KeyBanc-Mar-26-2013-2.pdf

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March 26, 2013
ENERGY: Electric Utilities / Multi-Utilities
Industry Update / Price Target Change
KeyBanc
Capital￿Markets

Utilities: Updating Price Targets
KeyBanc Capital Markets Inc.
Member NYSE/FINRA/SIPC
Paul T. Ridzon: [phone] Ð [e-mail]
Cur Prv Cur Prv FC FC Current EPS Previous EPS
Sym Rtg Rtg Target Target 2013 2014 2012 2013 2014 2012 2013 2014
AEP BUY BUY $49.50 $47.00 $3.16 $3.31 $3.09 $3.10 --$3.09 $3.10 --
ALE BUY BUY $50.00 $48.00 $2.74 $3.01 $2.58 $2.70 --$2.58 $2.70 --
CMS BUY BUY $28.50 $27.00 $1.65 $1.74 $1.55 $1.65 --$1.55 $1.65 --
CNL BUY BUY $46.50 $45.00 $2.52 $2.83 $2.46 $2.55 --$2.40 $2.55 --
IDA BUY BUY $49.50 $48.00 $3.26 $3.37 $3.37 $3.25 --$3.35 $3.25 --
NI BUY BUY $30.50 $28.50 $1.56 $1.68 $1.46 $1.55 --$1.45 $1.55 --
ACTION STATEMENT
We are revisiting price targets on some of our BUY-rated names after the strength in the markets has lifted the overall valuation of
the utility group. On a relative basis, we still find value in these names despite the fact that several of them have traded through ourprior price targets. We are raising our price targets on American Electric Power Company, Inc. (AEP-NYSE), ALLETE, Inc. (ALE-
NYSE), CMS Energy Corporation (CMS-NYSE), Cleco Corporation (CNL-NYSE), IDACORP, Inc. (IDA-NYSE) and NiSource, Inc. (NI-
NYSE). Given the nature of how the utility sector historically trades as a group, we use essentially the same valuation methodology,
grounded against a higher group multiple. Since we last revisited our price targets in mid-February, the Philadelphia Utility index has
risen by over 5%.
KEY INVESTMENT POINTS
Given recent market strength, including in the utilities sector, we are revisiting several price targets for our BUY-rated names. Since
the end of 2012, the S&P 500 is up 8.8%, while the Philadelphia Utility Index (UTY) has also risen by 8.9%.
We are raising price targets on BUY-rated AEP, ALE, CMS, CNL, IDA and NI to reflect a higher group multiple. Some of these names
have traded through our previous price targets given a strong overall market. Our coverage universe currently trades at a P/E multiple
of 16.1x 2013 earnings. We continue to view these names favorably based on relative valuation.
Below we discuss the characteristics that attract us to these companies:
American Electric Power Company, Inc. (AEP-NYSE; BUY; $49.50 price target; $3.10 EPS 2013E) - We continue to view AEP
as a core large cap holding. At its recent Analyst Day, AEP issued 2013 and 2014 guidance ranges of $3.05-$3.25 and $3.15-$3.45
per share, respectively. The dividend policy was raised from a 50-60% payout ratio to 60-70%, supported by regulated earnings.
The Company©s 4-6% growth rate was reaffirmed. We believe AEP offers investment opportunity on generally reasonable regulatory
environments and offers upside in a tightening commodity market. We have increased our price target to $49.50 from $47.00 per
share. Our valuation is based upon a modest discount to large cap regulated peers.
ALLETE, Inc. (ALE-NYSE; BUY; $50.00 price target; $2.70 EPS 2013E) - We believe ALE offers above-average growth prospects
through investment in renewables, environmental, transmission and potentially new generation, all in a constructive regulatory
environment. Potential near- to medium-term catalysts include incremental wind capacity and possible monetization of Florida real
estate assets. We have increased our price target to $50.00 from $48.00 per share. We add back the Florida real estate losses
and apply a premium valuation, and then add back 70% of the real estate book value in our valuation.
FOR IMPORTANT DISCLOSURES AND CERTIFICATIONS, PLEASE REFER TO PAGE 3 OF THIS NOTE.
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CMS Energy Corporation (CMS-NYSE; BUY; $28.50 price target; $1.65 EPS 2013E) - In our view, CMS offers solid capital
opportunities in a constructive regulatory environment. CMS has potential investment in renewables and baseload natural gas
generation. NOLs (net operating loss carry forwards) allow investment without meaningful equity needs. We have increased our price
objective to $28.50 from $27.00 per share. We use a valuation premium of 6% to a peer group of larger regulated names.
Cleco Corporation (CNL-NYSE; BUY; $46.50 price target; $2.55 EPS 2013E) - CNL has successfully completed its large capital
program and represents a free cash flow story. We estimate CNL can generate roughly $90 million of free cash annually. Management
has indicated it would utilize this free cash to seek investment opportunities with utility-like risk and returns and/or return cash to
shareholders through higher dividend payments or share repurchases. Our new $46.50 price target (prior $45.00) is derived from
the value of a premium utility, including earnings from rate-basing the Coughlin plant, and adding the cash generated by levering the
plant to the utility's capital structure.
IDACORP, Inc. (IDA-NYSE; BUY; $49.50 price target; $3.25 EPS 2013E) - IDA has investment opportunities around large
transmission projects and potential generation to fill the needs caused by expiring power contracts. We believe Idaho regulation
continues to improve as evidenced by recent constructive settlements that act to put a 9.5% floor on IDA's earned ROE. We have
raised our price target to $49.50 from $48.00 per share, based upon our view that shares should trade at a 5% discount to the
group given lingering risk that improvement in Idaho regulation stalls.
NiSource, Inc. (NI-NYSE; BUY; $30.50 price target; $1.55 EPS 2013E) - We view NI as a portfolio of attractive assets in the gas
distribution, electric utility and gas midstream businesses, coupled with a meaningful (100,000-200,000 acres) position in the Utica/
Marcellus. Our valuation is based on a sum-of-the-parts of companies in respective peer groups. We have raised our price objective
to $30.50 from $28.50 per share.
VALUATION TABLE FOR COMPANIES WITH PRICE TARGET CHANGES
Pricing: March 25, 2013 Close Pricing
Company TKR Rating
2013E
EPS
2013
P/E
Price Tgt
P/E
Price
Target
Allete, Inc.ALE Buy $2.70 16.0x 17.8x $50.00
American Electric Power, Inc.AEP Buy $3.10 14.4x 15.2x $49.50
CMS Energy Corp.CMS Buy $1.65 15.6x 16.4x $28.50
Cleco Corp.CNL Buy $2.55 16.2x 17.6x $46.50
IDACORP, Inc.IDA Buy $3.25 14.1x 14.8x $49.50
NiSource, Inc.NI Buy $1.55 16.9x 18.4x $30.50
16.1xKBCM Utility Peer Group Average Multiple =
Source: KeyBanc Capital Markets Inc.
Company NoteMarch 26, 2013
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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://key2.bluematrix.com/sellside/
Disclosures.action.
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]224 44.98 46 20.54
HOLD [HOLD]263 52.81 64 24.33
SELL [UND]11 2.21 1 9.09

ENERGY
IB Serv/Past 12 Mos.
Rating Count Percent Count Percent
BUY [BUY]28 44.44 15 53.57
HOLD [HOLD]35 55.56 18 51.43
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
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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
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Investors should assume that we are seeking or will seek investment banking or other business relationships with the
company described in this report.
Company NoteMarch 26, 2013