COC Keybank-Jan-2009.pdf

FOR IMPORTANT DISCLOSURES AND CERTIFICATIONS, PLEASE REFER TO PAGE 6 OF THIS NOTE.
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Cur Prv Cur Prv Current EPS Previous EPS
Sym Rtg Rtg Target Target 2008 2009 2010 2008 2009 2010
AEE HOLD HOLD NA NA $2.85 $3.10 --$2.85 $3.20 --
CMS BUY BUY $16.50 $16.50 $1.20 $1.30 --$1.25 $1.30 --
CNL BUY BUY $25.00 $25.00 $1.70 $1.75 --$1.70 $1.80 --
DPL HOLD HOLD NA NA $2.05 $2.20 --$2.00 $2.20 --
DTE HOLD HOLD NA NA $3.00 $3.20 --$2.90 $3.35 --
DUK HOLD HOLD NA NA $1.20 $1.20 --$1.20 $1.30 --
ED HOLD HOLD NA NA $3.05 $3.20 --$3.10 $3.20 --
ETR HOLD HOLD NA NA $6.50 $7.10 --$6.80 $7.75 --
IDA HOLD HOLD NA NA $2.20 $2.30 --$2.10 $2.30 --
MDU BUY BUY $23.00 $27.00 $2.00 $1.40 --$2.10 $1.95 --
NI HOLD HOLD NA NA $1.25 $1.05 --$1.25 $1.10 --
PGN HOLD HOLD NA NA $2.95 $3.05 --$3.05 $3.15 --
SO BUY BUY $38.00 $38.00 $2.35 $2.45 --$2.35 $2.50 --
WEC HOLD HOLD NA NA $2.95 $3.15 --$2.85 $3.15 --
KEY INVESTMENT POINTS
We expect companies in our universe to report a 3.0% increase in quarterly earnings over 4Q07, driven primarily by new rates,
modestly improved weather, weak economy, operating and maintenance cost pressures, commodity pricing and lower demand by
consumers. Our average annual EPS growth expectations for our coverage universe for 2008 and 2009 are 5.2% and 3.9%,
respectively.
For the quarter, weather was generally normal to modestly colder than normal throughout most of the United States. Moderate
October and November temperatures gave way to a cold December that resulted in higher heating degree-day comparisons same
quarter year-over-year for most utilities in our coverage universe, particularly those in the Midwest and Northeast. Mild temperatures
in Florida and the Southeast generally reduced air conditioning load early in the 4Q, while potentially contributing to higher heating
demand in the region toward the end of the year. Our weather data also showed that while the Pacific Northwest was snowy and
cold, that region was not as cold relative to 4Q07 on a heating-degree day basis.
For the 4Q, we believe estimating weather impacts is particularly difficult. The 4Q includes both air conditioning load in October,
switching over to heating load for the balance of the quarter. 4Q07 generally had a hot October, driving A/C load and milder than
normal heating degree days. This year the reverse happened as October was cool (less air conditioning load), and the rest of the
quarter was generally colder (more heating load). Calibrating these variables is quite challenging and we expect some surprising
weather impacts to hit the quarter. Our estimates of weather impacts to earnings are highlighted in our Investment Opinion section.
January 25, 2009 KeyBanc
ENERGY: Utilities Capital Markets
Estimates Change / Price Target Change
Electric Utilities Industry: 4Q08 Earnings and Weather Preview
KeyBanc Capital Markets Inc.,
Member NYSE/FINRA/SIPC
Paul T. Ridzon:[phone] —[e-mail]
Timothy Yee:[phone] —[e-mail]
Investors should assume that we are seeking or will seek investment banking
or other business relationships with the company described in this report.
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For 4Q08, we anticipate four potential upside surprises and two potential downside surprises, relative to consensus expectations:
POTENTIAL UPSIDE SURPRISES
•Cleco Corporation (CNL-NYSE; 4Q estimate of $0.24 vs. $0.20; First Call consensus is $0.18) -We expect higher AFUDC
related to construction of the Rodemacher plant to drive earnings higher. These should be partly offset by higher financing costs.
•IDACORP, Inc. (IDA-NYSE; 4Q estimate of $0.33 vs. $0.23; First Call consensus is $0.26)- We believe that new rates from
the 2007 Idaho general rate case settlement ($32 million annual revenue effective March 1, 2008) and improved hydroelectric
generation conditions could drive earnings beyond expectations this quarter.
•NiSource, Inc. (NI-NYSE; 4Q estimate of $0.47 vs. $0.40; First Call consensus is $0.42)- We believe that new rates from the
2008 Pennsylvania gas distribution rate case settlement ($41.5 million annual revenue effective October 28, 2008) and favorable
weather in the Company's service territories may drive earnings above consensus expectations. This would be dampened by our
weaker 2009 outlook for NI.
•Wisconsin Energy Corp. (WEC-NYSE; 4Q estimate of $0.77 vs. $0.80; First Call consensus is $0.72)- We expect positive
fuel recovery as gas prices kept falling during the quarter. We believe this could lead to FY08 earnings to be above
Company-provided guidance of $2.90 per share.
POTENTIAL DOWNSIDE SURPRISES
•Pinnacle West Capital Corp. (PNW-NYSE; 4Q estimate is $0.09 loss vs. $0.06 in earnings; First Call consensus is $0.01)-
We believe that earnings may be lower than expected due to losses and overhead costs at SunCor real estate subsidiary and
negative mark-to-market on hedge positions that the Street does not generally carve out.
•Pepco Holdings, Inc. (POM-NYSE; 4Q estimate is $0.27 vs. $0.29; First Call consensus is $0.31)- We believe that benefits
from a favorable trading environment have likely ended and that usage declines in POM's service territories may lead to lower
earnings this quarter.
ISSUES TO WATCH
Earnings conference calls this quarter may be more focused on the following themes: further capital expenditure cutbacks, timing of
any potential secondary equity issuances, dividend sustainability/commitment, weak economic conditions affecting usage/demand,
potential downward revisions to long-term growth rates and possible delays in issuing 2009 earnings guidance or issuing 2009
guidance with wide ranges. Company-specific issues that bear further watching include:
•FPL Group, Inc. (FPL-NYSE) -We look for any language by FPL management on the outlook for renewable energy, wind
development and national energy policy under President Obama and Congress's proposed $825 million American Recovery and
Reinvestment Act of 2009.
•Great Plains Energy, Inc. (GXP-NYSE) -We will watch for commentary by GXP as to the timing of its planned $200 million
secondary equity offering in 2009 and look for any changes surrounding the commitment to the dividend (currently yielding 8.8%).
•Southern Company (SO-NYSE) -We will closely watch for remarks by bellwether electric utility Southern Company regarding
sustainability of its stated long-term earnings growth rate of 6% per year.
•TECO Energy, Inc. (TE-NYSE)- We look for TE to provide an update to its uncontracted and unpriced coal contract positions for
2009 and 2010 and to the timing of contract signings. Given the decline in coal and commodity prices during the quarter, as well
as worldwide mining production cutbacks, we look for insight as to how the new economic landscape might affect TECO Coal's
margins and earnings.
•Consolidated Edison, Inc. (ED-NYSE), Dominion Resources, Inc. (D-NYSE), Great Plains Energy, Inc. (GXP-NYSE),
Pinnacle West Capital Corp. (PNW-NYSE)- We believe ED, D, GXP, and PNW likely need to issue equity this year through
secondary offerings. We look for management commentary and outlook on selling equity given volatile market conditions.
Industry NoteJanuary 25, 2009
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ANNUAL ESTIMATE CHANGES
•Ameren (AEE-NYSE)–We are lowering our 2009 EPS estimate to $3.10 from $3.20 due to a weakening economy and
operating cost pressures.
•CMS Energy (CMS-NYSE)–We are lowering our 2008 EPS estimate to $1.20 from $1.25 as new electric rates are partially
offset by a weak Michigan economy.
•Cleco Corp. (CNL-NYSE)–We are lowering our 2009 EPS estimate to $1.80 from $1.75 as we expect a slowing economy
could impact sales. We note 2009 earnings will be impacted by the timing of bringing the Rodemacher 3 plant into service and
implementing new rates.
•DPL Inc. (DPL-NYSE)–We are raising our 2008 EPS estimate to $2.05 from $2.00 for expected benefits from coal
optimization activity.
•DTE Energy (DTE-NYSE)–We are raising our 2008 EPS estimate to $3.00 from $2.90 as base gas sales at Michcon partially
offset lower electric usage at Detroit Edison.We are also lowering our 2009 EPS estimate to $3.20 from $3.35 due to the weak
Michigan economy.
•Duke Energy Corp. (DUK-NYSE)–We are lowering our 2009 EPS estimate to $1.20 from $1.30 due to generally weaker
economic conditions in DUK's service territories.
•Entergy (ETR-NYSE)–We are lowering our 2008 EPS estimate to $6.50 from $6.80 and lowering our 2009 EPS estimate to
$7.10 from $7.75 as weaker pricing and lower volumes reduce this year's earnings and higher costs and generally weaker
economic conditions in ETR's service territories impact next year's earnings.
•IDACORP Inc. (IDA-NYSE)–We are raising our 2008 EPS estimate to $2.20 from $2.10 due to new rates in Idaho and
improved hydroelectric generation conditions during the quarter.
•MDU Resources Group, Inc. (MDU-NYSE)–We are lowering our 2008 EPS estimate to $2.00 from $2.10 and lowering our
2009 EPS estimate to $1.40 from $1.95 given oil and gas pricing at the E&P segment and lower expected activity at the
construction segments as a slowing economy has meaningful impacts.
•NiSource (NI-NYSE)–We are lowering our 2009 EPS estimate to $1.05 from $1.10 due to an outlook for higher pension costs.
This makes us the low estimate on the Street.
•Progress Energy, Inc. (PGN-NYSE)–We are lowering our 2008 EPS estimate to $2.95 from $3.05 and lowering our 2009
EPS estimate to $3.05 from $3.15 as higher plant in-service operating costs and a generally weaker economy pressure
near-term earnings.
•Southern Company (SO-NYSE)–We are lowering our 2009 EPS estimate to $2.45 from $2.50 as a generally weaker
economy pressures customer usage in the Southeast.
•Wisconsin Energy Corp. (WEC-NYSE)–We are raising our 2008 EPS estimate to $2.95 from $2.85 due to better than
expected fuel cost recovery for the year as a result of falling natural gas prices.
PRICE TARGET CHANGES
•MDU Resources (MDU-NYSE)–Lowering target price to $23 from $27.Given MDU's diverse business mix, we derive our
price target from a sum-of-the-parts analysis. Our analysis utilizes a P/E methodology against peer groups for all the business
segments, except the E&P business. For that segment, we use a Risked Net Asset Value (RNAV) methodology. The overall $23
price target for MDU is 16.4x our 2009 estimate of $1.40 per share, vs. 11.7x average P/E for our coverage group.
Industry NoteJanuary 25, 2009
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INVESTMENT OPINION
The following tables outline our 4Q08 operating earnings estimates and 4Q08 weather data with estimated EPS impacts for electric
utility companies under coverage:
4Q08 EPS Estimates
Industry NoteJanuary 25, 2009
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4Q08 Heating Degree Days Deviation and Estimated EPS Impact
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, 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 NoteJanuary 25, 2009
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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.
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]123 35.80 29 23.58
HOLD [HOLD]193 56.10 31 16.06
SELL [UND]28 8.10 1 3.57
ENERGY
IB Serv/Past 12 Mos.
Rating Count Percent Count Percent
BUY [BUY]21 38.90 14 66.67
HOLD [HOLD]32 59.30 15 46.88
SELL [UND]1 1.90 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 in part, on investment banking revenue which may include revenue derived from the Firm's performance of investment banking
services for companies referred to in this report, although such compensation is not based upon specific investment banking services
transactions for these or any other companies. In accordance with industry practices, our analysts are prohibited from soliciting
investment banking business for our Firm.
Copyright 2009, KeyBanc Capital Markets Inc. All rights reserved.
Securities, mutual funds and other investment products are:
•Not Insured by the FDIC.
•Not deposits or other obligations of, or guaranteed by KeyBanc Capital Markets Inc., KeyBank, N.A. or any of
their affiliates.
•Subject to investment risks, including possible loss of the principal amount invested.
Industry NoteJanuary 25, 2009