496) (2,288) (2,417) (2,508) Operation and Maintenance (969) (952) (972) (983) (1,013) Depreciation (603) (631) (643) (640) (649) Operating Income 1,334 903 832 956 1,182 EBITDA 2,592 1,564 1,505 1,627 1,860 EBIT 1,989 933 862 986 1,212 Interest Expense (645) (626) (623) (592) (562) EBT 983 263 227 383 638 Income Taxes (22) (16) (14) (23) (38) Continuing Net Income 309 295 229 376 615 Net Income - GAAP 946 232 198 345 584 Adjusted Net Income 309 295 229 376 615 Basic Shares Outstanding 405 363 348 328 295 Diluted Shares Outstanding 409 365 350 330 297 Diluted Earnings Per Share 0.75 0.81 0.65 1.14 2.07 EPS Growth 97.5% 7.2% -19.2% 73.8% 82.0% Dividend Per Share $0.00 $0.00 $0.00 $0.00 $0.00 Dividend Growth 0.0% 0.0% 0.0% 0.0% 0.0% Dividend Payout Ratio 0.0% 0.0% 0.0% 0.0% 0.0% Summary Statement of Cash Flow 2014A 2015E 2016E 2017E 2018E Net Income 961 247 213 360 599 Depreciation & Amortization (incl. Nuclear) 649 676 688 685 694 Change in Working Capital 166 - - - - Cash Flow from Operations 854 1,035 962 1,137 1,370 Funds From Operations (FFO) 688 1,035 962 1,137 1,370 Capital Expenditures (492) (535) (405) (325) (280) Sale (Purchase of Assets) 1,573 - - 166 - Cash Flow from Investing (84) (775) (905) (159) (280) Short/Long-Term Debt, net (3,019) (2,080) (348) (1,050) (209) Common Issuance/Buyback, net (1,100) (585) (200) (500) (700) Common Dividend - - - - - Cash Flow from Financing (994) 125 (528) (934) (889) Summary Balance Sheet 2014A 2015E 2016E 2017E 2018E Cash and Equivalent 717 1,102 632 675 876 Current Assets 4,220 4,365 3,865 3,950 4,173 Gross Properties, Plant, and Equipment 17,556 18,906 19,986 20,896 20,896 Net Properties, Plant, and Equipment 13,190 13,909 14,346 14,616 13,967 Regulatory Assets - - - - - Total Assets 18,378 19,242 19,180 19,534 19,108 Short-Term Debt (incl. Current Maturities) 199 205 562 1,730 1,217 Current Liabilities 3,199 2,921 3,253 4,436 3,934 Regulatory Liabilities - - - - - Long-Term Debt 11,083 11,787 11,083 9,465 9,770 Noncontrolling interests 53 53 53 53 53 Common Equity 3,378 3,050 3,073 2,943 2,852 Liabilities and Shareholders' Equity 18,378 19,242 19,180 19,534 19,108 Total Capitalization 14,660 15,042 14,718 14,138 13,839 Operations Statistics Total Generation Owned: 25,862 MW Natural Gas; 725 MW Geothermal Total Retail Customers: ~22 million MWh of C&I and residential customer load (Texas, Northeast U.S.) Primary States with Operations: California, Texas, Mid-Atlantic, New England, Southeast Non-regulated Activities: Independent Power Producer Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15. January 4, 2016 42 2016 U.S. Power & Utility Best Ideas Portfolio
Shelby G. Tucker, CFA Insoo Kim, CFA Managing Director Associate RBC Capital Markets +1.212.428.6462 +1.212.905.2995 [email protected] [email protected] CenterPoint Energy (NYSE: CNP); Outperform; $21 Price Target; 19.6% Potential Return
Stock Price: $18.36 Market Cap. ($mm): 7,900 Daily Volume ('000): 4,826 52-wk Price Range: $16.05-$23.66 Shares Out. (mm): 430.3 Dividend: $0.950 2017 Consensus P/E: 15.9x Float: 94.0% Dividend Yield: 5.2% Volatility/Beta: 0.33x Short Interest: 2.8% Risk To Dividend: Low
Investment Thesis CenterPoint is currently in a tough position of not being in control of its own destiny, currently impacted by Enable's struggles due to low commodity prices. On the regulated utilities segment, we see around 6-7% three-year earnings CAGR through 2018. We expect management to continue to grow the company's regulated footprint both organically and through accretive acquisitions if available. While we do expect CenterPoint to be impacted near-term by movements in oil prices, we believe the current stock price presents a reasonable value proposition to capture the potential upside in utilities earnings growth as well as the recovery in Enable's earnings and cash contribution.
(millions) 2015E 2016E 2017E 2018E Key Metrics 2015E 2016E 2017E 2018E Revenues 8,637 8,767 9,101 9,428 P/E (x) 17.0 16.3 15.6 14.6 EBITDA 2,560 2,427 2,528 2,629 EV/EBITDA (x) 6.1 6.4 6.2 5.6 EBIT 1,186 1,244 1,294 1,357 FCF Yield -4.2% 0.2% 0.7% 0.9% RBCCM EPS $1.08 $1.12 $1.18 $1.26 Dividend Yield 5.4% 5.6% 5.8% 6.1% EPS Growth -10.0% 4.4% 4.8% 7.0% Credit Metrics Dividend/Share $0.99 $1.03 $1.07 $1.12 FFO Cov. (x) 5.6 6.4 6.3 6.3 Dividend Payout 91.9% 91.6% 90.8% 88.9% FFO/Debt 21.0% 25.2% 25.8% 29.8% Street EPS $1.06 $1.10 $1.16 $1.25 Debt/Capital 63.5% 63.6% 63.1% 60.0%
Investment Positives Investment Risks - Strategic and financial flexibility with large cash on hand - Continued low oil prices forces Enable to cut distributions to CenterPoint. - Potential benefit from growth at Enable Midstream MLP - Distribution growth at Enable takes longer than anticipated with lower returns. - Stable earnings growth from large regulated segment - Poor communication of strategic options. - Stable dividend growth
Potential Catalysts Calendar of Events - CenterPoint announces an accretive acquisition of an electric/gas asset. Mid-2016: Final decision in Minnesota rate case (15-424) - Enable announces increased projects in accretive locations. - Company announces share buybacks and/or dividend increases above expectations.
110 Company Description
CenterPoint Energy is an electric distribution and transmission utility in Houston. 105 CenterPoint owns and operates natural gas utilities in six states, serving 3.3 100 million customers. CenterPoint owns a 55.4% limited partner interest in Enable 95 Midstream Partners, a joint venture with OGE Energy. Enable engages in 90 gathering & processing and transportation operations in OK, TX, AK, and LA. 85 80 CEO: Scott Prochazka 75
week Relative Performance Relative week CFO: Bill Rogers - 70 52 IR Contact: Carla Kneipp 65 Phone: +1.713.207.6500 12/31/14 2/28/15 4/30/15 6/30/15 8/31/15 10/31/15 12/31/15 Headquarters: Houston, TX CNP UTY SPX Website: www.centerpointenergy.com Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15. January 4, 2016 43 2016 U.S. Power & Utility Best Ideas Portfolio
CenterPoint Energy Shelby G. Tucker, CFA; +1.212.428.6462 Summary Financial Statements Insoo Kim; +1.212.905.2995 Millions of Dollars Except for Per Share Amounts Fiscal Year Ending December 31, Summary Income Statement 2014A 2015E 2016E 2017E 2018E Revenues 9,226 8,637 8,767 9,101 9,428 Cost of Goods Sold (4,921) (3,899) (4,053) (4,184) (4,309) Operation and Maintenance (1,969) (2,057) (2,124) (2,204) (2,291) Depreciation (1,013) (1,374) (1,183) (1,234) (1,273) Operating Income 935 883 954 986 1,033 EBITDA 2,369 2,560 2,427 2,528 2,629 EBIT 1,356 1,186 1,244 1,294 1,357 Interest (353) (351) (360) (375) (383) EBT 885 715 769 805 862 Income Taxes (274) (250) (284) (298) (319) Continuing Net Income 611 465 484 507 543 Net Income - GAAP 611 465 484 507 543 Adjusted Net Income 517 465 484 507 543 Basic Shares Outstanding ('000) 430 430 430 430 430 Diluted Shares Outstanding ('000) 432 431 431 431 431 Diluted Earnings Per Share $1.20 $1.08 $1.12 $1.18 $1.26 EPS Growth -0.4% -10.0% 4.4% 4.8% 7.0% Dividend Per Share $0.9500 $0.9900 $1.0300 $1.0700 $1.1200 Dividend Growth 14.5% 4.2% 4.0% 3.9% 4.7% Dividend Payout Ratio 79.3% 91.9% 91.6% 90.8% 88.9% Summary Statement of Cash Flow 2014A 2015E 2016E 2017E 2018E Net Income 611 465 484 507 543 Depreciation & Amortization (incl. Nuclear) 1,041 1,402 1,211 1,262 1,301 Working Capital (380) 411 - - - Cash Flow from Operations 1,397 2,027 1,947 1,989 2,049 Funds From Operations (FFO) 1,777 1,616 1,947 1,989 2,049 Capital Expenditures (1,372) (1,522) (1,491) (1,477) (1,494) Sale (Purchase of Assets) - - - - - Cash Flow from Investing (1,384) (1,448) (1,491) (1,477) (1,494) Short/Long-Term Debt, net 487 (117) 90 (102) (142) Common Issuance/Buyback, net 4 - 4 4 4 Common Dividend (408) (427) (443) (461) (483) Cash Flow from Financing 77 (552) (357) (567) (628) Summary Balance Sheet 2014A 2015E 2016E 2017E 2018E Cash and Equivalent 298 325 424 370 297 Current Asset 3,268 3,057 3,184 3,182 3,159 Gross Properties, Plant, and Equipment 15,358 16,880 18,371 19,848 21,342 Net Properties, Plant, and Equipment 10,502 10,650 10,958 11,201 11,422 Regulatory Assets 3,527 3,351 3,183 3,024 2,873 Total Asset 23,200 22,639 22,906 22,988 23,035 Short-Term Debt (incl. Current Maturities) 848 913 1,080 1,220 570 Current Liabilities 3,475 3,260 3,461 3,630 3,008 Deferred Income Taxes 4,757 4,866 4,978 5,093 5,210 Long-Term Debt 8,009 7,099 7,070 6,856 6,612 Preferred Stock/Hybrids - - - - - Common Equity 4,548 4,586 4,630 4,681 4,745 Liabilities and Shareholders' Equity 23,200 22,639 22,906 22,988 23,035 Total Capitalization 13,396 12,621 12,809 12,790 11,966 Operations Statistics Total Generation Owned: N/A Total Utility Customers: Electric: 2.1 million, Gas: 3.3 million States with Utility Operations: TX, AR, LA, MN, MS, OK Non-regulated Activities: Midstream operations (Enable), Natural Gas Sales & Services Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15. January 4, 2016 44 2016 U.S. Power & Utility Best Ideas Portfolio
Shelby G. Tucker, CFA Insoo Kim, CFA Managing Director Associate RBC Capital Markets +1.212.428.6462 +1.212.905.2995 [email protected] [email protected] CMS Energy (NYSE: CMS); Sector Perform; $40 Price Target; 13.9% Potential Return
Stock Price: $36.08 Market Cap. ($mm): 10,026 Daily Volume ('000): 2,268 52-wk Price Range: $31.22-$38.66 Shares Out. (mm): 277.9 Dividend: $1.080 2017 Consensus P/E: 16.8x Float: 99.1% Dividend Yield: 3.0% Volatility/Beta: 0.16x Short Interest: 3.0% Risk To Dividend: Low
Investment Thesis While CMS's growth is primarily driven by its utility investments and constructive rate case outcomes, we believe management's focus on controlling costs provides further support to achieving their consistent and stable earnings and dividend growth targets. We believe the recent constructive signals regarding Michigan's energy policy changes as well as pricing uplift for CMS's merchant plants provide support for continued robust earnings growth. While we continue to like CMS as a best-in-class defensive name, we believe the stock largely reflects the justified premium.
($ in millions) 2015E 2016E 2017E 2018E Key Metrics 2015E 2016E 2017E 2018E Revenues 7,009 7,247 7,458 7,677 P/E (x) 19.1 17.9 16.7 15.5 EBITDA 2,076 2,218 2,351 2,489 EV/EBITDA (x) 9.1 8.7 8.3 7.9 EBIT 1,302 1,379 1,456 1,538 FCF Yield -3.2% -2.2% 0.5% 0.7% RBCCM EPS $1.89 $2.01 $2.16 $2.33 Dividend Yield 3.2% 3.4% 3.7% 4.0% EPS Growth 6.5% 6.7% 7.6% 7.9% Credit Metrics Dividend/Share $1.16 $1.24 $1.33 $1.43 FFO Cov. (x) 4.8 4.9 5.1 5.4 Dividend Payout 61.5% 61.6% 61.4% 61.2% FFO/Debt 18.3% 18.8% 19.6% 20.4% Street EPS $1.89 $2.01 $2.15 $2.31 Debt/Capital 69.1% 68.4% 67.4% 66.0%
Investment Positives Investment Risks - Constructive regulatory environment -Deterioration of constructive regulatory environment leads to less than favorable rate - Robust capital program that is in-line with the state's objective case decisions in gas and electric rate cases. - Better opportunities to grow utility earnings -Future capacity addition plans incur higher costs than expected. -Future power purchase agreement contracts are unattractive. -Unfavorable legislative proposals in 2014 from review of 2008 energy policy. -Michigan implements increased or full retail competition.
Potential Catalysts Calendar of Events -Announcement of new power plant builds, purchases, or upgrades spur rate base -1H16: Passage of Michigan Energy Law growth. -July 2016: Expected final decision in gas rate case (C-U-17882) -Favorable power purchase agreement terms in future negotiations. -Above-average economic recovery in Michigan continues. -The review of the 2008 energy policy yields constructive changes for CMS, including reduction of retail open access (ROA). -CMS is successful in achieving its cost-cutting initiatives.
115 Company Description CMS Energy is an electric and gas utility in Michigan, serving about 1.8M electric 110 customers and 1.7M gas customers. Consumers Energy is the primary business segment. CMS Enterprise is CMS Energy's non-utility business segment and 105 primarily focuses on independent power production in the U.S.
100
95
CEO: John Russell week Relative Performance Relative week
- 90 CFO: Thomas J. Webb
52 IR Contact: Phil McAndrews 85 Phone: +1.517.788.1464 12/31/14 2/28/15 4/30/15 6/30/15 8/31/15 10/31/15 12/31/15 Headquarters: Jackson, Michigan CMS UTY SPX Website: www.cmsenergy.com Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15. January 4, 2016 45 2016 U.S. Power & Utility Best Ideas Portfolio
CMS Energy Shelby Tucker; +1.212.428.6462 Summary Financial Statements Insoo Kim; +1.212.905.2995 Millions of Dollars Except for Per Share Amounts Fiscal Year Ending December 31, Summary Income Statement 2014A 2015E 2016E 2017E 2018E Revenues 7,179 7,009 7,247 7,458 7,677 Cost of Goods Sold (3,768) (3,395) (3,493) (3,576) (3,666) Operation and Maintenance (1,232) (1,195) (1,171) (1,149) (1,130) Depreciation (685) (774) (838) (894) (950) Operating Income 1,152 1,281 1,358 1,435 1,517 EBITDA 1,821 2,076 2,218 2,351 2,489 EBIT 1,136 1,302 1,379 1,456 1,538 Interest Expense (407) (429) (443) (445) (443) EBT 729 873 937 1,012 1,095 Income Taxes (250) (352) (377) (407) (440) Continuing Net Income 479 521 560 605 655 Net Income - GAAP 479 521 560 605 655 Adjusted Net Income 486 521 560 605 655 Basic Shares Outstanding 271 276 277 278 280 Diluted Shares Outstanding 275 277 278 279 281 Diluted Earnings Per Share 1.77 1.89 2.01 2.16 2.33 EPS Growth 6.5% 6.5% 6.7% 7.6% 7.9% Dividend Per Share $1.0800 $1.1600 $1.2400 $1.3300 $1.4300 Dividend Growth 7.0% 7.0% 7.0% 7.0% 7.0% Dividend Payout Ratio 61.0% 61.5% 61.6% 61.4% 61.2% Summary Statement of Cash Flow 2014A 2015E 2016E 2017E 2018E Net Income 479 521 560 605 655 Depreciation & Amortization (incl. Nuclear) 685 774 838 894 950 Change in Working Capital (32) - - - - Cash Flow from Operations 1,447 1,617 1,733 1,834 1,940 Funds From Operations (FFO) 1,479 1,617 1,733 1,834 1,940 Capital Expenditures (1,577) (1,614) (1,614) (1,413) (1,472) Sale (Purchase of Assets) - - - - - Cash Flow from Investing (1,910) (1,947) (1,947) (1,746) (1,805) Short/Long-Term Debt, net 678 582 278 181 1 Common Issuance/Buyback, net 43 53 50 50 50 Common Dividend (295) (321) (344) (370) (400) Cash Flow from Financing 498 412 83 (41) (250) Summary Balance Sheet 2014A 2015E 2016E 2017E 2018E Cash and Equivalent 207 289 158 205 90 Current Asset 2,597 2,690 2,608 2,696 2,623 Gross Properties, Plant, and Equipment 101,686 111,085 40,284 43,311 46,196 Net Properties, Plant, and Equipment 13,412 14,252 15,028 15,546 16,068 Regulatory Assets 16,767 18,904 6,197 6,159 6,120 Total Asset 19,185 20,050 20,725 21,312 21,741 Short-Term Debt (incl. Current Maturities) 600 372 619 699 1,169 Current Liabilities 2,014 1,699 1,962 2,056 2,541 Other Liabilities 5,325 5,520 5,635 5,744 5,852 Long-Term Debt 8,016 8,748 8,778 8,879 8,410 Minority Interest 37 37 37 37 37 Common Equity 3,670 3,923 4,189 4,473 4,778 Liabilities and Shareholders' Equity 19,185 20,050 20,725 21,312 21,741 Total Capitalization 12,446 13,202 13,746 14,211 14,517 Operations Statistics Total Generation Owned: 7,916 MW (6,805 MW regulated, 1,110 MW non-regulated) Total Utility Customers: 1.8M Electric and 1.7M Gas States with Utility Operations: Michigan Non-regulated Activities: Independent power production (CMS Enterprise) Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15. January 4, 2016 46 2016 U.S. Power & Utility Best Ideas Portfolio
Shelby G. Tucker, CFA Managing Director RBC Capital Markets +1.212.428.6462 [email protected] Consolidated Edison (NYSE: ED); Sector Perform; $67 Price Target; 8.3% Potential Return
Stock Price: $ 64.27 Market Cap. ($mm): 19,131 Daily Volume ('000): 1,939 52-wk Price Range: $56.86-$72.25 Shares Out. (mm): 293.19 Dividend: $2.600 2017 Consensus P/E: 15.4x Float: 99.8% Dividend Yield: 4.0% Volatility/Beta: 0.54x Short Interest: 4.9% Risk To Dividend: Low
Investment Thesis ConEd trades as one of the most defensive stocks in our coverage universe. Its dividend is visible and its yield is attractive. New York regulation is tough (low relative returns) but provides mechanisms that help the company earn its allowed return on a consistent basis through regular rate adjusters such as a pension cost tracker, decoupling, and other riders. The New York Public Service Commission is developing a plan to modernize the grid through the integration of distributed generation and other technologies. It is unclear to us how that will play out for ConEd. CECONY is possibly facing regulatory action stemming from an East Harlem explosion early 2014 that killed 8 people.
($ in millions) 2015E 2016E 2017E 2018E Key Metrics 2015E 2016E 2017E 2018E Revenues 12,624 12,936 13,298 13,723 P/E (x) 16.1 15.8 15.4 14.9 EBITDA 3,596 3,716 3,868 4,063 EV/EBITDA (x) 8.8 8.6 8.4 8.0 EBIT 2,449 2,519 2,596 2,701 FCF Yield -0.8% 0.6% 0.5% 0.5% RBCCM Basic EPS $4.00 $4.06 $4.17 $4.33 Dividend Yield 4.0% 4.2% 4.3% 4.4% EPS Growth 2.8% 1.5% 2.6% 3.8% Credit Metrics Dividend/Share $2.60 $2.68 $2.76 $2.84 FFO Cov. (x) 4.1 4.3 4.5 4.5 Dividend Payout 65.2% 66.2% 66.5% 65.9% FFO/Debt 24.3% 26.4% 26.8% 26.8% Street Basic EPS $4.00 $4.07 $4.18 $4.33 Debt/Capital 50.8% 50.5% 51.6% 51.6%
Investment Positives Investment Risks - Safe dividend - New York is in the process of re-defining the role of the grid through REV program, which - No commodity exposure could negatively impact utilities - Minimal generation exposure - ROEs reset lower due to low interest rate environment - Major revenue streams are decoupled - The PSC has not concluded how it will handle the East Harlem gas explosion that killed 8 - Reasonable rate base growth people - Strong credit metrics
Potential Catalysts Calendar of Events - Rhetoric from Governor's office could set negative tone for utility regulation - We expect CECONY to file electric, gas, and steam rate cases late January 2016 or early - Change in capital investment plan February - Interest rates - PSC to reach generic policy determination tied to distibuted systems as part of the "Reforming the Energy Vision" (REV) initiative - 2Q15: PSC to determine rate setting policy for REV
110 Company Description
ConEd distributes electricity to 3.7 million customers and natural gas to 1.2 105 million customers. Consolidated Edison of New York provides regulated electric and gas service in New York City and Westchester County and steam service in 100 Manhattan. Orange & Rockland provides electric and gas service in southeastern New York and adjacent areas. 95
90 CEO: John McAvoy 85
Week Relative Performance Relative Week CFO: Robert Hoglund -
52 80 IR Contact: Jan Childress 12/31/14 2/28/15 4/30/15 6/30/15 8/31/15 10/31/15 12/31/15 Phone: +1.212.460.6611 Headquarters: New York, NY ED UTY SPX Website: www.conedison.com Source: Company reports; RBCCM estimates; Thomson Reuters. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET Dec 31, 2015 January 4, 2016 47 2016 U.S. Power & Utility Best Ideas Portfolio
Consolidated Edison, Inc. Shelby G. Tucker, CFA; +1 (212) 428.6462 Summary Financial Statements Millions of Dollars Except for Per Share Amounts Fiscal Year Ending December 31, Summary Income Statement 2014 2015E 2016E 2017E 2018E Revenues 12,919 12,624 12,936 13,298 13,723 Cost of Goods Sold (4,513) (3,822) (3,906) (3,991) (4,078) Operation and Maintenance (3,294) (3,287) (3,307) (3,328) (3,347) Depreciation (1,071) (1,147) (1,197) (1,272) (1,361) Operating Income 2,209 2,407 2,461 2,534 2,635 EBITDA 3,277 3,596 3,716 3,868 4,063 EBIT 2,251 2,449 2,519 2,596 2,701 Interest Expense (591) (645) (687) (716) (739) EBT 1,660 1,804 1,833 1,881 1,962 Income Taxes (568) (632) (644) (661) (696) Continuing Net Income 1,092 1,172 1,189 1,220 1,266 Net Income - GAAP 1,092 1,172 1,189 1,220 1,266 Adjusted Net Income 1,140 1,172 1,189 1,220 1,266 Basic Shares Outstanding 292.9 292.9 292.8 292.7 292.7 Diluted Shares Outstanding 294.0 294.0 293.9 293.8 293.7 Basic Earnings Per Share $3.89 $4.00 $4.06 $4.17 $4.33 EPS Growth 2.5% 2.8% 1.5% 2.6% 3.8% Dividend Per Share $2.5200 $2.6000 $2.6800 $2.7600 $2.8400 Dividend Growth 2.4% 3.2% 3.1% 3.0% 2.9% Dividend Payout Ratio 65.0% 65.2% 66.2% 66.5% 65.9% Summary Statement of Cash Flow 2014 2015E 2016E 2017E 2018E Net Income 1,092 1,172 1,189 1,220 1,266 Depreciation & Amortization 1,071 1,147 1,197 1,272 1,361 Change in Working Capital (161) (45) (79) (95) (73) Cash Flow from Operations 2,831 3,416 3,706 3,733 3,895 Funds From Operations (FFO) 2,670 3,371 3,627 3,638 3,822 Capital Expenditures (2,419) (3,370) (3,804) (3,245) (3,211) Sale (Purchase of Assets) (175) - - - - Cash Flow from Investing (2,759) (3,450) (3,884) (3,325) (3,291) Short/Long-Term Debt, net (1,131) (738) (535) (60) (1,011) Common Issuance/Buyback, net (10) (10) (4) (4) (4) Common Dividend (739) (761) (785) (808) (831) Cash Flow from Financing (47) (527) 192 (425) (653) Summary Balance Sheet 2014 2015E 2016E 2017E 2018E Cash and Equivalent 699 138 152 136 87 Current Assets 3,854 3,230 3,182 3,105 2,997 Gross Properties, Plant, and Equipment 35,909 38,443 41,262 44,133 46,970 Net Properties, Plant, and Equipment 29,827 31,342 33,016 34,559 36,073 Regulatory Assets 9,156 8,698 8,263 7,850 7,458 Total Assets 44,308 45,293 47,055 48,357 49,366 Short-Term Debt (incl. Current Maturities) 1,360 1,295 770 1,971 1,445 Current Liabilities 3,781 3,764 3,289 4,540 4,066 Deferred Income Taxes and Investment Tax Credits 9,076 9,530 9,768 10,012 10,263 Long-Term Debt 11,631 11,974 13,489 12,803 13,515 Preferred Stock - - - - - Common Equity 12,585 12,986 13,386 13,794 14,229 Liabilities and Shareholders' Equity 44,308 45,293 47,055 48,357 49,366 Total Capitalization 25,576 26,255 27,645 28,568 29,189 Operations Statistics Total Generation Owned: Not Meaningful Total Utility Customers: 3.7 Million Electric; 1.2 Million Natural Gas States with Utility Operations: New York, New Jersey, Pennsylvania Non-regulated Activities: Over 400 MW utility-scale PV solar Source: Company reports; RBC Capital Markets estimates; Thomson Reuters. Priced as of market close ET Dec 31, 2015 January 4, 2016 48 2016 U.S. Power & Utility Best Ideas Portfolio
Shelby G. Tucker, CFA Sean He Managing Director Associate RBC Capital Markets +1.212.428.6462 +1.212.858.7110 [email protected] [email protected] Dominion Resources (NYSE: D); Sector Perform; $75 Price Target; 14.7% Potential Return
Stock Price: $67.64 Market Cap. ($mm): $40,268 Daily Volume ('000): 2,324 52-wk Price Range: $64.54-$79.89 Shares Out. (mm): 595 Dividend: $2.590 2017 Consensus P/E: 16.8x Float: 99.6% Dividend Yield: 3.8% Volatility/Beta: 0.15x Short Interest: 2.1% Risk To Dividend: Low
Investment Thesis We are reiterating our Sector Perform rating on Dominion Resources but reducing our PT to $75. While the Dominion story has been one we've always liked due to the company's portfolio of high quality utility and midstream assets, and its above average earnings and dividend growth opportunities, we continue to remain on the sidelines mainly due to valuation. Our price target has decreased primarily to reflect our revaluation of the midstream assets on a lower earnings multiple and the Dominion Midstream GP cash flows on a higher discount rate in a lower commodity price environment. We also have some concern that commodity exposure will materialize as a headwind against 2017 earnings, particularly in regards to the company's NGL sales and open length at the Millstone nuclear station in ISO-NE.
($ in millions) 2015E 2016E 2017E 2018E Key Metrics 2015E 2016E 2017E 2018E Revenues 12,253 12,905 13,324 14,631 P/E (x) 18.4 17.6 17.6 14.9 EBITDA 5,514 5,944 6,202 7,124 EV/EBITDA (x) 12.4 11.9 11.7 10.3 EBIT 4,124 4,439 4,626 5,437 FCF Yield -8.2% -4.3% -6.6% -4.2% RBCCM EPS $3.68 $3.84 $3.84 $4.53 Dividend Yield 3.8% 4.1% 4.5% 4.8% EPS Growth 7.2% 4.5% -0.1% 18.1% Credit Metrics Dividend/Share $2.59 $2.80 $3.02 $3.28 FFO Cov. (x) 5.2 6.3 5.8 5.6 Dividend Payout 70.5% 72.9% 78.7% 72.4% FFO/Debt 14.7% 16.9% 15.9% 15.9% Street EPS $3.66 $3.86 $4.02 $4.54 Debt/Capital 68.5% 67.6% 65.5% 63.9%
Investment Positives Investment Risks - 8% annual dividend growth target - Gas infrastructure growth fails to materialize or capex is reduced - Dominion Midstream (DM) offers visible valuation of midstream assets and growing - Increased cost of capital for DM, which makes drop-downs more difficult cash flows back to D through GP and IDR interest - Delays in construction of Cove Point or in the approval process of Atlantic Coast Pipeline - Presence of infrastructure in the high growth Marcellus and Utica shales - VA regulation turns less constructive - Cove Point LNG export project in Maryland - Power price recovery fails to materialize - Favorable regulatory environment and large regulated capex backlog in VA
Potential Catalysts Calendar of Events - Accretive acquisition of third-party assets (i.e. Carolina Gas Transmission & - 4Q15: Closing of SunEdison solar sell-down Iroquois) - 1/16: Hearings for proposed Greensville County CCGT - Announcements of additional organic gas infrastructure build-outs or joint ventures - 2/16: ISO-NE Forward Capacity Auction 10 (2019/2020 delivery year) - Opportunity for additional 0.5 bcf/d expansion on Atlantic Coast Pipeline
Company Description 105
Dominion Resources is one of the nation's largest producers and transporters of energy, with a portfolio of 24.6 GW of generation, 12,200 miles of natural gas 100 transmission pipes, gathering and processing, and 6,455 miles of electric transmission lines. Dominion's primary subsidiary is Virginia Electric and Power 95 Company.
90 CEO: Thomas Farrell II 85
week Relative Performance Relative week CFO: Mark McGettrick -
52 IR Contact: Tom Hamlin 80 Phone: +1.804.819.2154 12/31/14 2/28/15 4/30/15 6/30/15 8/31/15 10/31/15 12/31/15 Headquarters: Richmond, VA D UTY SPX Website: www.dom.com Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15. January 4, 2016 49 2016 U.S. Power & Utility Best Ideas Portfolio
Dominion Resources Shelby Tucker; +1.212.428.6462 Summary Financial Statements Sean He +1.212.858.7110 Millions of Dollars Except for Per Share Amounts Fiscal Year Ending December 31, Summary Income Statement 2014A 2015E 2016E 2017E 2018E Revenues 12,466 12,253 12,905 13,324 14,631 Cost of Goods Sold (4,672) (3,678) (3,707) (3,839) (3,989) Operation and Maintenance (2,337) (2,609) (2,713) (2,785) (2,956) Depreciation (1,254) (1,390) (1,505) (1,576) (1,687) Operating Income 3,668 4,009 4,365 4,500 5,334 EBITDA 5,105 5,514 5,944 6,202 7,124 EBIT 3,851 4,124 4,439 4,626 5,437 Interest Expense (907) (898) (961) (1,039) (1,116) EBT 2,944 3,226 3,478 3,587 4,321 Income Taxes (925) (1,024) (1,117) (1,171) (1,433) Continuing Net Income 2,003 2,182 2,340 2,396 2,868 Net Income - GAAP 1,310 2,100 2,340 2,396 2,868 Adjusted Net Income 2,003 2,182 2,340 2,396 2,868 Basic Shares Outstanding 583 592 609 624 632 Diluted Shares Outstanding 585 594 610 625 633 Diluted Earnings Per Share $3.43 $3.68 $3.84 $3.84 $4.53 EPS Growth 5.6% 7.2% 4.5% -0.1% 18.1% Dividend Per Share $2.40 $2.59 $2.80 $3.02 $3.28 Dividend Growth 6.7% 7.9% 8.1% 7.9% 8.6% Dividend Payout Ratio 70.0% 70.5% 72.9% 78.7% 72.4% Summary Statement of Cash Flow 2014A 2015E 2016E 2017E 2018E Net Income 1,326 2,120 2,360 2,416 2,888 Depreciation & Amortization (incl. Nuclear) 1,560 1,703 1,745 1,904 2,023 Change in Working Capital (342) - - - - Cash Flow from Operations 3,439 4,749 4,656 4,820 5,410 Funds From Operations (FFO) 3,781 4,749 4,656 4,820 5,410 Capital Expenditures (5,345) (4,961) (5,620) (4,629) (4,361) Sale (Purchase of Assets) 332 937 300 - 900 Cash Flow from Investing (5,181) (5,640) (5,320) (4,629) (3,461) Short/Long-Term Debt, net 2,940 1,687 1,110 513 (100) Common Issuance/Buyback, net 205 792 1,250 1,207 300 Common Dividend (1,398) (1,534) (1,704) (1,883) (2,073) Cash Flow from Financing 1,744 905 607 (218) (1,940) Summary Balance Sheet 2014A 2015E 2016E 2017E 2018E Cash and Equivalent 318 332 275 249 259 Current Asset 5,615 5,954 6,179 6,371 6,678 Gross Properties, Plant, and Equipment 51,406 55,430 60,750 65,379 68,840 Net Properties, Plant, and Equipment 36,270 38,904 42,719 45,772 47,546 Regulatory Assets 1,642 1,675 1,708 1,743 1,777 Total Asset 54,327 57,746 62,261 66,014 68,638 Short-Term Debt (incl. Current Maturities) 4,150 4,105 3,897 4,210 4,610 Current Liabilities 7,198 6,875 6,684 7,033 7,473 Other Liabilities 13,367 12,990 14,472 15,436 16,605 Long-Term Debt 21,805 24,264 25,582 26,282 26,182 Minority Interest - - - - - Common Equity 11,555 12,933 14,839 16,579 17,694 Liabilities and Shareholders' Equity 54,327 57,746 62,261 66,014 68,638 Total Capitalization 37,912 41,986 45,002 47,755 49,170 Operations Statistics Total Generation Owned: 20.4 GW Regulated; 4.2 GW Unregulated Total Utility Customers: 2.5 Million Electric; 1.3 Million Natural Gas States with Utility Operations: VA (Electric), NC (Electric), OH (Natural Gas), WV (Natural Gas) Other Activities: IPP; Gas Pipes; Gathering and Processing; LNG; and Unregulated Retail Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15. January 4, 2016 50 2016 U.S. Power & Utility Best Ideas Portfolio
Shelby G. Tucker, CFA David Emami Managing Director Associate RBC Capital Markets +1.212.428.6462 +1.212.618.2668 [email protected] [email protected] Duke Energy (NYSE: DUK); Outperform; $84 Price Target; 22.3% Potential Return
Stock Price: $71.39 Market Cap. ($mm): 49,140 Daily Volume ('000): 3,361 52-wk Price Range: $65.50-$89.97 Shares Out. (mm): 688.33 Dividend: $3.300 2017 Consensus P/E: 14.5x Float: 99.9% Dividend Yield: 4.6% Volatility/Beta: 0.59x Short Interest: 2.0% Risk To Dividend: Low
Investment Thesis We expect Duke to outperform due to its defensive profile, attractive regulatory environment and large capital plan. With the conclusion of the major rate cases, Duke will be able to stay out of rate cases over the next few years, keeping non-fuel O&M merger synergies until the next rate case. We see a number of potential catalysts in the form of a potential divestment of the international segment, greater than expected revenue and cost synergies from the PNY acquisition and the need for infrastructure investments within their service territory. Without investment in new generation technology or significant exposure to market power prices, Duke has emerged as a lower-risk regulated utility with average earnings growth and constructive regulatory environments, despite their exposure to Brazil. As a blue chip utility, we believe that Duke should be a core holding.
($ in millions) 2015E 2016E 2017E 2018E Key Metrics 2015E 2016E 2017E 2018E Revenues 25,368 25,214 25,946 26,753 P/E (x) 15.7 15.3 14.5 13.8 EBITDA 9,094 9,513 9,927 10,335 EV/EBITDA (x) 10.2 9.6 9.0 8.9 EBIT 6,082 6,321 6,550 6,799 FCF Yield -8.1% -6.1% -4.2% -4.6% RBCCM EPS 4.57 $4.68 $4.94 $5.17 Dividend Yield 4.6% 4.8% 5.0% 5.3% EPS Growth 0.4% 2.4% 5.6% 4.7% Credit Metrics Dividend/Share $3.27 $3.42 $3.60 $3.76 FFO Cov. (x) 5.6 6.1 6.4 6.5 Dividend Payout 71.6% 73.1% 72.8% 72.7% FFO/Debt 17.9% 18.2% 19.7% 20.2% Street EPS $4.59 $4.70 $4.94 $5.27 Debt/Capital 51.8% 52.9% 52.1% 51.9%
Investment Positives Investment Risks - Significant rate base growth/ Large capital spending plan - Less constructive regulation - Constructive regulatory environment - Continued weakness in international weighs on sentiment - Discounted multiple due to doubts regarding strategy brought on by PNY acquisition -Lower than expected rate base growth - Traditional regulated utilities fall out of favor
Potential Catalysts Calendar of Events - Closing of the PNY acquisition -Mid '16: Expected decision from IURC on DUK's revised 7-year, $1.8 B T&D plan - Decision to sell the international segment -2H16: Expected closing of PNY acquisition - Improvement of hydrology in Brazil
110 Company Description
Duke Energy is the largest US utility and serves about 7.2 million electric 105 customers in North Carolina, South Carolina, Florida, Indiana, Ohio, and 100 Kentucky. Duke also serves 500,000 gas customers. Duke Energy owns over 62,000 MWs of generation. The international segment operates 95 generation assets in South America. 90
85 CEO: Lynn Good
week Relative Performance Relative week CFO: Steve Young - 80
52 IR Contact: Bill Currens 75 Phone: +1.704.382.1603 12/31/14 2/28/15 4/30/15 6/30/15 8/31/15 10/31/15 12/31/15 Headquarters: Charlotte, NC DUK UTY SPX Website: www.duke-energy.com Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15. January 4, 2016 51 2016 U.S. Power & Utility Best Ideas Portfolio
Duke Energy, Inc. Shelby Tucker; +1.212.428.6462 Summary Financial Statements David Emami; +1.212.618.2668 Millions of Dollars Except for Per Share Amounts Fiscal Year Ending December 31, Summary Income Statement 2014A 2015E 2016E 2017E 2018E Revenues 23,925 25,368 25,214 25,946 26,753 Cost of Goods Sold (8,467) (8,989) (8,645) (8,843) (9,044) Operation and Maintenance (5,856) (6,217) (6,044) (6,134) (6,174) Depreciation (3,066) (3,012) (3,192) (3,378) (3,536) Operating Income 5,258 5,716 5,795 6,025 6,295 EBITDA 8,822 9,094 9,513 9,927 10,335 EBIT 5,756 6,082 6,321 6,550 6,799 Interest Expense (1,622) (1,609) (1,536) (1,547) (1,567) EBT 4,134 4,473 4,786 5,003 5,232 Income Taxes (1,669) (1,506) (1,562) (1,624) (1,701) Continuing Net Income 2,465 2,967 3,224 3,378 3,532 Net Income - GAAP 1,883 2,965 3,222 3,376 3,530 Adjusted Net Income 3,218 3,173 3,195 3,376 3,530 Basic Shares Outstanding 706.7 695.0 683.3 683.3 683.3 Diluted Shares Outstanding 706.7 695.0 683.3 683.3 683.3 Diluted Earnings Per Share $4.55 $4.57 $4.68 $4.94 $5.17 EPS Growth 4.6% 0.4% 2.4% 5.6% 4.7% Dividend Per Share $3.1500 $3.2700 $3.4200 $3.5950 $3.7600 Dividend Growth 1.9% 3.8% 4.6% 5.1% 4.6% Dividend Payout Ratio 69.2% 71.6% 73.1% 72.8% 72.7% Summary Statement of Cash Flow 2014A 2015E 2016E 2017E 2018E Net Income 1,889 2,967 3,224 3,378 3,532 Depreciation & Amortization (incl. Nuclear) 3,066 3,387 3,567 3,753 3,911 Change in Working Capital 55 240 326 187 199 Cash Flow from Operations 6,586 7,573 8,210 8,518 8,863 Funds From Operations (FFO) 6,641 7,813 8,536 8,705 9,063 Capital Expenditures (6,312) (9,025) (8,550) (7,950) (8,335) Sale (Purchase of Assets) - - - - - Cash Flow from Investing (5,373) (6,225) (8,550) (7,950) (8,335) Short/Long-Term Debt, net 741 531 2,100 1,400 800 Common Issuance/Buyback, net 36 (1,858) 48 - - Common Dividend (2,226) (2,273) (2,337) (2,456) (2,569) Cash Flow from Financing (678) (1,604) 1,027 (1,106) (1,432) Summary Balance Sheet 2014A 2015E 2016E 2017E 2018E Cash and Equivalent 2,036 1,780 2,467 1,929 1,025 Current Assets 11,575 12,230 13,180 12,946 12,361 Gross Properties, Plant, and Equipment 104,861 111,630 118,042 124,005 130,256 Net Properties, Plant, and Equipment 70,046 73,794 77,014 79,599 82,314 Regulatory Assets 11,042 11,263 11,488 11,718 11,952 Total Assets 120,709 125,557 130,188 133,012 135,630 Short-Term Debt (incl. Current Maturities) 2,514 3,045 5,145 5,145 5,145 Current Liabilities 11,233 10,813 12,715 13,296 11,962 Other Liabilities 31,364 36,561 37,303 41,535 44,296 Long-Term Debt 37,213 38,449 39,499 37,511 38,701 Minority Interest 24 24 24 24 24 Common Equity 40,875 39,711 40,646 40,646 40,646 Liabilities and Shareholders' Equity 120,709 125,557 130,188 133,012 135,630 Total Capitalization 83,433 82,414 86,364 84,840 84,577 Operations Statistics Total Generation Owned: 49.4 GW Reg US; 8.1 GW Unreg US (incl. 1.3 GW Renewables); 4.6 GW Latin Am Total Utility Customers: 7.2 Million Electric; 500 Thousand Natural Gas States with Utility Operations: NC, SC, FL, IN, OH, KY Non-regulated Activities: International (DEI); Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15. January 4, 2016 52 2016 U.S. Power & Utility Best Ideas Portfolio
Shelby G. Tucker, CFA Sean He Managing Director Associate RBC Capital Markets +1.212.428.6462 +1.212.858.7110 [email protected] [email protected] Dynegy (NYSE: DYN); Outperform; $24 Price Target; 79.1% Potential Return
Stock Price: $13.40 Market Cap. ($mm): 1,615 Daily Volume ('000): 3,326 52-wk Price Range: $9.62-$34.69 Shares Out. (mm): 120.55 Dividend: $0.000 2017 Consensus EV/EBITDA: 6.2x Float: 93.8% Dividend Yield: 0.0% Volatility/Beta: 0.57x Short Interest: 10.5% Risk To Dividend: N/A
Investment Thesis We continue to rate DYN an Outperform with a price target of $24. With the recent fall of Henry Hub natural gas prices below $2.00/mmbtu, we have seen significant pressure on the independent power producers, particularly those with coal asset exposure such as DYN. At this point, we believe market valuations have become significantly dislocated from asset valuations, with the market seemingly unwilling to give much (if any) credit to the company's coal plants. While coal earnings have undoubtedly been on the decline as gas prices have fallen, we believe a majority of DYN's coal assets continue to remain FCF positive at the plant level as they benefit from exposure to capacity prices (particularly plants located in PJM). We expect the market to rationalize this dislocation in value, and we believe a speedier recovery could occur if we see a spike in winter natural gas prices.
($ in millions) 2015E 2016E 2017E 2018E Key Metrics 2015E 2016E 2017E 2018E Revenues 3,997 4,623 4,703 4,671 P/E (x) 6.8 (22.9) (49.3) (87.0) Adjusted EBITDA 875 1,159 1,173 1,149 EV/Adjusted EBITDA (x) 9.3 6.8 6.5 6.7 EBIT 154 468 500 490 FCF Yield 0.7% 15.3% 20.9% 13.6% RBCCM EPS $1.96 ($0.58) ($0.27) ($0.15) Dividend Yield 0.0% 0.0% 0.0% 0.0% EPS Growth -174.1% -129.8% -53.5% -43.4% Credit Metrics Dividend/Share $0.00 $0.00 $0.00 $0.00 FFO Cov. (x) 0.6 1.3 1.3 1.3 Dividend Payout 0.0% 0.0% 0.0% 0.0% FFO/Debt 5.2% 10.1% 10.4% 10.0% Street EBITDA 882 1,201 1,216 1,282 Debt/Capital 61.7% 64.4% 66.0% 68.9%
Investment Positives Investment Risks - Diversified portfolio of natural gas and coal generation across PJM, ISO-NE, MISO, CAISO and - Recovery of power and natural gas prices fails to materialize NY-ISO - Power market M&A valuations fall - $3.3 billion of federal NOLs and $2.6 billion of state NOLs (as of 12/31/2014) - Higher coal or fuel transportation costs - $250 million share repurchase program - Additional regulations add to environmental compliance costs - Opportunities for organic growth capex at discounted costs - Inability to utilize NOLs - Additional subsidies/contracts given to competing generation resources
Potential Catalysts Calendar of Events - Strong capacity auction results - 2/2016: ISO-NE Forward Capacity Auction 10 (2019/2020 delivery year) - Additional MISO bilateral sales - 4/2016: MISO 2016/2017 Planning Resource Auction - Share repurchase program - 5/2016: PJM 2019/2020 RPM Auction - Monetization of California gas assets
120 Company Description Dynegy Inc., headquartered in Houston, Texas, is an operator of ~26,000 MW of 110 generation capacity through 35 coal and gas-fired power stations across 100 California, the Midwest, and the Northeast. The Company also serves as a retail 90 electricity provider through Homefield Energy and Dynegy Energy Services to 80 830,000 residential and 23,000 commercial, industrial and municipal customers across IL, OH, and PA. 70 60 CEO: Robert C. Flexon
week Relative Performance Relative week 50 - CFO: Clint C. Freeland 52 40 IR Contact: Rodney McMahon 30 Phone: +713.767.8435 12/31/14 2/28/15 4/30/15 6/30/15 8/31/15 10/31/15 Headquarters: Houston, Texas DYN UTY SPX Website: www.dynegy.com Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15.
January 4, 2016 53 2016 U.S. Power & Utility Best Ideas Portfolio
Dynegy Shelby Tucker; +1.212.428.6462 Summary Financial Statements Sean He; +1.212.858.7110 Millions of Dollars Except for Per Share Amounts Fiscal Year Ending December 31, Summary Income Statement 2014A 2015E 2016E 2017E 2018E Revenues 2,497 3,997 4,623 4,703 4,671 Cost of sales (1,661) (2,099) (2,390) (2,516) (2,536) Operation and Maintenance (477) (821) (946) (888) (858) Depreciation (247) (600) (693) (674) (661) Operating Income (19) 155 468 500 490 EBITDA 238 754 1,162 1,174 1,151 EBIT (9) 154 468 500 490 Interest Expense (223) (517) (507) (507) (502) EBT (268) (319) (39) (7) (12) Income Taxes 1 590 2 0 1 Continuing Net Income (278) 251 (61) (24) (14) Net Income - GAAP (278) 251 (61) (24) (14) Adjusted Net Income (278) 251 (61) (24) (14) Basic Shares Outstanding 105.0 124.5 105.0 89.2 92.2 Diluted Shares Outstanding 105.0 128.0 105.0 89.2 92.2 Diluted Earnings Per Share ($2.65) $1.96 ($0.58) ($0.27) ($0.15) EPS Growth -25.6% -174.1% -129.8% -53.5% -43.4% Dividend Per Share $0.0000 $0.0000 $0.0000 $0.0000 $0.0000 Dividend Growth 0.0% 0.0% 0.0% 0.0% 0.0% Dividend Payout Ratio 0.0% 0.0% 0.0% 0.0% 0.0% Summary Statement of Cash Flow 2014A 2015E 2016E 2017E 2018E Net Income (267) 271 (37) (7) (12) Depreciation & Amortization 247 600 693 674 661 Change in Working Capital 35 - - - - Cash Flow from Operations 163 330 651 666 646 Funds From Operations (FFO) 128 330 651 666 646 Capital Expenditures (132) (318) (404) (329) (426) Sale (Purchase of Assets) 18 (6,078) - - - Cash Flow from Investing (5,262) (1,248) (404) (329) (426) Short/Long-Term Debt, net 5,041 170 (8) (8) (108) Common Issuance/Buyback, net 719 (197) (300) 100 (240) Common Dividend - (17) - - - Cash Flow from Financing 6,126 (62) (317) (304) (357) Summary Balance Sheet 2014A 2015E 2016E 2017E 2018E Cash and Cash Equivalents 1,870 890 820 853 716 Current Assets 2,674 1,722 1,652 1,685 1,548 Gross Properties, Plant, and Equipment 3,685 8,971 9,376 9,705 10,131 Net Properties, Plant, and Equipment 3,255 7,941 7,652 7,307 7,072 Regulatory Assets - - - - - Total Assets 11,232 11,443 11,084 10,771 10,399 Short-Term Debt (incl. Current Maturities) 31 8 8 308 2,108 Current Liabilities 681 640 629 920 2,710 Regulatory Liabilities - - - - - Long-Term Debt 7,075 7,268 7,260 6,952 5,044 Noncontrolling interests - - - - - Common Equity 3,023 3,082 2,742 2,447 2,192 Liabilities and Shareholders' Equity 11,232 11,443 11,084 10,771 10,399 Total Capitalization 10,129 10,358 10,010 9,707 9,344 Operations Statistics Total Generation Owned: 25,758 MW (Unregulated) Total Retail Customers: 830,000 residential and 23,000 commercial, industrial and municipal customers Primary States with Operations: CA, IL, OH, PA, NY, CT, MA, ME Non-regulated Activities: Independent Power Producer Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15.
January 4, 2016 54 2016 U.S. Power & Utility Best Ideas Portfolio
Shelby G. Tucker, CFA Sean He Managing Director Associate RBC Capital Markets +1.212.428.6462 +1.212.858.7110 [email protected] [email protected] Edison International (NYSE: EIX); Outperform; $72 Price Target; 24.8% Potential Return
Stock Price: $59.21 Market Cap. ($mm): 19,291 Daily Volume ('000): 2,217 52-wk Price Range: $55.18-$69.59 Shares Out. (mm): 325.81 Dividend: $1.920 2017 Consensus P/E: 14.6x Float: 99.8% Dividend Yield: 3.2% Volatility/Beta: 0.28x Short Interest: 1.2% Risk To Dividend: Low
Investment Thesis We continue to rate EIX an Outperform as we believe the company is set up for sustainable high single-digit EPS and dividend growth, driven by organic transmission and distribution opportunities at Southern California Edison (SCE) as California seeks to reinvent its electric grid to integrate greener technologies. With SCE's 2015 General Rate Case having finally concluded and the company's cost of capital mechanism extended, we expect earnings to grow in-line with rate base at 7-8% per annum through 2017. If SCE is able to maintain utility capex in the $4 billion+ range in the 2018 GRC cycle, which would include Distributed Resources Plan spending if approved, we believe EPS growth can remain in a similar range beyond 2017. Going forward, we expect EIX's dividend to grow at a slightly faster pace than earnings as the company returns to its target payout ratio of 45-55% of SCE's earnings.
($ in millions) 2015E 2016E 2017E 2018E Key Metrics 2015E 2016E 2017E 2018E Revenues 12,359 12,844 13,408 13,980 P/E (x) 15.5 15.8 14.7 13.7 EBITDA 4,153 4,412 4,689 4,965 EV/EBITDA (x) 8.2 7.9 7.5 7.2 EBIT 2,212 2,498 2,676 2,848 FCF Yield -3.9% -3.5% -2.9% -3.4% RBCCM EPS $3.82 $3.75 $4.04 $4.32 Dividend Yield 2.9% 3.3% 3.6% 3.9% EPS Growth -16.0% -1.9% 7.8% 6.8% Credit Metrics Dividend/Share $1.73 $1.96 $2.14 $2.33 FFO Cov. (x) 7.6 7.7 8.1 7.7 Dividend Payout 45.3% 52.4% 52.9% 54.0% FFO/Debt 27.9% 28.4% 30.5% 29.0% Street EPS 3.78 3.74 4.04 4.31 Debt/Capital 48.8% 48.7% 48.4% 48.2%
Investment Positives Investment Risks - 7-8% rate base growth at SCE from 2015-2017 - SONGS settlement is reopened - Dividend growth in excess of earnings growth - California regulatory environment becomes less favorable - Cost of capital mechanism retained through April 2017 - Additional FERC capital spending is delayed or cancelled - Regulated utility revenues are decoupled from sales - Constructive utility regulation in California - Incremental investment opportunities to modernize the electric grid
Potential Catalysts Calendar of Events - SONGS settlement is upheld - 1/25/2016: OII statutory deadline for SONGS settlement (can be extended) - Additional FERC transmission projects are announced - Distributed Resource Plan spending is approved
110 Company Description Edison International, headquartered in Rosemead, California, is the parent 105 company of Southern California Edison (SCE). SCE is the second largest electric utility in California, serving 14 million people covering approximately 50,000 100 square miles. The utility owns around 103,000 miles of transmission and distribution lines and 3,100 MW of regulated generation capacity. 95
90 Relative Performance Relative CEO: Theodore (Ted) F. Craver Jr.
85 CFO: Jim Scilacci week - IR Contact: Scott Cunningham 52 80 Phone: +1.606.302.2540 12/31/14 2/28/15 4/30/15 6/30/15 8/31/15 10/31/15 12/31/15 Headquarters: Rosemead, California EIX UTY SPX Website: www.edison.com Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15. January 4, 2016 55 2016 U.S. Power & Utility Best Ideas Portfolio
Edison International Shelby Tucker; +1.212.428.6462 Summary Financial Statements Sean He; +1.212.558.0412 Millions of Dollars Except for Per Share Amounts Fiscal Year Ending December 31, Summary Income Statement 2014A 2015E 2016E 2017E 2018E Revenues 13,413 12,359 12,844 13,408 13,980 Cost of Goods Sold (5,593) (5,014) (5,216) (5,427) (5,646) Operation and Maintenance (3,149) (2,918) (2,932) (2,989) (3,048) Depreciation (1,720) (1,941) (1,913) (2,014) (2,117) Operating Income 2,472 2,149 2,435 2,613 2,785 EBITDA 4,259 4,153 4,412 4,689 4,965 EBIT 2,539 2,212 2,498 2,676 2,848 Interest Expense (560) (544) (570) (594) (626) EBT 1,979 1,668 1,928 2,081 2,222 Income Taxes (443) (300) (579) (624) (667) Continuing Net Income 1,536 1,368 1,350 1,457 1,555 Net Income - GAAP 1,612 1,254 1,229 1,325 1,416 Adjusted Net Income 1,497 1,254 1,229 1,325 1,416 Basic Shares Outstanding 326.0 326.0 326.0 326.0 326.0 Diluted Shares Outstanding 329.0 328.3 328.0 328.0 328.0 Diluted Earnings Per Share $4.55 $3.82 $3.75 $4.04 $4.32 EPS Growth 21.0% -16.0% -1.9% 7.8% 6.8% Dividend Per Share $1.4825 $1.7325 $1.9625 $2.1375 $2.3300 Dividend Growth 8.4% 16.9% 13.3% 8.9% 9.0% Dividend Payout Ratio 32.3% 45.0% 52.0% 52.6% 53.7% Summary Statement of Cash Flow 2014A 2015E 2016E 2017E 2018E Net Income 1,536 1,368 1,350 1,457 1,555 Depreciation & Amortization (incl. Nuclear) 1,815 1,941 1,913 2,014 2,117 Change in Working Capital (512) 250 50 50 50 Cash Flow from Operations 3,248 3,855 3,849 4,271 4,222 Funds From Operations (FFO) 3,760 3,605 3,799 4,221 4,172 Capital Expenditures (3,906) (3,923) (3,758) (4,022) (4,000) Sale (Purchase of Assets) 6 - - - - Cash Flow from Investing (3,907) (3,973) (3,808) (4,072) (4,050) Short/Long-Term Debt, net 966 821 462 475 525 Common Issuance/Buyback, net - - - - - Common Dividend (463) (564) (640) (697) (760) Cash Flow from Financing 645 131 (48) (192) (205) Summary Balance Sheet 2014A 2015E 2016E 2017E 2018E Cash and Equivalent 132 144 138 144 112 Current Assets 4,019 4,031 4,025 4,031 3,999 Gross Properties, Plant, and Equipment - - - - - Net Properties, Plant, and Equipment 32,981 34,365 35,664 37,070 38,412 Regulatory Assets 7,612 7,764 7,920 8,078 8,239 Total Assets 50,186 51,830 53,376 55,048 56,621 Short-Term Debt (incl. Current Maturities) 1,795 1,466 2,091 2,166 1,791 Current Liabilities 5,479 5,150 5,775 5,850 5,475 Other Liabilities 21,485 21,424 21,917 22,474 22,846 Long-Term Debt 10,234 11,585 11,422 11,822 12,722 Preferred and Preference Stock 2,022 2,022 2,022 2,022 2,022 Common Equity 10,960 11,644 12,234 12,874 13,549 Liabilities and Shareholders' Equity 50,186 51,830 53,376 55,048 56,621 Total Capitalization 25,017 26,723 27,775 28,890 30,090 Operations Statistics Total Generation Owned: 3.1 GW (regulated) Total Utility Customers: 14 million electric States with Utility Operations: California Non-regulated Activities: Limited Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15. January 4, 2016 56 2016 U.S. Power & Utility Best Ideas Portfolio
Shelby G. Tucker, CFA David Emami Managing Director Associate RBC Capital Markets +1.212.428.6462 +1.212.618.2668 [email protected] [email protected] Entergy Corp. (NYSE: ETR); Sector Perform; $78 Price Target; 19.1% Potential Return
Stock Price: $68.36 Market Cap. ($mm): 12,195 Daily Volume ('000): 1,354 52-wk Price Range: $61.27-$90.33 Shares Out. (mm): 178.39 Dividend: $3.400 2017 Consensus P/E: 13.7x Float: 99.8% Dividend Yield: 5.0% Volatility/Beta: 0.63x Short Interest: 1.7% Risk To Dividend: Low
Investment Thesis We expect solid growth from the utility segment as the utilities are better able to earn their ROEs, rate base growth continues with a robust capital expenditure plan through 2018, and the Entergy utilities are located in states with strong economic growth. We expect utility earnings to grow 5% compounded annually through 2018. However, the stronger performance at the utilities will be hampered by low power prices and plant closure risk at the non-utility nuclear segment. The combination of a relatively small share count and exposure to merchant power markets introduces a lot of volatility to earnings. We continue to believe there is too much uncertainty in the story at this time.
($ in millions) 2015E 2016E 2017E 2018E Key Metrics 2015E 2016E 2017E 2018E Revenues 12,495 12,515 12,862 13,006 P/E (x) 11.8 11.7 13.4 13.3 EBITDA 3,621 3,537 3,800 3,908 EV/EBITDA (x) 7.0 7.1 6.9 6.8 EBIT 2,030 1,889 2,017 2,088 FCF Yield -3.0% 4.7% -3.3% -12.2% RBCCM EPS $5.82 $5.83 $5.08 $5.13 Dividend Yield 4.9% 4.9% 5.1% 5.2% EPS Growth 8.5% 0.2% -12.8% 0.9% Credit Metrics Dividend/Share $3.32 $3.36 $3.46 $3.57 FFO Cov. (x) 6.7 5.3 5.3 5.0 Dividend Payout 57.1% 57.6% 68.0% 69.6% FFO/Debt 32.2% 21.4% 20.7% 18.6% Street EPS $5.83 $5.76 $5.00 $5.03 Debt/Capital 56.4% 56.5% 55.5% 56.7%
Investment Positives Investment Risks - Rate base growth at utilities - Closure of Indian Point - Utilities favorably located in states with better than average economic growth - Less favorable regulatory environments in Texas and Arkansas - New Lower Hudson Valley capacity zone uplift - Potential for Entergy to be required to make payments to SPP for using its transmission - Low carbon emissions lines - Positively levered to recovery in power prices through unregulated nuclear assets - Delays in implementing EPA regulations
Potential Catalysts Calendar of Events - Constructive outcome in Arkansas rate case - Jan.-April 2015: pursue legislation in Arkansas; forward test year - Non-utility nuclear license renewals - 1H15: File a new base rate case in Arkansas - Carbon pricing - Ongoing: Indian Point Nuclear renewal process
Company Description 110 Entergy is a utility holding company with electric utility operations serving 2.8 105 million customers in Arkansas, Louisiana, Mississippi, and Texas. Entergy also 100 owns the second largest fleet of unregulated nuclear plants in the U.S., primarily 95 located in the Northeast. 90 85 80 CEO: Leo Denault
75 week Relative Performance Relative week
- CFO: Drew Marsh 70 52 IR Contact: Paula Waters 65 Phone: +1.504.576.4380 12/31/14 2/28/15 4/30/15 6/30/15 8/31/15 10/31/15 12/31/15 Headquarters: New Orleans, LA ETR UTY SPX Website: www.entergy.com Source: Company reports; RBCCM estimates; Thomson Reuters. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15. January 4, 2016 57 2016 U.S. Power & Utility Best Ideas Portfolio
Entergy Corp. Shelby Tucker; +1.212.428.6462 Summary Financial Statements David Emami; +1.212.618.2668 Millions of Dollars Except for Per Share Amounts Fiscal Year Ending December 31, Summary Income Statement 2014A 2015E 2016E 2017E 2018E Revenues 12,495 12,515 12,862 13,006 13,546 Cost of Goods Sold (4,548) (4,471) (4,718) (4,884) (5,158) Operation and Maintenance (3,311) (3,623) (3,442) (3,290) (3,375) Depreciation (1,319) (1,383) (1,502) (1,537) (1,546) Operating Income 2,007 1,873 1,990 2,052 2,112 EBITDA 3,621 3,537 3,800 3,908 3,959 EBIT 2,030 1,889 2,017 2,088 2,128 Interest Expense (661) (645) (645) (687) (693) EBT 1,550 1,385 1,512 1,542 1,576 Income Taxes (590) (335) (592) (613) (608) Continuing Net Income 960 1,050 920 929 968 Net Income - GAAP 941 1,030 900 908 947
Adjusted Net Income 1,049 1,035 900 908 947 Basic Shares Outstanding 179.5 177.2 176.7 176.7 176.7 Diluted Shares Outstanding 180.3 177.6 177.0 177.0 177.0 Diluted Earnings Per Share $5.82 $5.83 $5.08 $5.13 $5.35 EPS Growth 8.5% 0.2% -12.8% 0.9% 4.3% Dividend Per Share $3.3200 $3.3600 $3.4600 $3.5700 $3.6750 Dividend Growth 0.0% 1.2% 3.0% 3.2% 2.9% Dividend Payout Ratio 57.1% 57.6% 68.0% 69.6% 68.6% Summary Statement of Cash Flow 2014A 2015E 2016E 2017E 2018E Net Income 960 1,050 920 929 968 Depreciation & Amortization (incl. Nuclear) 2,128 1,648 1,783 1,820 1,830 Change in Working Capital 93 - - - - Cash Flow from Operations 3,890 2,758 2,763 2,748 2,798 Funds From Operations (FFO) 3,982 2,758 2,763 2,748 2,798 Capital Expenditures (2,119) (2,568) (2,365) (2,810) (3,885) Sale (Purchase of Assets) - - - - - Cash Flow from Investing (2,954) (3,221) (3,008) (3,034) (4,129) Short/Long-Term Debt, net 352 1,315 827 595 1,020
Common Issuance/Buyback, net 12 (69) - - - Common Dividend (596) (595) (611) (631) (649) Cash Flow from Financing (252) 632 196 (55) 351 Summary Balance Sheet 2014A 2015E 2016E 2017E 2018E Cash and Equivalent 1,422 1,590 1,541 1,200 221 Current Assets 4,390 4,558 4,509 4,168 3,188 Gross Properties, Plant, and Equipment 186,070 193,319 102,762 107,937 114,632 Net Properties, Plant, and Equipment 28,723 29,908 30,771 32,044 34,383
Regulatory Assets 20,744 21,871 12,085 12,085 12,085 Total Assets 46,528 48,417 49,184 50,149 52,045 Short-Term Debt (incl. Current Maturities) 1,498 951 1,171 1,643 1,973 Current Liabilities 3,849 3,307 3,527 3,999 4,328 Other Liabilities 19,866 19,866 19,866 19,869 19,871 Long-Term Debt 12,500 14,330 14,487 15,042 13,608 Preferred and Preference Stock 211 211 211 211 211 Common Equity 10,008 10,932 11,693 11,991 11,991 Liabilities and Shareholders' Equity 46,528 48,739 49,878 51,205 50,102 Total Capitalization 24,216 26,424 27,562 28,887 27,783 Operations Statistics Total Generation Owned: 22,980 MW Regulated, 6,612 MW Unregulated Total Utility Customers: 2.8 Million Electric, 188 Thousand Gas States with Utility Operations: AR, LA, MS, TX Non-regulated Activities: IPP (Entergy Wholesale Commodities) Source: Company reports; RBCCM estimates; Thomson Reuters. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15. January 4, 2016 58 2016 U.S. Power & Utility Best Ideas Portfolio
Shelby G. Tucker, CFA Insoo Kim, CFA Managing Director Associate RBC Capital Markets +1.212.428.6462 +1.212.905.2995 [email protected] [email protected] Exelon Corp. (NYSE: EXC); Outperform; $32 Price Target; 19.7% Potential Return
Stock Price: $ 27.77 Market Cap. ($mm): 25,536 Daily Volume ('000): 7,910 52-wk Price Range: $25.09-$38.25 Shares Out. (mm): 919.6 Dividend: $1.240 2017 Consensus P/E: 10.3x Float: 99.8% Dividend Yield: 4.5% Volatility/Beta: 0.20x Short Interest: 2.0% Risk To Dividend: Low
Investment Thesis Despite the continued overhang with the Pepco acquisition and a lack of recovery in forward gas and power prices, we believe Exelon's recent negative move has been overdone and see current levels as an attractive entry point given successful PJM auction results and an opportunity for the company to repurchase shares with the raised PHI acquisition financing. We currently do not assume the PHI acquisition goes through.
(millions) 2015E 2016E 2017E 2018E Key Metrics 2015E 2016E 2017E 2018E Revenues 27,793 27,816 28,287 28,843 P/E (x) 11.1 10.5 10.3 9.6 EBITDA 6,900 7,045 7,423 7,834 EV/EBITDA (x) 6.6 7.0 6.6 6.0 EBIT 4,335 4,239 4,407 4,601 FCF Yield -5.8% -2.5% 0.9% 5.9% RBCCM EPS $2.50 $2.65 $2.70 $2.90 Dividend Yield 4.5% 4.5% 4.5% 4.5% EPS Growth 4.3% 6.4% 1.5% 7.7% Credit Metrics Dividend/Share $1.24 $1.24 $1.24 $1.24 FFO Cov. (x) 7.4 7.9 8.3 9.5 Dividend Payout 49.7% 46.7% 46.0% 42.7% FFO/Debt 35.7% 30.9% 32.9% 37.4% Street EPS $2.52 $2.54 $2.71 $2.88 Debt/Capital 51.5% 51.6% 48.9% 47.3%
Investment Positives Investment Risks - Improved regulatory environment - Further deterioration or non-recovery of forward power curves leads to non-profitable - Low cost power producer power plant economics, resulting in the company shutting down several nuclear plants. - Improved balance sheet health - The PHI acquisition ultimately fails. - Sustainable dividend - Ratings agencies downgrade parent/subsidiary debt to non-investment grade.
Potential Catalysts Calendar of Events - Recovery in forward power curves lead to improved ExGen gross margins. - 1Q16: Final decision expected from D.C. commission re: Pepco acquisition settlement - Assuming the PHI acquisition fails, management deploys a +$3B stock buyback filing program. - May 2016: PJM Capacity Performance auction - Successful implementation of O&M expense reductions. - June 2016: Final decision expected in BGE electric/gas rate case (C-9406) - Illinois legislature passes bill on nuclear subsidies.
110 Company Description Exelon is one of the largest power companies in the U.S. Its three utilities, 105 ComEd, PECO, and BG&E, serve more than 7.5 million electric and gas 100 customers in Illinois, Pennsylvania, and Maryland. Exelon Generation owns 95 around 35,000 MW of unregulated generation, of which 19,300 MW is nuclear. 90 The Constellation business provides competitive energy to 1.1 million retail and 85 wholesale customers. 80
Week Relative Performance Relative Week CEO: Christopher Crane - 75
52 CFO: Jonathan Thayer 70 IR Contact: Francis Idehen 65 12/31/14 2/28/15 4/30/15 6/30/15 8/31/15 10/31/15 12/31/15 Phone: +1.312.394.3967 Headquarters: Chicago, IL EXC UTY SPX Website: www.exeloncorp.com Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15. January 4, 2016 59 2016 U.S. Power & Utility Best Ideas Portfolio
Exelon Corp. Shelby G. Tucker, CFA; +1.212.428.6462 Summary Financial Statements Insoo Kim; +1.212.905.2995 Millions of Dollars Except for Per Share Amounts Fiscal Year Ending December 31, Summary Income Statement 2014A 2015E 2016E 2017E 2018E Revenues 27,429 27,793 27,816 28,287 28,843 Cost of Goods Sold (13,003) (12,609) (12,476) (12,580) (12,721) Operation and Maintenance (8,568) (7,533) (7,466) (7,413) (7,373) Depreciation (2,314) (2,566) (2,806) (3,016) (3,232) Operating Income 2,390 3,885 3,790 3,958 4,152 EBITDA 5,865 6,900 7,045 7,423 7,834 EBIT 3,551 4,335 4,239 4,407 4,601 Interest (1,065) (1,110) (1,060) (1,055) (947) EBT 2,486 3,225 3,179 3,351 3,654 Income Taxes (666) (989) (995) (1,061) (1,161) Continuing Net Income 1,820 2,236 2,185 2,291 2,493 Net Income - GAAP 1,623 2,223 2,172 2,278 2,480 Adjusted Net Income 2,068 2,223 2,172 2,278 2,480 Basic Shares Outstanding ('000) 860 888 816 843 852 Diluted Shares Outstanding ('000) 864 891 818 845 854 Diluted Earnings Per Share $ 2.39 $ 2.50 $ 2.65 $ 2.70 $ 2.90 EPS Growth -4.4% 4.3% 6.4% 1.5% 7.7% Dividend Per Share $1.2400 $1.2400 $1.2400 $1.2400 $1.2400 Dividend Growth -14.8% 0.0% 0.0% 0.0% 0.0% Dividend Payout Ratio 51.8% 49.7% 46.7% 46.0% 42.7% Summary Statement of Cash Flow 2014A 2015E 2016E 2017E 2018E Net Income 1,623 2,223 2,172 2,278 2,480 Depreciation & Amortization (incl. Nuclear) 3,868 4,118 4,358 4,568 4,784 Working Capital (2,072) - - - - Cash Flow from Operations 4,457 7,140 7,346 7,662 8,080 Funds From Operations (FFO) 6,529 7,140 7,346 7,662 8,080 Capital Expenditures (6,077) (7,525) (6,975) (6,375) (5,525) Sale (Purchase of Assets) - - - - - Cash Flow from Investing (4,599) (7,580) (7,030) (6,430) (5,580) Short/Long-Term Debt, net 2,040 4,938 (1,868) (666) 171 Common Issuance/Buyback, net - 1,868 (3,018) 1,150 - Common Dividend (1,065) (1,101) (1,012) (1,045) (1,056) Cash Flow from Financing 411 5,250 (5,953) (866) (1,141) Summary Balance Sheet 2014A 2015E 2016E 2017E 2018E Cash and Equivalent 1,878 6,688 1,051 1,416 2,776 Current Asset 12,097 16,969 11,336 11,783 13,238 Gross Properties, Plant, and Equipment 66,829 74,354 81,329 87,704 93,229 Net Properties, Plant, and Equipment 52,087 55,494 58,111 59,918 60,659 Regulatory Assets 6,076 6,076 6,076 6,076 6,076 Total Asset 86,814 95,620 93,157 95,992 98,797 Short-Term Debt (incl. Current Maturities) 2,262 4,908 3,836 2,450 2,110 Current Liabilities 8,762 11,316 10,212 8,851 8,544 Deferred Income Taxes 13,019 13,019 13,019 13,019 13,019 Long-Term Debt 20,010 21,756 21,015 22,236 22,286 Preferred Stock/Hybrids 193 193 193 193 193 Common Equity 22,608 25,634 23,810 26,228 27,686 Liabilities and Shareholders' Equity 86,814 95,620 93,157 95,992 98,797 Total Capitalization 44,425 51,764 48,168 50,459 51,628 Operations Statistics Total Generation Owned: 35,000 MW (19,300 MW Nuclear) Total Utility Customers: 6.6 Million Electric; 1.1 Million Natural Gas States with Utility Operations: IL, MD, PA, TX Non-regulated Activities: IPP (Exelon Generation), Trading (Power Team) Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15. January 4, 2016 60 2016 U.S. Power & Utility Best Ideas Portfolio
Shelby G. Tucker, CFA Insoo Kim, CFA Managing Director Associate RBC Capital Markets +1.212.428.6462 +1.212.905.2995 [email protected] [email protected] FirstEnergy Corp (NYSE: FE); Outperform; $39 Price Target; 27.5% Potential Return
Stock Price: $31.73 Market Cap. ($mm): 13,423 Daily Volume ('000): 4,021 52-wk Price Range: $28.89-$41.68 Shares Out. (mm): 423.0 Dividend: $1.440 2017 Consensus P/E: 12.1x Float: 99.7% Dividend Yield: 4.5% Volatility/Beta: 0.10x Short Interest: 1.7% Risk To Dividend: Low
Investment Thesis FirstEnergy has taken the necessary steps to restructure its competitive retail business, by matching sales load with generation output. On the generation side, the PJM Capacity Performance (CP) auctions boost the segment's earnings starting in 2016. We expect earnings growth of FirstEnergy's regulated segment to be driven by the company's various transmission projects, with potentially accelerated growth through its proposed Mid-Atlantic Interstate Transmission (MAIT) creation. In addition to the announced cost savings initiative and CP benefit, we believe the recently settled purchase power agreement (PPA) in Ohio is key to alleviating the need for bulk equity. Despite this near-term overhang, we believe valuations are attractive and see material upside longer-term.
(millions) 2015E 2016E 2017E 2018E Key Metrics 2015E 2016E 2017E 2018E Revenues 15,161 15,156 14,836 14,878 P/E (x) 11.7 10.5 10.7 11.6 EBITDA 4,255 4,693 4,709 4,607 EV/EBITDA (x) 8.3 7.6 7.6 7.9 EBIT 2,913 3,262 3,209 3,037 FCF Yield -3.2% -3.1% -2.6% -2.4% RBCCM EPS $2.71 $3.03 $2.96 $2.74 Dividend Yield 4.5% 4.5% 4.5% 4.5% EPS Growth 6.1% 12.0% -2.5% -7.3% Credit Metrics Dividend/Share $1.44 $1.44 $1.44 $1.44 FFO Cov. (x) 3.6 3.5 3.3 3.4 Dividend Payout 53.1% 47.5% 48.7% 52.5% FFO/Debt 14.2% 14.2% 13.2% 13.1% Street EPS $2.70 $2.84 $2.63 $2.66 Debt/Capital 63.1% 61.2% 60.5% 59.8%
Investment Positives Investment Risks - Expansion of direct retails sales and away from POLR contracts - Ohio PPA proposal is rejected by the state commission. - Transmission investment growth; growing regulated earnings platform - Less-than-expected O&M savings pressures earnings further. - Stable and sustainable dividend level - Competitive retail margins are compressed further from lower power prices. -Benefit from cost savings, CP auctions - Management issues significantly more equity than expected that heavily dilutes earnings. - S&P and/or Moody's downgrades FirstEnergy to below investment grade.
Potential Catalysts Calendar of Events - Improvement in forward power curves and competitive retail margins. - 1Q16: Final decision expected in Ohio PPA proposal - Approval of Ohio PPA - May 2016: PJM Capacity Performance auction - Successful implementation of transmission investment growth leads to improved - Mid-2016: Decision expected on Mid-Atlantic Interstate Transmission (MAIT) proposal stable earnings growth trajectory.
110 Company Description FirstEnergy is one of the largest electric utilities, with approximately six million 105 customers in the Mid-Atlantic and Midwest regions. FirstEnergy also has almost $2 100 billion transmission rate base, which are under FERC jurisdiction. Through its 95 competitive energy services segment, FirstEnergy owns and operates more than 18,000 MW of generation capacity. 90 85 CEO: Charles E. Jones
80 week Relative Performance Relative week
- CFO: James Pearson 75 52 IR Contact: Irene Prezelj 70 Phone: +1.330.384.3859 12/31/14 2/28/15 4/30/15 6/30/15 8/31/15 10/31/15 12/31/15 Headquarters: Akron, OH FE UTY SPX Website: www.firstenergycorp.com Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15.
January 4, 2016 61 2016 U.S. Power & Utility Best Ideas Portfolio
FirstEnergy Corp Shelby Tucker; +1.212.428.6462 Summary Financial Statements Insoo Kim; +1.212.905.2995 Millions of Dollars Except for Per Share Amounts Fiscal Year Ending December 31, Summary Income Statement 2014A 2015E 2016E 2017E 2018E Revenues 15,049 15,161 15,156 14,836 14,878 Cost of Goods Sold (6,996) (5,194) (5,094) (5,127) (5,178) Operation and Maintenance (3,962) (4,592) (4,199) (3,790) (3,843) Depreciation (1,220) (1,342) (1,431) (1,500) (1,570) Operating Income 1,062 2,841 3,196 3,142 2,970 EBITDA 2,346 4,255 4,693 4,709 4,607 EBIT 1,126 2,913 3,262 3,209 3,037 Interest Expense (1,073) (1,200) (1,266) (1,265) (1,244) EBT 171 1,838 2,122 2,069 1,919 Income Taxes 42 (691) (786) (766) (711) Continuing Net Income 213 1,146 1,336 1,303 1,208 Net Income - GAAP 299 1,146 1,336 1,303 1,208 Adjusted Net Income 1,075 1,146 1,336 1,303 1,208 Basic Shares Outstanding 420 422 439 439 439 Diluted Shares Outstanding 421 423 440 440 440 Diluted Earnings Per Share $2.56 $2.71 $3.03 $2.96 $2.74 EPS Growth -15.7% 6.1% 12.0% -2.5% -7.3% Dividend Per Share $1.4400 $1.4400 $1.4400 $1.4400 $1.4400 Dividend Growth -34.5% 0.0% 0.0% 0.0% 0.0% Dividend Payout Ratio 56.4% 53.1% 47.5% 48.7% 52.5% Summary Statement of Cash Flow 2014A 2015E 2016E 2017E 2018E Net Income 299 1,146 1,336 1,303 1,208 Depreciation & Amortization (incl. Nuclear) 1,452 1,680 1,768 1,838 1,907 Change in Working Capital 32 - - - - Cash Flow from Operations 2,713 3,113 3,134 2,970 2,990 Funds From Operations (FFO) 2,681 3,113 3,134 2,970 2,990 Capital Expenditures (3,545) (2,935) (2,923) (2,685) (2,685) Sale (Purchase of Assets) 394 - - - - Cash Flow from Investing (3,359) (3,038) (3,026) (2,788) (2,788) Short/Long-Term Debt, net 1,164 629 131 411 193 Common Issuance/Buyback, net - - 500 - - Common Dividend (604) (607) (633) (633) (633) Cash Flow from Financing 513 22 (1) (222) (439) Summary Balance Sheet 2014A 2015E 2016E 2017E 2018E Cash and Equivalent 85 182 289 250 13 Current Asset 3,876 3,679 3,713 3,702 3,732 Gross Properties, Plant, and Equipment 47,484 50,419 53,342 56,027 58,712 Net Properties, Plant, and Equipment 35,783 37,376 38,868 40,053 41,168 Regulatory Assets 1,411 1,411 1,411 1,411 1,411 Total Asset 52,166 54,041 55,602 56,812 57,995 Short-Term Debt (incl. Current Maturities) 2,603 2,702 3,494 3,358 4,265 Current Liabilities 5,561 5,762 6,536 6,406 7,323 Regulatory Liabilities - - - - - Long-Term Debt 19,176 19,465 18,804 19,351 18,637 Preferred Stock/Hybrids - - - - - Common Equity 12,422 12,961 14,165 14,835 15,410 Liabilities and Shareholders' Equity 52,166 54,041 55,602 56,812 57,995 Total Capitalization 34,201 35,127 36,462 37,543 38,312 Operations Statistics Total Generation Owned: 18.5 GW unregulated, 3.7 GW regulated Total Utility Customers: 6 million States with Operations: OH, PA, NJ, WV, MD, IN, NY, VA Non-regulated Activities: IPP and Retail (FE Solutions) Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15.
January 4, 2016 62 2016 U.S. Power & Utility Best Ideas Portfolio
Shelby G. Tucker, CFA David Emami Managing Director Associate RBC Capital Markets +1.212.428.6462 +1.212.618.2668 [email protected] [email protected] InfraREIT Inc. (NYSE: HIFR); Outperform; $24 Price Target; 31.7% Potential Return
Stock Price: $18.91 Market Cap. ($mm): 824 Daily Volume ('000): 227 52-wk Price Range: $17.84-$34.47 Shares Out. (mm): 43.57 Dividend: $0.900 2017 Consensus EV/EBITDA: 8.3x Float: 78.3% Dividend Yield: 4.8% Volatility/Beta: 1.4x Short Interest: 0.8% Risk To Dividend: Low
Investment Thesis We view InfraREIT as a high-growth, regulated utility within a tax-efficient REIT structure. We expect InfraREIT to grow its dividend at a 14.5% CAGR through the end of the decade. Despite this attractive profile, we see a number of challenges for HIFR. Fundamentally, we believe there is increased regulatory risk introduced by the REIT structure, as there is potential for adverse rulings from commissioners in future rate cases. Additionally, there is not a logical investor base for this name. The REIT investors have been wary of the utility assets and the fact that it is externally managed; utility investors are generally uncomfortable with the binary nature of the Oncor case and are cautious on the regulatory risk associated with the REIT model. The Oncor bankruptcy has grown increasingly complex, and the resolution appears to be so distant, that many event-arb investors have moved on due to investment horizon constraints. Finally, HIFR is very thinly traded, and has been pressured by significant insider selling. With that said, we find the current valuation compelling .
($ in millions) 2015E 2016E 2017E 2018E Key Metrics 2015E 2016E 2017E 2018E Revenues 152 200 259 297 P/CAFD (x) 17.9 14.0 12.9 12.1 Adjusted EBITDA 127 182 241 278 EV/EBITDA (x) 11.2 9.8 7.9 7.1 EBIT 51 131 164 179 CAFD Yield 8.2% 11.6% 12.6% 13.7% RBCCM CAD/share $1.06 $1.35 $1.47 $1.57 Dividend Yield 4.8% 5.5% 6.4% 7.3% CAFD Growth 0.0% 27.2% 8.8% 6.8% Credit Metrics Dividend/Share $0.90 $1.04 $1.22 $1.38 FFO Cov. (x) 3.6x 4.0x 4.2x 4.3x Dividend Payout 85.0% 77.0% 83.0% 88.0% FFO/Debt 16.1% 14.3% 17.1% 18.8% Street EBITDA 130 166 229 #N/A Debt/Capital 35.6% 50.4% 52.4% 55.8%
Investment Positives Investment Risks * Footprint capex drives double digit dividend growth • Inability to apply the REIT structure outside of Texas. * Regulated assets within REIT structure create stable perpetuity-like cash flows • Hunt fails to acquire Oncor. * Relationship with Hunt provides upside through ROFO acquisitions • InfraREIT receives a negative rate case decision that lowers revenues. * Opportunity to acquire Oncor • Sharyland encounters Construction delays or cost overruns • Slowdown in the Texas economy hinders organic growth. * Continued technical weakness due to insider selling
Potential Catalysts Event Timeline * Hunt acquisition of Oncor. 1Q16: Acquisition of first ROFO asset- GSEC • Positive decisions from FERC and/or the state commissions permitting the REIT January 2016: PUCT change of control hearings regarding Oncor structure outside of Texas. 1H16: decision from PUCT on Oncor change of control • Third-party acquisitions with a tenant other than Sharyland. 2H16: IRS approval expected for Oncor bankruptcy plan • Additions were made to the ROFO list.
Company Description
InfraREIT Inc. is a transmission and distribution REIT based in Dallas, Texas. 125 They own and lease regulated utility assets and pay out a large percentage of cash flow as dividends. HIFR has slightly over $1 billion in rate base and 115 their assets are approximately 75% transmission, 25% distribution. 105
95
85
week Relative Performance Relative week -
52 CEO: David Campbell 75 CFO: Brant Meleski 65 IR contact: Brook Wooten 1/30/15 3/30/15 5/30/15 7/30/15 9/30/15 11/30/15 Phone: 214-855-6748 Headquarters: Dallas, Texas HIFR UTY SPX website:http://infrareitinc.com/investor-relations/default.aspx Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 1/2/16.
January 4, 2016 63 2016 U.S. Power & Utility Best Ideas Portfolio
InfraREIT Inc. Shelby Tucker; +1.212.428.6462 Summary Financial Statements David Emami +1.212.618.2662 Millions of Dollars Except for Per Share Amounts Fiscal Year Ending December 31 Summary Income Statement 2014A 2015E 2016E 2017E 2018E Base Rent 116 124 163 211 242 Percentage Rent 21 28 37 48 55 Lease Revenue 137 152 200 259 297 Management incentive fee - - - (1) (2) Other general and administrative expense (19) (54) (19) (19) (20) Depreciation (34) (40) (51) (78) (99) EBIT 84 51 131 164 179 Adjusted EBITDA 118 127 182 241 278 Net Interest Expense (24) (36) (45) (58) (64) EBT 60 15 86 106 115 Income Taxes (1) (1) (1) (2) (2)
Adjusted Net Income 53 56 62 76 83 Cash Available for Distribution (CAD) - 67 96 104 113 Basic Shares Outstanding 63.6 70.9 70.9 72.0 Diluted Shares Outstanding - 63.6 70.9 70.9 72.0 Diluted Earnings Per Share $0.88 $0.87 $1.07 $1.15 EPS Growth - -0.6% 22.8% 6.8% CAD Per Share - $1.06 $1.35 $1.47 $1.57 CAD Growth - 27.2% 8.8% 6.8% Dividend Per Share $0.9004 $1.0378 $1.2167 $1.3776 Dividend Growth - - 15.3% 17.2% 13.2% Dividend Payout Ratio - 85.0% 77.0% 83.0% 88.0% Summary Statement of Cash Flow 2014A 2015E 2016E 2017E 2018E Net Income 81 127 192 223 262 Depreciation (34) (40) (51) (78) (99) Funds From Operations (FFO) - 96 136 182 213 Capital Expenditures - (248) (270) (243) (197) Sale (Purchase of Assets) - - (325) - (81) Cash Flow from Investing (162) (208) (544) (165) (178) Short/Long-Term Debt, net (5) (196) 384 203 90 Common Issuance/Buyback, net - 494 146 - 36 Common Dividend - (57) (74) (86) (99) Cash Flow from Financing (5) 240 455 115 25 Summary Balance Sheet 2014A 2015E 2016E 2017E 2018E Cash and Equivalent 3 27 54 154 179 Current Assets 44 81 109 209 234 Net Properties, Plant, and Equipment 1,292 1,497 1,717 1,946 1,946 Total Assets 1,515 1,753 1,999 2,323 2,348 Current Liabilities 5 7 13 12 12 Long-Term Debt 625 625 1,007 1,217 1,310 Other Long-Term Liabilities - 19 19 19 19 Common Equity 884 885 921 926 926 Total Capitalization 1,515 1,753 1,999 2,323 2,348 Operations Statistics InfraREIT holds $1.1 bn in regulated electric Transmission and Distribution assets as of March 31, 2015. Their transmission assets comprise approximately 75 percent of their rate base. These assets have an average life span of 40 years, and their average age is less than five years.
Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 1/2/16.
January 4, 2016 64 2016 U.S. Power & Utility Best Ideas Portfolio
Shelby G. Tucker, CFA Managing Director RBC Capital Markets +1.212.428.6462 [email protected] The Laclede Group Inc. (NYSE: LG); Sector Perform; $63 Price Target; 9.3% Potential Return
Stock Price: $59.41 Market Cap. ($mm): 2,575 Daily Volume ('000): 271 52-wk Price Range: $49.07-$61.04 Shares Out. (mm): 43.35 Dividend: $1.960 2017 Consensus P/E: 16.9x Float: 96.5% Dividend Yield: 3.3% Volatility/Beta: 0.51x Short Interest: 6.0% Risk To Dividend: Low
Investment Thesis We see Laclede is a consolidator in a very fragmented natural gas local distribution company (LDC) industry. Management has already closed on two deals (MGE and Alagasco), which, we believe will lead to a 4%-6% growth rate through 2017. As Laclede faces a conversion of equity units in late 2017 and a general rate case in its largest jurisdiction, we expect EPS to slow. We forecast that Laclede's 2013-2018E growth rate will be 4% versus its peer group's 5%. Its 3.3% dividend yield is higher than the peer group (3.1%), while its payout ratio is lower. Part of the discount might come from skepticism about the strategy. As management delivers, we expect the discount to narrow. Our $63 price target still assumes a 4% discount to where the LDC peer group is currently trading.
($ in millions) 2015 2016E 2017E 2018E Key Metrics 2015 2016E 2017E 2018E Revenues 1,976 1,991 2,072 2,117 P/E (x) 18.6 17.6 17.0 16.6 EBITDA 395 436 459 488 EV/EBITDA (x) 12.0 11.1 10.9 10.3 EBIT 274 296 312 331 FCF Yield -1.1% -1.0% -0.5% -1.0% RBCCM EPS $3.19 $3.37 $3.50 $3.57 Dividend Yield 3.1% 3.3% 3.5% 3.7% EPS Growth 4.8% 5.6% 3.6% 2.3% Credit Metrics Dividend/Share $1.84 $1.96 $2.08 $2.20 FFO Cov. (x) 5.6 5.4 5.4 5.1 Dividend Payout 57.6% 58.1% 59.5% 61.5% FFO/Debt 15.6% 15.7% 15.7% 15.3% Street EPS $3.19 $3.38 $3.51 $3.67 Debt/Capital 63.9% 62.4% 61.5% 61.6%
Investment Positives Investment Risks - Astute acquisitions should lead to superior growth rate - Disappointing quarterly results could keep the stock trading at a discount. - Supportive regulatory construct should facilitate growth - Rate case filings in 2017 in Missouri could make 2018 growth challenging. - Smaller bolt-on acquisitions better strategy near-term - Inability to keep cost savings combined with equity unit conversion in mid-2017 puts - Attractive relative value proposition additional pressure on 2018 estimates.
Potential Catalysts Calendar of Events - Quarterly execution on cost savings at the Missouri utilities (Laclede Gas and MGE) would solidify management's credibility as a strong value creator. -Properly priced acquisition announcement could help the stock, particularly if located in Missouri or Alabama. - Ability to increase the equity layer at Alagasco would translate into higher earnings potential.
Company Description
115 The Laclede Group is a utility holding company headquartered in St. Louis, MO. It owns three gas local distribution companies (LDCs) that serve 1.56 million 110 customers through Laclede Gas and Missouri Gas Energy in Missouri, and its 105 Alabama Gas in Alabama. Laclede bought MGE in Sept. 2013 and Alagasco in Aug. 2014. Laclede’s main unregulated units focus on gas marketing and CNG 100 fueling stations. 95 CEO: Suzanne Smithewood
90 CFO: Steve Rasche week Performance Relative week
- IR Contact: Scott Dudley
85 52 12/31/14 2/28/15 4/30/15 6/30/15 8/31/15 10/31/15 12/31/15 Phone: +1.314.342.0878 Headquarters: St. Louis, MO LG UTY SPX Website: www.thelacledegroup.com Source: Company reports; RBCCM estimates; Thomson Reuters. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET Dec 31, 2015 January 4, 2016 65 2016 U.S. Power & Utility Best Ideas Portfolio
The Laclede Group Inc. Shelby G. Tucker, CFA; +1 (212) 428.6462 Summary Financial Statements Millions of Dollars Except for Per Share Amounts Fiscal Year Ending September 30, Summary Income Statement 2014 2015 2016E 2017E 2018E Revenues 1,627 1,976 1,991 2,072 2,117 Cost of Goods Sold (732) (882) (836) (885) (895) Operation and Maintenance (535) (557) (581) (584) (587) Depreciation (82) (130) (144) (154) (163) Operating Income 166 273 292 306 325 Adjusted EBITDA 249 395 436 459 488 EBIT 163 274 296 312 331 Interest (46) (75) (81) (86) (91) EBT 117 199 215 225 240 Income Taxes (32) (62) (69) (72) (77) Continuing Net Income 85 137 146 153 163 Net Income - GAAP 85 137 146 153 163 Adjusted Net Income 100 138 146 153 163 Basic Shares Outstanding 35.8 43.2 43.2 43.8 45.6 Diluted Shares Outstanding 35.9 43.3 43.3 43.9 45.6 Diluted Earnings Per Share $3.05 $3.19 $3.37 $3.50 $3.57 EPS Growth 6.3% 4.8% 5.6% 3.6% 2.3% Dividend Per Share $1.7600 $1.8400 $1.9600 $2.0800 $2.2000 Dividend Growth 3.5% 4.5% 6.5% 6.1% 5.8% Dividend Payout Ratio 57.8% 57.6% 58.1% 59.5% 61.5% Summary Statement of Cash Flow 2014 2015 2016E 2017E 2018E Net Income 85 137 146 153 163 Depreciation & Amortization (incl. Nuclear) 83 131 144 154 163 Change in Working Capital (55) (17) 8 (9) (13) Cash Flow from Operations 123 322 366 369 362 Funds From Operations (FFO) 177 340 358 378 375 Capital Expenditures (171) (290) (300) (300) (300) Sale (Purchase of Assets) (1,270) (8) - - - Cash Flow from Investing (1,438) (299) (300) (300) (300) Short/Long-Term Debt, net 2,358 989 111 90 110 Common Issuance/Buyback, net 460 3 - - - Common Dividend (62) (79) (85) (91) (100) Cash Flow from Financing 1,278 (26) (61) (72) (63) Summary Balance Sheet 2014 2015 2016E 2017E 2018E Cash and Equivalent 16 14 19 16 15 Current Assets 628 530 551 570 587 Gross Properties, Plant, and Equipment 3,928 4,235 4,535 4,835 5,135 Net Properties, Plant, and Equipment 2,760 2,928 3,083 3,230 3,367 Regulatory Assets 614 738 730 723 716 Total Assets 5,074 5,290 5,550 5,824 5,980 Short-Term Debt (incl. Current Maturities) 287 418 498 278 393 Current Liabilities 783 854 957 750 870 Regulatory Liabilities 126 119 117 115 112 Long-Term Debt 1,851 1,772 1,801 2,151 2,076 Preferred Stock/Hybrids - - - - - Common Equity 1,508 1,574 1,635 1,697 1,760 Liabilities and Shareholders' Equity 5,074 5,290 5,550 5,824 5,980 Total Capitalization 3,359 3,425 3,686 3,948 4,011 Operations Statistics Total Utility Customers: 1.56 Million Natural Gas States with Utility Operations: AL, MO Non-regulated Activities: Gas Marketing; NGL Refueling (Spire)
Source: Company reports; RBC Capital Markets estimates; Thomson Reuters. Priced as of market close ET Dec 31, 2015 January 4, 2016 66 2016 U.S. Power & Utility Best Ideas Portfolio
Shelby G. Tucker, CFA David Emami Managing Director Associate RBC Capital Markets +1.212.428.6462 +1.212.618.2668 [email protected] [email protected] NextEra Energy (NYSE: NEE); Outperform; $125 Price Target; 23.3% Potential Return
Stock Price: $103.89 Market Cap. ($mm): 44,750 Daily Volume ('000): 2,128 52-wk Price Range: $90.33-$112.64 Shares Out. (mm): 454.12 Dividend: $3.080 2017 Consensus P/E: 15.9x Float: 99.7% Dividend Yield: 3.0% Volatility/Beta: 0.3x Short Interest: 1.3% Risk To Dividend: Low
Investment Thesis Continued investment at both Florida Power & Light (FPL) and NextEra Energy Resources (NEER) should lead to 7% earnings growth through 2018. NEE deserves a premium multiple given their strong management team, exposure to the high-growth renewable development space, and above-average dividend growth. We believe NEE is the biggest beneficiary in the utility space from the multi-year extension of the renewable production tax credit and investment tax credit, which is a source of potential upside to our estimates. Another potential source of upside would be a large, opportunistic acquisition. We believe management remains acquisitive, whether or not the Hawaii Electric deal is approved. The presence of NEP should facilitate capital recycling and catalyze multiple expansion of NEER contracted wind portfolio, however NEP is not essential for NEE to reach their EPS & DPS growth targets. We believe NEE should remain a core holding for utility investors.
($ in millions) 2015E 2016E 2017E 2018E Key Metrics 2015E 2016E 2017E 2018E Revenues 17,021 17,562 18,205 18,974 P/E (x) 19.6 17.1 16.2 14.7 EBITDA 7,377 7,992 8,901 9,798 EV/EBITDA (x) 12.7 10.1 10.2 9.7 EBIT 4,826 5,070 5,831 6,470 FCF Yield -1.2% 1.3% -8.6% -10.7% RBCCM EPS $5.30 $6.06 $6.43 $7.06 Dividend Yield 2.8% 3.4% 3.9% 4.4% EPS Growth 6.9% 7.4% 6.0% 9.9% Credit Metrics Dividend/Share $2.90 $3.52 $4.00 $4.53 FFO Cov. (x) 5.6 5.8 5.2 5.5 Dividend Payout 54.7% 58.0% 62.2% 64.1% FFO/Debt 18.4% 21.2% 19.2% 20.3% Street EPS $5.66 $6.17 $6.52 $6.93 Debt/Capital 61.2% 59.3% 57.6% 55.8%
Investment Positives Investment Risks - Florida rate base growth - Rate base growth slows at FPL - Above average dividend growth - Adverse ruling in 2016 general rate case - Exposure to high-growth markets renewable development and battery storage - Failure to execute on growth projects at FPL - Earnings primarily from regulated or contracted businesses - Decrease in government support for renewable energy development - Participation in accelerated growth in NEP through General Partner IDRs
Potential Catalysts Calendar of Events - 2016 general rate case settlement 1Q16: Rate case: FPL files general rate case- rates in effect 2017. - Surpassing high-splits on IDRs from NEP November 2016: Rates set - Potential Oncor acquisition? Mid 2016: deadline for approval of Hawaii Electric acquisition
110 Company Description NextEra Energy is one of the nation's largest providers of electricity. The company's principal subsidiaries are Florida Power & Light (FPL) and NextEra 105 Energy Resources (NEER). FPL serves 4.5 million customers in Florida. NEER invests in independent power projects and is the leader in wind energy in the 100 U.S.
95 CEO: Jim Robo
week Relative Performance Relative week 90 - CFO: Moray Dewhurst 52 IR Contact: Amanda Finnis 85 Phone: +1.561.691.7927 12/31/14 2/28/15 4/30/15 6/30/15 8/31/15 10/31/15 12/31/15 Headquarters: Juno Beach, FL NEE UTY SPX Website: www.nexteraenergy.com Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15. January 4, 2016 67 2016 U.S. Power & Utility Best Ideas Portfolio
NextEra Energy, Inc. Shelby Tucker; +1.212.428.6462 Summary Financial Statements David Emami; +1.212.618.2668 Millions of Dollars Except for Per Share Amounts Fiscal Year Ending December 31, Summary Income Statement 2014A 2015E 2016E 2017E 2018E Revenues 17,021 16,911 17,562 18,205 18,974 Cost of Goods Sold (5,602) (5,145) (5,186) (5,145) (5,278) Operation and Maintenance (3,149) (3,148) (3,148) (3,226) (3,332) Depreciation (2,551) (2,611) (2,922) (3,069) (3,328) Operating Income 4,384 4,543 4,808 5,354 6,123 EBITDA 7,377 7,577 7,992 8,901 9,798 EBIT 4,826 4,966 5,070 5,831 6,470 Interest Expense (1,261) (1,321) (1,354) (1,376) (1,341) EBT 3,645 3,726 3,816 4,506 5,160 Income Taxes (1,176) (1,164) (994) (1,535) (1,896) Continuing Net Income 2,334 2,562 2,822 2,971 3,264 Net Income - GAAP 2,469 2,562 2,822 2,971 3,264
Adjusted Net Income 2,334 2,562 2,822 2,971 3,264 Basic Shares Outstanding 436.4 450.4 462.9 462.0 462.0 Diluted Shares Outstanding 440.0 453.9 465.4 462.0 462.0 Diluted Earnings Per Share $5.30 $5.64 $6.06 $6.43 $7.06 EPS Growth 6.9% 6.4% 7.4% 6.0% 9.9% Dividend Per Share $2.9000 $3.0800 $3.5200 $4.0000 $4.5300 Dividend Growth 9.8% 6.2% 14.3% 13.6% 13.3% Dividend Payout Ratio 54.7% 54.6% 58.0% 62.2% 64.1% Summary Statement of Cash Flow 2014A 2015E 2016E 2017E 2018E Net Income 2,469 2,562 2,822 2,971 3,264 Depreciation & Amortization (incl. Nuclear) 2,896 3,016 3,327 3,482 3,741 Change in Working Capital (538) (50) - - - Cash Flow from Operations 5,500 5,527 6,110 6,168 6,850 Funds From Operations (FFO) 4,962 5,477 6,110 6,168 6,850 Capital Expenditures (6,868) (7,665) (8,490) (6,310) (6,360) Sale (Purchase of Assets) (149) (15) (70) (70) (70) Cash Flow from Investing (6,361) (6,314) (7,515) (5,580) (5,630) Short/Long-Term Debt, net 755 1,256 1,715 1,428 1,421 Common Issuance/Buyback, net 633 1,289 545 - - Common Dividend (1,261) (1,387) (1,629) (1,848) (2,093) Cash Flow from Financing 1,000 1,383 481 (570) (822) Summary Balance Sheet 2014A 2015E 2016E 2017E 2018E Cash and Equivalent 577 1,181 248 265 663 Current Assets 6,944 6,657 4,837 5,501 6,197 Gross Properties, Plant, and Equipment 68,042 70,756 77,536 81,949 86,411 Net Properties, Plant, and Equipment 55,705 59,835 63,511 63,767 64,733 Regulatory Assets 951 1,726 1,175 1,175 1,175 Total Assets 74,929 79,963 81,268 82,188 83,851 Short-Term Debt (incl. Current Maturities) 4,657 4,660 2,098 2,655 2,476 Current Liabilities 9,663 10,371 7,809 8,366 8,187 Other Liabilities 20,731 21,162 21,162 21,262 21,362 Long-Term Debt 24,367 25,604 28,241 27,381 27,952 Preferred and Preference Stock - - - - - Common Equity 19,916 22,318 24,056 25,179 26,350 Liabilities and Shareholders' Equity 74,929 79,963 81,268 82,188 83,851 Total Capitalization 48,940 52,582 54,395 55,215 56,778 Operations Statistics Total Generation Owned: 24.4 GW Regulated, 18.2 GW Unregulated Total Utility Customers: 4.5 Million Electric States with Utility Operations: Florida Non-regulated Activities: IPP (NextEra Energy Resources); Retail (Gexa); YieldCo (NEP) Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15. January 4, 2016 68 2016 U.S. Power & Utility Best Ideas Portfolio
Shelby G. Tucker, CFA Sean He Managing Director Associate RBC Capital Markets +1.212.428.6462 +1.212.858.7110 [email protected] [email protected] NRG Yield (NYSE: NYLD); Sector Perform; $16 Price Target; 14.2% Potential Return
Stock Price: $14.76 Market Cap. ($mm): 927 Daily Volume ('000): 1,003 52-wk Price Range: $10.79-$28.11 Shares Out. (mm): 182.85 Dividend: $0.860 2017 Consensus EV/EBITDA: 7.3x Float: 34.3% Dividend Yield: 5.8% Volatility/Beta: 2.97x Short Interest: 4.6% Risk To Dividend: Low
Investment Thesis We continue to rate NYLD a Sector Perform with a $16 price target. Our price target is derived using a discounted cash flow sum-of-the-parts valuation, arriving at ~$14.50 per share for the YieldCo's existing assets and ~$1.50 per share for its growth backlog. While NYLD remains well positioned with the ability to grow its dividend by 15% through 2018 without the need for any equity issuance, our valuation indicates that the stock trades at levels closer to fair value when compared with YieldCo peers. In addition, we believe that the recent management changes at NRG and NYLD creates some uncertainty as to the YieldCo's future within the broader NRG strategy, as well as its role in facilitating additional residential and distributed solar developments at the parent company. However, we are expecting status quo for the time being.
($ in millions) 2015E 2016E 2017E 2018E Key Metrics 2015E 2016E 2017E 2018E Revenues 934 1,082 1,191 1,307 P/CAFD (x) 15.3 10.4 8.2 8.0 Adjusted EBITDA 710 852 976 1,133 EV/EBITDA (x) 7.3 7.1 6.7 6.0 EBIT 408 498 556 598 FCF Yield 6.7% 18.1% 28.5% 27.5% RBCCM CAFD/share $0.96 $1.43 $1.79 $1.86 Dividend Yield 5.6% 6.4% 7.3% 8.4% CAFD Growth -53.2% 47.8% 25.6% 3.6% Credit Metrics Dividend/Share $0.82 $0.94 $1.08 $1.25 FFO Cov. (x) 1.9 2.5 2.9 3.2 Dividend Payout 85.0% 66.3% 60.5% 67.1% FFO/Debt 5.3% 7.4% 9.2% 9.8% Street EBITDA 687 840 905 1,040 Debt/Capital 69.2% 69.5% 68.6% 66.0%
Investment Positives Investment Risks - Visible 15% annual dividend growth through 2018 with current assets and no need for - Finite length of contracts tied to gas plants in California (expirations in 2023) equity - Output production variance from renewable generation assets could significantly impact - Diverse technology types within portfolio CAFD - 2.2 GW drop-down backlog offering $135+ million of incremental CAFD - Reliance on capital markets to fund growth beyond current asset base - Geographic and counterparty risk from concentration of assets located in California and off- taken by SCE and PG&E
Potential Catalysts Calendar of Events - Execution of drop-downs of ROFO designated or NYLD-eligible EME assets - 1Q16: Potential drop-down of remaining NRG stake in California Valley Solar Ranch - Acquisition of third-party assets by either NYLD or its parent, NRG - New asset developments at NRG that could be potential drop-downs to NYLD
120 Company Description 115 NRG Yield, headquartered in Princeton, NJ, is a YieldCo focused on acquiring and 110 105 operating contracted renewable and conventional generation, and thermal 100 infrastructure assets in North America. NYLD intends to generate a stable and 95 predictable stream of cash available for distribution to pay quarterly dividends. 90 85 NYLD currently operates 3,984 MW of power generation and 1,444 MWt of 80 thermal energy. 75 70 65 CEO: Mauricio Gutierrez
week Relative Performance Relative week 60 - 55 CFO: Kirkland B. Andrews 52 50 IR Contact: Chad Plotkin 45 12/31/14 2/28/15 4/30/15 6/30/15 8/31/15 10/31/15 12/31/15 Phone: +1.609.524.4526 Headquarters: Princeton, New Jersey NYLD UTY SPX Website: www.nrgyield.com Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15.
January 4, 2016 69 2016 U.S. Power & Utility Best Ideas Portfolio
NRG Yield Shelby Tucker; +1.212.428.6462 Summary Financial Statements Sean He; +1.212.858.7110 Millions of Dollars Except for Per Share Amounts Fiscal Year Ending December 31 Summary Income Statement 2014A 2015E 2016E 2017E 2018E Revenues 583 934 1,082 1,191 1,307 Operation and Maintenance (214) (311) (322) (335) (361) General and Administrative (8) (12) (12) (12) (13) Depreciation (136) (228) (287) (334) (406) Operating Income 221 383 461 510 528 EBITDA 387 637 784 890 1,003 EBIT 251 408 498 556 598 Interest Expense (166) (253) (258) (274) (259) EBT 85 155 239 283 338 Income Taxes (4) (28) (47) (60) (76) Adjusted Net Income 81 127 192 223 262 Net Income - Common Shareholders 16 65 108 134 168 Cash Available For Distribution 147 170 278 384 443 Basic Shares Outstanding 71.3 175.8 194.7 214.6 238.8 Diluted Shares Outstanding 71.3 175.8 194.7 214.6 238.8 Diluted Earnings Per Share $2.06 $0.96 $1.43 $1.79 $1.86 EPS Growth N/A -53.2% 47.8% 25.6% 3.6% Dividend Per Share $1.4200 $0.8200 $0.9449 $1.0827 $1.2457 Dividend Growth N/A -42.3% 15.2% 14.6% 15.1% Dividend Payout Ratio 68.9% 85.0% 66.3% 60.5% 67.1% Summary Statement of Cash Flow 2014A 2015E 2016E 2017E 2018E Net Income 81 127 192 223 262 Depreciation & Amortization 136 228 287 334 406 Change in Working Capital (31) - - - - Cash Flow from Operations 223 223 378 517 577 Funds From Operations (FFO) 254 223 378 517 577 Capital Expenditures (33) (17) (26) (21) (24) Sale (Purchase of Assets) (1,258) (764) (289) (484) (633) Cash Flow from Investing (1,068) (1,116) (315) (505) (657) Short/Long-Term Debt, net 696 (275) (274) (294) (333) Common Issuance/Buyback, net 630 599 189 359 483 Common Dividend (101) (144) (184) (232) (297) Cash Flow from Financing 1,177 286 (269) (167) (148) Summary Balance Sheet 2014A 2015E 2016E 2017E 2018E Cash and Equivalent 391 391 51 51 52 Current Assets 539 152 154 159 158 Net Properties, Plant, and Equipment 3,487 5,821 6,465 7,843 9,713 Other Long-Term Assets 1,726 1,691 1,631 1,571 1,511 Total Assets 5,752 7,664 8,250 9,573 11,382 Short-Term Debt (incl. Current Maturities) 160 259 302 337 350 Other Current Liabilities 137 124 124 124 124 Current Liabilities 297 383 426 461 474 Long-Term Debt 3,890 4,378 4,851 5,353 5,589 Other Long-Term Liabilities 85 840 713 1,149 2,262 Common Equity 1,480 2,062 2,260 2,610 3,057 Liabilities and Shareholders' Equity 5,752 7,664 8,250 9,573 11,382 Total Capitalization 5,530 6,699 7,413 8,300 8,996 Operations Statistics Total Generation Owned: 3,984 MW power generation, 1,444 MWt thermal energy
Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15.
January 4, 2016 70 2016 U.S. Power & Utility Best Ideas Portfolio
Shelby G. Tucker, CFA Nelson Ng Managing Director Research Analyst RBC Capital Markets +1.212.428.6462 +1.604.257.7617 [email protected] [email protected] Pattern Energy Group Inc. (NASDAQ: PEGI); Outperform; $29 Price Target; 45.8% Potential Return
Stock Price: $20.91 Market Cap. ($mm): 1,561 Daily Volumes ('000): 949 52-wk Price Range: $16.96-$32.00 Shares Out. (mm): 75 Dividend: $1.488 2016 Consensus EBITDA: 365 Float: 76.3% Dividend Yield: 7.1% Volatility/Beta: 1.05x Short Interest: 13.7% Risk To Dividend: Low
Investment Thesis Approximately 89% Pattern's forecast power generation is contracted of hedged for an average term of 15 years, which provides strong cash flow visibility. As a result, the company is able to pay out 80% of its cash flows as dividends. More importantly, the company should be able to grow its dividend by growing the assets under management. Through its parent, PEG LP, Pattern has the opportunity to acquire an additional 1,270 MW that would be 'dropped down' from PEG LP through a ROFO mechanism. We expect management to achieve its targeted 10-12% dividend growth target through 2017. Moreover, valuation looks attractive, as the company trades at a meaningful discount to the value of its existing portfolio alone ($26/share), with additional upside from the execution of its growth backlog ($3/share).
($ in millions) 2015E 2016E 2017E 2018E Key Metrics 2015E 2016E 2017E 2018E Revenues 329 465 607 648 P/CAFD (x) 17.5x 10.0x 9.3x 8.6x Adjusted EBITDA 249 391 484 587 EV/EBITDA (x) 15.0x 12.6x 10.8x 9.3x EBIT 27 113 142 173 FCF Yield 2.7% 7.0% 8.4% 9.5% RBCCM CAFD/share $1.20 $2.09 $2.24 $2.44 Dividend Yield 6.8% 7.6% 8.4% 9.3% CAFD Growth 12.1% 74.5% 7.3% 9.0% Credit Metrics Dividend/Share $1.43 $1.58 $1.76 $1.94 FFO Cov. (x) 2.8x 4.0x 4.2x 4.5x Dividend Payout 119.4% 75.9% 78.3% 79.4% FFO/Debt 7.4% 10.2% 14.3% 16.1% Street EBITDA $241.5 $364.6 $441.3 $493.6 Debt/Capital 56.6% 53.5% 47.7% 48.5%
Investment Positives Investment Risks - Improved regulatory environment - Wind generation that is significantly different than the long-term average - Long-term contracted power prices - Deferral of ROFO drop-downs - Management forecasts 12-15% average CAFD/share growth - Sooner-than-expected sell down from principal investor, Riverstone Capital - Management has a strong track record of successfully developing projects - Changes in the regulatory environment (e.g., RPS targets and subsidies)
Potential Catalysts Calendar of Events - Execution of additional ROFO drop-downs - September 2015, Pattern commenced operations of 200 MW Logan's Cap wind facility in - PEG LP successfully develops new project, increasing the size of the ROFO portfolio Texas and a 270 MW K2 wind facility in Ontario - Acquisition of third-party projects (independent of PEG LP) - July 2015, Pattern completed a $125 million public secondary offering and $225 million private convertible debt offering. - June 2015, Pattern expanded its ROFO list with 526 MW of projects in Japan and New Mexico.
Company Description 130
Pattern Energy Group is an independent power producer (IPP) with 2,282 MW 125 (net) of wind generation in operation and 116 MW (net) under construction. It is 120 headquartered in San Francisco, California. It has wind assets in the United 115 States (California, Texas, and Nevada), Canada (Ontario and Manitoba), Puerto 110 Rico, and Chile. Approximately 89% of its fleet's expected output is under long- 105 term contracts, with an average 15-year life. 100 95 CEO: Michael Garland
week Relative Performance Relative week 90 CFO: Michael Lyon -
52 85 IR Contact: Sarah Webster 80 Phone: +1.415.283.4076 12/31/14 2/28/15 4/30/15 6/30/15 8/31/15 10/31/15 12/31/15 Headquarters: San Francisco, CA PEGI UTY SP50 Website: www.patternenergy.com Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15. January 4, 2016 71 2016 U.S. Power & Utility Best Ideas Portfolio
Pattern Energy Group Inc. Shelby Tucker; +1.212.428.6462 Summary Financial Statements Nelson Ng; +1.604.257.7617 Millions of Dollars Except for Per Share Amounts Fiscal Year Ending December 31 Summary Income Statement 2014A 2015E 2016E 2017E 2018E Revenues 265 329 465 607 648 Operation and Maintenance (78) (111) (144) (196) (207) General and Administrative (28) (36) (36) (38) (39) Depreciation (104) (141) (198) (267) (280) Operating Income 55 42 87 106 122 Adjusted EBITDA 198 249 391 484 587 EBIT 31 27 113 142 173 Interest Expense (68) (74) (82) (101) (106) EBT (37) (47) 31 41 67 Income Taxes (3) (2) (9) (11) (18) Continuing Net Income (40) (49) 22 30 49 Adjusted Net Income (31) (26) 45 57 80 Cash Available For Distribution (CAFD) 62 84 183 238 283 Basic Shares Outstanding (weighted average) 58 71 88 106 116 Diluted Shares Outstanding 58 74 96 114 124 CAFD Per Share $1.07 $1.20 $2.09 $2.24 $2.44 CAFD Growth 27.3% 12.1% 74.5% 7.3% 9.0% Dividend Per Share $1.30 $1.43 $1.58 $1.76 $1.94 Dividend Growth n/a 10.1% 10.9% 10.8% 10.5% CAFD Payout Ratio 121.6% 119.4% 75.9% 78.3% 79.4% Summary Statement of Cash Flow 2014A 2015E 2016E 2017E 2018E Net Income (31) (26) 45 57 80 Depreciation & Amortization 104 141 198 267 280 Change in Working Capital 36 28 12 9 28 Cash Flow from Operations 109 142 256 333 388 Funds From Operations (FFO) 107 135 249 319 374 Capital Expenditures (1) (1) (1) (1) (1) Sale (Purchase of Assets) (379) (910) (1,674) (240) (485) Cash Flow from Investing (380) (910) (1,674) (241) (486) Short/Long-Term Debt, net 29 247 1,073 (200) 87 Common Issuance/Buyback, net 287 318 492 307 250 Common Dividend (52) (91) (139) (186) (225) Cash Flow from Financing 264 474 1,425 (79) 113 Summary Balance Sheet 2014A 2015E 2016E 2017E 2018E Cash and Equivalent 102 50 50 50 50 Accounts Receivable 107 105 105 105 105 Current Assets 209 155 155 155 155 Net Properties, Plant, and Equipment 2,351 3,252 4,603 4,510 4,470 Other Long-Term Assets 272 549 648 688 893 Total Assets 2,832 3,956 5,405 5,353 5,518 Short-Term Debt (incl. Current Maturities) 50 322 433 211 253 Other Current Liabilities 91 140 140 140 140 Current Liabilities 141 462 574 351 394 Debt (incl. converts) 1,451 1,560 2,047 2,071 2,115 Other Long-Term Liabilities 76 171 196 217 243 Common Equity 1,165 1,763 2,588 2,715 2,765 Liabilities and Shareholders' Equity 2,832 3,956 5,405 5,353 5,518 Total Capitalization 2,615 3,323 4,635 4,785 4,881 Operations Statistics Total Generation Owned: 2,282MW (net) wind in operation and 116MW (net) wind under construction Drop-Downs: 1,270 MW (net) expected through 2019 Plant Locations: TX, CA, NV, Canada (Ontario, Manitoba), Puerto Rico, and Chile Non-regulated Activities: Renewable energy generation Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15. January 4, 2016 72 2016 U.S. Power & Utility Best Ideas Portfolio
Shelby G. Tucker, CFA Sean He Managing Director Associate RBC Capital Markets +1.212.428.6462 +1.212.858.7110 [email protected] [email protected] PG&E Corp. (NYSE: PCG); Sector Perform; $59 Price Target; 14.3% Potential Return
Stock Price: $53.19 Market Cap. ($mm): 26,087 Daily Volume ('000): 2,284 52-wk Price Range: $47.33-$60.21 Shares Out. (mm): 490.45 Dividend: $1.820 2017 Consensus P/E: 14.3x Float: 99.8% Dividend Yield: 3.4% Volatility/Beta: 0.25x Short Interest: 1.1% Risk To Dividend: Low
Investment Thesis Similar to the other California investor-owned utilities, we continue to find the long-term growth opportunities that have been laid ahead for PCG to be attractive due to public policy that favors integration of greener technologies requiring additional transmission and distribution spending. PCG has outlined the potential to grow rate base by 6-8% through 2019, and we expect normalized earnings growth to track this range. We also expect the dividend to be addressed in the year ahead with the potential for the first hike since 2010. Despite these positives however, we continue to rate PCG Sector Perform as we think the headline risk potential associated with both CPUC and federal investigations will keep the stock from trading at a significant premium to the regulated group multiple.
($ in millions) 2015E 2016E 2017E 2018E Key Metrics 2015E 2016E 2017E 2018E Revenues 16,679 18,217 18,641 19,453 P/E (x) 17.5 14.5 14.3 13.5 EBITDA 5,350 6,156 6,525 6,963 EV/EBITDA (x) 8.1 7.2 6.9 6.6 EBIT 1,878 3,087 3,511 3,713 FCF Yield -8.1% -5.6% -6.5% -5.1% RBCCM EPS $3.04 $3.68 $3.71 $3.93 Dividend Yield 3.4% 3.6% 3.8% 3.8% EPS Growth -13.2% 21.0% 0.9% 6.0% Credit Metrics Dividend/Share $1.82 $1.92 $2.02 $2.02 FFO Cov. (x) 6.2 7.0 6.8 7.2 Dividend Payout 59.9% 52.2% 54.4% 51.4% FFO/Debt 23.6% 28.4% 28.1% 28.5% Street EPS $3.05 $3.72 $3.71 $3.94 Debt/Capital 50.9% 49.3% 48.8% 48.4%
Investment Positives Investment Risks - Growing rate base driven by public policy - California regulatory environment becomes less favorable - Safe dividend, with the potential to grow - Potential for additional fines, including from federal criminal indictment - Cost of capital mechanism retained through April 2017 - Decisions on open dockets are less constructive than expected - Regulated utility revenues are decoupled from sales
Potential Catalysts Calendar of Events - Constructive decisions on GT&S case - 1Q16: GT&S Phase 1 proposed decision expected - Dividend increase above expectations - 1Q16: Testimonies begin for 2017 GRC - Overhang from CPUC and federal investigations are removed - 2Q16: GT&S Phase 2 proposed decision expected - 11/8/2016: Current schedule for 2017 GRC proposed decision
Company Description 115
PG&E's principal activity is the generation, procurement and transmission of electricity and procurement, transportation and storage of natural gas. It 110 operates through its subsidiary, Pacific Gas and Electric Co. (PacGas), in 105 northern California. The company serves 5.1 million electricity and 4.3 million natural gas customers. 100
95 CEO: Tony Earley 90
week Relative Performance Relative week CFO: Kent Harvey -
52 IR Contact: Janet Loduca 85 12/31/14 3/31/15 6/30/15 9/30/15 12/31/15 Phone: +1.415.972.7080 PCG UTY SPX Headquarters: San Francisco, CA website: www.pgecorp.com Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15. January 4, 2016 73 2016 U.S. Power & Utility Best Ideas Portfolio
PG&E Corporation Shelby G. Tucker, CFA; +1.212.428.6462 Summary Financial Statements Sean He; +1.212.858.7110 Millions of Dollars Except for Per Share Amounts Fiscal Year Ending December 31, Summary Income Statement 2014A 2015E 2016E 2017E 2018E Revenues 17,090 16,679 18,217 18,641 19,453 Cost of Goods Sold (6,569) (5,471) (5,769) (6,059) (6,312) Operation and Maintenance (5,282) (5,809) (5,938) (6,056) (6,177) Depreciation (2,433) (2,596) (2,845) (3,074) (3,310) Operating Income 2,450 1,739 3,027 3,451 3,653 EBITDA 5,239 5,350 6,156 6,525 6,963 EBIT 2,520 1,878 3,087 3,511 3,713 Interest (734) (781) (843) (900) (908) EBT 1,795 1,107 2,254 2,621 2,815 Income Taxes (345) (244) (564) (708) (760) Continuing Net Income 1,450 863 1,691 1,913 2,055 Net Income - GAAP 1,450 863 1,691 1,913 2,055 Adjusted Net Income 1,647 1,479 1,846 1,899 2,041 Basic Shares Outstanding 468.0 483.6 498.5 509.7 516.9 Diluted Shares Outstanding 470.0 486.4 502.0 511.7 518.9 Diluted Earnings Per Share $3.50 $3.04 $3.68 $3.71 $3.93 EPS Growth 28.9% -13.2% 21.0% 0.9% 6.0% Dividend Per Share $1.8200 $1.8200 $1.9200 $2.0200 $2.0200 Dividend Growth 0.0% 0.0% 5.5% 5.2% 0.0% Dividend Payout Ratio 51.9% 59.9% 52.2% 54.4% 51.4% Summary Statement of Cash Flow 2014A 2015E 2016E 2017E 2018E Net Income 1,450 863 1,691 1,913 2,055 Depreciation & Amortization (incl. Nuclear) 2,433 2,596 2,845 3,074 3,310 Change in Working Capital 511 294 (287) (15) (130) Cash Flow from Operations 3,677 4,202 4,759 5,216 5,483 Funds From Operations (FFO) 3,166 4,058 5,047 5,231 5,613 Capital Expenditures (4,833) (5,300) (5,550) (5,900) (5,900) Sale (Purchase of Assets) - - - - - Cash Flow from Investing (4,714) (5,313) (5,550) (5,900) (5,900) Short/Long-Term Debt, net (excl. Securitization) 893 1,281 850 1,300 1,000 Common Issuance/Buyback, net 802 754 793 500 400 Common Dividend (828) (861) (960) (1,030) (1,044) Cash Flow from Financing 892 1,147 669 756 342 Summary Balance Sheet 2014A 2015E 2016E 2017E 2018E Cash and Equivalent 151 186 65 137 61 Current Assets 6,389 6,255 6,583 6,829 7,026 Gross Properties, Plant, and Equipment 63,062 68,361 73,911 79,810 85,710 Net Properties, Plant, and Equipment 43,941 46,644 49,349 52,175 54,764 Regulatory Assets 6,322 6,448 6,577 6,709 6,843 Total Assets 60,127 63,620 66,621 69,473 72,619 Short-Term Debt (incl. Current Maturities) 633 1,078 928 1,028 228 Current Liabilities 5,920 6,477 6,489 6,624 5,966 Regulatory Liabilities 6,290 6,605 6,935 7,281 7,646 Long-Term Debt 15,050 16,279 16,879 17,729 19,529 Preferred Stock/Hybrids 252 252 252 258 258 Common Equity 15,748 16,504 18,027 19,411 20,822 Liabilities and Shareholders' Equity 60,127 63,620 66,621 69,473 72,619 Total Capitalization (excl. Securitization) 31,683 34,113 36,086 38,426 40,837 Operations Statistics Total Generation Owned: 7,342 MW Regulated Total Utility Customers: 5.1 Million Electric; 4.3 Million Natural Gas States with Utility Operations: California Non-regulated Activities: None Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15. January 4, 2016 74 2016 U.S. Power & Utility Best Ideas Portfolio
Shelby G. Tucker, CFA Insoo Kim, CFA Managing Director Associate RBC Capital Markets +1.212.428.6462 +1.212.905.2995 [email protected] [email protected] Pinnacle West Capital (NYSE: PNW); Sector Perform; $68 Price Target; 9.0% Potential Return
Stock Price: $64.48 Market Cap. ($mm): 7,148 Daily Volumes ('000): 945 52-wk Price Range: $56.01-$73.31 Shares Out. (mm): 110.9 Dividend: $2.298 2017 Consensus P/E: 15.3x Float: 99.5% Dividend Yield: 3.6% Volatility/Beta: 0.30x Short Interest: 1.7% Risk To Dividend: Low
Investment Thesis Pinnacle West benefits from robust customer growth, although continuing customer conservation and energy efficiency measures partially offset ultimate load growth. The utility's expected rate case filing in 2016 provides an opportunity to recover and earn on its various investments; however we, see limited near-term catalysts and expect the stock to trade in-line with its regulated peers for now.
($ in millions) 2015E 2016E 2017E 2018E Key Metrics 2015E 2016E 2017E 2018E Revenues 3,438 3,549 3,694 3,848 P/E (x) 16.8 16.1 15.4 14.6 EBITDA 1,338 1,410 1,497 1,589 EV/EBITDA (x) 8.2 8.0 7.7 7.4 EBIT 870 912 966 1,022 FCF Yield -2.8% -3.1% -5.0% -4.3% RBCCM EPS $3.83 $3.99 $4.19 $4.41 Dividend Yield 3.7% 3.9% 4.1% 4.3% EPS Growth 7.0% 4.4% 4.9% 5.2% Credit Metrics Dividend/Share $2.41 $2.53 $2.66 $2.79 FFO Cov. (x) 6.7 6.6 6.4 6.3 Dividend Payout 63.0% 63.4% 63.5% 63.3% FFO/Debt 29.0% 28.7% 27.8% 27.4% Street EPS $3.78 $4.00 $4.20 $4.31 Debt/Capital 45.9% 46.3% 47.3% 47.9%
Investment Positives Investment Risks - Improved regulatory environment - Load growth continues to struggle. - Strong and sustainable dividend - ACC lowers APS's allowed ROE significantly in the next rate case. - Retail electric competition discussions resurface and result in deregulation in Arizona. - Higher operating costs versus expectations during the stayout period.
Potential Catalysts Calendar of Events - Weather-normalized load growth picks up due to even more robust customer - Mid-2016: Expected filing of general rate case growth and/or less impact of energy efficiency/demand response/customer conservation measures.
110 Company Description
Pinnacle West Capital Corp. is the largest regulated electric utility in Arizona. 105 Pinnacle West's subsidiary, Arizona Public Service, serves about 1.1 million customers. Pinnacle owns about 6,300 MWs, including 1,100 MWs of nuclear 100 generation.
95
90 CEO: Don Brandt
week Relative Performance Relative week CFO: Jim Hatfield
- 85
52 IR Contact: Paul Mountain 80 Phone: +1.602.250.4952 12/31/14 2/28/15 4/30/15 6/30/15 8/31/15 10/31/15 12/31/15 Headquarters: Phoenix, AZ PNW UTY SPX Website: www.pinnaclewest.com Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15. January 4, 2016 75 2016 U.S. Power & Utility Best Ideas Portfolio
Pinnacle West Capital Corp. Shelby Tucker; +1.212.428.6462 Summary Financial Statements Insoo Kim; +1.212.905.2995 Millions of Dollars Except for Per Share Amounts Fiscal Year Ending December 31, Summary Income Statement 2014A 2015E 2016E 2017E 2018E Revenues 3,389 3,438 3,549 3,694 3,848 Cost of Goods Sold (1,180) (1,156) (1,177) (1,212) (1,249) Operation and Maintenance (908) (894) (903) (912) (926) Depreciation (417) (469) (498) (532) (568) Operating Income 811 842 884 938 994 EBITDA 1,247 1,338 1,410 1,497 1,589 EBIT 830 870 912 966 1,022 Interest Expense (201) (198) (210) (228) (245) EBT 644 687 718 753 792 Income Taxes (221) (241) (251) (264) (277) Continuing Net Income 424 447 467 489 515 Net Income - GAAP 424 447 467 489 515 Adjusted Net Income 398 427 447 469 495 Basic Shares Outstanding 111 111 111 111 112 Diluted Shares Outstanding 111 112 112 112 112 Diluted Earnings Per Share $3.58 $3.83 $3.99 $4.19 $4.41 EPS Growth -2.4% 7.0% 4.4% 4.9% 5.2% Dividend Per Share $2.2975 $2.4100 $2.5325 $2.6600 $2.7925 Dividend Growth -2.4% 7.0% 4.4% 4.9% 5.2% Dividend Payout Ratio 64.2% 63.0% 63.4% 63.5% 63.3% Summary Statement of Cash Flow 2014A 2015E 2016E 2017E 2018E Net Income 424 447 467 489 515 Depreciation & Amortization (incl. Nuclear) 496 548 577 611 647 Change in Working Capital 111 - - - - Cash Flow from Operations 1,100 1,120 1,169 1,226 1,287 Funds From Operations (FFO) 988 1,120 1,169 1,226 1,287 Capital Expenditures (911) (1,056) (1,111) (1,285) (1,285) Sale (Purchase of Assets) - - - - - Cash Flow from Investing (923) (1,058) (1,113) (1,287) (1,287) Short/Long-Term Debt, net 73 191 243 348 323 Common Issuance/Buyback, net 15 14 16 16 16 Common Dividend (247) (268) (282) (296) (312) Cash Flow from Financing (179) (63) (22) 68 27 Summary Balance Sheet 2014A 2015E 2016E 2017E 2018E Cash and Equivalent 8 7 40 46 74 Current Asset 973 973 973 973 973 Gross Properties, Plant, and Equipment 15,543 16,599 17,710 18,995 20,280 Net Properties, Plant, and Equipment 11,194 11,359 11,528 11,767 11,970 Regulatory Assets 1,054 1,054 1,054 1,054 1,054 Total Asset 14,314 14,478 14,647 14,886 15,089 Short-Term Debt (incl. Current Maturities) 531 424 174 224 674 Current Liabilities 1,559 1,452 1,202 1,252 1,702 Other Liabilities 5,204 4,862 4,595 4,284 3,953 Long-Term Debt 3,031 3,452 3,938 4,228 4,093 Minority Interest - - - - - Common Equity 4,519 4,712 4,913 5,122 5,341 Liabilities and Shareholders' Equity 14,314 14,478 14,647 14,886 15,089 Total Capitalization 7,930 8,437 8,873 9,422 9,956 Operations Statistics Total Generation Owned: 6,300 MW (1,100 MW nuclear) Total Utility Customers: 1.1 Million Electric States with Utility Operations: Arizona Non-regulated Activities: N/A Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15. January 4, 2016 76 2016 U.S. Power & Utility Best Ideas Portfolio
Shelby G. Tucker, CFA Insoo Kim, CFA Managing Director Associate RBC Capital Markets +1.212.428.6462 +1.212.905.2995 [email protected] [email protected] PNM Resources (NYSE: PNM); Outperform; $36 Price Target; 20.2% Potential Return
Stock Price: $ 30.57 Market Cap. ($mm): 2,435 Daily Volume ('000): 618 52-wk Price Range: $24.42-$31.23 Shares Out. (mm): 79.65 Dividend: $0.755 2017 Consensus P/E: 15.9x Float: 99.2% Dividend Yield: 2.5% Volatility/Beta: 0.25x Short Interest: 2.3% Risk To Dividend: Low
Investment Thesis Despite the delay in the 2016 rate case process, we believe that PNM has an attractive story based on above-average earnings and dividend growth; while we expect the large rate uplift to be pushed back to 2017 from 2016, we continue to expect double-digit dividend growth from 2016-2018. We believe that there is further upside to the PNM story, given the continued rate base and earnings growth through the 2018–2019 time frame from the recently approved Best Available Retrofit Technology (BART) settlement. At this point, we believe that the market is not fully valuing the additional growth in the 2018–2019 period. Finally, we believe PNM remains a potential take-out candidate.
($ in millions) 2015E 2016E 2017E 2018E Key Metrics 2015E 2016E 2017E 2018E Revenues 1,450 1,477 1,560 1,612 P/E (x) 19.1 18.9 15.7 14.2 EBITDA 530 546 606 636 EV/EBITDA (x) 9.1 9.0 8.2 7.8 EBIT 344 346 392 410 FCF Yield -13.6% -8.7% -1.8% -0.3% RBCCM EPS 1.60 1.62 1.94 2.16 Dividend Yield 2.6% 2.9% 3.3% 3.7% EPS Growth 7.3% 1.2% 20.1% 10.9% Credit Metrics Dividend/Share $0.80 $0.88 $1.00 $1.12 FFO Cov. (x) 3.6 4.4 4.6 5.2 Dividend Payout 50.0% 54.4% 51.2% 52.0% FFO/Debt 13.1% 16.3% 18.1% 19.3% Street EPS $1.59 $1.63 $1.92 $2.07 Debt/Capital 57.0% 56.6% 55.7% 54.6%
Investment Positives Investment Risks - Strong rate base growth - Less-than-favorable decision in PNM general rate case - Above average earnings and dividend growth - Failure to extend contracts for firm-requirements wholesale business - No need for near-term equity - M&A activity slows - TNMP favorably located in Texas in growing economy and load - Continued negative load growth at PNM - Potential for takeout as M&A target
Potential Catalysts Calendar of Events - Continuation of above-average dividend growth - 2Q16: Final decision expected in PNM general rate case - Utility sector M&A activity
Company Description 110
PNM Resources (PNMR) is headquartered in Albuquerque, New Mexico. PNM 105 Resources is the holding company for two regulated utilities, PNM and TNMP. PNM is the largest electricity provider in New Mexico and serves over 500,000 100 electricity customers in the state. TNMP is an electricity transmission and distribution service provider and provides electricity to 230,000 accounts in 95 Texas. 90 CEO: Pat Vincent-Collawn
week Relative Performance Relative week 85 CFO: Chuck Eldred -
52 IR Contact: Jimmie Blotter 80 Phone: (505) 241-2227 12/31/14 2/28/15 4/30/15 6/30/15 8/31/15 10/31/15 12/31/15 Headquarters: Albuquerque, New Mexico PNM UTY SPX Website: www.pnmresources.com Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15. January 4, 2016 77 2016 U.S. Power & Utility Best Ideas Portfolio
PNM Resources Shelby Tucker; +1.212.428.6462 Summary Financial Statements Insoo Kim; +1.212.905.2995 Millions of Dollars Except for Per Share Amounts Fiscal Year Ending December 31, Summary Income Statement 2014A 2015E 2016E 2017E 2018E Revenues 1,436 1,450 1,477 1,560 1,612 Cost of Goods Sold (657) (627) (626) (640) (654) Operation and Maintenance (171) (168) (172) (175) (179) Depreciation (173) (187) (200) (214) (226) Operating Income 300 325 330 376 394 EBITDA 493 530 546 606 636 EBIT 320 344 346 392 410 Interest Expense (120) (119) (119) (124) (116) EBT 201 225 227 268 295 Income Taxes (70) (81) (82) (97) (106) Continuing Net Income 131 144 145 171 188 Net Income - GAAP 131 144 145 171 188 Adjusted Net Income 120 128 129 156 173 Basic Shares Outstanding 79.8 79.8 79.4 79.5 79.7 Diluted Shares Outstanding 80.3 80.2 79.9 80.1 80.2 Diluted Earnings Per Share 1.49 1.60 1.62 1.94 2.16 EPS Growth 5.6% 7.3% 1.2% 20.1% 10.9% Dividend Per Share $0.7400 $0.8000 $0.8800 $0.9950 $1.1200 Dividend Growth 12.1% 8.1% 10.0% 13.1% 12.6% Dividend Payout Ratio 49.7% 50.0% 54.4% 51.2% 52.0% Summary Statement of Cash Flow 2014A 2015E 2016E 2017E 2018E Net Income 131 144 145 171 188 Depreciation & Amortization (incl. Nuclear) 210 210 223 237 249 Change in Working Capital 13 (52) (10) (2) (1) Cash Flow from Operations 415 362 409 452 482 Funds From Operations (FFO) 428 310 399 450 481 Capital Expenditures (461) (577) (542) (415) (398) Sale (Purchase of Assets) - - - - - Cash Flow from Investing (485) (467) (522) (395) (378) Short/Long-Term Debt, net 186 220 163 26 5 Common Issuance/Buyback, net (10) (12) 4 4 4 Common Dividend (59) (64) (70) (79) (89) Cash Flow from Financing 96 122 80 (66) (101) Summary Balance Sheet 2014A 2015E 2016E 2017E 2018E Cash and Equivalent 28 45 11 2 5 Current Assets 433 465 440 443 454 Gross Properties, Plant, and Equipment 5,942 6,569 7,111 7,526 7,924 Net Properties, Plant, and Equipment 4,270 4,662 5,006 5,208 5,382 Regulatory Assets 491 491 491 491 491 Total Assets 5,829 6,153 6,462 6,658 6,833 Short-Term Debt (incl. Current Maturities) 439 144 264 683 410 Current Liabilities 704 379 501 924 656 Other Liabilities 1,676 1,630 1,801 1,875 1,943 Long-Term Debt 1,642 2,259 2,202 1,809 2,087 Preferred and Preference Stock 12 12 12 12 12 Common Equity 1,722 1,801 1,876 1,969 2,068 Liabilities and Shareholders' Equity 5,829 6,153 6,462 6,658 6,833 Total Capitalization 3,814 4,216 4,354 4,472 4,576 Operations Statistics Total Generation Owned or Leased: 2,368 MW; additional 204 MW wind under PPA Total Utility Customers: 735,000 customers States with Utility Operations: New Mexico, Texas Non-regulated Activities: Palo Verde 3 nuclear generation (134 MW) Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15. January 4, 2016 78 2016 U.S. Power & Utility Best Ideas Portfolio
Shelby G. Tucker, CFA Sean He Managing Director Associate RBC Capital Markets +1.212.428.6462 +1.212.858.7110 [email protected] [email protected] PPL Corp. (NYSE: PPL); Sector Perform; $37 Price Target; 12.8% Potential Return
Stock Price: $ 34.13 Market Cap. ($mm): 22,928 Daily Volume ('000): 4,613 52-wk Price Range: $29.18-$36.74 Shares Out. (mm): 671.79 Dividend: $1.510 2017 Consensus P/E: 14.2x Float: 100.0% Dividend Yield: 4.4% Volatility/Beta: 0.29x Short Interest: 0.5% Risk To Dividend: Low
Investment Thesis With the spin-off of the unregulated generation business and increased EPS growth expectations of 6% annually through 2017 (off a 2014 base), we have began warming up to the new PPL story. Behind new rate cases in Kentucky and Pennsylvania and strong transmission rate base growth, PPL's U.S. segments are expected to deliver 12-14% EPS growth, anchoring the bulk of the company's 6% annual growth target. At the same time, the U.K. segment is expected to deliver 1-2% in the initial years of the RIIO-ED1 program, with potential variability driven by incentive awards, and currency (GBP/USD) and inflation (RPI). We continue to keep a close eye on these latter two drivers, which we believe could be potential headwinds in outer years, while we remain on the sidelines.
($ in millions) 2015E 2016E 2017E 2018E Key Metrics 2015E 2016E 2017E 2018E Revenues 7,829 8,253 8,564 8,902 P/E (x) 15.5 14.5 14.0 13.3 EBITDA 3,902 4,148 4,371 4,617 EV/EBITDA (x) 8.1 8.1 8.2 8.1 EBIT 3,012 3,190 3,356 3,545 FCF Yield -10.2% -7.6% -5.8% -6.8% RBCCM EPS 2.21 $2.35 $2.45 $2.56 Dividend Yield 4.4% 4.5% 4.6% 4.8% EPS Growth -9.9% -3.9% 10.9% 9.0% Credit Metrics Dividend/Share $1.50 $1.52 $1.58 $1.64 FFO Cov. (x) 4.2 4.6 3.9 3.8 Dividend Payout 68.0% 64.6% 64.6% 64.0% FFO/Debt 16.6% 17.6% 14.1% 13.7% Street EPS $2.21 $2.32 $2.40 $2.52 Debt/Capital 61.1% 65.4% 65.2% 65.0%
Investment Positives Investment Risks - 7% rate base growth and 6% EPS growth expected annually - Load growth is lower than expected in Kentucky or Pennsylvania - U.K. subsidiary operating under fast-track status for RIIO-ED1 with potential for - Weaker GBP/US foreign exchange rates in unhedged currency years incremental performance rewards - Retail Price Index (RPI) inflation is lower than forecasted - High dividend yield - FERC transmission projects are not approved and/or delayed
Potential Catalysts Calendar of Events - Regulatory approvals for Project Compass - 1/16: New rates go in effect at PPL Electric Utilities - Stronger GBP or higher U.K. inflationary environment
Company Description
110 PPL is headquartered in Pennsylvania, with regulated operations in the United 105 States and United Kingdom. PPL's regulated operations consist of PPL Electric Utilities, Louisville Gas & Electric, Kentucky Utilities, and Western Power 100 Distribution (UK).
95
90
CEO: William Spence week Relative Performance Relative week
- 85 CFO: Vincent Sorgi 52 IR Contact: Joe Bergstein 80 Phone: +1.610.774.5609 12/31/2014 03/30/2015 06/24/2015 09/18/2015 12/14/2015 Headquarters: Allentown, Pennsylvania PPL UTY SPX Website: www.pplweb.com Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15. January 4, 2016 79 2016 U.S. Power & Utility Best Ideas Portfolio
PPL Corporation Shelby Tucker; +1.212.428.6462 Summary Financial Statements Sean He; +1.212.858.7110 Millions of Dollars Except for Per Share Amounts Fiscal Year Ending December 31, Summary Income Statement 2014A 2015E 2016E 2017E 2018E Revenues 11,499 7,829 8,253 8,564 8,902 Cost of Goods Sold (3,202) (1,787) (1,812) (1,837) (1,862) Operation and Maintenance (2,803) (1,814) (1,892) (1,940) (1,990) Depreciation (1,220) (890) (958) (1,014) (1,073) Operating Income 3,272 2,968 3,194 3,360 3,549 EBITDA 4,608 3,902 4,148 4,371 4,617 EBIT 3,388 3,012 3,190 3,356 3,545 Interest Expense (1,024) (910) (972) (1,028) (1,086) EBT 2,364 2,101 2,218 2,328 2,459 Income Taxes (781) (578) (621) (652) (688) Continuing Net Income 1,583 1,524 1,597 1,676 1,770 Net Income - GAAP 1,737 1,524 1,597 1,676 1,770 Adjusted Net Income 1,629 1,484 1,597 1,676 1,770 Basic Shares Outstanding 654 670 676 682 688 Diluted Shares Outstanding 666 672 679 685 691 Diluted Earnings Per Share 2.45 2.21 2.35 2.45 2.56 EPS Growth 1.1% -9.9% -3.9% 10.9% 9.0% Dividend Per Share $1.49 $1.50 $1.52 $1.58 $1.64 Dividend Growth 1.4% 0.7% 1.3% 3.9% 3.8% Dividend Payout Ratio 60.9% 68.0% 64.6% 64.6% 64.0% Summary Statement of Cash Flow 2014A 2015E 2016E 2017E 2018E Net Income 1,737 1,524 1,597 1,676 1,770 Depreciation & Amortization (incl. Nuclear) 1,465 965 1,033 1,089 1,148 Change in Working Capital 90 - - - - Cash Flow from Operations 3,403 3,282 2,815 2,916 3,068 Funds From Operations (FFO) 3,493 3,282 2,815 2,916 3,068 Capital Expenditures (4,090) (3,611) (3,347) (3,339) (3,537) Sale (Purchase of Assets) 805 135 - - - Cash Flow from Investing (3,329) (3,620) (3,342) (3,334) (3,532) Short/Long-Term Debt, net 505 900 1,295 1,235 1,195 Common Issuance/Buyback, net 1,074 200 200 200 200 Common Dividend (967) (1,004) (1,028) (1,078) (1,128) Cash Flow from Financing 583 (318) 467 357 267 Summary Balance Sheet 2014A 2015E 2016E 2017E 2018E Cash and Equivalent 1,751 1,095 1,035 973 776 Current Assets 6,159 5,503 5,443 5,381 5,184 Gross Properties, Plant, and Equipment 30,568 33,457 36,134 38,806 41,635 Net Properties, Plant, and Equipment 34,597 30,477 32,517 34,511 36,626 Regulatory Assets 1,562 1,562 1,562 1,562 1,562 Total Assets 48,864 44,566 46,545 48,479 50,396 Short-Term Debt (incl. Current Maturities) 1,466 1,478 1,423 1,358 1,303 Current Liabilities 7,443 6,380 5,965 5,800 5,745 Regulatory Liabilities 992 992 992 992 992 Long-Term Debt 18,856 18,628 20,338 21,738 22,988 Noncontrolling Interests - - - - - Common Equity 13,628 10,621 11,390 12,189 13,031 Liabilities and Shareholders' Equity 48,864 44,566 46,545 48,479 50,396 Total Capitalization 35,034 30,698 32,763 34,796 36,833 Operations Statistics Total Generation Owned: 8.0 GW Regulated Total Utility Customers: 1.4 m (PPL Electric); 0.9 m electric & 0.3 m nat gas (LG&E and KU), 7.8 m (U.K.) States with Utility Operations: Pennsylvania, Kentucky, Virginia, and regulated distribution in the UK Non-regulated Activities: Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15. January 4, 2016 80 2016 U.S. Power & Utility Best Ideas Portfolio
Shelby G. Tucker, CFA Insoo Kim, CFA Managing Director Associate RBC Capital Markets +1.212.428.6462 +1.212.905.2995 [email protected] [email protected] Public Service Enterprise Grp. (NYSE: PEG); Sector Perform; $43 Price Target; 15.0% Potential Return
Stock Price: $38.69 Market Cap. ($mm): 19,576 Daily Volumes ('000): 3,080 52-wk Price Range: $36.80-$44.45 Shares Out. (mm): 506.0 Dividend: $1.480 2017 Consensus P/E: 13.5x Float: 99.8% Dividend Yield: 3.8% Volatility/Beta: 0.22x Short Interest: 2.1% Risk To Dividend: Low
Investment Thesis PSEG is making significant investments in its regulated distribution and transmission businesses, helping the company offset the decline in the unregulated generation business. In PJM, the Capacity Performance auctions provides a moderate benefit to Power earnings in 2016 and 2017 with a more meaningful uplift in 2018/2019. On the energy side, while we expect Power's access to low-cost Marcellus gas to provide partial offset to lower power prices, we expect the negative basis to moderate through 2018. On the regulated side, we expect PSE&G to sustain a high single-digit earnings growth through 2018 with its significant rate base growth opportunities which could increase further given various potential investments on deck. However, we believe current valuations already reflect most of the visible upside.
($ in millions) 2015E 2016E 2017E 2018E Key Metrics 2015E 2016E 2017E 2018E Revenues 10,667 10,542 10,749 11,060 P/E (x) 13.2 13.0 13.2 12.8 EBITDA 4,232 4,144 4,211 4,402 EV/EBITDA (x) 6.6 7.1 6.8 6.7 EBIT 2,812 2,847 2,818 2,902 FCF Yield -2.3% -3.0% -1.0% -0.4% RBCCM EPS $2.93 $2.98 $2.92 $3.03 Dividend Yield 4.0% 4.2% 4.5% 4.7% EPS Growth 6.7% 6.7% 6.7% 6.7% Credit Metrics Dividend/Share $1.56 $1.64 $1.73 $1.82 FFO Cov. (x) 10.5 10.2 10.0 10.5 Dividend Payout 53.2% 55.1% 59.2% 60.0% FFO/Debt 42.0% 35.4% 39.2% 38.5% Street EPS $2.91 $2.93 $2.87 $2.99 Debt/Capital 39.1% 42.5% 38.3% 39.6%
Investment Positives Investment Risks - Higher locational value for generation assets - Deterioration of constructive regulatory and/or legislative environment in NJ. - Constructive regulatory environment - Sustained low power prices from lack of power demand. - Low cost generator with attractive asset mix - Marcellus gas price basis difference narrows, reducing Power's margin benefit. - PSEG is heavily penalized by the FERC regarding the historical over-collection of fossil unit revenues.
Potential Catalysts Calendar of Events - Sustained gas basis advantage due to the Marcellus Shale provides margin support - Feb 2016: BGS auction for PSEG Power's margins. - May 2016: PJM Capacity Performance auction - Load growth improves stronger than expected. - BGS customer switching continues to slow. - Improving cash position leads to increased dividend growth.
Company Description
110 PSEG is the largest utility provider in New Jersey. The utility, PSE&G, serves 2.2 million electric and 1.8 million gas customers in New Jersey. PSEG Power owns 105 13,500 MW of unregulated generation in the Mid-Atlantic, mostly in New Jersey. PSEG Power's generation portfolio includes 3,500 MW of nuclear generation. 100
95 CEO: Ralph Izzo
90 week Relative Performance Relative week
- CFO: Daniel Cregg 52 85 IR Contact: Kathleen Lally 12/31/14 2/28/15 4/30/15 6/30/15 8/31/15 10/31/15 12/31/15 Phone: +1.973.430.6565 PEG UTY SPX Headquarters: Newark, NJ Website: www.pseg.com Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15.
January 4, 2016 81 2016 U.S. Power & Utility Best Ideas Portfolio
Public Service Enterprise Group Shelby Tucker; +1.212.428.6462 Summary Financial Statements Insoo Kim; +1.212.905.2995 Millions of Dollars Except for Per Share Amounts Fiscal Year Ending December 31, Summary Income Statement 2014A 2015E 2016E 2017E 2018E Revenues 10,886 10,667 10,542 10,749 11,060 Cost of Goods Sold (3,886) (3,422) (3,371) (3,484) (3,567) Operation and Maintenance (3,150) (3,146) (3,185) (3,213) (3,249) Depreciation (1,227) (1,420) (1,297) (1,392) (1,500) Operating Income 2,623 2,679 2,689 2,660 2,744 EBITDA 4,072 4,232 4,144 4,211 4,402 EBIT 2,845 2,812 2,847 2,818 2,902 Interest Expense (389) (376) (378) (398) (394) EBT 2,456 2,435 2,469 2,421 2,508 Income Taxes (938) (947) (958) (936) (968) Continuing Net Income 1,518 1,489 1,511 1,485 1,540 Net Income - GAAP 1,518 1,489 1,511 1,485 1,540 Adjusted Net Income 1,400 1,489 1,511 1,485 1,540 Basic Shares Outstanding 506 506 505 505 505 Diluted Shares Outstanding 508 508 508 508 508 Diluted Earnings Per Share $2.76 $2.93 $2.98 $2.92 $3.03 EPS Growth 6.7% 6.7% 6.7% 6.7% 6.7% Dividend Per Share $1.48 $1.56 $1.64 $1.73 $1.82 Dividend Growth 3.1% 3.1% 3.1% 3.1% 3.1% Dividend Payout Ratio 53.7% 53.2% 55.1% 59.2% 60.0% Summary Statement of Cash Flow 2014A 2015E 2016E 2017E 2018E Net Income 1,518 1,489 1,511 1,485 1,540 Depreciation & Amortization (incl. Nuclear) 1,427 1,630 1,518 1,624 1,743 Change in Working Capital (209) - - - - Cash Flow from Operations 3,160 3,582 3,492 3,572 3,746 Funds From Operations (FFO) 3,369 3,582 3,492 3,572 3,746 Capital Expenditures (2,820) (3,250) (3,245) (2,900) (2,900) Sale (Purchase of Assets) - - - - - Cash Flow from Investing (2,892) (3,286) (3,283) (2,939) (2,941) Short/Long-Term Debt, net (60) - - - - Common Issuance/Buyback, net - - - - - Common Dividend (748) (789) (828) (874) (919) Cash Flow from Financing (359) (472) (252) (474) (819) Summary Balance Sheet 2014A 2015E 2016E 2017E 2018E Cash and Equivalent 402 226 183 341 327 Current Asset 4,119 3,714 3,662 3,862 3,892 Gross Properties, Plant, and Equipment 32,196 35,446 38,691 41,591 44,491 Net Properties, Plant, and Equipment 23,589 25,419 27,366 28,874 30,274 Regulatory Assets 3,192 3,240 3,288 3,338 3,388 Total Asset 35,333 37,687 39,725 41,581 43,163 Short-Term Debt (incl. Current Maturities) - - - - - Current Liabilities 3,478 3,060 2,329 3,349 2,864 Regulatory Liabilities 258 263 268 274 279 Long-Term Debt 8,261 8,745 10,045 9,445 10,045 Preferred Stock/Hybrids - - - - - Common Equity 12,186 12,886 13,569 14,180 14,801 Liabilities and Shareholders' Equity 35,333 37,687 39,725 41,581 43,163 Total Capitalization 21,071 22,380 23,622 24,633 25,354 Operations Statistics Total Generation Owned: 14.5 GW Unregulated Total Utility Customers: 2.2 Million and 1.8 Million Natural Gas States with Operations: Regulated: NJ; IPP: AZ, CA, CT, DE, FL, HI, NJ, NY, OH, PA, TX, VT Non-regulated Activities: IPP (PSEG Power) Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15.
January 4, 2016 82 2016 U.S. Power & Utility Best Ideas Portfolio
Shelby G. Tucker, CFA Sean He Managing Director Associate RBC Capital Markets +1.212.428.6462 +1.212.858.7110 [email protected] [email protected] Sempra Energy (NYSE: SRE); Outperform; $119 Price Target; 29.6% Potential Return
Stock Price: $94.01 Market Cap. ($mm): 23,334 Daily Volume ('000): 1,181 52-wk Price Range: $89.44-$116.21 Shares Out. (mm): 248.21 Dividend: $2.800 2017 Consensus P/E: 16.4x Float: 99.8% Dividend Yield: 3.0% Volatility/Beta: 0.47x Short Interest: 1.2% Risk To Dividend: Low
Investment Thesis We continue to remain Outperform on SRE, but we are reducing our PT to $119. Our reduced price target is primarily due to applying a reduced premium of 5% to SoCalGas' P/E multiple (prior: 15%) due to possibility of ongoing headline risk and overhang related to the Aliso Canyon gas leak, which we will continue to monitor. We also lowered our probability-weighted value for additional LNG train expansions to $7 (from $10) based on the lower commodity price environment, which makes U.S. LNG less economic. Nevertheless, we still continue to find SRE compelling on a sum-of-the-parts basis whether or not additional trains are added as we see $112 of value per share for the company's existing assets. Resolution of the Aliso Canyon gas leak in an effective and controlled manner and confirmation of additional LNG export contracts would drive upside.
($ in millions) 2015E 2016E 2017E 2018E Key Metrics 2015E 2016E 2017E 2018E Revenues 10,506 11,404 12,086 12,614 P/E (x) 18.5 17.7 16.3 15.3 EBITDA 3,545 4,004 4,419 4,678 EV/EBITDA (x) 10.6 9.8 9.0 8.5 EBIT 2,312 2,570 2,837 3,011 FCF Yield -4.6% -5.2% -1.2% -0.1% RBCCM EPS $5.07 $5.31 $5.76 $6.13 Dividend Yield 3.0% 3.2% 3.4% 3.6% EPS Growth 7.7% 4.7% 8.5% 6.3% Credit Metrics Dividend/Share $2.80 $2.97 $3.15 $3.34 FFO Cov. (x) 5.7 5.7 5.7 5.9 Dividend Payout 55.2% 55.9% 54.7% 54.5% FFO/Debt 18.8% 18.4% 19.3% 20.4% Street EPS $5.05 $5.34 $5.73 $6.74 Debt/Capital 54.4% 55.3% 53.8% 52.1%
Investment Positives Investment Risks - Mostly contracted or regulated revenue streams provides earnings visibility - Cameron LNG construction is delayed - Strong rate base growth at SDG&E and SoCalGas - Mexican infrastructure growth stops or slows - Constructive regulatory environment in California - Aliso Canyon gas leak worsens - Mexican Energy Reform supports IEnova growth - Load growth slows at South American utilities - Early-mover in U.S. LNG export with Cameron - Regulatory environment shifts in California
Potential Catalysts Calendar of Events - Additional wind or solar developments and PPAs - 1Q16: Potential CPUC approval of GRC settlements - Expansion of LNG export capacity at Cameron, ECA or Port Arthur - 1Q16: Restructuring of PEMEX-IEnova deal - Wins on tenders for Mexican infrastructure projects - 3/14-3/15/16: Sempra Analyst Day - Resolution of Aliso Canyon gas leak
105 Company Description Sempra owns the largest natural gas utility in the United States, Southern California Gas, with 21.3 million customers. It also owns San Diego Gas & 100 Electric, serving 1.4 million electric and 865,000 natural gas meters and electric distribution utilities in Chile and Peru. Infrastructure assets include LNG 95 terminals, natural gas pipelines and storage, and generation in the US and Mexico. 90 CEO: Debra Reed
week Relative Performance Relative week 85 - CFO: Joe Householder 52 IR Contact: Richard Vaccari 80 Phone: +1.619.696.1815 12/31/14 2/28/15 4/30/15 6/30/15 8/31/15 10/31/15 12/31/15 Headquarters: San Diego, CA SRE UTY SPX Website: www.sempra.com Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15. January 4, 2016 83 2016 U.S. Power & Utility Best Ideas Portfolio
Sempra Energy Shelby Tucker; +1.212.428.6462 Summary Financial Statements Sean He; +1.212.858.7110 Millions of Dollars Except for Per Share Amounts Fiscal Year Ending December 31, Summary Income Statement 2014A 2015E 2016E 2017E 2018E Revenues 11,035 10,506 11,404 12,086 12,614 Cost of Goods Sold (4,754) (3,963) (4,247) (4,428) (4,613) Operation and Maintenance (2,935) (2,876) (2,960) (3,050) (3,121) Depreciation (1,156) (1,233) (1,434) (1,583) (1,667) Operating Income 1,838 2,092 2,326 2,577 2,752 EBITDA 3,212 3,545 4,004 4,419 4,678 EBIT 2,056 2,312 2,570 2,837 3,011 Interest Expense (554) (596) (637) (672) (685) EBT 1,524 1,708 1,923 2,164 2,325 Income Taxes (300) (361) (481) (597) (660) Continuing Net Income 1,161 1,317 1,336 1,453 1,547 Net Income - GAAP 1,182 1,275 1,336 1,453 1,547 Adjusted Net Income 1,182 1,275 1,336 1,453 1,547 Basic Shares Outstanding 245.9 248.2 248.9 249.5 250.0 Diluted Shares Outstanding 250.7 251.2 251.5 252.1 252.6 Diluted Earnings Per Share $4.71 $5.07 $5.31 $5.76 $6.13 EPS Growth 12.6% 7.7% 4.7% 8.5% 6.3% Dividend Per Share $2.6400 $2.8000 $2.9700 $3.1500 $3.3400 Dividend Growth 4.8% 6.1% 6.1% 6.1% 6.0% Dividend Payout Ratio 56.1% 55.2% 55.9% 54.7% 54.5% Summary Statement of Cash Flow 2014A 2015E 2016E 2017E 2018E Net Income 1,262 1,427 1,475 1,607 1,708 Depreciation & Amortization (incl. Nuclear) 1,156 1,233 1,434 1,583 1,667 Change in Working Capital (375) 300 - - - Cash Flow from Operations 2,161 3,074 3,004 3,187 3,370 Funds From Operations (FFO) 2,536 2,774 3,004 3,187 3,370 Capital Expenditures (3,123) (3,520) (3,550) (2,745) (2,625) Sale (Purchase of Assets) (91) 344 - - - Cash Flow from Investing (3,342) (3,151) (3,525) (2,720) (2,600) Short/Long-Term Debt, net 1,650 777 1,148 98 (50) Common Issuance/Buyback, net 18 (18) 60 60 60 Common Dividend (598) (630) (674) (721) (770) Cash Flow from Financing 854 128 533 (564) (761) Summary Balance Sheet 2014A 2015E 2016E 2017E 2018E Cash and Equivalent 570 621 633 536 545 Current Assets 4,184 3,790 3,802 3,705 3,714 Gross Properties, Plant, and Equipment 35,407 38,927 42,477 45,222 47,847 Net Properties, Plant, and Equipment 25,902 28,189 30,305 31,467 32,425 Regulatory Assets 512 512 512 512 512 Total Assets 39,732 41,620 43,908 45,156 46,308 Short-Term Debt (incl. Current Maturities) 2,202 2,810 2,580 2,537 1,437 Current Liabilities 5,069 5,677 5,447 5,404 4,304 Other Liabilities 10,396 10,531 10,310 10,514 10,718 Long-Term Debt 12,167 12,534 14,412 14,553 15,603 Preferred and Preference Stock 20 20 20 20 20 Common Equity 12,080 12,859 13,720 14,665 15,663 Liabilities and Shareholders' Equity 39,732 41,620 43,908 45,156 46,308 Total Capitalization 26,469 28,223 30,732 31,775 32,723 Operations Statistics Total Generation Owned: 1,193 MW Regulated, 1,875 MW Unregulated (Solar and Wind) Total Utility Customers: 1.4 million electric & 6.8 million gas (California); 1.6 million electric (Peru/Chile) States with Utility Operations: California Non-regulated Activities: Generation, LNG terminals, Pipelines and Gas Storage Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15. January 4, 2016 84 2016 U.S. Power & Utility Best Ideas Portfolio
Shelby G. Tucker, CFA David Emami Managing Director Associate RBC Capital Markets +1.212.428.6462 +1.212.858.7110 [email protected] [email protected] Southern Co. (NYSE: SO); Sector Perform; $53 Price Target; 17.9% Potential Return
Stock Price: $ 46.79 Market Cap. ($mm): 42,529 Daily Volume ('000): 4,337 52-wk Price Range: $41.40-$53.16 Shares Out. (mm): 908.94 Dividend: $2.170 2017 Consensus P/E: 15.2x Float: 99.9% Dividend Yield: 4.6% Volatility/Beta: 0.51x Short Interest: 2.6% Risk To Dividend: Low
Investment Thesis Southern is a quality utility with strong management and constructive regulatory environments. While SO has been a challenging story in recent years due to construction overruns at Kemper and Vogtle and below-average EPS and DPS growth, we believe 2016 couldl be the year for SO to reclaim their historical P/E premium to the group, if SO is able to get Kemper in-service. We expect a number catalysts to drive SO throughout the year, as the street increases estimates to incorporate the AGL Resources acquisition and based on our expectation that Southern will successfully place Kemper County IGCC in-service this year. The multi-year extension of the investment tax credit should also catalyze additional investment in the growing Southern Power subsidiary, providing potential additional upside.
($ in millions) 2015E 2016E 2017E 2018E Equity Metrics 2015E 2016E 2017E 2018E Revenues 18,862 19,544 20,169 20,784 P/E (x) 16.2 15.8 14.7 14.1 EBITDA 6,997 7,726 8,645 8,983 EV/EBITDA (x) 10.1 10.6 9.7 9.2 EBIT 4,921 5,547 6,374 6,642 FCF Yield -4.8% -6.8% -7.8% -3.8% RBCCM EPS 2.89 2.95 3.19 $3.32 Dividend Yield 4.6% 4.8% 5.0% 5.3% EPS Growth 3.2% 2.3% 7.9% 4.2% Credit Metrics 2015E 2016E 2017E 2018E Dividend/Share $2.17 $2.24 $2.35 $2.47 FFO Cov. (x) 7.2 6.9 5.7 4.9 Dividend Payout 75.2% 75.9% 73.9% 74.2% FFO/Debt 21.4% 20.0% 15.6% 15.8% Street EPS $2.87 $2.95 $3.07 $3.19 Debt/Capital 53.9% 57.3% 61.3% 61.1%
Investment Positives Investment Risks - Supportive regulatory environment and mechanisms to limit lag - Construction cost overruns at Vogtle nuclear - increasing exposure to natural gas infrastructure through AGL acquisition - Further delays and cost escalation at Mississippi IGCC - Long-term need for environmental capex to meet EPA mandates - Slower than expected economic growth in Southeast territory - ~3.5% dividend growth, increasing to 5% due to AGL acquisition - Loss of investor confidence in management lowers valuation premium - AGL Resources acquisition fails to close
Potential Catalysts Calendar of Events - Changes in cost estimates for major construction projects -December 2015: Mississippi Commission rules on permanent rates - Vogtle consortium dispute with CB&I (Chicago Bridge & Iron) and Westinghouse - March 2016: Kemper in service - Global settlement on Kemper to remove uncertainty regarding cost recovery, -3Q16: AGL Resources acquisition closing expected availability standards
110 Company Description Southern is one of the nation's largest utilities, operating in the southeastern 105 U.S. It owns approximately 46,000 MW of generation. Its four electric utilities in Alabma, Georgia, Mississippi, and Florida serve 4.4 million customers. In 100 addition, it owns Southern Power, a competitive wholesale generation business that mostly operates with long-term contracts. 95
90
CEO: Tom Fanning week Relative Performance Relative week - 85 CFO: Art Beattie 52 IR Contact: Dan Tucker 80 Phone: +1.404.506.5310 12/31/14 2/28/15 4/30/15 6/30/15 8/31/15 10/31/15 12/31/15 Headquarters: Atlanta, GA SO UTY SPX Website: www.southernco.com Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15. January 4, 2016 85 2016 U.S. Power & Utility Best Ideas Portfolio
Southern Company Shelby Tucker; +1.212.428.6462 Summary Financial Statements David Emami; +1.212.618.2668 Millions of Dollars Except for Per Share Amounts Fiscal Year Ending December 31, Summary Income Statement 2014A 2015E 2016E 2017E 2018E Revenues 18,499 18,862 19,544 20,169 20,784 Cost of Goods Sold (6,677) (6,292) (6,451) (6,770) (7,035) Operation and Maintenance (4,356) (4,502) (4,653) (4,728) (4,823) Depreciation (1,939) (2,076) (2,178) (2,270) (2,342) Operating Income 3,673 4,787 5,450 6,207 6,444 EBITDA 5,795 6,997 7,726 8,645 8,983 EBIT 3,856 4,921 5,547 6,374 6,642 Interest Expense (840) (939) (1,235) (1,591) (1,600) EBT 3,035 3,982 4,312 4,783 5,042 Income Taxes (987) (1,421) (1,503) (1,677) (1,785) Continuing Net Income 2,516 2,637 2,756 3,053 3,204 Net Income - GAAP 2,048 2,561 2,809 3,106 3,257 Adjusted Net Income 2,516 2,637 2,756 3,053 3,204 Basic Shares Outstanding 897.0 910.5 930.2 955.1 961.6 Diluted Shares Outstanding 899.6 913.5 933.2 958.1 964.6 Diluted Earnings Per Share 2.80 2.89 2.95 3.19 3.32 EPS Growth 4.3% 3.2% 2.3% 7.9% 4.2% Dividend Per Share $2.1000 $2.1720 $2.2420 $2.3540 $2.4660 Dividend Growth 4.3% 3.4% 3.2% 5.0% 4.8% Dividend Payout Ratio 75.1% 75.2% 75.9% 73.9% 74.2% Summary Statement of Cash Flow 2014A 2015E 2016E 2017E 2018E Net Income 2,031 2,561 2,809 3,106 3,257 Depreciation & Amortization (incl. Nuclear) 2,293 2,258 2,361 2,453 2,594 Change in Working Capital 614 285 - - - Cash Flow from Operations 5,815 5,799 5,777 6,126 6,388 Funds From Operations (FFO) 6,429 6,084 5,777 6,126 6,388 Capital Expenditures (5,977) (6,700) (7,000) (5,475) (4,050) Sale (Purchase of Assets) - - - - - Cash Flow from Investing (6,408) (6,853) (15,133) (5,608) (4,183) Short/Long-Term Debt, net 1,677 4,450 9,410 1,545 (1,145) Common Issuance/Buyback, net 806 256 1,500 600 - Common Dividend (1,866) (1,978) (2,085) (2,248) (2,371) Cash Flow from Financing 644 2,650 8,747 (181) (3,594) Summary Balance Sheet 2014A 2015E 2016E 2017E 2018E Cash and Equivalent 710 2,306 1,696 2,032 643 Current Assets 6,370 7,467 6,960 7,296 5,707 Gross Properties, Plant, and Equipment 70,013 74,509 89,509 94,984 99,034 Net Properties, Plant, and Equipment 54,868 58,905 71,545 74,567 78,617 Regulatory Assets 4,334 4,733 4,733 4,733 4,733 Total Assets 70,923 77,084 89,302 92,746 95,292 Short-Term Debt (incl. Current Maturities) 4,136 4,803 4,035 3,675 2,300 Current Liabilities 8,967 9,356 8,908 8,548 8,278 Other Liabilities 19,775 20,257 21,054 21,046 23,380 Long-Term Debt 20,841 25,142 34,787 37,142 35,623 Preferred and Preference Stock 375 375 375 375 375 Common Equity 20,965 21,955 24,178 25,636 27,636 Liabilities and Shareholders' Equity 70,923 77,084 89,302 92,746 95,292 Total Capitalization 46,317 52,274 63,375 66,828 65,934 Operations Statistics Total Generation Owned: ~46 GW (9 GW Unregulated) Total Utility Customers: 4.4 Million Electric States with Utility Operations: GA, AL, FL, MS Non-regulated Activities: IPP (Southern Power), Source: Company reports; RBCCM estimates; FactSet. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET, 12/31/15. January 4, 2016 86 2016 U.S. Power & Utility Best Ideas Portfolio
Shelby G. Tucker, CFA Managing Director RBC Capital Markets +1.212.428.6462 [email protected] Unitil Corp. (NYSE: UTL); Underperform; $37 Price Target; 7.0% Potential Return
Stock Price: $35.88 Market Cap. ($mm): 501.7 Daily Volume ('000): 29 52-wk Price Range: $32.63-$39.00 Shares Out. (mm): 13.98 Dividend per Share: $1.400 2017 Consensus P/E: 17.6x Float: 94.2% Dividend Yield: 3.9% Volatility/Beta: 0.50x Short Interest: 2.0% Risk To Dividend: Low
Investment Thesis Unitil is a low-risk transmission and distribution (T&D) utility that should post superior earnings growth through: 1) rate increases that should add $8 million of incremental revenue in 2016 and $6.6 million in 2017; 2) growth-focused capital budgeting that is projected to double the natural gas distribution rate base to $360 million by the end of 2016, compared to $180 million in December 2008; and 2) the potential for fuel switching from fuel oil to natural gas in under-penetrated markets; we estimate that a percent increase in natural gas sales adds about $0.02 to EPS. This higher organic growth makes Unitil an attractive take-out target. We expect the dividend to grow about 1.5% a year. Our Underperform rating is based on Unitil's higher than average P/E multiple for a combo electric/natural gas utility.
($ in millions) 2015E 2016E 2017E 2018E Key Metrics 2015E 2016E 2017E 2018E Revenues 425.3 440.3 466.1 494.3 P/E (x) 19.1 18.2 17.5 17.0 EBITDA 109.3 118.2 123.4 130.2 EV/EBITDA (x) 8.1 7.7 7.6 7.6 EBIT 62.5 66.7 68.0 70.8 FCF Yield -5.8% -5.2% -4.5% -3.3% RBCCM EPS $1.88 $1.97 $2.05 $2.11 Dividend Yield 3.9% 4.0% 4.0% 4.1% EPS Growth 4.9% 4.7% 4.1% 3.0% Credit Metrics Dividend/Share $1.40 $1.42 $1.44 $1.46 FFO Cov. (x) 5.2 5.0 5.4 5.4 Dividend Payout 74.5% 72.2% 70.3% 69.2% FFO/Debt 23.0% 22.0% 22.1% 21.0% Street EPS $1.90 $1.91 $2.04 N/A Debt/Capital 51.2% 52.9% 52.4% 53.1%
Investment Positives Investment Risks - Proven ability to manage rate cases - A sudden and abrupt increase in natural gas prices could reduce the competitive - Low penetration of natural gas in MN and NH should lead to higher organic growth advantage that natural gas enjoys over fuel oil. In turn, this could slow down the rate at - Attractive take out characteristics which customers switch. - While we believe Unitil could make a compelling takeout candidate at some point, it might decide to grow through a utility acquisition, which could negatively impact the stock
Potential Catalysts Calendar of Events - A takeout bid for the company by an infrastructure fund or other player could boost - Initial briefs by FG&E (electric and gas) due 1/12/2016 with reply briefs by intervenors the stock price materially due 1/26; final DPU decision due end of April 2016 - Increased penetration of natural gas - UES electric filing likely early 2016; we estimate that interim rates will be in place by mid- - Constructive outcome from FG&E rate case could improve our 2017 estimates July (company is asking $6.6 million; we are assuming $3.3 million
Company Description 110
Unitil services 102,700 electric customers in Massachusetts through Fitchburg Gas & Electric Light (FG&E) and in New Hampshire through Unitil Energy System 105 (UES), and 77,900 natural gas customers through Northern Utilities in New Hampshire and Maine, and through FG&E in Massachusetts. The company also 100 owns Granite State, an 86-mile natural gas transmission pipeline, and USource, an energy broker. 95 CEO: Bob Schoenberger 90
CFO: Mark Collin
week Relative Performance Relative week -
52 IR Contact: David Chong 85 12/31/14 2/28/15 4/30/15 6/30/15 8/31/15 10/31/15 12/31/15 Phone: +1.603.773.6499 Headquarters: Hampton, NH UTL UTY SPX Website: www.unitil.com Source: Company reports; RBCCM estimates; Thomson Reuters. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET Dec 31, 2015. January 4, 2016 87 2016 U.S. Power & Utility Best Ideas Portfolio
Unitil Corp. Shelby G. Tucker, CFA; +1.212.428.6462 Summary Financial Statements Millions of Dollars Except for Per Share Amounts Fiscal Year Ending December 31, Summary Income Statement 2014 2015E 2016E 2017E 2018E Revenues 425.8 425.3 440.3 466.1 494.3 Cost of Goods Sold (241.9) (230.1) (232.7) (249.1) (266.4) Operation and Maintenance (64.6) (67.2) (68.9) (71.3) (73.8) Depreciation (42.1) (46.8) (51.5) (55.4) (59.4) Operating Income 60.0 62.8 67.1 68.4 71.2 EBITDA 101.8 109.3 118.2 123.4 130.2 EBIT 59.7 62.5 66.7 68.0 70.8 Interest (20.9) (20.9) (22.9) (22.3) (23.6) EBT 38.8 41.6 43.8 45.7 47.2 Income Taxes (14.0) (15.4) (16.2) (16.9) (17.5) Continuing Net Income 24.8 26.2 27.6 28.8 29.7 Net Income - GAAP 24.8 26.2 27.6 28.8 29.7 Adjusted Net Income 24.8 26.2 27.6 28.8 29.7 Basic Shares Outstanding ('000) 13,843 13,954 14,009 14,042 14,076 Diluted Shares Outstanding ('000) 13,847 13,957 14,013 14,046 14,080 Diluted Earnings Per Share $1.79 $1.88 $1.97 $2.05 $2.11 EPS Growth 6.8% 4.9% 4.7% 4.1% 3.0% Dividend Per Share $1.3800 $1.4000 $1.4200 $1.4400 $1.4600 Dividend Growth 0.0% 1.4% 1.4% 1.4% 1.4% Dividend Payout Ratio 77.1% 74.5% 72.2% 70.3% 69.2% Summary Statement of Cash Flow 2014 2015E 2016E 2017E 2018E Net Income 24.7 26.2 27.6 28.8 29.7 Depreciation & Amortization (incl. Nuclear) 42.1 46.8 51.5 55.4 59.4 Change in Working Capital 7.0 0.2 (4.6) (4.8) (5.3) Cash Flow from Operations 84.0 88.4 86.3 92.3 98.0 Funds From Operations (FFO) 77.0 88.2 90.9 97.2 103.3 Capital Expenditures (92.6) (98.0) (97.8) (100.7) (100.7) Sale (Purchase of Assets) - - - - - Cash Flow from Investing (92.6) (98.0) (97.8) (100.7) (100.7) Short/Long-Term Debt, net 14.7 25.8 32.7 27.7 19.9 Common Issuance/Buyback, net 1.2 1.3 1.2 1.2 1.2 Common Dividend (19.2) (19.1) (19.2) (19.2) (19.2) Cash Flow from Financing 7.6 7.8 14.1 9.1 1.9 Summary Balance Sheet 2014 2015E 2016E 2017E 2018E Cash and Equivalent 8.4 6.6 9.2 9.9 9.0 Current Assets 145.2 140.9 149.1 158.1 166.2 Gross Properties, Plant, and Equipment 988.8 1,086.8 1,184.6 1,285.3 1,386.1 Net Properties, Plant, and Equipment 733.7 786.6 834.5 881.4 924.4 Regulatory Assets 107.6 101.1 99.1 97.1 95.2 Total Assets 1,000.2 1,044.9 1,099.9 1,154.8 1,228.3 Short-Term Debt (incl. Current Maturities) 33.3 76.4 76.4 84.2 122.9 Current Liabilities 129.4 170.3 171.3 182.6 224.9 Regulatory Liabilities 72.9 81.6 91.4 102.4 114.7 Long-Term Debt 328.9 313.6 346.2 366.1 377.3 Preferred Stock/Hybrids 0.2 0.2 0.2 0.2 0.2 Common Equity 273.1 281.5 291.1 301.9 313.7 Liabilities and Shareholders' Equity 1,000.2 1,044.9 1,099.9 1,154.8 1,228.3 Total Capitalization 606.2 612.6 654.9 698.3 710.0 Operations Statistics Total Generation Owned: None Total Utility Customers: 102,700 electric and 77,900 natural gas States with Utility Operations: New Hampshire, Massachusetts, Maine Non-regulated Activities: Competitive retail (USource) Source: Company reports; RBCCM estimates; Thomson Reuters. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET Dec 31, 2015. January 4, 2016 88 2016 U.S. Power & Utility Best Ideas Portfolio
Shelby G. Tucker, CFA Managing Director RBC Capital Markets +1.212.428.6462 [email protected] Xcel Energy (NYSE: XEL); Sector Perform; $40 Price Target; 15.0% Potential Return
Stock Price: $35.91 Market Cap. ($mm): 18,224 Daily Volume ('000): 3,452 52-wk Price Range: $31.76-$38.35 Shares Out. (mm): 507.50 Dividend: $1.280 2017 Consensus P/E: 15.4x Float: 99.8% Dividend Yield: 3.6% Volatility/Beta: 0.60x Short Interest: 1.9% Risk To Dividend: Low
Investment Thesis We believe that Xcel is well positioned to grow earnings and dividend by 5%-6% per share through 2018, respectively. Xcel's growth is supported by the capital spending program at its utilities, in particular environmental upgrades or retrofits, new renewable investments, and large transmission projects. Regulation has become constructive in Colorado. Minnesota had been more challenging, but new legislation sets conditions that should improve the regulatory framework. Xcel also benefits from a strong backlog of transmission investment opportunities that support a premium multiple. Management has been guiding to a slowing EPS growth rate (down to a range of $5-6% from 5%-7%), though our forecast suggests growth at the upper end of the guidance. Dividend growth guidance was increased to 5%-7% from 4%-6%; we forecast dividend growth at the lower half of guidance. We view Xcel as a core defensive utility holding.
($ in millions) 2015E 2016E 2017E 2018E Key Metrics 2015E 2016E 2017E 2018E Revenues 11,778 12,270 12,750 13,234 P/E (x) 17.2 16.3 15.4 14.5 EBITDA 3,320 3,531 3,741 3,953 EV/EBITDA (x) 9.6 9.2 8.9 8.6 EBIT 2,086 2,326 2,466 2,608 FCF Yield -6.5% -4.3% -4.0% -2.5% RBCCM EPS $2.09 $2.21 $2.34 $2.47 Dividend Yield 3.6% 3.8% 4.0% 4.2% EPS Growth 3.3% 5.6% 5.8% 5.6% Credit Metrics Dividend/Share $1.28 $1.36 $1.44 $1.52 FFO Cov. (x) 5.7 5.2 5.1 5.1 Dividend Payout 61.2% 61.6% 61.6% 61.6% FFO/Debt 20.5% 18.3% 18.4% 18.5% Street EPS $2.10 $2.21 $2.33 $2.46 Debt/Capital 56.5% 56.8% 56.9% 56.7%
Investment Positives Investment Risks - One of the most pro-active "green" utilities - Political/regulatory mood can change, with Colorado more at risk given how well the - Large and visible capital spending program dialog has gone since the implementation of the multi-year rate case program - Constructive and improving regulation - Three pending rate cases, including a crucial one in Minnesota - Superior dividend growth - Unanticipated cutbacks in capital spending targets
Potential Catalysts Calendar of Events - Positive Minnesota rate case by early 2017, with multi-year rates approved - CO gas rate case to be decided by end January 2016 - MN Resource Plan could lead to greater capital spending needs due to carbon - New Mexico rate case decision by end 2016 reduction targets - MN rate case decision by end March 2017 - Upside to capital budget through grid modernization programs, rate basing of gas reserves, new transmission projects, and other initiatives
Company Description 110 Xcel Energy serves 3.5 millions electricity and 2 million natural gas customers in 8 states, with the largest earnings contribution coming from Colorado and 105 Minnesota. It owns over 17,000 MW of generation, 82,500 transmission lines, 100 190,414 distribution lines and 35,000 miles of natural gas pipeline.
95
90 CEO: Ben Fowke 85 CFO: Teresa Madden
week Relative PerformanceRelative week IR Contact: Paul Johnson - 80
52 12/31/14 2/28/15 4/30/15 6/30/15 8/31/15 10/31/15 12/31/15 Phone: +1.612.215.4535 Headquarters: Minneapolis, MN XEL UTY SPX Website: www.xcelenergy.com Source: Company reports; RBCCM estimates; Thomson Reuters. Results presented should not be viewed as an indicator of future performance. Priced as of market close ET Dec 31, 2015 January 4, 2016 89 2016 U.S. Power & Utility Best Ideas Portfolio
Xcel Energy Inc. Shelby G. Tucker, CFA; +1 (212) 428.6462 Summary Financial Statements Millions of Dollars Except for Per Share Amounts Fiscal Year Ending December 31, Summary Income Statement 2014 2015E 2016E 2017E 2018E Revenues 11,686 11,778 12,270 12,750 13,234 Cost of Goods Sold (5,617) (5,412) (5,631) (5,852) (6,077) Operation and Maintenance (2,636) (2,625) (2,644) (2,662) (2,680) Depreciation (1,019) (1,105) (1,206) (1,276) (1,344) Operating Income 1,948 1,991 2,240 2,379 2,521 EBITDA 3,092 3,320 3,531 3,741 3,953 EBIT 2,073 2,086 2,326 2,466 2,608 Interest (567) (594) (635) (675) (718) EBT 1,545 1,519 1,713 1,812 1,913 Income Taxes (524) (539) (589) (623) (658) Continuing Net Income 1,021 980 1,124 1,189 1,255 Net Income - GAAP 1,021 980 1,124 1,189 1,255 Adjusted Net Income 1,021 1,063 1,124 1,189 1,255 Basic Shares Outstanding 503.8 507.7 508.0 508.0 508.0 Diluted Shares Outstanding 504.1 508.1 508.5 508.5 508.5 Diluted Earnings Per Share $2.03 $2.09 $2.21 $2.34 $2.47 EPS Growth 3.9% 3.3% 5.6% 5.8% 5.6% Dividend Per Share $1.2000 $1.2800 $1.3600 $1.4400 $1.5200 Dividend Growth 8.1% 6.7% 6.3% 5.9% 5.6% Dividend Payout Ratio 59.2% 61.2% 61.6% 61.6% 61.6% Summary Statement of Cash Flow 2014 2015E 2016E 2017E 2018E Net Income 1,021 980 1,124 1,189 1,255 Depreciation & Amortization (incl. Nuclear) 1,151 1,236 1,337 1,407 1,476 Change in Working Capital (120) 43 (11) (10) (8) Cash Flow from Operations 2,648 2,974 2,634 2,771 2,909 Funds From Operations (FFO) 2,768 2,801 2,646 2,781 2,916 Capital Expenditures (3,200) (3,375) (2,780) (2,825) (2,650) Sale (Purchase of Assets) - - - - - Cash Flow from Investing (3,117) (3,337) (2,737) (2,782) (2,607) Short/Long-Term Debt, net 835 994 800 716 450 Common Issuance/Buyback, net 181 5 - - - Common Dividend (561) (606) (645) (685) (726) Cash Flow from Financing 442 371 137 9 (303) Summary Balance Sheet 2014 2015E 2016E 2017E 2018E Cash and Equivalent 80 87 122 120 119 Current Assets 3,364 3,311 3,425 3,504 3,581 Gross Properties, Plant, and Equipment 43,883 47,404 50,329 53,299 56,094 Net Properties, Plant, and Equipment 28,757 31,042 32,630 34,192 35,512 Regulatory Assets 2,774 2,913 2,971 3,031 3,091 Total Assets 36,958 39,356 41,462 43,580 45,080 Short-Term Debt (incl. Current Maturities) 1,277 1,270 1,256 1,973 1,023 Current Liabilities 4,065 4,040 4,095 4,881 4,002 Regulatory Liabilities 1,163 1,280 1,376 1,479 1,590 Long-Term Debt 11,500 12,492 13,297 13,289 14,830 Preferred Stock/Hybrids - - - - - Common Equity 10,214 10,595 11,074 11,577 12,107 Liabilities and Shareholders' Equity 36,958 39,356 41,462 43,580 45,080 Total Capitalization 22,991 24,357 25,627 26,839 27,959 Operations Statistics Total Generation Owned: 16,650 MW Total Utility Customers: 3.5 Million Electric and 2 Million Natural Gas States with Utility Operations: CO, MI, MN, NM, ND, SD, TX, WI Non-regulated Activities: Low-income Housing (Eloigne) Source: Company reports; RBC Capital Markets estimates; Thomson Reuters. Priced as of market close ET Dec 31, 2015 January 4, 2016 90 2016 U.S. Power & Utility Best Ideas Portfolio
Companies mentioned Dominion Midstream Partners, LP (NYSE: DM; $30.66; Outperform) Required disclosures Conflicts disclosures This product constitutes a compendium report (covers six or more subject companies). As such, RBC Capital Markets chooses to provide specific disclosures for the subject companies by reference. To access conflict of interest and other disclosures for the subject companies, clients should refer to https://www.rbccm.com/GLDisclosure/PublicWeb/DisclosureLookup.aspx?entityId=1. These disclosures are also available by sending a written request to RBC Capital Markets Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7 or an email to [email protected]. The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including total revenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generated by investment banking activities of the member companies of RBC Capital Markets and its affiliates. Distribution of ratings For the purpose of ratings distributions, regulatory rules require member firms to assign ratings to one of three rating categories - Buy, Hold/Neutral, or Sell - regardless of a firm's own rating categories. Although RBC Capital Markets' ratings of Top Pick(TP)/ Outperform (O), Sector Perform (SP), and Underperform (U) most closely correspond to Buy, Hold/Neutral and Sell, respectively, the meanings are not the same because our ratings are determined on a relative basis (as described below). Distribution of ratings RBC Capital Markets, Equity Research As of 31-Dec-2015 Investment Banking Serv./Past 12 Mos. Rating Count Percent Count Percent BUY [Top Pick & Outperform] 933 52.59 271 29.05 HOLD [Sector Perform] 727 40.98 102 14.03 SELL [Underperform] 114 6.43 8 7.02
Conflicts policy RBC Capital Markets Policy for Managing Conflicts of Interest in Relation to Investment Research is available from us on request. To access our current policy, clients should refer to https://www.rbccm.com/global/file-414164.pdf or send a request to RBC Capital Markets Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7. We reserve the right to amend or supplement this policy at any time. Dissemination of research and short-term trade ideas RBC Capital Markets endeavors to make all reasonable efforts to provide research simultaneously to all eligible clients, having regard to local time zones in overseas jurisdictions. RBC Capital Markets' equity research is posted to our proprietary website to ensure eligible clients receive coverage initiations and changes in ratings, targets and opinions in a timely manner. Additional distribution may be done by the sales personnel via email, fax, or other electronic means, or regular mail. Clients may also receive our research via third party vendors. RBC Capital Markets also provides eligible clients with access to SPARC on the Firms proprietary INSIGHT website, via email and via third-party vendors. SPARC contains market color and commentary regarding subject companies on which the Firm currently provides equity research coverage. Research Analysts may, from time to time, include short-term trade ideas in research reports and / or in SPARC. A short-term trade idea offers a short-term view on how a security may trade, based on market and trading events, and the resulting trading opportunity that may be available. A short-term trade idea may differ from the price targets and recommendations in our published research reports reflecting the research analyst's views of the longer-term (one year) prospects of the subject company, as a result of the differing time horizons, January 4, 2016 91 2016 U.S. Power & Utility Best Ideas Portfolio
methodologies and/or other factors. Thus, it is possible that a subject company's common equity that is considered a long-term 'Sector Perform' or even an 'Underperform' might present a short-term buying opportunity as a result of temporary selling pressure in the market; conversely, a subject company's common equity rated a long-term 'Outperform' could be considered susceptible to a short-term downward price correction. Short-term trade ideas are not ratings, nor are they part of any ratings system, and the firm generally does not intend, nor undertakes any obligation, to maintain or update short-term trade ideas. Short-term trade ideas may not be suitable for all investors and have not been tailored to individual investor circumstances and objectives, and investors should make their own independent decisions regarding any securities or strategies discussed herein. Please contact your investment advisor or institutional salesperson for more information regarding RBC Capital Markets' research. Analyst certification All of the views expressed in this report accurately reflect the personal views of the responsible analyst(s) about any and all of the subject securities or issuers. No part of the compensation of the responsible analyst(s) named herein is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the responsible analyst(s) in this report.
The Global Industry Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Standard & Poor’s Financial Services LLC (“S&P”) and is licensed for use by RBC. Neither MSCI, S&P, nor any other party involved in making or compiling the GICS or any GICS classifications makes any express or implied warranties or representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability and fitness for a particular purpose with respect to any of such standard or classification. Without limiting any of the foregoing, in no event shall MSCI, S&P, any of their affiliates or any third party involved in making or compiling the GICS or any GICS classifications have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. Disclaimer
RBC Capital Markets is the business name used by certain branches and subsidiaries of the Royal Bank of Canada, including RBC Dominion Securities Inc., RBC Capital Markets, LLC, RBC Europe Limited, RBC Capital Markets (Hong Kong) Limited, Royal Bank of Canada, Hong Kong Branch and Royal Bank of Canada, Sydney Branch. The information contained in this report has been compiled by RBC Capital Markets from sources believed to be reliable, but no representation or warranty, express or implied, is made by Royal Bank of Canada, RBC Capital Markets, its affiliates or any other person as to its accuracy, completeness or correctness. All opinions and estimates contained in this report constitute RBC Capital Markets' judgement as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. Nothing in this report constitutes legal, accounting or tax advice or individually tailored investment advice. This material is prepared for general circulation to clients and has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The investments or services contained in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about the suitability of such investments or services. This report is not an offer to sell or a solicitation of an offer to buy any securities. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. RBC Capital Markets research analyst compensation is based in part on the overall profitability of RBC Capital Markets, which includes profits attributable to investment banking revenues. Every province in Canada, state in the U.S., and most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as the process for doing so. As a result, the securities discussed in this report may not be eligible for sale in some jurisdictions. RBC Capital Markets may be restricted from publishing research reports, from time to time, due to regulatory restrictions and/ or internal compliance policies. If this is the case, the latest published research reports available to clients may not reflect recent material changes in the applicable industry and/or applicable subject companies. RBC Capital Markets research reports are current only as of the date set forth on the research reports. This report is not, and under no circumstances should be construed as, a solicitation to act as securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of a securities broker or dealer in that jurisdiction. To the full extent permitted by law neither RBC Capital Markets nor any of its affiliates, nor any other person, accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein. No matter contained in this document may be reproduced or copied by any means without the prior consent of RBC Capital Markets. Additional information is available on request.
To U.S. Residents: This publication has been approved by RBC Capital Markets, LLC (member FINRA, NYSE, SIPC), which is a U.S. registered broker-dealer and which accepts responsibility for this report and its dissemination in the United States. Any U.S. recipient of this report that is not a registered broker-dealer or a bank acting in a broker or dealer capacity and that wishes further information regarding, or to effect any transaction in, any of the securities discussed in this report, should contact and place orders with RBC Capital Markets, LLC. To Canadian Residents: This publication has been approved by RBC Dominion Securities Inc.(member IIROC). Any Canadian recipient of this report that is not a Designated Institution in Ontario, an Accredited Investor in British Columbia or Alberta or a Sophisticated Purchaser in Quebec (or similar permitted purchaser in any other province) and that wishes further information regarding, or to effect any transaction in, any of the securities discussed in this report should contact and place orders with RBC Dominion Securities Inc., which, without in any way limiting the foregoing, accepts responsibility for this report and its dissemination in Canada. To U.K. Residents: This publication has been approved by RBC Europe Limited ('RBCEL') which is authorized by the Prudential Regulation Authority and regulated by the Financial Conduct Authority ('FCA') and the Prudential Regulation Authority, in connection with its distribution in the United Kingdom. This material is not for general distribution in the United Kingdom to retail clients, as defined under the rules of the FCA. However, targeted distribution may be made to selected retail clients of RBC and its affiliates. RBCEL accepts responsibility for this report and its dissemination in the United Kingdom. To Persons Receiving This Advice in Australia: This material has been distributed in Australia by Royal Bank of Canada - Sydney Branch (ABN 86 076 940 880, AFSL No. 246521). This material has been prepared for general circulation and does not take into account the objectives, financial situation or needs of any recipient. Accordingly, any recipient should, before acting on January 4, 2016 92 2016 U.S. Power & Utility Best Ideas Portfolio
this material, consider the appropriateness of this material having regard to their objectives, financial situation and needs. If this material relates to the acquisition or possible acquisition of a particular financial product, a recipient in Australia should obtain any relevant disclosure document prepared in respect of that product and consider that document before making any decision about whether to acquire the product. This research report is not for retail investors as defined in section 761G of the Corporations Act. To Hong Kong Residents: This publication is distributed in Hong Kong by RBC Capital Markets (Hong Kong) Limited and Royal Bank of Canada, Hong Kong Branch (both entities which are regulated by the Hong Kong Monetary Authority ('HKMA') and the Securities and Futures Commission ('SFC')). Financial Services provided to Australia: Financial services may be provided in Australia in accordance with applicable law. Financial services provided by the Royal Bank of Canada, Hong Kong Branch are provided pursuant to the Royal Bank of Canada's Australian Financial Services Licence ('AFSL') (No. 246521). RBC Capital Markets (Hong Kong) Limited is exempt from the requirement to hold an AFSL under the Corporations Act 2001 in respect of the provision of such financial services. RBC Capital Markets (Hong Kong) Limited is regulated by the HKMA and the SFC under the laws of Hong Kong, which differ from Australian laws. To Singapore Residents: This publication is distributed in Singapore by the Royal Bank of Canada, Singapore Branch, a registered entity granted offshore bank licence by the Monetary Authority of Singapore. This material has been prepared for general circulation and does not take into account the objectives, financial situation, or needs of any recipient. You are advised to seek independent advice from a financial adviser before purchasing any product. If you do not obtain independent advice, you should consider whether the product is suitable for you. Past performance is not indicative of future performance. If you have any questions related to this publication, please contact the Royal Bank of Canada, Singapore Branch. Royal Bank of Canada, Singapore Branch accepts responsibility for this report and its dissemination in Singapore. To Japanese Residents: Unless otherwise exempted by Japanese law, this publication is distributed in Japan by or through RBC Capital Markets (Japan) Ltd., a registered type one financial instruments firm and/or Royal Bank of Canada, Tokyo Branch, a licensed foreign bank. .® Registered trademark of Royal Bank of Canada. RBC Capital Markets is a trademark of Royal Bank of Canada. Used under license. Copyright © RBC Capital Markets, LLC 2016 - Member SIPC Copyright © RBC Dominion Securities Inc. 2016 - Member Canadian Investor Protection Fund Copyright © RBC Europe Limited 2016 Copyright © Royal Bank of Canada 2016 All rights reserved
January 4, 2016 93