general body meeting 10.20.11. mutual investment club of cornell agenda announcements various...

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


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


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


Power & Utilities

Progressive restructuring along with significant regulatory changes

Industry trend of vertical integration ensuring power off-taker

Average annual dividend – 3.9%


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


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


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


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



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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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



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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Geographic & Portfolio Diversity



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Proposed CapEx Structure


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


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!

general body meeting 10.20.11. mutual investment club of cornell agenda announcements various...

Documents

year slide

ford healthcare updates

year eps

eps revenue

chrysler ford stock

th statler hotel

prescription drug revenue

hourly workers