traficon – energy sector services portfolio analysis

TRAFICON – Energy Sector Services Portfolio Analysis

Energetický a průmyslový holding & CONSOL Energy Inc.

12 March 2015

1

Part 21. TIA 2. TCA3. Summary/Reasoning4. Final Comments and

Questions

AgendaPart 1

1. Industry Analysis2. EPH Analysis3. CONSOL Analysis

2

STEEP AnalysisIndustry A

nalysis: C

entral Europe

Area Major Points Implications

Social● The minimum wage● Awarness of global warming

● Higher GDP growth rate

● Companies should adopt green technologies

Technological● Hydro, solar, and wind power● Infrastructure supports more

renewable energy

● Research and development are to continue meeting goals

Economic● Koruna and Euro falling ● Historically low interest rates

● Importing goods is more expensive● Less money for the consumer

Ecological● Pollutants due to environmental

negligence

● Reduce European carbon footprint

● Correct past mistakes and make up for their actions in the future

● Negative correlation towards harming the environment

Political ● Abiding by Czech and European Law

● Utilizing legislation

● EU has passed a variety of provisions aiding this industry for future growth

3

Porter’s 5 ForcesIndustry A

nalysis: C

entral Europe

3.4

4

Porter’s Five

Forces

Threat of New

Entrants- 3

Supplier Power

Buyer Power

Substitutes

Competitors

Porter’s 5 Forces

3.4

5

Porter’s Five

ForcesThreat of New

Entrants

Supplier Power- 4

Buyer Power

Substitutes

Competitors

Industry Analysis:

Central E

urope

Porter’s 5 Forces

3.4

6

Porter’s Five

ForcesThreat of New

Entrants

Supplier Power

Buyer Power- 3

Substitutes

Competitors

Industry Analysis:

Central E

urope

Porter’s 5 Forces

3.4

7

Porter’s Five

ForcesThreat of New

Entrants

Supplier Power

Buyer Power

Substitutes- 1

Competitors

Industry Analysis:

Central E

urope

Porter’s 5 Forces

3.4

8

Porter’s Five

Forces

Threat of New

Entrants

Supplier Power

Buyer Power

Substitutes

Competitors- 2

Industry Analysis:

Central E

urope

Best Business Practices

● Reducing CO2 Emissions: Carbon Trading Scheme

● Continued investment in R&D

● Keeping up with EU Standards

Industry Analysis:

Central E

urope

9

STEEP AnalysisIndustry A

nalysis: U

nited States

Area Major Points Implications

Social● “Babyboomers” generation are

retiring● Increase the minimum wage

● Smaller labor force● Labor becoming expensive

Technological● Technology to capture CO2

emissions● Investment in start-up energy ● Nuclear power

● US can reach 27% by 2030● Nuclear energy not as

essential

Economic● The US is out of its recession● Interest rates down and dollar

strong

● Foreign investments in market

● Capital investment

Ecological● Carbon Dioxide, coal and gas ● Renewable resources

Political ● Stable political environment ● Direction of future energy industry

3.6

10


nalysis: U

nited States

3.8

11

Porter’s Five

Forces

Threat of New

Entrants- 3

Supplier Power

Buyer Power

Substitutes

Competitors


nalysis: U

nited States

3.8

12

Porter’s Five

Forces

Threat of New

Entrants

Supplier Power- 4

Buyer Power

Substitutes

Competitors


nalysis: U

nited States

3.8

13

Porter’s Five Forces

Threat of New Entrants

Supplier PowerBuyer Power- 1

Substitutes

Competitors


nalysis: U

nited States

3.8

14



Supplier PowerBuyer Power

Substitutes- 1

Competitors


nalysis: U

nited States

3.8

15



Supplier PowerBuyer Power

Substitutes

Competitors- 3

Best Business PracticesIndustry A

nalysis: U

nited States

● Continuing increased trend in renewable energy

● Keeping up with US energy standards

● Efforts to decrease costs16

EPH● Founded as a subsidiary

of J&T Finance Group● Private company● Comprised of 40

companies and subsidiaries

● Centrally located in Europe

17

EP

H

Mining20%

Heat and Power 32%

Renewables 0.29%

Power Distri-bution

and Supply 47%

Other 0.15%

Product/Service Portfolio

38

EP

H

SWOT Analysis

4.1.1

● Natural monopoly in the heat business

● Vertically integrated

● Diversified portfolio

19

EP

H

SWOT Analysis

4.1.1

● Liquidity● Recent acquisition of

E.ON

● Stock capital market is poorly developed

20

EP

H

SWOT Analysis

4.1.1

● EU Energy Goals - Renewable Energy

● Eggborough Power Acquisition

● Government providing incentives

21

EP

H

SWOT Analysis

4.1.1

● Providing alternative energy sources

● EU heighten sanctions against Russia

● Stricter EU environmental regulations

22

EP

H

Recommendations

• Plan today for long term sustained growth.• Leverage strong balance sheet to pursue

diversification strategy. • Comply with EU renewable energy policy of the

future.

23

EP

H

Business Strategy: EPH w. TRAFICON

4.1.3

24

EP

H

Productivity

Improve Cost Structure

Increase Asset Utilization

Revenue Growth

Enhance Customer Value

Expand Revenue Opportunity

Price

Reliability

Products

Reliability

Product/Service Attributes PositioningBranding

Customer Retention

Operations- Vertical Integration

of the value chain- Few Suppliers to

rely on

Customer- Keeping prices

affordable- Acquiring new customer base through M & A

Innovation- Renewables

- Modernization of old plants

-Clean technology

Regulations- EU Renewable

Energy Act- Emission regulations

- Corporate Social Responsibility

Information CapitalHuman Capital Organizational Capital- Reassign employees

- Train employees about environmental sustainability

- Information Technology- Information sharing

systems - Improve company website

- Decentralized corporate structure

- Share more information to customers about the corporation

Financial Perspective

CustomerPerspective

InternalPerspective

Learning & Growth Perspective

4.1.4

25

Strategy CanvasE

PH

Ratio Analysis - EPHSpecific Ratio 2009 2010 2011 2012 2013 5 Year

AveragePeer Group

AverageLiquidity Ratios

Current Ratio 0.88 0.44 0.39 2.18 1.33 1.04 2.2

Quick Ratio 0.37 0.32 0.21 1.19 0.45 0.508 1.36

Solvency Ratios

Total Debt to Equity 147.00% 79.20% 86.10% 41.60% 68.63% 84.51% 64.46%

Interest Coverage 1.93 15.90 0.80 3.71 7.74 6.02 9.48

Asset Management RatiosTotal Asset Turnover 0.61 0.51 0.55 0.39 0.52 0.85

Profitability Ratios

Return on Assets (%) 1.69% 17.07% 9.97% 12.01% 5.02% 9.15% 4.46%

Return on Equity (%) 13.90% 73.20% 31.10% 46.50% 59.40% 44.82% 10.72%

Net Profit Margin (%) 7.12% 35.15% 19.23% 26.85% 20.66% 21.80% 11.1% 27

Financial Analysis

EP

H

Net Asset Value – Market Value Multiplier (in billions) JSW KBTK LWB CNX

Total Assets 91 Kč 12 Kč 25 Kč 226 Kč

Less: Total Liabilities 36 Kč 7 Kč 9 Kč 127 Kč

Net Assets 55 Kč 6 Kč 16 Kč 99 Kč

Market Value Analysis (in millions)

Price Per Share 351.00 Kč 33.11 Kč 831.09 Kč 754.24 Kč

Shares Outstanding 117 Kč 99 Kč 34 Kč 229 Kč

Market Value 41,211 Kč 3,286 Kč 28,265 Kč 172,676 Kč

Net Assets/Market Value 133% 180% 57% 57%

Average 107%

NAV Analysis (billion CZK)Market Value Multiplier Net Assets/Market Value EPH

High 180% 211 Kč

Average 107% 125 Kč

Low 57% 67 Kč

28

Financial Analysis

EP

H

Guideline Company Method

*All ratios current

as of 28/2/15

Market Valuation MethodComparable Company P/E P/B P/Sales P/CF

CNX 38.20 1.39 2.04 7.24JSW 33.33 0.32 0.34 1.51KBTK 19.22 0.99 0.45 4.57LWB 11.99 1.37 1.68 4.54

Industry 34.78 2.14 1.65 7.97AVERAGE 27.50 1.24 1.23 5.17

Fair Market Value (billion CZK)P/E 27.50 Net Income 17 Kč 471 Kč

P/B 1.24 Net Assets 117 Kč 145 Kč

P/Sales 1.23 Revenues 83 Kč 102 Kč

P/CF 5.17 Free Cash Flow 43 Kč 223 Kč

*Comparable Company Avg. *EPH Financials Fair Market Value = 235 Kč

29

Financial Analysis

EP

H

Discounted Cash Flow Analysis: WACCCost of Equity

Czech Equity Risk Premium 7.16%Beta 1.45

Risk Free Rate 0.45%Rf + Beta(Equity Risk

Premium) 10.83%Add: Country Risk Premium 1.41%

Re= 12.24%

Cost of DebtAverage Financing Cost 4.52%

Add: Country Risk Premium 1.41%Add: Risk Free Rate 0.45%

Rd= 6.38%

Final WACC RateAverage Weight of Debt 50%

Average Weight of Equity 50%(1-Tax Rate) 81%

re(E/V)+rd(D/V)(1-t)WACC = 8.71%

30

Financial Analysis

EP

H

Discounted Cash Flows: Historical FCF

31

Financial Analysis

EP

H2010 2011 2012 2013

-20,000 Kč

-10,000 Kč

- Kč

10,000 Kč

20,000 Kč

30,000 Kč

40,000 Kč

50,000 Kč

Billi

on C

ZK

Discounted Cash Flows: Growth Rate

32

Financial Analysis

EP

H

2009 2010 2011 2012 2013 2014 2015 2016 2017

-5.00%

-4.00%

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%Czech Republic GDP

Historic GDPProjected GDP

Discounted Cash Flows: Future Cash Flows

33

Financial Analysis

EP

H

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 38,000 Kč

40,000 Kč

42,000 Kč

44,000 Kč

46,000 Kč

48,000 Kč

50,000 Kč

Historical Cash FlowsFuture Cash Flows

Milli

on C

ZK

Discounted Cash Flows: Present Value Discount

Discounted Cash Flows (billion CZK)Year Cash Flows (mult.) PV Discount = Discounted Cash Flows2014 44 Kč 0.92 40 Kč 2015 45 Kč 0.85 38 Kč 2016 46 Kč 0.78 36 Kč 2017 47 Kč 0.72 34 Kč 2018 49 Kč 0.66 32 Kč

Sum of Discounted Cash Flows = 180 Kč Discounted Terminal Value (TV)

Last Projected Cash Flow 49 KčGrowth Rate 2.70%WACC 8.70%

TV = (Last Future CF*1+LTGR)/(WACC-LTGR)Terminal Value (TV) 834 Kč Multiply: PV Discount 0.66Discounted Terminal Value 549 Kč

34

Financial Analysis

EP

H

Discounted Cash Flows: Fair ValueFair Value (billion CZK)

Sum of Discounted Cash Flows 180 Kč

Add: Discounted Terminal Value 549 Kč

Sum: Enterprise Value 730 Kč

Less: Net Debt 2013 107 Kč

Fair Value 622 Kč 35

Financial Analysis

EP

H

EPH Financial Analysis Summary

• Valuations indicate a sizeable net worth• European Quantitative Easing -- Debt Financing to

become cheaper• Global Oil Overproduction -- Producing more coal

helps to mitigate risk• EPH is a profitable, growing company with a

sizeable footprint in Central Europe

36

Financial Analysis

EP

H

CONSOL Energy Inc.● Founded in 1864● Coal Mining and Natural Gas Extraction Company● Operations in the Central U.S. throughout the

Appalachian Mountains● Produce 6.5% of total energy consumed in U.S.● Why CONSOL Energy Inc.?

o Issue of parent country sizeo Revenue, Asset, and Debt similarityo Core Operations

CO

NS

OL

36

66%22%

12%2013 Revenue

CoalNatural GasOther

61%31%

8% 2014 Revenue

CoalNatural GasOther

Product/Service Portfolio

38

CO

NS

OL

SWOT Analysis

● Largest private R&D facility ● Marine terminal

● Longwall mining technology

● Marcellus shale and bituminous coal

5.1.1

38

CO

NS

OL

SWOT Analysis

● Warmer winter weather’s● Product/service portfolio

● Not fully integrated vertically

5.1.1

39

CO

NS

OL

SWOT Analysis

● Joint venture with Noble Energy

● Water division

● First mover in water segment

● International coal demand

5.1.1

40

CO

NS

OL

SWOT Analysis

● Natural Gas prices ● Waning domestic coal demand

● Long term resource contracts expiring

● Environmental regulations

5.1.1

41

CO

NS

OL

Recommendations● Continue to grow domestic natural gas

operations and temper coal operations● Increase international export of coal to meet

growing demand● Invest in water division and related

technologies

42

CO

NS

OL

Business Strategy- CONSOL

44

CO

NS

OLProductivity

Increase Resource Utilization

Revenue Growth

Expand Service Portfolio

Expand Consumer Base

Price

Reliability

Products

Reliability

Product/Service Attributes Positioning

Branding

Customer Retention

Operations- Efficient operations- Focus operations

on new vision/direction

Customer- Reach out to

new international

customers

Innovation- Continuous

focus on R&D- Water Segment

first mover

Regulations-Adhere to state and federal

regulations-Project and uphold green

image-Manage resources responsibly

Information CapitalHuman Capital Organizational Capital- Train employees about

environmental sustainability and overall services provided

- Knowledge of overseas markets- Water recycling

- R&D developments

- Company culture - Strong leadership structure


CustomerPerspective

InternalPerspective


Strategy Canvas

5.1.3

44

CO

NS

OL

Financial Analysis - CONSOL

45

Financial Analysis

CO

NS

OL

Comparable Company Analysis

46

Financial Analysis

CO

NS

OL

WACC InputsCost of Debt (in millions)

Exchange Rate 31/12/13 - 19.86

Weights Rate Wd

29,790

0.4802 8.00% 3.84%

24,825

0.4001 8.25% 3.30%

4,965

0.0800 6.38% 0.51%

2,046

0.0330 5.75% 0.19%

218

0.0035 7.93% 0.03%

199

0.0032 6.19% 0.02%

62,043 7.08% 7.89%

CAPM -- CONSOL EnergyCompany Beta 1.73Risk Free Rate 1.82%

Expected Market Return 9.01%Cost of Equity 14.26%

*CAPM=Rf + B(Rm - Rf)

Calculating Expected Return on the Market - RmGeometric Averages

1928-2014 9.60%1965-2014 9.84%2005-2014 7.60%AVERAGE 9.01% 47

Financial Analysis

CO

NS

OL

WACC

WACC (in millions) -- CONSOL ENERGY

Total Equity 99 Kč

Debt (Long + Short Term Borrowings) 63 Kč

Total Debt and Equity (V) 162 Kč Weight of Equity (E/V) 61.19%Weight of Debt (D/V) 38.81%

WACC = (E/V)(Re) + (D/V)Rd(1-T)E/V 61.19%

Re= 14.26%

D/V 38.81%

Rd= 7.89%

T 23.25%

WACC 11.08%

48

Financial Analysis

CO

NS

OL

Historical Free Cash Flow (billions)2009 2010 2011 2012 2013 2014

(20,000,000,000)

(15,000,000,000)

(10,000,000,000)

(5,000,000,000)

-

5,000,000,000

10,000,000,000

15,000,000,000

49

Financial Analysis

CO

NS

OL

Capital Expenditure ForecastHistorical Capital Expenditures (in millions)

Segment Weights FY 2011 FY 2012 FY 2013 FY 2014 GUIDANCE 2015

GAS 74% CAPEX (13,130) (10,131) (19,237) (25,264) (24,610)

% Change -22.8% 89.9% 31.3% -2.6%

COAL 26% CAPEX (13,367) (12,610) (9,110) (8,705) (5,414)

% Change -5.7% -27.8% -4.4% -37.8%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 -

5,000,000,000

10,000,000,000

15,000,000,000

20,000,000,000

25,000,000,000

30,000,000,000 Forecasted Capital Expenditure Growth Rate

Gas Coal% Change 2014-2015 % Change 2013-2015

-2.59% -23.33%

50

Financial Analysis

CO

NS

OL

Forecasted Free Cash Flow2015 2016 2017 2018 2019

(10,000,000,000)

(8,000,000,000)

(6,000,000,000)

(4,000,000,000)

(2,000,000,000)

-

2,000,000,000

4,000,000,000

6,000,000,000

8,000,000,000

EV / EBITDA Multiple Analysis51

Financial Analysis

CO

NS

OL

EV / EBITDA Multiples Analysis

CONSOL E

NERGY IN

C

ALLIANCE H

OLDINGS G

P LP

PEABODY E

NERGY C

ORP

NATURAL R

ESOURCE P

ARTNER

CLOUD PEA

K ENER

GY INC

0.00

2.00

4.00

6.00

8.00

10.00

12.00

EBITDA 2019 in millions Growth Rate 2020 31,555 3.40% 32,628

2020 EBITDA 32,628 EV / EBITDA Multiple 7.82

2020 Enterprise Value in millions 255,155

2020 Enterprise Value 255,155 Discounted by WACC (1+ .1108)^5

2015 Enterprise Value in millions 150,878

Mean

52

Financial Analysis

CO

NS

OL

Threats Benchmark

6

EP

H &

CO

NS

OL

53

STEEPTR

AFIC

ON

Industry Analysis

6

Area Major Points ImplicationsSocial • Hofstede’s cultural dimensions • Altered business culture

Technological • New technologies are growing • Confidence in decisions• More demand for IT consulting

Economical • Recessions• Economic changes• Globalized consulting

• No money to hire consultants

Ecological• Development of renewable

energy sources • European Union reform of

energy efficiency

• Oversee development• European wide commitment and

reform

Political• Government Incentives• Uncertainty with governments• Changes in Policies

• Additional funding to hire consultants

• Creates uncertainty for companies

54

Recap• Clean Energy focus in the European Energy Industry• STEEP implications for TRAFICON

Koruna/Euro depreciating, low interest ratesPolitical opportunities and threats

• Porter’s 5 Forces• TRAFICON Best Business Practices • EPH vs. CNX

CNX- main business irrelevant to TRAFICON, strategic direction not aligned with TRAFICON’s expertise, not enough financial capacity for green energy push, unnecessary costs EPH- going towards green energy, geographically feasible, more capable financially

55

TRA

FICO

N Industry A

nalysis

Comparison Companies W/ TRAFICON (Strategies)

CONSOL

● Continue to grow domestic natural gas operations and temper coal operations

● Increase international export of coal to meet growing demand

● Invest in water division and related technologies

EPH

● Formulate long term financial stability blueprints

● Strengths and opportunities outweigh weaknesses and threats

● Long run sustainability over short run profitability 56

TRA

FICO

NC

ompany A

nalysis

EPH SWOT Analysis in TRAFICON’s Eyes● Strengths- Diversified portfolio● Weaknesses- Uncertainty of industry● Opportunities- E.ON acquisition● Threats- Pressure for EU standards, long-term

financial stability

57

TRA

FICO

NC

ompany A

nalysis

Existing Service PortfolioMain Services1) M & A Advisory2) Structure Financing 3) Strategic AdvisoryMain Territories4) Central Europe5) Russia 6) United KingdomMain Industries7) Energy8) Real Estate9) Logistics

58

TRA

FICO

NC

ompany A

nalysis

● Small, independent company● Expertise in their areas of

consulting● Professional understanding of

clients’ business psychology

● Individual attention to clients● International contacts-

Partnerships, Membership in associations (CGBC, AREM, EUEA)

8.2.2

59

SWOT Analysis - TRAFICONTR

AFIC

ON

Com

pany Analysis

● Matching funding requirements to particular investors

● Cyber-presence- website● Cyber-presence- social media

TRA

FICO

NC

ompany A

nalysis

● Information accessibility/Credibility

● Territorial/Geographical reach

8.2.2

60

SWOT Analysis - TRAFICON


8.2.2

• Market development- Asia-Oceania region

• Market development- Technology sector (Prague, Berlin, Lithuania, Estonia)

• Internet presence- social media (FB, LI, Seznam), website, 3rd party B2B digital marketing company

61

TRA

FICO

NC

ompany A

nalysis

• Internet presence• Difficulty in starting a

company (140) and weak investor protection (83rd/188) in CR

TRA

FICO

NC

ompany A

nalysis

• Decentralization Default in Communication Corruption

8.2.2

62


Strategy Map- TRAFICON TRA

FICO

NC

ompany A

nalysis

8.1.3

63

Service

Target EPH Market Development

Expand Revenue Opportunity

Market Penetration Service Development

Quality Availability

Service Attributes PositioningBrand Partnership

Customer Management- On-site visits- Expertise

- Information Accessibility

Innovation Processes- Hire someone with experience

in technology sector- Hire a web/app designer- Research feasibility of

expansion into Asia-Oceania/technology Sector

Regulatory/Social Processes- EU and Czech Republic Renewable

Energy initiatives- Three association memberships

collaboration with local law firm- Join more associations

Information CapitalHuman Capital Organizational Capital- Skills

- Knowledge- Training

- Streamlined Systems- Cyber Presence

- Culture- Teamwork- Leadership


CustomerPerspective

InternalPerspective


Long-Term Profitability

Summary and Recommendations1. Internal improvements 2. Market penetration 3. Market development

• TRAFICON should help EPH diversify into renewables• TRAFICON should help CONSOL partner with a strong renewables

company

64

TRA

FICO

NC

ompany A

nalysis

traficon – energy sector services portfolio analysis

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