Utilities and Power Industry Update - Deutsche Bank (2010) PDF

Company
Global Markets Research
North America United States

Industrials Utilities and Power
21 December 2010
Utilities and Power

Preparing for another
challenging utility year
Jonathan Arnold
Caroline Bone, CFA
Lauren Duke
Research Analyst
(+1) 212 250-3182
[email protected]
Research Associate
(+1) 212 250-8253
[email protected]
Associate Analyst
(+1) 212 250-8204
[email protected]
Lacking meaningful catalysts, utilities risk lagging a third straight year

With 2010 drawing to a close we turn our thoughts to our 2011 outlook. With little
time left for a defensive year-end rally the S&P Utilities are on track to lag the
market by about 11% this year, a second straight year of double-digit
underperformance. While it is tempting to position for a rebound, we see little
fundamental underpinning for near-term outperformance absent a market pullback
or a meaningful upswing in the natural gas price. Within the group we remain
cautious on merchants and favor growth over yield in the regulated group.
Emphasize growth-oriented regulated names over yield plays
While utility stocks lagged the market as a group in 2010, performance between
the individual sub-categories was highly divergent with regulated names (+10% on
average) beating diversified (-7%) and pure-play merchant generators (-20%) by a
significant margin. Absent signs of an improvement in generator fundamentals
(most obviously a turn in natural gas prices) we would continue to favor regulated
names going into 2011. Within the regulated group we would currently
emphasize higher growth profiles over yield plays a trade which has been
working since 10-Year Treasury yields started moving up in October. Buy-rated
names we would emphasize within this theme are CMS, ITC and PCG.
Generation challenged by oversupply in both gas and power markets
Power fundamentals remain under intense pressure thanks to low gas prices
(largely courtesy of shale drilling). For coal generators low gas prices are
exacerbated by robust coal pricing (reflecting factors including international
demand and mine safety costs). Meanwhile, the entire group is pressured by
ample reserve margins providing for little heat rate upside given 1) muted demand
recovery; 2) completion of plants started pre-recession; 3) continued addition of
renewables, albeit slower than in 2009; and 4) ongoing uncertainty regarding
future EPA mandates leaving little near-term incentive for plant retirements.
Within our coverage we favor EIX and PEG as lower risk diversified plays and CPN
among IPPs (asset quality and thematic play on increased gas-fired generation).
Watching EPA, but economy and politics likely delay an upside case
Outside of a gas rally, coming EPA regulations and resulting coal plant shut-downs
look to be the best hope for tighter power supply/demand. While we expect this
to play out over time, we see the weak economy and change of control in the
House as important context, likely moderating the pace of transition. The next
PJM auction (2014-15) in May will be closely watched, although in our view it is
unlikely that a material upside materializes until at least the following year.
No change to target multiples although relative P/E back to a discount
Having run up to a market multiple at mid-year the 12M forward S&P Utilities P/E
of 12.4x now stands at a 7% discount to the S&P 500 a more reasonable relative
level in our view given the early stages of economic recovery. Our regulated utility
target valuations are based on a 12.0x multiple over 2012E slightly below the
current average. For merchant generation we are using 8.5x 2012E EBITDA and
continue to include a carbon adder as a proxy for relative environmental
positioning. Sector risks include weakness in gas and power prices; higher
interest rates; and continued uncertainty over evolving environmental mandates.
Industry Update
Companies featured
American Electric Power (AEP.N),USD35.99
Calpine (CPN.N),USD13.14
CenterPoint Energy (CNP.N),USD15.87
CMS Energy (CMS.N),USD19.09
Con Edison (ED.N),USD49.34
Dominion Resources (D.N),USD42.57
DTE Energy (DTE.N),USD45.37
Duke Energy (DUK.N),USD17.74
Edison International (EIX.N),USD38.68
Entergy Corp. (ETR.N),USD70.51
Exelon (EXC.N),USD41.08
FirstEnergy (FE.N),USD36.28
GenOn Energy (GEN.N),USD3.66
ITC Holdings (ITC.N),USD61.67
NextEra Energy (NEE.N),USD51.67
Northeast Utilities (NU.N),USD31.88
NRG Energy (NRG.N),USD18.67
NSTAR (NST.N),USD42.23
PG&E Corp (PCG.N),USD48.10
PPL Corp. (PPL.N),USD26.03
Progress Energy (PGN.N),USD43.66
PSEG (PEG.N),USD31.64
Southern Company (SO.N),USD37.90
TECO Energy (TE.N),USD17.49
Xcel Energy (XEL.N),USD23.73
Buy
Buy
Buy
Buy
Hold
Hold
Hold
Hold
Buy
Hold
Hold
Hold
Hold
Buy
Hold
Hold
Hold
Hold
Buy
Hold
Hold
Buy
Hold
Sell
Hold
Forward P/E Valuation by Segment
16x
16x
15x
15x
14x
14x
13x
13x
12x
12x
11x
11x
10x
10x
9x
9x
8x
8x
2010E
2011E
2012E
Mostly Regulated
Less Regulated
S&P 500 12M Fwd
S&P 500 15% Disc.
2010 Performance by Segment
30%
30%
20%
20%
10%
10%
0%
0%
-10%
-10%
-20%
-20%
-30%
-30%
Av er age
L ow
Hi gh
-40%
-40%
-50%
-50%
M ost ly Regu l ated
Less Reg u lat ed
Mer chan t & IPPs
DB Utilities & Power Research

Jonathan Arnold
Caroline Bone, CFA
Lauren Duke
Keith Stanley, CFA
212-250-3182
212-250-8253
212-250-8204
212-250-3890
Deutsche Bank Securities Inc.

All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1.
MICA(P) 007/05/2010
21 December 2010
Utilities and Power Utilities and Power
Preparing for another

challenging utility year
Summary of DB Utilities & Power Ratings
Figure 1: DB Utilities & Power Summary Ratings and Price Targets
Stock
DB
Mkt. Cap.
Price
Target
Ticker
Rating
($MM)
12/17/2010
Price
Price
Yld. '11E
Tot. Rtn.
AEP
Buy
17,160
$35.99
$40.00
11.1%
5.2%
16.3%
CMS ENERGY
CMS
Buy
4,370
$19.09
$20.00
4.8%
4.4%
9.2%
CENTERPOINT ENERGY
CNP
Buy
6,186
$15.87
$17.00
7.1%
5.0%
12.2%
ITC
Buy
3,081
$61.67
$65.00
5.4%
2.3%
7.7%
PG&E CORP
PCG
Buy
17,830
$48.10
$50.00
4.0%
4.1%
8.0%
DTE ENERGY
DTE
Hold
7,462
$45.37
$47.00
3.6%
4.9%
8.5%
DUKE ENERGY
AMERICAN ELECTRIC POWER
ITC HOLDINGS
Implied Returns
DUK
Hold
23,004
$17.74
$17.00
-4.2%
5.7%
1.6%
CON EDISON
ED
Hold
13,882
$49.34
$48.00
-2.7%
4.9%
2.1%
NORTHEAST UTILITIES
NU
Hold
5,588
$31.88
$31.00
-2.8%
3.4%
0.6%
NSTAR
NST
Hold
4,511
$42.23
$40.50
-4.1%
4.0%
-0.1%
PROGRESS ENERGY
PGN
Hold
11,438
$43.66
$44.00
0.8%
5.7%
6.5%
SO
Hold
30,170
$37.90
$37.00
-2.4%
5.0%
2.6%
XEL
Hold
10,814
$23.73
$24.00
1.1%
4.4%
5.5%
1.8%
4.5%
6.4%
EIX
Buy
12,602
$38.68
$41.00
6.0%
3.3%
9.3%
PEG
Buy
16,008
$31.64
$36.00
13.8%
4.4%
18.2%
SOUTHERN COMPANY
XCEL ENERGY
MOSTLY REGULATED
EDISON INTERNATIONAL
PSEG
155,496
Hold
25,340
$42.57
$42.00
-1.3%
4.6%
3.3%
ENTERGY CORP.
ETR
Hold
13,805
$70.51
$79.00
12.0%
4.7%
16.7%
EXELON
EXC
Hold
27,087
$41.08
$42.00
2.2%
5.1%
7.4%
FE
Hold
11,059
$36.28
$35.00
-3.5%
6.1%
2.5%
NEXTERA ENERGY
NEE
Hold
21,260
$51.67
$56.00
8.4%
4.0%
12.4%
PPL CORP
PPL
Hold
9,802
$26.03
$27.00
3.7%
5.4%
9.2%
TE
Sell
3,682
$17.49
$15.50
-11.4%
4.9%
-6.5%
3.3%
4.7%
8.1%
CPN
Buy
6,396
$13.14
$15.00
14.2%
0.0%
14.2%
DOMINION RESOURCES
FIRSTENERGY
TECO ENERGY
LESS REGULATED
CALPINE
140,647
GENON ENERGY
GEN
Hold
2,833
$3.66
$4.00
9.3%
0.0%
9.3%
NRG ENERGY
NRG
Hold
4,750
$18.67
$19.00
1.8%
0.0%
1.8%
8.4%
0.0%
8.4%
IPPs
13,979
Source: Deutsche Bank, CapitalIQ
Page 2
21 December 2010
Utilities closing out 2010 close to relative lows

Utility stocks have lagged the market by about 11% through December 20
Absent a late December rally the S&P Utility index is on track to underperform the market by
some 11% this year. This comes on the heels of 17% underperformance in 2009 and would
be the second year in a row that utilities have lagged a rising stock market. As shown in
Figure 3, the year started out poorly for the utilities with consistent underperformance
through mid-April, followed by a strong rally in the aftermath of the market flash crash.
After a brief period back in positive territory for the year during the late summer, performance
turned sharply Southwards in September and the sector is now back close to its relative low
for the year. In short, utilities have struggled to keep pace with a generally buoyant market
while clearly constrained by their own fundamental challenges. The most notable of these in
our view are weak gas and power markets for the generation stocks and (more recently)
rising interest rates which have begun to weigh on the regulated group. Ironically, the
extension of favorable tax rates on dividends while a key issue for utility investors ended
up being overshadowed in the broader market context as it occurred simultaneously with the
extension of lower income tax rates. As shown in Figure 4 and Figure 5 the utility group as a
whole was the market laggard in 2009 and is looking set for a repeat performance in 2010.
Figure 2: S&P Utils & S&P 500 (2008-2010)
Figure 3: S&P Utils vs. S&P 500 Daily Perf. (2010)
110
6%
4%
100
2%
0%
90
-2%
80
-4%
-6%
70
-8%
60
-10%
-12%
50
-14%
40
Jan-08
Apr-08
Aug-08
Dec-08
Apr-09
Aug-09
S&P Utilities
Dec-09
Apr-10
Aug-10
Dec-10
S&P 500
S&P Utils - S&P 500 Daily Performance
Source: Capital IQ
Source: Capital IQ
Figure 4: Worst Performing S&P Sector in 2009
Figure 5: Heading for a Repeat in 2010?
60%
28%
50%
24%
20%
40%
16%
30%
12%
20%
8%
10%
4%
0%
0%
2009
Source: Capital IQ
2010 YTD
Source: Capital IQ
Page 3
21 December 2010
Strong outperformance from regulated names in 2010

Within the utility group, individual stock performance has been highly divergent with the best
showings from smaller and mid-cap regulated names and a bias towards some of the more
growth-oriented profiles. At the other end of the spectrum, merchant generators both
diversified utilities and IPPs alike have been by far the biggest laggards. The two notable
exceptions here have been EIX which has clearly benefited from owning its merchant
exposure via a non-recourse subsidiary (EME) and CPN within the IPPs. We highlight our
2010 year-to-date performance ranking for our coverage and broader comp sheet watch list in
Figure 6 below.
Figure 6: DB Utilities and Power Universe Stock Performance (2010 YTD)
NU
CMS
LNT
CPN
WEC
ITC
IDA
TEG
WR
NVE
NST
SO
PNW
XEL
NWE
S&P 500
NI
EIX
D
CNP
POR
POM
ED
SCG
TE
PCG
PGN
DTE
AEP
UNS
DUK
PNM
AEE
AYE
S&P Utils
GXP
NEE
PEG
SRE
DPL
ETR
AES
EXC
CEG
PPL
NRG
FE
ORA
GEN
DYN
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
Source: Capital IQ
Page 4
21 December 2010
Figure 7: Utilities & Power 2010 Performance by Segment

30%
30%
20%
20%
10%
10%
0%
0%
-10%
-10%
Aver age
Low
-20%
-20%
-30%
-30%
-40%
-40%
-50%
-50%
Mostly Regulated
Less Regulated
Hi gh
Merchant & IPPs
Source: Bloomberg Finance LP.

Note: Mostly Regulated group includes AEP, CMS, CNP, DPL, DTE, DUK, ED, GXP, IDA, ITC, LNT, NI, NST, NU, NVE, NWE, PCG, PGN, PNM, PNW, POM, POR, SCG,
SO, TEG, UNS, WEC, WR and XEL.
Less Regulated group includes AEE, AYE, CEG, D, EIX, ETR, EXC, FE, NEE, PPL, PEG, SRE and TE.
Merchant & IPPs group includes AES, CPN, DYN, GEN, NRG and ORA.
Page 5
21 December 2010
Looking into 2011 fundamentals remain challenging

Tempting to bet on a rebound, but fundamentals not supportive in our view
Clearly the utility groups two consecutive years of underperformance and the highly
divergent segment performance within the group makes it tempting for investors to position
for some reversion to the mean in 2011. From our perspective we would be more inclined to
position for a relative recovery in the overall group although this seems most likely to occur
within the context of a disappointing macro environment and likely one that is less
constructive than our relatively upbeat DB equity strategy view. On the power generation
front we have little doubt that these stocks will ultimately see strong performance at some
point, but for now we remain far from convinced that the necessary fundamental conditions
are in place for this to be a 2011 event. As discussed below, history suggests and our
fundamental view concurs that the single most important positive driver for overall sector
performance would be a rebound in natural gas prices. While investors and analysts tend to
focus significant attention on power supply and demand dynamics, the resulting heat rate
upside potential clearly pales into insignificance for most companies versus a rebound in gas
(particularly if the latter were coupled with a commensurate drop in forward coal prices and
dark spread expansion from current anemic levels).
Figure 8: S&P Utilities vs. 2Y Natural Gas Strip (2003-2010)

60%
40%
20%
0%
-20%
-40%
-60%
2003
2004
2005
S&P Utils
2006
S&P 500
2007
2008
2009
2010
(YTD)
NGOPSW2Y Index
Source: Capital IQ and Bloomberg Finance LP.
Page 6
21 December 2010
Figure 9: Natural Gas and Yields Both Moving in the Wrong Direction
12
10
0
8/23/1994
8/23/1996
8/23/1998
8/23/2000
8/23/2002
8/23/2004
NGOPSW2Y Index
8/23/2006
8/23/2008
8/23/2010
USGG10YR Index
Source: Deutsche Bank
Figure 10: PJM-West 1 Year Forward Prices
12
150
135
$/MWh
105
90
6
75
60
45
30
MMBtu/MWh
10
120
15
Dark spread
NYMEX coal
ATC power price
Dec-10
Sep-10
Jun-10
Mar-10
Dec-09
Sep-09
Jun-09
Mar-09
Dec-08
Sep-08
Jun-08
Mar-08
Dec-07
Oct-07
Jul-07
Apr-07
0
Jan-07
On-peak heat rate (RHS)
Note: On-peak heat rate assumes a constant $0.85/MMBtu basis spread at Tetco M3.
Source: Deutsche Bank; Bloomberg Finance LP
We expect another challenging year ahead for utility stocks

Looking forward to 2011 the outlook remains challenging for utility stocks, with rising interest
rates already pressuring the more yield-oriented regulated names with a difficult commodity
and power market backdrop for less regulated (diversified) utility names and pure merchant
generators. Coal generators are particularly pressured with low dark spreads resulting from
weak gas prices (largely thanks to the domestic shale gas phenomenon) and relatively
stronger coal pricing reflecting buoyant international demand and prices (Figure 10).
Page 7
21 December 2010
Stay with growth over yield in regulated group

Within regulated utilities we continue to emphasize more growth-oriented names versus pure
yield plays. This trade has been working well since Treasury yields started moving up in
October and we believe it likely has further to run (Figure 11). Focus names here include
PCG, CMS CNP, and transmission pure-play ITC. While yield may come back into focus if
rates fall again in 1H 2011 (as DB economists expect) we remain reluctant to chase regulated
utility stocks solely for yield. The extension of the favorable tax rates on dividends while a
fundamental positive has ended up being overshadowed by the broader market
implications of Bush-era income tax rates being extended as well. If the latter translates into
higher economic growth and/or relieves deflation fears we would expect utilities to be
relative laggards versus other sectors with higher-growth names likely doing better than
average.
Figure 11: Stock Performance by Dividend Yield (since low in 10Y yield on 10/11)
105
104
103
102
101
100
99
98
97
96
95
10/11/2010
10/21/2010
10/31/2010
Higher Dividend Yield
11/10/2010
11/20/2010
11/30/2010
12/10/2010
Lower Dividend Yield
Source: Capital IQ and Bloomberg Finance LP.

Note: Higher Dividend Yield group includes AEP, CNP, DUK, ED, PGN, SO, NI, NWE, POM, POR, SCG, TEG, UNS and WR.
Lower Dividend Yield group includes CMS, DPL, DTE, GXP, IDA, ITC, LNT, NU, NST, NVE, PCG, PNM, XEL and WEC.
Page 8
21 December 2010
Fundamental challenges keep us cautious on merchant generators

Within diversified and merchant names we remain generally cautious given continuing
fundamental challenges and lack of likely near-term positive catalysts.
Our Buy-rated
merchant utility names continue to be those with a lower risk profile for shareholders (EIX,
PEG). Within the IPPs we continue to favor CPN for its more moderate near-term gas
exposure and higher-quality assets which are better positioned for the longer-term transition
towards gas fired-generation.
Natural gas prices and oversupplied power markets are key headwinds
As has been the case for much of the past year the key issue facing merchant generation is
weak natural gas pricing exacerbated by not enough demand and excess supply in the
power markets. While summer 2010 was one of the hottest on record throughout much of
the country (the West being the main exception) it was noticeable how little trouble the
system had meeting demand in fact, we hardly saw any instances of curtailments or calls
for conservation this year. With legacy hedges continuing to roll off into a weak market,
merchant utilities generally face downward earnings trajectories into at least 2012 and in
some cases 2013. Looking for catalysts that might reverse this cycle, higher natural gas
prices would be by far the most significant for most of our names. With shale gas
production continuing to climb month after month despite continued weak pricing this
catalyst has so far proved elusive and any respite has tended to be short-term or weatherrelated. At some point gas will doubtless find a firmer footing, but until that definitely occurs
we expect power generators to remain under pressure.
Figure 12: NYMEX Natural Gas Forward Curves
($/MMBtu)
Figure 13: NYMEX Nat Gas Calendar Year Strips

($/MMBtu)
$9
$8
Cal 2010 - $4.39
$8
Cal 2011 - $4.29
$7
$7
Cal 2012 - $4.92
$6
$6
$5
$4
17-Dec-10
$3
$5
$2
17-Dec-09
$4
Oct-12
16-Nov-10
$3
Source: Deutsche Bank and Bloomberg Finance LP
Jul-12
Jan-12
Apr-12
Jul-11
Oct-11
Apr-11
Oct-10
Jan-11
Jul-10
Apr-10
Oct-09
Jan-10
Jul-09
Jan-09
Apr-09
$1
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Source: Deutsche Bank and Bloomberg Finance LP
Weather drove 2010 power demand rebound; decline likely in 2011

On the power front, electricity demand is on track to grow almost 5% in 2010, but much of
this has been weather-driven with an extremely cold Q1 followed by a record-breaking
summer with heat stretching well into September in many regions. As weather comps
become more challenging we expect demand growth to moderate with forecasts currently
calling for a flat to down demand year in 2011 (EIA, for example, shows electricity demand
down 0.1% for 2011 in their December 2010 Short Term Energy Outlook). As we have
argued before, demand was dealt a major blow by the recession and is unlikely to be the
primary driver of the next power market up-cycle.
Page 9
21 December 2010
Figure 14: EEI Weekly Demand (2001-2010) Growth Should Moderate On 2010 Weather Comps
30%
8%
20%
6%
10%
4%
0%
2%
-10%
0%
-20%
-2%
-30%
2001
-4%
2002
2003
2004
2005
2006
2007
2008
2009
2010
-6%
Weekly Output vs. Prior Year
Trailing 52-Weeks
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Source: EEI and Deutsche Bank
Environmental rules to tighten markets; but timing remains somewhat fluid

With the failure of carbon legislation in the current Congress, investor attention has now
shifted squarely to the regulatory front and more specifically to the myriad of new
requirements expected from the US Environmental Protection Agency (EPA) over the next
several months. These have been well documented with various studies suggesting that the
rules may force the retirement of a significant amount up to 65 GW according to some
estimates - of generally older and less efficient coal-fired generation. While we concur that
retirement of much of the existing uncontrolled coal fleet is likely to be a significant driver for
power markets in the future, we continue to doubt that this transition will occur on an
accelerated timetable at least while the pace of economic recovery remains relatively
lackluster. In addition the recent mid-term elections clearly have some relevance with the
incoming House Republicans clearly intending to subject EPAs regulatory process to close
scrutiny potentially even resorting to curtailing the agencys activities through the budget
process. In fact, EPA has proactively sought to slow down its work on both ground level
ozone and the MACT standards for industrial boilers in the past month. The latter involved
requesting a court order to slow down a mandated implementation timetable and certainly
bears watching in the context of the related rules for power plants.
Hazardous Air Pollutant MACT generally seen as the critical front
Under an order from the U.S. District Court, EPA is required to come up with proposed rules
by March of 2011 for the control of Hazardous Air Pollutants including mercury emitted by
coal and oil-fired power plants. The rules are then required to be finalized by November of
2011 with implementation three years later (i.e. November 2014 or more likely early 2015
counting from the likely Federal Register publication). The so-called HAPs rule is widely
expected to be the most impactful for coal generators particularly if EPA were to adopt an
across the board removal standard requiring ~90% removal levels regardless of the type of
boiler and/or specific coal being burned. While EPA has little flexibility on timing per the
courts requirement, it is our understanding that they could certainly propose something
more granular (i.e. sub-categorization) instead of a one-size fits all removal threshold that
would likely leave owners of smaller and older units little room for maneuver. EPA Staff
reportedly favors a more stringent standard, but it remains to be seen what actually emerges
in the proposed rules in March as this appears to still be a topic of some debate or indeed if
EPA seeks extra time as they recently did for the industrial boilers rule as noted above.
Page 10
21 December 2010
On our recent D.C. field trip, we learned that the EPA has not yet sent its MACT rule proposal
for power plants to the Office of Management and Budget (OMB) which implies the OMB
will have less than its standard 90 days to review the proposal before the March deadline.
Additionally, industry representatives on our trip indicated that the delayed industrial boiler
MACT was supposed to be used as somewhat of a precedent and guide for electric
generator MACT, and that certain EPA managers will now be working simultaneously on both
boiler and electric generator MACT rules. Given the likely high volume of comments from
industry, politicians, and environmentalists following rule proposal in March, other EPA
priorities, and likely Congressional interference in the broader EPA agenda (i.e. oversight
hearings, possible budgetary actions), the tight timeframe between mandated rule proposal
in March and finalization in November of 2011 could be challenging to achieve, in our view.
May RPM auction to be closely watched but far from a clear positive
While publication of the draft MACT rule could be a catalyst in its own right, investors will be
particularly focused on the PJM markets next RPM capacity auction for the 2014-2015
delivery year which will be held in May. Given weak near-term fundamentals due to
compressed dark spreads and an oversupplied market, the upcoming RPM auction is likely to
be an important data point in 2011 for investors hoping for a power market recovery as it
provides a view of potential conditions three years out. We see several competing drivers
for the May auction, which leads to a high level of uncertainty as to the outlook for capacity
prices, and no clear upside case for investors at this point in time. On the positive side, a
likely increase in the net cost of new entry (net CONE), continued deterioration in the forward
commodity outlook, and a potential change in demand response products could provide
upside to prices relative to last Mays auction. However, we also see several potential
negatives, including a possible (though perhaps unlikely) change in PJMs load forecasting
methodology, pending legislation in NJ that would subsidize new generation, and continued
growth in demand response resources in line with recent trends.
Given that this auction covers a period when the MACT rule is supposed to be put in force,
there has been some investor focus on the possibility that large amounts of coal-fired
capacity might withdraw from this years auction for fear of being forced to shut down during
the 2014-15 delivery year. From our perspective this is highly unlikely to happen in this years
auction as any MACT rule would only be a proposal and subject to change at the time of the
May auction, and the timing of any forced shut-down from the MACT rule (if implemented on
schedule) would only happen part-way through the delivery year. As such, a generator
participating in the 2014-15 auction that ends up being forced to shut down in late 2014 or
early 2015 would anticipate receiving capacity payments for the first half of the year, but
owing only modest penalties (~20% of the clearing price) for the second half. In the
meantime the unit would be available to run during the summer of 2014 when the bulk of the
annual energy margins would typically be made. Given these timing factors and
considering the inherent uncertainty in the current political/economic context we would not
anticipate seeing significant amounts of generation being proactively withdrawn from this
Mays capacity auction.
Page 11
21 December 2010
Utility rate cases and regulated return trends

Increased rate case activity likely to continue
Utility rate case filings have continued at a rapid pace in 2010, as regulated utilities have
continued to seek recovery of increased investment in new generation and transmission
lines, environmental-related spending, other infrastructure upgrades, in addition to higher
operating expense (i.e. pension costs). The economic recession has also pushed utilities to
file rate cases, as many have struggled to earn their cost of capital given lower sales. By the
end of November, the number of electric rate cases decided in 2010 hit a new annual record.
As of mid December, 52 cases had been decided YTD versus 39 in 2009 and 12 in 2000.
About 50 cases are currently pending suggesting 2011 could set another record. While some
regulators have adopted more formulaic rate-setting mechanisms, such as riders to recover
infrastructure investment and pension costs, these have not yet seemed to meaningfully
reduce the need for filing. Transmission ROEs have continued to be robust as FERC has
sought to incentivize investment in the grid although we note recent indications that the
commission intends to become more granular in its methodology for determining which
projects are eligible for what level of incentives.
Authorized utility returns hold steady but could face pressure from low interest rates
Authorized utility returns held steady in 2010 despite below normal Treasury and utility
investment grade bond yields, with commissions granting average return on equity of
10.34% YTD. While ROEs have come down close to 200 basis points since the early 1990s,
they have stabilized around 10.5% since 2005. The spread between authorized ROEs and
treasury yields has remained wide for a protracted period without putting significant
downward pressure on returns. However, with the spread versus the 10-year treasury
closing in on 800 basis points in Q3-10 the risk of sub 10% ROEs becoming the norm was
becoming very real looking into 2011. This risk has clearly receded somewhat with the
recent jump in bond yields in the past two months as shown in Figure 16.
Figure 15: Electric Utility Rate Cases and Allowed ROEs

13%
60
Figure 16: Electric Utility ROEs vs. Bond Yields (bps)

800
800
600
600
400
400
200
200
50
12%
40
11%
30
20
10%
10
9%
0
Q1 99
Q1 01
Q1 03
ROE Spread vs. 10 Yr.

Cases Decided (RHS)
Source: SNL Financial
Page 12
Q1 05
Q1 07
Q1 09
ROE Spread vs. IG Utility Bonds
Average ROE (%)

Source: Deutsche Bank, FactSet. Note: Q4 data point reflects 10-year treasury and investment grade utility
yields as of 12/17 rather than QTD average
21 December 2010
Valuation snapshot
Relative P/E and yield values both reverting to normal
At the high level utility relative valuations have pulled back from being around 100% of the
S&P 500 multiple in late summer to about 93% (i.e. 7% discount) today. This is still above
the long-run average of 15% although the sector has enjoyed significant yield support this
year from the unusually low Treasury yields (Figure 19). With the context of a recovering
economy and growth opportunities we continue to believe utilities should be trading closer to
their long-run relative average multiple and base our current regulated valuations on an core
average of 12x 2012E. Yield relative valuations (Figure 20) still suggest significant headroom
versus history even if we assume an eventual reversion to normalized tax rates. That said,
our position all year is that this yield gap anomaly would be more likely to close via higher
market interest rates (they being the more anomalous) than via lower utility dividend yields.
This has certainly been the case in recent trading and we expect this to continue hence our
preference for more growth-oriented names within the regulated utility group.
Figure 17: S&P Utils and S&P 500 12M Forward P/E
Figure 18: S&P Utils 12M Fwd P/E Relative to S&P 500
25x
25x
23x
23x
21x
21x
19x
19x
17x
17x
15x
15x
13x
13x
11x
11x
9x
9x
7x
7x
'86
'88
'90
'92
'94
'96
'98
'00
'02
'04
'06
'08
S&P Utils (12.4x)
Utils Average (12.7x)
S&P 500 (13.2x)
500 Average (15.1x)
'10
120%
120%
100%
100%
80%
80%
60%
60%
40%
40%
'86
'88
'90
'92
'94
'96
'98
'00
P/E Relative (93%)
'02
'04
'06
'08
'10
P/E Rel. Avg. (85%)
Source: FactSet, CapitalIQ and DB Research
Figure 19: S&P Utilities Dividend Yield vs. IG Utility
Figure 20: Tax-Adjusted S&P Utilities Dividend Yield vs.
Bonds and 10 Year Treasury
10 Year Treasury
(300)
(300)
8%
8%
6%
6%
4%
4%
2%
2%
S&P Utils: 3.9% @ 15% Tax

10 Year: 2.1% @ 35% Tax
(200)
(200)
(100)
(100)
0%
0%
'99
'00
'01
'02
'03
'04
S&P Utils (4.48%)

'05
'06
'07
IG Utils (4.51%)
'08
'09
'10
10-Year (3.33%)
100
100
200
200
300
300
'99
'00
'01
'02
'03
'04
'05
S&P Util Yld vs. 10-Yr Net (156bp)

20%, 39.6% Div. Tax
'06
'07
'08
'09
'10
'11
Avg. Utils vs. 10-Yr. Net (12bp)
Page 13
21 December 2010
Regulated and diversified valuations cross over on our 2012E

Figure 21 highlights the valuation gap and trajectory between our Mostly Regulated and Less
Regulated utility sub-sectors. The near-term divergence reflects the fact that the Less
Regulated group (i.e. those with generation/commodity exposure) benefit from hedges that
are generally above market and the multiple expands as these hedges roll off into 2011, 2012
and in many cases 2013 as well. On the other hand the Mostly Regulated group sees steady
earnings growth over this period and therefore a declining forward multiple each year. The
dotted lines show the current S&P 500 market multiple for the next 12 months (black line)
and a 15% discount to the market (grey line) which has been the utilities overall average
since based on data back to the mid-80s (Figure 18). While Figure 21 primarily captures the
cyclicality of Less Regulated utility earnings it is a useful reminder that the Less Regulated
generation stocks have held up better than their declining earnings trajectories would
suggest. While we would certainly expect the generation group to perform better given a
definitive turn in gas and/or power fundamentals, it is worth remembering that the stocks
may already be discounting a fairly significant improvement in key valuation denominators.
Both regulated and less

regulated sub-sectors are
Figure 21: Mostly Regulated vs. Less Regulated P/E Multiples
16x
16x
average 15% P/E discount
15x
15x
versus S&P 500
14x
14x
13x
13x
regulated earnings grow
12x
12x
while less regulated drop
11x
11x
10x
10x
9x
9x
8x
8x
trading above historical
Cross-over in 2012 as
with hedge roll-offs into

weak gas/power curves
2010E
2011E
2012E
Mostly Regulated
Less Regulated
S&P 500 12M Fwd
S&P 500 15% Disc.
Source: Deutsche Bank
Page 14
21 December 2010
Figure 22: Mostly Regulated Utilities P/E Ranking (2012E)

16x
15x
14x
13x
12x
11x
10x
9x
8x
Consensus P/E 2012E
Average (12.7x)
DB P/E 2012E
Source: Deutsche Bank and Capital IQ.

Note: Valuations based on DB estimates for DB coverage and consensus for others. See Figure 1 for DB coverage list. Buy-rated stocks in bold shading.
Figure 23: Mostly Regulated Utilities Dividend Yield Ranking (2011E)

6%
5%
4%
3%
2%
Regulated Div. Yield 2011
Average (4.6%)
Source: Deutsche Bank and Capital IQ.

Page 15
21 December 2010
Figure 24: Less Regulated Utilities EV/EBITDA Ranking (2012E)

10x
9x
8x
7x
6x
5x
4x
PPL
EXC
NEE
AYE
ETR
PEG
SRE
Less Regulated EV/EBITDA 2012E
TE
FE
EIX
AEE
CEG
Average (7.5x)
Source: Source: Deutsche Bank and Capital IQ.

Figure 25: Less Regulated Utilities Dividend Yield Ranking (2011E)

7%
6%
5%
4%
3%
2%
FE
AEE
PPL
EXC
TE
ETR
Less Regulated Div. Yield 2011
PEG
NEE
SRE
CEG
EIX
AYE
Average (4.4%)
Source: Source: Deutsche Bank and Capital IQ.

Page 16
DEUTSCHE BANK SECURITIES

UTILITIES & POWER
MOSTLY REGULATED
Basic
Ticker
Price
12/20/10
DB
Rating
DB Price Target
Target
Return
TSR '10
52 Week
Low
High
Shs
(MM)
M. Cap.
($MM)
EPS
DPS
P/E
Div. Yield
Payout Ratio
2011
2012
2010
2011
2010
2011
2010

AEP
$35.96
Buy
$40.00
11.2%
16.0%
$28.17
$37.94
477
17,145
2.97
3.05
3.10
3.25
12.1x
11.8x
CMS ENERGY
CMS
$19.14
Buy
$20.00
4.5%
7.9%
$14.09
$19.09
229
4,381
1.26
1.37
1.45
1.55
15.2x
14.0x
CENTERPOINT ENERGY
CNP
$15.91
Buy
$17.00
6.9%
11.8%
$12.75
$17.00
390
6,202
1.06
1.07
1.20
1.25
15.0x
14.8x
DTE ENERGY
DTE
$45.61
Hold
$47.00
3.0%
8.0%
$41.25
$49.06
164
7,502
3.30
3.60
3.50
3.65
13.8x
12.7x
DUKE ENERGY
DUK
$17.73
Hold
$17.00
-4.1%
1.4%
$15.47
$18.60
1,297
22,991
1.22
1.45
1.25
1.30
14.5x
12.3x
CON EDISON
ED
$49.46
Hold
$48.00
-3.0%
1.9%
$41.52
$51.03
281
13,916
3.07
3.40
3.50
3.60
16.1x
14.6x
ITC HOLDINGS
ITC
$61.79
Buy
$65.00
5.2%
7.4%
$47.45
$63.89
50
3,087
2.58
2.83
3.25
4.15
23.9x
21.9x
NORTHEAST UTILITIES
NU
$31.94
Hold
$31.00
-2.9%
0.3%
$24.68
$32.21
175
5,599
1.91
2.00
2.25
2.40
16.7x
16.0x
NSTAR
NST
$42.36
Hold
$40.50
-4.4%
-0.6%
$32.53
$42.94
107
4,524
2.37
2.55
2.60
2.75
17.9x
16.6x
PG&E CORP
PCG
$48.42
Buy
$50.00
3.3%
7.0%
$34.95
$48.63
371
17,949
3.21
3.40
3.70
3.95
15.1x
14.2x
PROGRESS ENERGY
PGN
$43.63
Hold
$44.00
0.8%
6.5%
$37.04
$45.61
262
11,430
3.03
3.05
3.20
3.35
14.4x
14.3x
SOUTHERN COMPANY
SO
$38.28
Hold
$37.00
-3.3%
1.4%
$30.85
$38.62
796
30,473
2.32
2.38
2.50
2.65
16.5x
16.1x
XCEL ENERGY
XEL
$23.76
Hold
$24.00
1.0%
5.3%
$19.81
$24.36
456
10,828
1.50
1.65
1.75
1.85
15.8x
14.4x
ALLIANT ENERGY
LNT
$36.63
----$29.20
$37.65
111
4,061
1.96
2.75
2.87
2.99
18.7x
13.3x
DPL INC.
DPL
$25.88
----$23.73
$28.50
119
3,078
2.01
2.43
2.45
2.56
12.9x
10.7x
GREAT PLAINS ENERGY
GXP
$19.45
----$16.63
$20.29
136
2,638
1.14
1.57
1.57
1.72
17.1x
12.4x
IDACORP
IDA
$37.60
----$29.98
$37.76
49
1,847
2.64
2.79
2.98
3.02
14.2x
13.5x
NISOURCE
NI
$17.30
----$14.13
$17.96
278
4,815
1.07
1.22
1.32
1.42
16.2x
14.1x
NV ENERGY INC
NVE
$14.29
----$10.94
$14.30
235
3,361
0.78
0.97
0.98
1.24
18.3x
14.8x
NORTHWESTERN CORP.
NWE
$29.21
----$23.77
$30.60
36
1,058
2.02
2.02
2.24
2.36
14.5x
14.5x
PS NEW MEXICO
PNM
$12.95
----$10.81
$13.96
91
1,184
0.94
0.87
0.79
1.17
13.8x
14.9x
PINNACLE WEST CAPITAL
PNW
$41.36
----$32.31
$42.68
109
4,496
0.91
3.02
3.07
3.37
45.5x
13.7x
PEPCO HOLDINGS
POM
$18.33
----$15.13
$19.80
225
4,115
0.91
1.06
1.21
1.33
20.1x
17.3x
PORTLAND GENERAL
POR
$22.53
----$17.46
$22.36
75
1,696
1.31
1.72
1.84
1.79
17.2x
13.1x
SCANA
SCG
$40.72
----$34.23
$41.97
127
5,181
2.85
2.99
3.20
3.41
14.3x
13.6x
INTEGRYS
TEG
$48.92
----$40.53
$54.45
78
3,795
2.85
3.16
3.35
3.55
17.2x
15.5x
WISCONSIN ENERGY
WEC
$59.37
----$46.84
$61.02
117
6,940
3.20
3.80
4.16
4.56
18.6x
15.6x
WESTAR ENERGY
WR
$25.40
----$20.56
$25.90
118
3,006
1.28
1.86
1.75
2.00
19.8x
13.7x
AVERAGE - SIMPLE
Total
207,297
17.3x
14.4x
GROUP HIGH
45.5x
21.9x
DB Rated
156,027
GROUP LOW
12.1x
10.7x
LESS REGULATED
DOMINION RESOURCES
D
$42.93
Hold
$42.00
-2.2%
2.1%
$36.12
$45.12
595
25,554
3.27
3.40
3.05
3.15
13.1x
12.6x
EIX
$38.86
Buy
$41.00
5.5%
8.7%
$30.37
$38.99
326
12,661
3.25
3.50
2.50
2.25
12.0x
11.1x
ENTERGY CORP.
ETR
$70.79
Hold
$79.00
11.6%
16.3%
$68.65
$84.44
196
13,860
6.67
7.15
6.50
6.10
10.6x
9.9x
EXELON
EXC
$41.35
Hold
$42.00
1.6%
6.7%
$37.24
$50.06
659
27,265
4.12
4.05
4.05
2.80
10.0x
10.2x
FIRSTENERGY
FE
$36.50
Hold
$35.00
-4.1%
1.9%
$33.57
$47.77
305
11,126
3.75
3.65
3.00
2.95
9.7x
10.0x
NEXTERA ENERGY
NEE
$51.53
Hold
$56.00
8.7%
12.6%
$45.29
$56.26
411
21,203
4.06
4.40
4.40
4.60
12.7x
11.7x
PPL CORP.
PPL
$26.16
Hold
$27.00
3.2%
8.5%
$23.75
$33.05
377
9,851
1.95
2.87
2.70
2.50
13.4x
9.1x
PSEG
PEG
$31.48
Buy
$36.00
14.4%
18.7%
$29.01
$34.93
506
15,927
3.12
3.15
2.70
2.55
10.1x
10.0x
TECO ENERGY
TE
$17.65
Sell
$15.50
-12.2%
-7.5%
$14.46
$18.11
211
3,716
1.08
1.30
1.40
1.50
16.3x
13.6x
AMEREN
AEE
$28.24
----$23.09
$29.89
240
6,773
2.79
2.76
2.38
2.10
10.1x
10.2x
ALLEGHENY ENERGY
AYE
$23.82
----$18.97
$25.44
170
4,048
2.33
2.25
2.06
1.19
10.2x
10.6x
CONSTELLATION ENERGY
CEG
$28.81
----$27.64
$38.73
200
5,756
3.36
3.20
3.44
2.44
8.6x
9.0x
SEMPRA ENERGY
SRE
$52.41
----$43.91
$57.18
240
12,581
4.52
3.57
4.15
4.28
11.6x
14.7x
AVERAGE - SIMPLE
Total
170,323
11.4x
11.0x
GROUP HIGH
16.3x
14.7x
DB Rated
141,164
GROUP LOW
8.6x
9.0x
MERCHANT & IPPs
CALPINE
CPN
$13.43
Buy
$15.00
11.7%
11.7%
$10.71
$14.27
487
6,537
0.77
0.29
0.33
0.29
17.4x
46.3x
GENON ENERGY
GEN
$3.66
Hold
$4.00
9.3%
9.3%
$3.49
$3.79
774
2,833
4.10
1.32
(0.29)
(0.39)
0.9x
2.8x
NRG ENERGY
NRG
$18.70
Hold
$19.00
1.6%
1.6%
$18.22
$25.80
254
4,758
1.49
2.86
0.70
0.46
12.6x
6.5x
AES CORPORATION
AES
$11.76
----$8.82
$14.24
788
9,268
1.08
0.93
1.13
1.25
10.9x
12.7x
DYNEGY INC.
DYN
$5.67
----$2.76
$10.15
121
686
(1.25)
(1.09)
(1.38)
(2.24)
NM
NM
ORMAT TECHNOLOGIES
ORA
$28.75
----$25.80
$38.80
45
1,306
1.51
0.69
0.98
1.33
19.0x
41.6x
AVERAGE - SIMPLE
Total
25,388
12.2x
22.0x
GROUP HIGH
19.0x
46.3x
DB Rated
14,128
GROUP LOW
0.9x
2.8x
Source: Deutsche Bank and Capital IQ. Note: Numbers for DB rated stocks are DB forecasts; numbers for other names are consensus estimates derived from Capital IQ. Forward year data are estimated.
11.6x
13.2x
13.3x
13.0x
14.2x
14.1x
19.0x
14.2x
16.3x
13.1x
13.6x
15.3x
13.6x
12.8x
10.6x
12.4x
12.6x
13.1x
14.6x
13.0x
16.4x
13.5x
15.2x
12.3x
12.7x
14.6x
14.3x
14.5x
13.8x
19.0x
10.6x
11.1x
12.3x
12.7x
12.5x
13.6x
13.8x
14.9x
13.3x
15.4x
12.3x
13.0x
14.4x
12.9x
12.2x
10.1x
11.3x
12.4x
12.2x
11.6x
12.4x
11.1x
12.3x
13.8x
12.6x
11.9x
13.8x
13.0x
12.7x
12.7x
15.4x
10.1x
1.71
0.66
0.78
2.24
0.98
2.38
1.34
1.03
1.60
1.82
2.48
1.82
1.01
1.59
1.20
0.83
1.20
0.92
0.44
1.36
0.50
2.10
1.08
1.04
1.90
2.72
1.61
1.23
1.86
0.84
0.80
2.24
1.02
2.40
1.40
1.08
1.70
1.96
2.50
1.89
1.04
1.68
1.25
0.84
1.24
0.92
0.48
1.39
0.51
2.12
1.09
1.08
1.93
2.74
1.96
1.29
4.8%
3.4%
4.9%
4.9%
5.5%
4.8%
2.2%
3.2%
3.8%
3.8%
5.7%
4.8%
4.3%
4.3%
4.6%
4.3%
3.2%
5.3%
3.1%
4.7%
3.9%
5.1%
5.9%
4.6%
4.7%
5.6%
2.7%
4.9%
4.4%
5.9%
2.2%
5.2%
4.4%
5.0%
4.9%
5.8%
4.9%
2.3%
3.4%
4.0%
4.0%
5.7%
4.9%
4.4%
4.6%
4.8%
4.3%
3.3%
5.3%
3.4%
4.8%
3.9%
5.1%
5.9%
4.8%
4.7%
5.6%
3.3%
5.1%
4.6%
5.9%
2.3%
56%
48%
73%
62%
68%
70%
48%
51%
63%
53%
81%
76%
61%
58%
49%
53%
43%
75%
46%
67%
58%
70%
102%
61%
64%
86%
42%
66%
63%
102%
42%
60%
58%
67%
64%
82%
69%
43%
48%
65%
53%
78%
76%
60%
59%
51%
54%
42%
70%
49%
62%
65%
69%
90%
59%
60%
82%
47%
74%
63%
90%
42%
14.1x
15.5x
10.9x
10.2x
12.2x
11.7x
9.7x
11.6x
12.6x
11.9x
11.6x
8.4x
12.6x
11.8x
15.5x
8.4x
13.6x
17.3x
11.6x
14.8x
12.4x
11.2x
10.5x
12.3x
11.8x
13.4x
20.0x
11.8x
12.3x
13.3x
20.0x
10.5x
1.83
1.26
3.32
2.10
2.20
2.00
1.40
1.37
0.82
1.54
0.61
0.95
1.60
1.97
1.28
3.32
2.10
2.20
2.08
1.42
1.40
0.85
1.54
0.69
0.98
1.84
4.3%
3.2%
4.7%
5.1%
6.0%
3.9%
5.3%
4.4%
4.6%
5.5%
2.6%
3.3%
3.1%
4.3%
6.0%
2.6%
4.6%
3.3%
4.7%
5.1%
6.0%
4.0%
5.4%
4.4%
4.8%
5.5%
2.9%
3.4%
3.5%
4.4%
6.0%
2.9%
54%
36%
46%
52%
60%
45%
49%
43%
63%
56%
27%
30%
45%
47%
63%
27%
65%
51%
51%
52%
73%
47%
52%
52%
61%
65%
33%
28%
44%
52%
73%
28%
40.7x
NM
26.7x
10.4x
NM
29.4x
26.8x
40.7x
10.4x
46.3x
NM
40.7x
9.4x
NM
21.6x
29.5x
46.3x
9.4x
0.27
0.23
0.9%
0.9%
0.9%
0.9%
0.8%
0.8%
0.8%
0.8%
39%
39%
39%
39%
23%
23%
23%
23%
2010
2011
2012
2009
2011
2010
2009
21 December 2010
Figure 26: DB Utilities & Power Comparative Valuation Sheet (1)
Page 17
Consensus EPS
Consensus P/E
EBITDA $MM
EV/EBITDA
FCF Yield
Net Debt: Capital
EBITDA/Interest
Net Debt: EBITDA
2010
2011
2012
2010
2011
2012
2010
2011
2012
2010
2011
2012
2010
2011
2012
2010
2011
2012
2010
2011
2012
2010
2011
2012

CMS ENERGY
CENTERPOINT ENERGY
DTE ENERGY
DUKE ENERGY
CON EDISON
ITC HOLDINGS
NORTHEAST UTILITIES
NSTAR
PG&E CORP
PROGRESS ENERGY
SOUTHERN COMPANY
XCEL ENERGY
ALLIANT ENERGY
DPL INC.
GREAT PLAINS ENERGY
IDACORP
NISOURCE
NV ENERGY INC
NORTHWESTERN CORP.
PS NEW MEXICO
PINNACLE WEST CAPITAL
PEPCO HOLDINGS
PORTLAND GENERAL
SCANA
INTEGRYS
WISCONSIN ENERGY
WESTAR ENERGY
3.04
1.36
1.06
3.60
1.43
3.43
2.80
2.11
2.56
3.43
3.03
2.39
1.64
2.75
2.43
1.57
2.79
1.22
0.97
2.02
0.87
3.02
1.06
1.72
2.99
3.16
3.80
1.86
3.14
1.46
1.20
3.67
1.34
3.51
3.32
2.24
2.65
3.71
3.14
2.52
1.73
2.87
2.45
1.57
2.98
1.32
0.98
2.24
0.79
3.07
1.21
1.84
3.20
3.35
4.16
1.75
3.28
1.55
1.27
3.81
1.38
3.65
4.13
2.39
2.76
3.93
3.25
2.69
1.83
2.99
2.56
1.72
3.02
1.42
1.24
2.36
1.17
3.37
1.33
1.79
3.41
3.55
4.56
2.00
11.8x
14.1x
14.9x
12.7x
12.4x
14.4x
22.1x
15.1x
16.6x
14.1x
14.4x
16.0x
14.5x
13.3x
10.7x
12.4x
13.5x
14.1x
14.8x
14.5x
14.9x
13.7x
17.3x
13.1x
13.6x
15.5x
15.6x
13.7x
11.4x
13.1x
13.3x
12.4x
13.2x
14.1x
18.6x
14.3x
16.0x
13.0x
13.9x
15.2x
13.7x
12.8x
10.6x
12.4x
12.6x
13.1x
14.6x
13.0x
16.4x
13.5x
15.2x
12.3x
12.7x
14.6x
14.3x
14.5x
11.0x
12.3x
12.6x
12.0x
12.9x
13.6x
14.9x
13.3x
15.3x
12.3x
13.4x
14.2x
13.0x
12.2x
10.1x
11.3x
12.4x
12.2x
11.6x
12.4x
11.1x
12.3x
13.8x
12.6x
11.9x
13.8x
13.0x
12.7x
4,720
1,510
2,054
2,479
5,280
2,903
444
1,350
866
4,664
3,047
5,320
2,476
882
637
837
317
1,521
998
254
389
1,142
985
494
1,107
716
1,155
753
4,728
1,577
2,199
2,523
5,306
3,102
503
1,345
835
5,043
3,001
5,841
2,676
936
629
877
382
1,563
1,032
278
404
1,192
1,096
545
1,179
765
1,290
775
4,960
1,645
2,280
2,623
5,629
3,290
606
1,462
844
5,374
3,097
6,350
2,797
959
629
961
429
1,683
1,155
284
469
1,288
1,207
550
1,277
756
1,387
892
7.4x
7.7x
7.6x
6.2x
7.8x
8.7x
12.4x
8.2x
8.2x
6.7x
7.8x
10.0x
8.2x
7.8x
6.1x
7.3x
9.9x
7.6x
8.3x
8.2x
7.8x
6.9x
8.7x
7.1x
8.5x
7.9x
9.9x
7.9x
7.6x
7.5x
7.2x
6.0x
8.2x
8.4x
11.6x
8.8x
8.5x
6.3x
8.2x
8.9x
7.8x
7.3x
6.2x
7.0x
8.3x
7.4x
8.0x
7.4x
7.5x
6.6x
7.8x
6.5x
8.0x
7.4x
8.9x
7.7x
7.4x
7.4x
6.9x
5.7x
8.1x
8.1x
10.4x
8.4x
8.3x
6.0x
8.1x
8.5x
7.6x
7.2x
6.2x
6.3x
7.4x
6.8x
7.2x
7.3x
6.4x
6.1x
7.1x
6.4x
7.4x
7.5x
8.2x
6.7x
6.2%
-1.8%
-4.3%
7.3%
-3.8%
-5.0%
0.1%
-2.6%
7.7%
-2.7%
0.3%
-0.7%
-1.7%
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
2.7%
0.5%
0.3%
4.0%
-6.0%
-2.9%
-7.8%
-10.8%
6.5%
-1.9%
-3.1%
-0.4%
-1.5%
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
1.9%
-4.9%
4.5%
4.9%
-2.4%
-1.9%
-13.5%
-7.7%
7.5%
0.3%
-0.7%
-4.1%
-0.2%
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
57%
72%
75%
54%
45%
51%
69%
59%
57%
55%
55%
57%
54%
49%
40%
54%
46%
58%
59%
56%
51%
48%
52%
53%
54%
39%
55%
55%
56%
71%
74%
53%
48%
51%
69%
61%
56%
53%
55%
54%
54%
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
56%
71%
72%
50%
50%
50%
71%
60%
54%
52%
55%
54%
54%
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
3.8x
4.8x
4.6x
3.1x
3.4x
3.9x
5.4x
4.0x
3.0x
2.8x
4.1x
4.2x
3.9x
3.2x
1.3x
4.1x
4.1x
4.4x
4.9x
4.0x
4.7x
3.0x
4.5x
3.7x
3.8x
2.6x
3.9x
3.9x
3.9x
4.7x
4.4x
3.0x
3.9x
3.9x
5.4x
4.6x
3.1x
2.8x
4.4x
3.7x
3.8x
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
4.0x
4.7x
4.2x
2.8x
4.0x
3.9x
5.3x
4.6x
2.9x
2.7x
4.4x
3.7x
3.7x
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
5.0x
3.9x
3.4x
4.7x
6.2x
4.8x
3.5x
4.8x
7.4x
6.4x
3.9x
6.0x
4.7x
4.8x
8.2x
4.3x
4.3x
3.6x
2.8x
3.7x
4.1x
4.8x
2.9x
4.9x
5.3x
4.4x
7.5x
5.0x
4.8x
3.8x
3.7x
4.8x
5.5x
4.8x
3.6x
4.3x
7.9x
6.7x
3.7x
6.4x
4.9x
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
4.7x
3.8x
3.9x
5.0x
5.2x
4.7x
4.2x
4.2x
7.4x
6.8x
3.6x
6.3x
4.9x
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
14.4x
22.1x
10.7x
13.7x
18.6x
10.6x
12.7x
15.3x
10.1x
8.1x
12.4x
6.1x
7.7x
11.6x
6.0x
7.3x
10.4x
5.7x
-0.1%
7.7%
-5.0%
-1.6%
6.5%
-10.8%
-1.3%
7.5%
-13.5%
55%
75%
39%
58%
74%
48%
58%
72%
50%
3.8x
5.4x
1.3x
4.0x
5.4x
2.8x
3.9x
5.3x
2.7x
4.8x
8.2x
2.8x
5.0x
7.9x
3.6x
5.0x
7.4x
3.6x
12.8x
11.1x
10.2x
10.4x
10.0x
11.8x
9.2x
10.0x
13.4x
10.2x
10.6x
9.0x
14.7x
13.5x
12.8x
10.7x
10.1x
11.4x
11.5x
10.0x
10.9x
12.5x
11.9x
11.6x
8.4x
12.6x
13.3x
14.0x
11.3x
13.2x
12.2x
10.9x
10.8x
11.6x
11.6x
13.4x
20.0x
11.8x
12.3x
8.2x
5.8x
6.9x
5.7x
6.6x
8.5x
7.5x
6.2x
7.0x
6.7x
6.5x
5.3x
9.0x
9.1x
6.5x
7.4x
6.7x
6.8x
8.8x
8.9x
6.9x
6.9x
6.4x
7.1x
4.8x
7.5x
9.1x
6.6x
7.4x
8.6x
6.6x
8.5x
9.7x
7.2x
6.6x
6.5x
7.8x
5.5x
7.0x
60%
58%
52%
48%
59%
60%
58%
50%
53%
NA
NA
NA
NA
3.2x
2.9x
3.0x
1.6x
3.7x
4.1x
4.1x
2.3x
3.1x
3.4x
3.2x
1.9x
3.6x
3.8x
3.4x
3.2x
2.1x
3.8x
4.6x
5.0x
2.7x
3.0x
NA
NA
NA
NA
3.9x
3.6x
3.3x
3.0x
3.6x
4.7x
5.7x
2.9x
2.8x
NA
NA
NA
NA
6.1x
6.4x
6.5x
9.5x
5.7x
5.5x
6.0x
8.0x
4.1x
4.0x
3.7x
5.3x
6.5x
5.8x
5.6x
5.8x
8.1x
4.8x
4.9x
4.6x
5.7x
4.8x
NA
NA
NA
NA
5.7x
5.3x
5.1x
5.7x
4.5x
4.9x
4.3x
5.4x
5.6x
NA
NA
NA
NA
12.8x
20.0x
10.8x
6.9x
9.0x
5.3x
7.2x
9.1x
4.8x
7.5x
9.7x
5.5x
-2.4%
-7.3%
7.8%
-1.9%
10.2%
-9.8%
-4.9%
0.2%
10.1%
NA
NA
NA
NA
0.2%
10.2%
-9.8%
60%
56%
53%
45%
60%
60%
57%
49%
56%
NA
NA
NA
NA
11.4x
13.5x
8.4x
-1.3%
-10.4%
7.0%
-0.5%
8.5%
-8.7%
-5.6%
0.6%
8.9%
NA
NA
NA
NA
-0.2%
8.9%
-10.4%
59%
54%
54%
44%
61%
58%
57%
49%
58%
47%
54%
30%
49%
11.0x
14.7x
9.0x
-2.6%
-7.5%
16.0%
6.3%
8.5%
-8.9%
6.1%
-1.4%
6.7%
NA
NA
NA
NA
2.6%
16.0%
-8.9%
52%
61%
30%
55%
60%
45%
55%
60%
48%
3.1x
4.1x
1.6x
3.5x
5.0x
2.1x
3.7x
5.7x
2.8x
6.0x
9.5x
3.7x
5.5x
8.1x
4.6x
5.2x
5.7x
4.3x
92.8x
NM
7.2x
12.7x
NM
41.6x
58.3x
NM
15.4x
10.4x
NM
29.4x
45.0x
NM
19.3x
9.4x
NM
21.6x
9.4x
5.9x
4.5x
6.7x
9.5x
15.2x
9.2x
8.6x
6.2x
5.3x
9.9x
10.9x
9.7x
10.5x
6.8x
5.8x
9.8x
8.9x
4.6%
-0.9%
19.0%
NA
NA
NA
0.7%
-13.9%
-9.1%
NA
NA
NA
2.3%
-13.1%
-15.7%
NA
NA
NA
65%
14%
43%
74%
59%
40%
65%
25%
44%
NA
NA
NA
NA
NA
NA
65%
28%
46%
NA
NA
NA
NA
NA
NA
5.4x
1.3x
2.6x
4.6x
8.2x
4.9x
4.5x
8.2x
1.3x
5.3x
4.2x
3.6x
NA
NA
NA
NA
NA
NA
5.5x
5.4x
4.2x
NA
NA
NA
NA
NA
NA
2.0x
3.0x
3.9x
3.3x
1.1x
7.6x
3.5x
7.6x
1.1x
1.9x
1.8x
2.7x
NA
NA
NA
NA
NA
NA
1.9x
1.6x
2.6x
NA
NA
NA
NA
NA
NA
AVERAGE - SIMPLE
GROUP HIGH
GROUP LOW
LESS REGULATED
DOMINION RESOURCES
ENTERGY CORP.
EXELON
FIRSTENERGY
NEXTERA ENERGY
PPL CORP.
PSEG
TECO ENERGY
AMEREN
ALLEGHENY ENERGY
CONSTELLATION ENERGY
SEMPRA ENERGY
AVERAGE - SIMPLE
GROUP HIGH
GROUP LOW
MERCHANT & IPPs
CALPINE
GENON ENERGY
NRG ENERGY
AES CORPORATION
DYNEGY INC.
ORMAT TECHNOLOGIES
3.34
3.51
6.95
3.99
3.64
4.36
2.84
3.15
1.32
2.76
2.25
3.20
3.57
0.14
(0.34)
2.59
0.93
(1.09)
0.69
3.17
3.03
6.60
4.10
3.21
4.46
2.61
2.88
1.41
2.38
2.06
3.44
4.15
0.23
(0.21)
1.22
1.13
(1.38)
0.98
3.23
2.78
6.24
3.13
2.99
4.71
2.41
2.72
1.53
2.10
1.19
2.44
4.28
0.30
(0.15)
0.97
1.25
(2.24)
1.33
5,085
4,275
3,509
6,777
3,812
4,892
2,839
4,066
953
2,051
1,259
1,684
2,324
1,640
605
2,515
4,226
511
127
4,735
4,135
3,333
6,009
3,649
4,994
2,558
3,738
947
2,128
1,152
1,851
2,784
1,665
635
1,860
5,333
490
177
4,916
4,327
3,338
4,897
3,704
5,483
2,474
3,684
969
2,105
1,038
1,617
2,969
1,565
555
1,790
4,909
497
218
AVERAGE - SIMPLE
38.6x
28.4x
23.8x
8.5x
8.4x
8.6x
NA
NA
NA
49%
GROUP HIGH
92.8x
58.3x
45.0x
15.2x
10.9x
10.5x
NA
NA
NA
74%
GROUP LOW
7.2x
10.4x
9.4x
4.5x
5.3x
5.8x
NA
NA
NA
14%
Source: Deutsche Bank and Capital IQ. Note: Numbers for DB rated stocks are DB forecasts; numbers for other names are consensus estimates derived from Capital IQ. Forward year data are estimated.
DEUTSCHE BANK SECURITIES

UTILITIES & POWER
MOSTLY REGULATED
21 December 2010
Page 18
Figure 27: DB Utilities & Power Comparative Valuation Sheet (2)
21 December 2010
DB Utilities & Power: Buy

Rated Stocks
AEP: Undervalued with longer-term investment opportunities
In our view, AEP is undervalued versus its regulated peers based on its forward earnings
outlook and above-average dividend yield. This in part reflects uncertainty with ongoing and
upcoming proceedings in Ohio including the Significantly Excessive Earnings Test (SEET) and
a coming ESP filing. While we expect near-term growth to be relatively limited, we believe
these near term pressures will be navigated without materially changing ongoing earnings
power and see upside longer-term from AEPs transmission expansion opportunities. AEP is
pursuing several new transmission lines through joint ventures with fellow utilities and its
relatively new Transco subsidiary. Beyond transmission opportunities, we see potential
upside in the event of a strong Midwest industrial recovery through AEPs off-system sales.
AEP also benefits from jurisdictional diversity, so its growth does not rely on a single states
policies or regulatory environment.
CMS: Constructive regulation with steady growth

We expect CMS to grow earnings 5%-7% per year for the next several years without a need
to issue new equity. The growth is driven by the utilitys 5-year $6.4B capex program, which
includes ~$650M for new renewable generation and $1.5B for environmental compliance.
We also expect the utilitys earned ROE to improve as CMS files annual rate cases using a
forward test year (per Michigans 2008 energy legislation) and has decoupling at both its
electric and gas utilities. Several provisions of the 2008 legislation have lowered CMS risks
(decoupling, file-and-implement rates, forward test year) which should minimize the impact of
the relatively weaker Michigan economy. We note that CMS expects a continued rebound in
industrial sales in 2011, with total weather-adjusted electric sales expected to increase by
2%. Earlier this year, CMS slightly lowered its near-term growth outlook after postponing
construction of a new coal plant. This allowed the company to instead boost the dividend
meaningfully (40%) to move the dividend yield in line with peers. We believe CMS
shareholder diversification will continue, with CMS working to expand its retail shareholder
base, the higher yield making CMS more attractive to yield-oriented long-only funds, and
concerns about the Michigan economy lessen as industrial sales continue to rebound.
CNP: Benefitting from shale gas development

We rate CNP a Buy based on its strong growth prospects and electric and gas business mix.
With a South Central US footprint for its electric and gas utility businesses, CNP has moved
more aggressively into gas gathering in various shale basins. We expect the Field Services
segment to drive near-term growth, as new relatively low risk fee-based contracts for
gathering systems in the Haynesville shale are completed. We see further growth
opportunities as CNP looks to expand into other shale basins, including Eagleford and
Marcellus, potentially through joint ventures or acquisitions. Major new growth projects at
Field Services could also spur CNP to create an MLP for its midstream assets, which could
unlock value. On the regulated side (electric T&D, gas utilities, and pipelines), we expect
slower but steady growth driven by some capital investment and sales growth. CNP also has
an attractive dividend that we expect to increase slowly as cash will be used to fund growth.
Page 19
21 December 2010
CPN: Preferred IPP pick in a low gas price world

CPN remains our preferred IPP pick given a lower gas price sensitivity in a shale gas world,
newer and cleaner plants in the face of new environmental rules, and the potential for
accretive M&A activity as the company continues to refine its portfolio of assets.
Management has developed a strong track record on the M&A front with the recent sale of
plants in Colorado and purchase of the Conectiv fleet, and we would not be surprised if CPN
sold some of its non-core plants or pursued other accretive acquisitions in 2011. CPNs
EBITDA growth over the medium term is driven by a diverse range of variables, including
low-risk organic development, rising RPM capacity prices, contango in the natural gas price
curve, and increasing market heat rates. Additionally, given a lower gas price sensitivity and
a significant amount of longer term contracts, CPN faces a smaller risk from hedge roll-offs
over the next several years than some of its merchant peers.
EIX: High quality utility with merchant option

Our Buy rating on EIX is largely premised on the value proposition provided by EIX's California
utility Southern California Edison (SCE). We expect the utility to grow at an above-average
rate, supported by state and federal initiatives (renewables, transmission), while earning a
higher rate of return than peers. The California Public Utilities Commission (CPUC) is one of
the more constructive state utility commissions, encouraging energy efficiency through
decoupling and incentive payments and being generally supportive of utility investment in the
state. We note that SCE has focused on investment in transmission and distribution over
generation, viewing it as lower risk (especially in the event of a stronger community choice
aggregation or direct access push). We also see value potential at the merchant generation
segmenteither through the option value on a recovery in power markets or potential tax
loss value in the event of a write-off. Management continues to operate the merchant
business to preserve cash and maintain optionality should power market conditions improve.
ITC: A lower risk growth stock

ITC remains well positioned as the only publicly-traded transmission pure play in the US with
the highest EPS growth outlook in our sector by a wide margin. We expect ITC to deliver
EPS CAGR of about 17% through 2015, which could be about four times as fast as the
average regulated utility through the same time period. This above average growth will be
driven capital spending of $3.9B and the ability to earn 20%+ return on equity. Favorable and
transparent FERC regulation allows ITC to earn a ~13% return on equity on 60% equity at its
subsidiaries while maintaining a 30% equity layer at the consolidated level. This arrangement
should allow ITC to fund its capital program without relying on external equity needs. In
addition, forward-looking, formulaic rates ensure that ITCs subsidiaries are able to earn their
authorized returns unlike many utilities who struggle because of regulatory lag or insufficient
rate relief. The most significant risk to this outlook is project execution. ITC has so far
delivered or over-delivered on growth promises, but executing its current five-year capital
plan will require more than doubling the amount of capital it has invested over the past five
years. While this will be no easy task, we believe ITC faces fewer risks than the average
growth stock and arguably fewer risks than the average regulated utility. We also note that
ITC has underperformed many regulated peers and the S&P 500 since mid September
creating an attractive entry point ITC is now trading at a 40% premium on 12 month
forward consensus earnings versus an average closer to 70% since consensus estimates
first became available in 2006. We view the upcoming calendar year rollover as a potential
catalyst for ITC as investors begin to look forward another year, which will highlight ITCs
superior growth profile versus peers.
Page 20
21 December 2010
PCG: State clean energy policies provide opportunities

We rate PCG a Buy based on its more attractive higher growth and lower yield profile versus
most regulated peers in the event of an economic recovery. A recovery, which would likely
be accompanied by rising interest rates, would also ease fears of a sizable ROE adjustment in
2013 when PCGs cost of capital is reexamined. With PCGs 2011 General Rate Case settled
and clean energy supporter Jerry Brown elected as Californias governor in November, we
expect strong near-term earnings growth at the utility. We also believe that Californias 33%by-2020 Renewable Portfolio Standard (RPS), which Governor-elect Brown supports, will
provide additional growth opportunities over the next decade through transmission, utilityowned renewable generation, and distribution system enhancements. We see little risk that
the San Bruno pipeline incident will require substantial non-recoverable (from ratepayers or
insurance) expenditures. In fact to date, San Bruno has driven a renewed focus on pipeline
safety and suggestions that additional investments made need to be made.
PEG: Balanced growth profile without the dividend risk

We rate PEG a Buy as the company offers a clear path for earnings upside post a 2012
trough and a safer dividend outlook than more levered peers in the meantime. We like PEGs
regulated growth story through transmission investment and new solar projects, both of
which earn attractive returns without much regulatory lag. Capital spending at the utility is
supported by a strong balance sheet and should not require any equity issuances over the
next several years. PEGs cleaner and more balanced portfolio of generation assets that span
across the dispatch curve results in lower environmental risk and more limited exposure to
market dark spreads. The location of PEGs plants within the constrained zones of PJM will
lead to robust and rising RPM capacity revenues over the medium term, and the potential for
rising energy margins in a relatively tighter market. We note that recent developments in NJ
where the legislature may pass a bill that would subsidize new in-state generating capacity
has created some risk to PEGs locational premium and the overall RPM construct. However,
we continue to view the location of PEGs assets in a more constrained region and in close
proximity to load centers to be a competitive advantage over the long run.
Page 21
21 December 2010
Appendix 1
Important Disclosures
Additional information available upon request
For disclosures pertaining to recommendations or estimates made on a security mentioned in this report, please see
the most recently published company report or visit our global disclosure look-up page on our website at
http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr.
Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject
issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any
compensation for providing a specific recommendation or view in this report. Jonathan Arnold
Equity rating key

Buy: Based on a current 12- month view of total shareholder return (TSR = percentage change in share price
from current price to projected target price plus projected dividend yield ) , we recommend that investors
buy the stock.
Sell: Based on a current 12-month view of total shareholder return, we recommend that investors sell the
stock
Hold: We take a neutral view on the stock 12-months
out and, based on this time horizon, do not recommend
either a Buy or Sell.
Notes:
1. Newly issued research recommendations and target
prices always supersede previously published research.
2. Ratings definitions prior to 27 January, 2007 were:
Buy: Expected total return (including dividends) of
10% or more over a 12-month period
Hold: Expected total return (including dividends)
between -10% and 10% over a 12-month period
Sell: Expected total return (including dividends) of 10% or worse over a 12-month period
Page 22
Equity rating dispersion and banking relationships

500
450
400
350
300
250
200
150
100
50
0
51 %
48 %
41 %
38 %
2%31 %
Buy
Hold
Companies Covered
Sell
Cos. w/ BankingRelationship
NorthAmericanUniverse
21 December 2010
Regulatory Disclosures
1. Important Additional Conflict Disclosures
Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the
"Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.
2. Short-Term Trade Ideas

Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent
or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at
http://gm.db.com.
3. Country-Specific Disclosures
Australia: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian
Corporations Act.
Brazil: The views expressed above accurately reflect personal views of the authors about the subject company(ies) and
its(their) securities, including in relation to Deutsche Bank. The compensation of the equity research analyst(s) is indirectly
affected by revenues deriving from the business and financial transactions of Deutsche Bank.
EU countries: Disclosures relating to our obligations under MiFiD can be found at http://globalmarkets.db.com/riskdisclosures.
Japan: Disclosures under the Financial Instruments and Exchange Law: Company name - Deutsche Securities Inc. Registration
number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117.
Member of associations: JSDA, The Financial Futures Association of Japan. Commissions and risks involved in stock
transactions - for stock transactions, we charge stock commissions and consumption tax by multiplying the transaction
amount by the commission rate agreed with each customer. Stock transactions can lead to losses as a result of share price
fluctuations and other factors. Transactions in foreign stocks can lead to additional losses stemming from foreign exchange
fluctuations. "Moody's", "Standard & Poor's", and "Fitch" mentioned in this report are not registered as rating agency in Japan
unless specifically indicated as Japan entities of such rating agencies.
New Zealand: This research is not intended for, and should not be given to, "members of the public" within the meaning of the
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Page 23

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Company

Global Markets Research

North America United States

Utilities and Power

Caroline Bone, CFA

Lacking meaningful catalysts, utilities risk lagging a third straight year

Forward P/E Valuation by Segment

S&P 500 12M Fwd

S&P 500 15% Disc.

2010 Performance by Segment

Less Reg u lat ed

Mer chan t & IPPs

DB Utilities & Power Research

Deutsche Bank Securities Inc.

Utilities and Power Utilities and Power

Preparing for another

AMERICAN ELECTRIC POWER

Source: Deutsche Bank, CapitalIQ

Deutsche Bank Securities Inc.

Utilities and Power Utilities and Power

Utilities closing out 2010 close to relative lows

Figure 2: S&P Utils & S&P 500 (2008-2010)

Figure 3: S&P Utils vs. S&P 500 Daily Perf. (2010)

S&P Utils - S&P 500 Daily Performance

Figure 4: Worst Performing S&P Sector in 2009

Figure 5: Heading for a Repeat in 2010?

Deutsche Bank Securities Inc.

Utilities and Power Utilities and Power

Strong outperformance from regulated names in 2010

Deutsche Bank Securities Inc.

Utilities and Power Utilities and Power

Figure 7: Utilities & Power 2010 Performance by Segment

Merchant & IPPs

Source: Bloomberg Finance LP.

Deutsche Bank Securities Inc.

Utilities and Power Utilities and Power

Looking into 2011 fundamentals remain challenging

Figure 8: S&P Utilities vs. 2Y Natural Gas Strip (2003-2010)

Source: Capital IQ and Bloomberg Finance LP.

Deutsche Bank Securities Inc.

Utilities and Power Utilities and Power

Source: Deutsche Bank

Figure 10: PJM-West 1 Year Forward Prices

ATC power price

On-peak heat rate (RHS)

We expect another challenging year ahead for utility stocks

Deutsche Bank Securities Inc.

Utilities and Power Utilities and Power

Stay with growth over yield in regulated group

Higher Dividend Yield

Lower Dividend Yield

Source: Capital IQ and Bloomberg Finance LP.

Deutsche Bank Securities Inc.

Utilities and Power Utilities and Power

Fundamental challenges keep us cautious on merchant generators

Figure 13: NYMEX Nat Gas Calendar Year Strips

Cal 2011 - $4.29

Cal 2012 - $4.92

Source: Deutsche Bank and Bloomberg Finance LP