How to value power and utilities

Import-Substitution Industrialization (isi) is an Economic Model That Generally Favors

Prospect in IB - Gen

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jenNberrys

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This is a broad answer to your broad question. Maybe someone else wants to chime in with specific modeling steps / comp ranges. Hoping to give a general overview and some keywords you can Google further with this answer.

For utilities you’ll have rate base models. Can plug rate base into a DCF / LBO framework but key difference is the model starts with net income (set by regulators) and works to revenue, as opposed to starting with revenue and working to net income which is the standard DCF format. The rate base is essentially the capital expenditures of the utility on which it is allowed to earn income.

For power companies it is more variable. Generally you’ll start with volumes and revenue. Some features you might see are calculations for tax equity or tax credits (ITCs / PTCs). Would also want to consider contracted cash flows vs. merchant (market) generation. Contracted would have a higher multiple and lower IRR since lower risk, because you have a contract backing your cash flows.

Analyst 1 in IB - Cov

This is a good source that expands on the above: http://sellsidehandbook.com/industries/power-utilities/

Authored by: Certified Investment Banking Professional - 1st Year AnalystCertified Investment Banking Pro

Prospect in IB - Gen

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