COC Keybanc-Oct-20-2010.pdf

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Cur Prv Cur Prv FC FC Current EPS Previous EPS
Sym Rtg Rtg Target Target 2010 2011 2009 2010 2011 2009 2010 2011
AEE HOLD HOLD NA NA $2.63 $2.32 $2.79 $2.70 $2.30 $2.79 $2.60 $2.30
CV HOLD HOLD NA NA $1.52 $1.55 $1.74 $1.55 $1.70 $1.74 $1.60 $1.70
D HOLD HOLD NA NA $3.34 $3.19 $3.27 $3.35 $3.25 $3.27 $3.30 $3.25
DPL HOLD HOLD NA NA $2.43 $2.52 $1.97 $2.40 $2.40 $1.97 $2.40 $2.45
DUK HOLD HOLD NA NA $1.33 $1.34 $1.22 $1.35 $1.35 $1.22 $1.30 $1.35
ED HOLD HOLD NA NA $3.34 $3.49 $3.07 $3.35 $3.45 $3.07 $3.25 $3.45
ETR HOLD HOLD NA NA $6.82 $6.82 $6.67 $7.15 $6.90 $6.67 $7.00 $6.90
GXP HOLD HOLD NA NA $1.43 $1.61 $1.14 $1.50 $1.55 $1.14 $1.35 $1.55
MDU BUY BUY $26.50 $26.50 $1.30 $1.51 $1.40 $1.35 $1.60 $1.40 $1.45 $1.60
PGN HOLD HOLD NA NA $3.05 $3.15 $3.03 $3.05 $3.10 $3.03 $3.00 $3.10
POM HOLD HOLD NA NA $0.97 $1.21 $0.91 $1.00 $1.20 $0.91 $0.95 $1.20
PPL HOLD HOLD NA NA $2.85 $2.87 $1.95 $2.80 $2.95 $1.95 $2.75 $2.95
SO HOLD HOLD NA NA $2.41 $2.52 $2.32 $2.45 $2.50 $2.32 $2.40 $2.50
WEC HOLD HOLD NA NA $3.76 $4.15 $3.20 $3.80 $4.10 $3.20 $3.75 $4.10
ACTION STATEMENT
On average, we expect that the companies in our universe will report higher 3Q10 quarterly earnings, up 11.6% compared to 3Q09.
Our EPS growth expectations for our coverage universe are for annual earnings growth of 9.4% in 2010 and 3.2% in 2011. Our
coverage universe currently trades at an average peer group 2011 P/E multiple of 12.8x. We also anticipate three potential earnings
upside surprises [CMS Energy, Inc. (CMS-NYSE); Central Vermont Public Service Corp. (CV-NYSE); Pinnacle West Capital Corp.
(PNW-NYSE)] and one potential earnings downside surprise [Progress Energy, Inc. (PGN-NYSE)] relative to First Call consensus
expectations this quarter.
KEY INVESTMENT POINTS
We expect that the companies in our universe will report higher 3Q10 quarterly earnings, up 11.6% on average from 3Q09.
Favorable earnings drivers of higher rates, hot summer weather and potentially improved wholesale margins may be partially offset
by continued slow economic recovery, conservation efforts, and higher operating costs. Our EPS growth expectations for our
coverage universe are for average annual earnings growth of 9.4% in 2010 and 3.2% in 2011.
As the 3Q is typically a high cooling demand period, we would expect weather to be a significant earnings driver in the quarter. By
our weather tracking estimates, most of the nation experienced generally warmer temperatures in 3Q10 (more cooling degree days)
compared to the same quarter a year ago. Nationally, it was the fourth hottest summer on record, with intense heat all along the
East Coast in July, above-average temperatures continuing in August, and an above-average September mixed in with some cold
fronts and heavy rains in the Midwest. A notable exception to these temperature trends was in the Pacific Northwest where 3Q10
temperatures this year compared unfavorably to a record-setting heat wave in 3Q09. For the quarter, outside of the Pacific
Northwest, we would expect the weather impact for most utility service areas to be a favorable earnings driver. Our estimates of
weather impacts to earnings are highlighted in our Investment Opinion section.
October 20, 2010 KeyBanc
ENERGY: Utilities Capital Markets
Estimates Change
Electric Utilities Industry: 3Q10 Earnings and Weather Preview
KeyBanc Capital Markets Inc.,
Member NYSE/FINRA/SIPC
Paul T. Ridzon:[phone] —[e-mail]
Timothy Yee:[phone] —[e-mail]
FOR IMPORTANT DISCLOSURES AND CERTIFICATIONS, PLEASE REFER TO PAGE 6 OF THIS NOTE.
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Earnings conference calls this quarter may be focused more on the following themes: weather impact, retail sales trends with
respect to somewhat tougher "comps" to 3Q09, regulatory updates, project capital spending, financing plans, hedging updates, any
signs of 2H10 sluggishness in the local economy and earnings guidance.
For 3Q10, we anticipate three potential upside surprises and one potential downside surprise, relative to First Call consensus
expectations:
POTENTIAL UPSIDE SURPRISES
CMS Energy, Inc. (CMS-NYSE; BUY; $19.50 price target; 3Q estimate of $0.47 vs. $0.32, First Call is $0.42)– We believe that
higher electric rates self-implemented in July may help drive 3Q earnings above consensus expectations.
Central Vermont Public Service Corp. (CV-NYSE; HOLD; 3Q estimate is $0.76 vs. $0.52, First Call is $0.53)– We believe that
booking recovery of 1H10 storm costs (some of which is recoverable by the end of this year and the remainder to be deferred for
future recovery) and earnings from VELCO transmission equity investment may drive 3Q earnings above consensus expectations.
Pinnacle West Capital Corp. (PNW-NYSE; HOLD; 3Q estimate is $2.05 vs. $1.96; First Call is $2.00)– We believe that higher
rates partially offset by share dilution and the reversal of favorable 3Q09 mark-to-market on fuel and purchased power hedges may
result in 3Q earnings being above consensus expectations.
POTENTIAL DOWNSIDE SURPRISES
Progress Energy, Inc. (PGN-NYSE; HOLD; 3Q estimate is $1.25 vs. $1.22; First Call is $1.30)– We believe that favorable
weather impact is partially offset by higher costs, interest expense, and share dilution that may result in 3Q earnings being below
consensus expectations.
ISSUES TO WATCH
Company-specific issues that bear further watching include:
DPL Inc. (DPL-NYSE; HOLD)– We look for an update by DPL on its Smart Grid / Advanced Metering Initiative (AMI) program, as
any timing delays or potential changes to the AMI program will free up cash for other transmission and distribution projects or share
repurchases/dividends.
Dominion Resources (D-NYSE; HOLD)– We await an update on Dominion's share repurchase program, which we believe could
impact trading. Dominion's last update was that 12.2 million shares of an estimated 22 million-23 million share buyback had been
purchased (as of May 7). Dominion has indicated that it expects to complete its repurchases over the entirety of 2010.
IDACORP, Inc. (IDA-NYSE; HOLD)– We look for IDA to provide an update on the tax treatment of direct vs. indirect cost allocation
to large capital projects (uniform capitalization or UCAP), which could provide a tax refund for prior periods. We believe the issue
bears watching as any funds received that could be retained by shareholders (as opposed to returned to ratepayers) could be used
to fund the equity portion of capital, potentially reducing or eliminating secondary equity issuances.
ANNUAL ESTIMATE CHANGES
Ameren Corp. (AEE-NYSE; HOLD) – We are raising our 2010 EPS estimate to $2.70 from $2.60 for 3Q10 favorable weather
impact.
Central Vermont Public Service Corp. (CV-NYSE; HOLD) – We are reducing our 2010 EPS estimate to $1.55 from $1.60 for a
slower than expected rebound in the economy.
Consolidated Edison, Inc. (ED-NYSE; HOLD) – We are raising our 2010 EPS estimate to $3.35 from $3.25 for aggressive cost
cutting measures that started taking hold in 2Q10.
DPL Inc. (DPL-NYSE; HOLD) – We are reducing our 2011 EPS estimate to $2.40 from $2.45 for continued weakness in
wholesale pricing and potential for margin erosion around shopping.
Dominion Resources (D-NYSE; HOLD) – We are raising our 2010 EPS estimate to $3.35 from $3.30 for 3Q10 favorable
weather impact.
Duke Energy, Inc. (DUK-NYSE; HOLD) – We are raising our 2010 EPS estimate to $1.35 from $1.30 for 3Q10 favorable
Industry NoteOctober 20, 2010
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weather impact.
Entergy Corp. (ETR-NYSE; HOLD) – We are raising our 2010 EPS estimate to $7.15 from $7.00 as 3Q10 pre-released results
indicated a strong quarter from Utility segment earnings due to higher retail sales volumes across all customer classes, favorable
weather and previous rate impacts partly offset by increased O&M expense. Entergy Nuclear segment results are expected to be
driven by lower net revenues due to less generation output and higher O&M expense.
Great Plains Energy, Inc. (GXP-NYSE; HOLD) – We are raising our 2010 EPS estimate to $1.50 from $1.35 as we believe solid
3Q10 results from new rates in effect and favorable weather impact, partly offset by higher costs and D&A will drive 2010 year-end
earnings toward the high-end of management guidance (currently $1.30-$1.50 per share).
MDU Resources Group, Inc. (MDU-NYSE; BUY; $26.50 price target) - We are reducing our 2010 estimate to $1.35 from $1.45
for continued pressure at construction segments.
PPL Corp. (PPL-NYSE; HOLD) – We are raising our 2010 EPS estimate to $2.80 from $2.75 for favorable weather.
Pepco Holdings, Inc. (POM-NYSE; HOLD) – We are raising our 2010 EPS estimate to $1.00 from $0.95 for 3Q10 impacts of
new rates in effect and favorable weather.
Progress Energy, Inc. (PGN-NYSE; HOLD) – We are raising our 2010 EPS estimate to $3.05 from $3.00 for 3Q10 favorable
weather impact partly offset by higher costs, interest expense, and share dilution
Southern Company (SO-NYSE; HOLD) – We are raising our 2010 EPS estimate to $2.45 from $2.40 for 3Q10 favorable
weather impact.
Wisconsin Energy Corp. (WEC-NYSE; HOLD) – We are raising our 2010 EPS estimate to $3.80 from $3.75 for 3Q10 impacts
of new rates for Oak Creek in effect and favorable weather.
Valuation Table for Changed Annual Estimates
Industry NoteOctober 20, 2010
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INVESTMENT OPINION
The following tables outline our 3Q10 operating earnings estimates and 3Q10 weather data with estimated EPS impacts for electric
utility companies under coverage:
3Q10 EPS Estimates
Source: KeyBanc Capital Markets Inc. estimates
Industry NoteOctober 20, 2010
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3Q10 Cooling Degree Days Deviation and Estimated EPS Impact
Source: National Oceanic and Atmospheric Administration (NOAA), KeyBanc Capital Markets Inc. estimates
ABOUT WEATHER DATA
Most companies give their earnings guidance using the assumption of normal weather in their territories. Temperature is an
uncontrollable variable for utility companies and can have a material impact on earnings when the deviation from normal is
significant. Our intention in developing this research product is to give investors a look at potential earnings variability so that they
can adjust their expectations. We believe that this incremental information will allow investors to capture value by responding to
potential market overreaction to earnings surprises induced by a factor beyond management control. Favorable weather in a peak
month can materially raise a company's earnings for a quarter, inflating the Company's perceived performance and presenting a sell
opportunity. The reverse is true for poor weather, which can make an otherwise successful quarter end with lower earnings than
expected. Year-over-year weather comparisons are also useful for noting where an earnings shortfall or uptick may take place for a
utility.
Our data is presented as a percentage differential between normal and the previous year's heating or cooling degree-days. The
magnitude of the numbers can be misleading, in our opinion, depending on the normal temperature of the territory. A 10% increase
in cooling degree-days in a historically warm climate may be significant, while a 100% increase in heating degree-days in the same
climate can, in fact, be very small.
The data included in this report is an approximation, based on heating and cooling degree-day totals taken from cities within each
company's service territory. The weighting of the territories is based upon our assumptions of customer distribution within each
company's service territory and may differ from actual company data. The per share impact of weather is an estimate based on
previous year impacts given by the Company and our estimates on weather deviation from normal and prior-year periods. We
continuously fine-tune and calibrate our models in an effort to maintain and improve the accuracy of our forecasts.
BACKGROUND ON DEGREE DAYS
A degree day is the variation of the daily average temperature from 65 degrees Fahrenheit. Heating degree days relate to
temperatures below 65 degrees, while cooling degree days are for average temperatures above this temperature. As an example, if
the average temperature over the course of a 24-hour day were 70 degrees, this would equate to five cooling degree days.
Conversely, an average 60-degree temperature day would be five heating degree days.
Industry NoteOctober 20, 2010
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KeyBanc Capital Markets Inc.Disclosures and Certifications
Important disclosures for the companies mentioned in this report can be found at https://key.bluematrix.com/bluematrix/Disclosure.
Please refer to the analysts' recently published reports for company-specific valuation and risks.
Reg A/C Certification
The research analyst(s) responsible for the preparation of this research report certifies that:(1) all the views expressed in this
research report accurately reflect the research analyst's personal views about any and all of the subject securities or issuers; and (2)
no part of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or
views expressed by the research analyst(s) in this research report.
Rating Disclosures
Distribution of Ratings/IB Services Firmwide and by Sector
KeyBanc Capital Markets
IB Serv/Past 12 Mos.
Rating Count Percent Count Percent
BUY [BUY]201 48.80 45 22.39
HOLD [HOLD]205 49.80 52 25.37
SELL [UND]6 1.50 1 16.67
ENERGY
IB Serv/Past 12 Mos.
Rating Count Percent Count Percent
BUY [BUY]27 44.30 13 48.15
HOLD [HOLD]34 55.70 21 61.76
SELL [UND]0 0.00 0 0.00
Rating System
BUY - The security is expected to outperform the market over the next six to 12 months; investors should consider adding the security
to their holdings opportunistically, subject to their overall diversification requirements.
HOLD - The security is expected to perform in line with general market indices over the next six to 12 months; no buy or sell action is
recommended at this time.
UNDERWEIGHT - The security is expected to underperform the market over the next six to 12 months; investors should reduce their
holdings opportunistically.
The information contained in this report is based on sources considered to be reliable but is not represented to be
complete and its accuracy is not guaranteed. The opinions expressed reflect the judgment of the author as of the date of
publication and are subject to change without notice. This report does not constitute an offer to sell or a solicitation of an
offer to buy any securities. Our company policy prohibits research analysts and members of their families from owning
securities of any company followed by that analyst, unless otherwise disclosed. Our officers, directors, shareholders and
other employees, and members of their families may have positions in these securities and may, as principal or agent,
buy and sell such securities before, after or concurrently with the publication of this report. In some instances, such
investments may be inconsistent with the opinions expressed herein. One or more of our employees, other than the
research analyst responsible for the preparation of this report, may be a member of the Board of Directors of any
company referred to in this report. The research analyst responsible for the preparation of this report is compensated
based on various factors, including the analyst's productivity, the quality of the analyst's research and stock
recommendations, ratings from investor clients, competitive factors and overall Firm revenues, which include revenues
derived from, among other business activities, the Firm's performance of investment banking services. In accordance with
industry practices, our analysts are prohibited from soliciting investment banking business for our Firm.
Investors should assume that we are seeking or will seek investment banking or other business relationships with the
company described in this report.
Industry NoteOctober 20, 2010