general body meeting 10.20.11. mutual investment club of cornell agenda announcements various...
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General Body Meeting 10.20.11
Mutual Investment Club of Cornell
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Agenda
Announcements Various Recruiting Events Elections
News Updates UAW and Ford Healthcare Updates El Paso Deal
NEE Energy Pitch
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Recruiting Events
UBS: Intro to Global Capital Markets 4:30pm – 5:30pm - Wednesday, October 26th
Phillips 219 Goldman Sachs: An Inside Look at Wall Street
10:00am – 11:00am – Thursday, October 27th
Statler Hotel, Amphitheater Morgan Stanley: Firmwide Presentation
6:00pm – 7:30pm – Thursday, October 27th
Statler Hotel, Ballroom
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Elections
Thursday, November 3rd
Positions: President Vice President Chief Investment Officer Portfolio Manager Vice President of Public Relations
Voting: Invested Members and Regular Attendees
Letter of intents by Saturday, 10/29
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News Updates
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UAW and the American Car Industry GM workers already signed pact on Sept
16 48,000 unionized workers Lower bonus/wages than Ford contract Credit Rating: BB- to BB+ (Moody’s)
Chrysler and Ford yet to sign Ratification likely for Ford, uncertain for
Chrysler Ford stock down 32% this year
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UAW and Ford
67,000 unionized workers Total vote 57% in favor of pact Dearborn, MI (HQ) 62% in favor Salaried vs. hourly workers
No raise in veteran wage (since 2003) Signing bonus of $6,000
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Healthcare Reform Cuts Long-Term Care
Obama administration scrapped insurance program for chronically ill/disabled patients, citing inefficiency & high costs (October 14th) Community Living Assistance Services &
Supports (CLASS) CLASS controversial because of soaring
premiums Increasing costs due to lack of healthy
purchasers cause instability, could require another taxpayer bailout
10-year projection to cut federal deficit by $86 billion; many skeptical about validity of estimates
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JNJ Earnings
EPS: $1.24 actual v. $1.21estimated Excludes $0.09 charge for the pending
acquisition of medical device maker Synthes (early 2012)
Product recall costs and rising generic competition hurt EPS
Revenue +7% yoy: $16b v. $16.2b estimated
Why did the stock price tank? U.S. prescription drug revenue -6% Consumer business -4.5% as a result of a
two-year-long stretch of product recalls
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JNJ Earnings (cont.)
Some good news!! International revenue rose 16.4%, with
stronger results in all three divisions Worldwide revenue from medical devices
and diagnostics rose 6.1%, to $6.28 billion Prescription drug sales jumped 8.9% to
$5.98 billion Consumer product sales rose 4.9% to
$3.74 billion J&J raised forecast full-year EPS to $4.95-
$5, lifting the low end of the forecast by 5 cents
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Kinder Morgan/El Paso
Estimated Transaction Value - $21.1 bn Including assumption of debt, deal valued
at $38 bn ~45% premium to El Paso’s 20-day
average closing price Kinder Morgan to become the biggest
of North America’s midstream energy company Boardwalk Pipeline Partners
Kinder Morgan shareholders will own ~68% of the new company
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NextEra Energy Inc.(NYSE:NEE)
Logan HarperZach O’Connor
Mihir PatelPooja Patel
Stella Zhang
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Thesis
Portfolio & Geographic Diversity Approximately 43,000 megawatts of
generating capacity, approximately 53% natural gas, 19% wind, 13% nuclear, 13% oil and coal, and 2% hydro and solar
Operations in 28 states and Canada
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Thesis
Dividend Growth Current Dividend Yield – 4% Current Dividend Payout Ratio – ~50% Trailing 5 Year Dividend Growth – 8% p.a. Projected 3-5 Year Dividend Growth – 6%
p.a. Increased dividends for past 15
consecutive years
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Thesis
Industry Performance Low Beta – Great hedge against market
volatility 1-Year Financial Performance
Dow Jones Multi-Utilities Index – 8.77% Dow Jones Industrial Average – 5.26%
Opportunity to take advantage of market consolidation trend
Potential legislative benefit given involvement in the renewable space
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Industry Overview1
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Utilities Sector
Infrastructure focused sector Capital intensive Regulated industry Utilities entail:
Electric Gas Water Renewables
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Power & Utilities
GenerationTransmission & Distribution
Retail
Description
• Power Plant Owners• Generates
and sells power for profit
• Owners of transmission (high voltage) and distribution (low voltage) assets
• Customer Interface• Billing
Business Model
Integrated Utilities
Traditional business model before industry deregulation
Disaggregated Utilities
Traditional utilities that have separated into a regulated T&D Co. and an unregulated generation company
Merchant Gencos
Own generation assets in states that have deregulated
Transmission & Distribution
Traditional utilities that have divested their unregulated generation business
Pure-Play Transmission
Result of state mandate/deregulation
Retail Providers
Handles customer interface and billing
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Power & Utilities
Progressive restructuring along with significant regulatory changes
Industry trend of vertical integration ensuring power off-taker
Average annual dividend – 3.9%
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Regulation
Monopoly structure in exchange for obligation to serve all customers with Federal and State regulations to safeguard against potential monopolistic abuses
The local utility is granted monopoly to service customers in a specific geographic area (service territory)
Regulations developed to control operating procedures, prices, and entry to the industry in order to protect consumers from potential monopolistic abuses
Earn a reasonable return in exchange for obligation to serve and provide reliable electric power to all customers
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Regulation
Utilities are price regulated by federal, state, and local governments as well as FERC and NERC for energy reliability standards.
Florida retail operations are regulated by the FPSC, which has jurisdiction over retail rates, service territory, and other matters.
The American Clean Energy and Security Act in June 2009 included provisions for a cap and trade that requires utilities to get 15% of their electricity from renewable sources and to reduce their electricity use by 5% by 2020.
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Industry M&A Outlook
Stimulation of further M&A activity: First Energy and Allegheny Energy Exelon and Constellation Energy Duke Energy and Progress Energy Northeast Utilities and NSTAR
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Industry Outlook
U.S. Regulatory Structure Renewable Portfolio Standards Political & Regulatory Risk
Global Demand Uptick U.S. Energy Information Administration
expects global energy demand to increase 44% over the next 20 years
Liquidity Remains a high priority as expiration dates
for sizeable bank credit facilities approach in 2011-2012
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Company Overview2
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NextEra Energy Inc.
NYSE:NEE; $55.08
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NextEra Energy Inc.
Capacity - 43,000MW
Service Territory – 28 States, Canada
Renewable resources accounted for 90% of electricity output in 2010 CO2 emissions at
less than half the industry average
3rd largest nuclear power generation fleet
Corporate Structure
Service Territory
NextEra Energy Inc.
N YSE:NEE
Florida Power & Light Co.
NextEra Energy
Resources
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Florida Power & Light Co.
8.7 million customers in FL Most affordable electric service in FL
Lowest of 55 electricity providers 24% below national average
99.98% service reliability to customers 3rd largest rate-regulated electric utility Rate Case – Through 2012
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Florida Power & Light Co.
Revenue Segment Mix
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Revenues
Residen-tial
Com-mercial
Industrial
Regulation – FSPC, FERC, NERC
Cost Recovery Clauses Fuel Purchased Power &
Interchange Agreements
Conservation & Environmental-Related Expenses
Revenue Taxes & Franchise Fees
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Florida Power & Light Co.
Proposed CapEx Structure
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NextEra Energy Resources
18,866 MW of Generating Assets Contracted ~ 11,300 MW – Weighted Average
Remaining Contract Life of 14 Years Merchant Basis ~ 5,800 MW
#1 Wind Energy Portfolio expanded from 1,745 MW in 2002 to
8,298 MW in 2010 Continuing to add capacity (750 MW in
2010)
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NextEra Energy Resources
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Geographic & Portfolio Diversity
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NextEra Energy Resources
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Proposed CapEx Structure
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NEE – Portfolio
Natural Gas 54% Wind 20% Nuclear 13% Oil 10% Coal 2% Hydro & Solar 2%
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Other Operations
Lone Star is a regulated transmission provider in TX regulated by PUCT with regards to rates charged to customers, and aspects of siting, construction, and operation of transmission systems
Lease wholesale fiber-optic network capacity and dark fiber to FPL, and other customers, primarily telephone, wireless carriers, internet and other telecom companies
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Growth and Expansion
CapEx $35 billion between 2002-2010 $16 billion planned through 2014
8.7% annual rate-base growth Renewable Portfolio Standards – 29
States Industry Consolidation Trend
Recent uptick in M&A transactions within the Power & Utilities sector provides opportunity for NEE to acquire additional assets and/or position itself as an attractive acquisition target
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Competitors3
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Southern Company
S&P Credit Rating – A 4.4 million customers Constructing,
acquiring, and managing generation assets and selling electricity in the wholesale market
Expanding into communication & fiber optics
Trading @ 43.11 (~99% of 52 Week High)
Dividend Rate of 4.3% with an 80% Payout Ratio
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Exelon Corporation
S&P Credit Rating – BBB-
5.4 million customers Energy generation,
power marketing, transmission and energy delivery
Relatively low PE Ratio – 10.6x
Trading @ 42.5 (~94% of 52 Week High)
13.2% Revenue Increase & 10.8% Decrease in Net Income
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Duke Energy Corp
S&P Credit Rating – A-
4 million customers Sell natural gas and
natural gas liquids Services to retail
distributors, electric utilities, marketers, industrial companies, and independent power producers
DUK – $20.23 Currently trading @
~99% of 52 Week High Slightly volatile period –
In midst of Progress merger
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Financials4
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NEE – Credit Ratings
Credit Ratings – December 2010
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Valuation
Rate Base Model resulting in a Cost of Service Annual 8.7% historical rate base growth
Rate Cases – Result of Over/Under Earning allowed ROE
Rates charged to customers are generally regulated based on costs incurred by a utility and a rate of return
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Cost of Service
Rate Base•Assets “used and useful” in providing rate regulated utility service• Investments that need to be financed by the capitalization of the firm
Capital Structure
•How the Rate Base is financed –
% Debt% Equity
Allowed Return
•Cost of Debt•Cost of Preferred•Allowed Return on Equity
X X
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Cost of Service
Return on Capital•Rate Base* (% Debt * Cost of Debt)* (% Preferred * Cost of Preferred)* (% Equity * Allowed ROE)=Allowed Return On Capital
Operating Expenses•Fuel Expense•O&M Expense•Depreciation Expense (Return On Capital)•Operating Tax Expense• Income Tax Expense
+
= Cost of Service
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Dividend Payout Ratio
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Financials
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Investment Rationale
Analyst Estimate $62 target price is based on a combination of
12.75x 2013 PE ($63.99) and 2013 sum-of-the-parts($59.15) methodologies.
Risks Prolonged weakness in the FL economy and
housing market Continued weakness in the wind market
Long-term outlook Annual dividend growth of approximately 5% NEE benefiting from being national leader in
solar and wind development
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Recommendation
Time Horizon > 1 Year 25 Shares @ $55.08 Questions?
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Thanks for coming by!
Reminder: No Meeting Next Week!