KeyBank-4-23-2012.pdf

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April 23, 2012
ENERGY: Multi-Utilities / Electric Utilities
Industry Update / Estimates Change
KeyBanc
Capital￿Markets

Electric Utilities Industry: 1Q12 Earnings and Weather Preview
KeyBanc Capital Markets Inc.
Member NYSE/FINRA/SIPC
Paul T. Ridzon: [phone] Ð [e-mail]
Timothy Yee: [phone] Ð [e-mail]
Cur Prv Cur Prv FC FC Current EPS Previous EPS
Sym Rtg Rtg Target Target 2012 2013 2011 2012 2013 2011 2012 2013
CV HOLD HOLD NA NA $1.80 NA $1.59 $1.75 --$1.59 $1.80 --
ETR HOLD HOLD NA NA $5.60 $5.42 $7.62 $5.25 --$7.62 $5.45 --
EXC HOLD HOLD NA NA $3.04 $3.07 $4.16 $2.95 --$4.16 $3.00 --
MDU BUY BUY $24.00 $24.00 $1.22 $1.40 $1.19 $1.25 --$1.19 $1.35 --
XEL HOLD HOLD NA NA $1.78 $1.89 $1.72 $1.75 --$1.72 $1.80 --
ACTION STATEMENT
On average, we expect that the companies in our coverage universe will report lower 1Q12 quarterly earnings, down 12.1% compared
to 1Q11. Based on our 2012 estimates, we currently expect average annual earnings per share decline of 3.5% over 2011 results. Our
coverage universe currently trades at an average peer group 2012 P/E multiple of 14.3x. We also anticipate one potential earningsupside surprise [FirstEnergy Corp. (FE-NYSE)] and two potential earnings downside surprises [CMS Energy Corporation (CMS-NYSE)
and DTE Energy Company (DTE-NYSE)] relative to current consensus expectations this quarter.
KEY INVESTMENT POINTS
We expect that companies in our coverage universe will generally report lower 1Q12 quarterly earnings, down 12.1% on average
from 1Q11. This year, our EPS expectations for our coverage universe project an average annual earnings decline of 3.5% in 2012
compared to 2011 results. For the 1Q12 quarter, we feel that earnings will primarily be driven by significantly milder winter weather
impacts, lower merchant pricing, higher pension expenses and higher non-fuel operating and maintenance expenses, partially offset
by higher rates from rate increases and riders in effect, cost management efforts, and sluggish core retail demand growth.
According to the U.S. National Climatic Data Center, the contiguous (Lower-48) United States experienced record warm winter
temperatures during the first three months of 2012. 25 states east of the Rockies had 1Q12 average temperatures as their warmest on
record, while 16 states had temperatures ranking in their top ten warmest. No state in the Lower-48 had below-average temperatures
during 1Q12. Regions in the United States that experienced temperature extremes included the Northeast, Upper Midwest, Ohio Valley,
Northern Rockies and Plains, Southeast and South.
Given the record warm winter temperatures experienced across the United States this quarter, we would expect significant 1Q12
weather earnings impacts to trend negatively for utility service areas when compared to 1Q11 weather degree days, due to declines
in electric load or gas volumes typically used for winter heating. Our estimates of weather impacts to earnings are highlighted in our
Investment Opinion section. The extremity of the weather swing drives lower confidence in our estimate of weather impacts.
Earnings conference calls this quarter may also be focused more on the following themes: mild winter weather and efforts to mitigate
its impact; power pricing and hedging updates; pension funding and expenses; regulatory updates; low natural gas price impacts
(coal-to-gas switching), and general retail sales trends and the local economy.
For 1Q12, we anticipate one potential upside surprise and two potential downside surprises, relative to current consensus expectations:
FOR IMPORTANT DISCLOSURES AND CERTIFICATIONS, PLEASE REFER TO PAGES 6 - 10 OF THIS NOTE.
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POTENTIAL UPSIDE SURPRISE
FirstEnergy Corp. (FE-NYSE; HOLD; 1Q estimate of $0.82 vs. $0.69 in 1Q11; consensus is $0.77) ± We believe that fewer nuclear
outage days, incremental capacity revenues from additional generation being bid into the PJM auction and accretion from the Allegheny
Energy merger, partly offset by share dilution and mild weather, may lead to 1Q results above consensus expectations.
POTENTIAL DOWNSIDE SURPRISES
CMS Energy Corporation (CMS-NYSE; BUY, $23 price target; 1Q estimate of $0.36 vs. $0.51 in 1Q11; consensus is $0.39) ±
We believe that milder winter weather would significantly impact gas utility sales and result in 1Q earnings coming in below consensus
expectations.
DTE Energy Co. (DTE-NYSE; HOLD; 1Q estimate of $0.99 vs. $1.11 in 1Q11; consensus is $1.21) ± We believe that milder winter
weather would most significantly impact DTE©s MichCon gas utility and could drive 1Q earnings below consensus expectations. DTE
recently indicated that 1Q weather cost MichCon $0.12 per share vs. normal. We believe consensus likely misses the fact that 1Q11
was approximately $0.06 per share above normal.
ISSUES TO WATCH
During this season©s 1Q12 earnings conference calls, we will be focused on management commentary pertaining to the following
themes: mild winter weather and efforts to mitigate its impact, merchant generator hedging positions and the power pricing environment
given an outlook for abundant natural gas supplies; pension funding and expenses given changes in actuarial assumptions, and the
general health of the economy.
Other company-specific issues that bear further watching include:
Duke Energy Corporation (DUK-NYSE; HOLD) ± We will be focused on management©s commentary and commitment to the Progress
Energy, Inc. (PGN-NYSE) merger, in light of delays in receiving FERC regulatory approval, potential for state objection, additional
FERC market power mitigation requirements and a pending July 8, 2012 merger termination deadline.
Cleco Corporation (CNL-NYSE; BUY, $42 price target) ± We will look for a Company update on its 2003-2008 fuel adjustment
clause audit of $3.26 billion in fuel expenses currently before the Louisiana Public Service Commission (LPSC), as any fuel costs
disallowed would be refunded to customers. We expect more vigilance on CNL©s part after past issues limit exposure to this matter. We
will also look for more quantification of the benefits arising from the Evangeline LLC©s Coughlin Power Station winning the Request for
Proposal (RFP) for sale and delivery of capacity and energy to Cleco Power from May 2012 through April 2015.
DTE Energy Company (DTE-NYSE; HOLD) ± We will be focused on how low natural gas prices might impact DTE©s plans to develop
and monetize its Barnett Shale assets and its Reduced Emissions Fuels (REF) operations. The REF program generates tax credits
by treating coal to reduce emissions. Coal burn across the sector has declined around coal-to-gas fuel switching.
NiSource, Inc. (NI-NYSE; BUY, $26.50 price target) ± We expect the Company may provide an update on a potential joint-venture
with an oil and gas developer on its Utica acreage, where NI would contribute some of its own acres and be the developer of supporting
infrastructure around production.
Otter Tail Corporation (OTTR-NASDAQ; HOLD) ± We look for the Company to continue providing updates on its strategy to
rationalize its portfolio of non-electric businesses and to create growth opportunities at its regulated utility.
ANNUAL ESTIMATE CHANGES
Decreases
Central Vermont Public Service Corporation (CV-NYSE; HOLD) ± We are lowering our 2012 EPS estimate to $1.75 from $1.80
for mild winter weather and a lower authorized return on equity after the annual return was reset based on moves in treasury yields.
Entergy Corporation (ETR-NYSE; HOLD) ± We are lowering our 2012 EPS estimate to $5.25 from $5.45 for lower merchant
results on weak power pricing and mild winter weather, partly offset by rate increases.
Exelon Corporation (EXC-NYSE; HOLD) ± We are lowering our 2012 EPS estimate to $2.95 from $3.00 due to mild winter weather
and lower capacity pricing.
MDU Resources Group, Inc. (MDU-NYSE; BUY, $24 price target) ± We are lowering our 2012 EPS estimate to $1.25 from $1.35
as 1Q12 pre-release indicated mild weather and oil basis spreads negatively impacted results.
Company NoteApril 23, 2012
3
Xcel Energy Inc. (XEL-NYSE; HOLD) ± We are lowering our 2012 EPS estimate to $1.75 from $1.80 due to mild 1Q weather and
higher operating and maintenance (O&M) and depreciation expenses, partly offset by new electric rates in Colorado assuming state
regulatory approval of a three-year rate plan settlement.
Valuation Table for Companies in This Report with Changed Annual Estimates
Company TKR Rating
2012E
EPS
2012
P/E
Price Tgt
P/E
Price
Target
Central Vermont Public Svc. Corp.CV Hold $1.75 20.1x N/A N/A
Entergy Corp.ETR Hold $5.25 12.5x N/A N/A
Exelon Corp.EXC Hold $2.95 12.7x N/A N/A
MDU Resources Group, Inc.MDU Buy $1.25 17.4x 19.2x $24.00
Xcel Energy, Inc.XEL Hold $1.75 15.0x N/A N/A
14.3xKBCM Utility Peer Group Average Multiple =
Source: KeyBanc Capital Markets Inc. estimates
INVESTMENT OPINION
The following tables outline our 1Q12 operating earnings estimates and 1Q12 weather data with estimated EPS impacts for electric
utility companies under coverage:
1Q12 EPS Estimates
Company Ticker 1Q12E 1Q11A 2012E
Ameren Corp.AEE $0.19 $0.25 $2.35
American Electric Power Co.AEP $0.80 $0.82 $3.05
Avista Corp.AVA $0.69 $0.73 $1.75
CMS Energy, Inc.CMS $0.36 $0.51 $1.55
Central Vermont Public Svc. Corp.CV $0.56 $0.62 $1.75
Cleco Corp.CNL $0.44 $0.47 $2.40
Consolidated Edison, Inc ED $1.02 $0.98 $3.70
DTE Energy Co.DTE $0.99 $1.11 $3.75
Dominion Resources, Inc.D $0.86 $0.93 $3.20
Duke Energy Corp.DUK $0.35 $0.39 $1.40
Entergy Corp.ETR $0.43 $1.38 $5.25
Exelon Corp.EXC $0.86 $1.17 $2.95
FirstEnergy Corp.FE $0.82 $0.69 $3.40
Great Plains Energy, Inc.GXP $0.01 $0.01 $1.25
IDACORP, Inc.IDA $0.64 $0.60 $3.10
MDU Resources Group, Inc.MDU $0.19 $0.22 $1.25
NextEra Energy, Inc.NEE $0.97 $0.94 $4.50
NiSource, Inc.NI $0.69 $0.72 $1.45
Northwestern Corp.NWE $0.76 $0.89 $2.45
Otter Tail Corp.OTTR $0.21 $0.10 $1.10
PPL Corp.PPL $0.62 $0.84 $2.35
Pepco Holdings, Inc.POM $0.22 $0.27 $1.25
Pinnacle West Capital Corp.PNW ($0.08)($0.15)$3.35
Progress Energy, Inc.PGN $0.60 $0.69 $3.20
Southern Company SO $0.42 $0.50 $2.70
TECO Energy, Inc.TE $0.21 $0.24 $1.35
Wisconsin Energy Corp.WEC $0.73 $0.72 $2.30
Xcel Energy Inc.XEL $0.37 $0.42 $1.75
Source: KeyBanc Capital Markets Inc. estimates
Company NoteApril 23, 2012
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1Q12 Heating Degree Days Deviation and Estimated EPS Impact
Company Ticker
1Q12 vs
Normal
1Q12 vs
1Q11
Estimated
Same Qtr YOY
EPS Impact
Ameren Corp.AEE (32.2)%(31.8)%($0.08)
American Electric Power, Inc.AEP (31.5)%(34.3)%($0.09)
CMS Energy Corp.CMS (24.8)%(28.3)%($0.20)
Central Vermont Public Svc. Corp.CV (18.9)%(20.8)%($0.04)
Cleco Corp.CNL (45.5)%(45.3)%($0.05)
DTE Energy Co.DTE (24.9)%(29.3)%($0.20)
Dominion Resources, Inc.D (26.5)%(28.5)%($0.12)
Duke Energy DUK (24.5)%(25.4)%($0.05)
Exelon Corp.EXC (26.2)%(26.6)%($0.06)
Great Plains Energy, Inc.GXP (29.9)%(35.7)%($0.06)
NiSource, Inc.NI (24.1)%(26.9)%($0.03)
Northwestern Corp.NWE (18.5)%(25.3)%($0.13)
Pepco Holdings, Inc.POM (23.0)%(25.8)%($0.04)
(37.7)%(30.9)%
*42.4%*0.8%
(36.8)%(30.5)%
*152.8%*133.3%
(57.8)%(33.2)%
*102.1%*79.2%
(37.4)%(34.5)%
*385.7%*253.8%
Wisconsin Energy Corp.WEC (25.4)%(25.9)%($0.18)
Xcel Energy, Inc.XEL (22.4)%(24.4)%($0.05)
PNW ($0.03)
($0.11)
Southern Company SO
TECO Energy, Inc.TE ($0.06)
($0.04)
Progress Energy, Inc.PGN
Pinnacle West Capital Corp.
* Data is Cooling Degree Days
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.
Company NoteApril 23, 2012
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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.
Company NoteApril 23, 2012
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KeyBanc Capital Markets Inc. Disclosures and Certifications
Xcel Energy Inc. - XEL
We have received compensation for non-investment banking securities related services from Xcel Energy Inc. during the
past 12 months.
We expect to receive or intend to seek compensation for investment banking services from Xcel Energy Inc. within the next
three months.
During the past 12 months, Xcel Energy Inc. has been a client of the firm or its affiliates for non-securities related services.
For the three-year history represented in this chart, this stock has been rated HOLD.
Central Vermont Public Service Corporation - CV
Central Vermont Public Service Corporation is an investment banking client of ours.
We expect to receive or intend to seek compensation for investment banking services from Central Vermont Public Service
Corporation within the next three months.
During the past 12 months, Central Vermont Public Service Corporation has been a client of the firm or its affiliates for
non-securities related services.
Entergy Corporation - ETR
Entergy Corporation is an investment banking client of ours.
We have received compensation for investment banking services from Entergy Corporation during the past 12 months
We expect to receive or intend to seek compensation for investment banking services from Entergy Corporation within the
next three months.
During the past 12 months, Entergy Corporation has been a client of the firm or its affiliates for non-securities related
services.
Exelon Corporation - EXC
Exelon Corporation is an investment banking client of ours.
We have received compensation for investment banking services from Exelon Corporation during the past 12 months
We have received compensation for non-investment banking securities related services from Exelon Corporation during
the past 12 months.
We expect to receive or intend to seek compensation for investment banking services from Exelon Corporation within the
next three months.
During the past 12 months, Exelon Corporation has been a client of the firm or its affiliates for non-securities related services.
MDU Resources Group, Inc. - MDU
MDU Resources Group, Inc. is an investment banking client of ours.
We have received compensation for investment banking services from MDU Resources Group, Inc. during the past 12
months
We have received compensation for non-investment banking securities related services from MDU Resources Group, Inc.
during the past 12 months.
We expect to receive or intend to seek compensation for investment banking services from MDU Resources Group, Inc.
within the next three months.
During the past 12 months, MDU Resources Group, Inc. has been a client of the firm or its affiliates for non-securities
related services.
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.
Three-Year Rating and Price Target History
Company NoteApril 23, 2012
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Company NoteApril 23, 2012
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Company NoteApril 23, 2012
9
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 44.09 47 20.98
HOLD [HOLD]272 53.54 50 18.38
SELL [UND]12 2.36 4 33.33

ENERGY
IB Serv/Past 12 Mos.
Rating Count Percent Count Percent
BUY [BUY]38 48.10 17 44.74
HOLD [HOLD]41 51.90 18 43.90
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.
Company NoteApril 23, 2012
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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.
Company NoteApril 23, 2012