1101 Exec Digest.Market in Brief

Six major deals were announced or completed in 2010 and the first few days of 2011. FirstEnergy and Allegheny merged. PPL acquired the old LGE Energy companies in Kentucky from E.On. Mirant and Reliant Resources merged and created GenOn Energy. Northeast Utilities and NStar merged. Carl Icahn acquired Dynegy, the successful spin-off of QEP Resources by Questar. AGL Resources acquired Nicor. And Duke Energy purchased Progress Energy.

There was other big news, as well: the death of cap and trade; the Environmental Protection Agency’s flexing its muscles; a House majority change; striking down California’s Proposition 23  by a 61 percent to 39 percent vote; and extending renewable energy credits through 2011.

NICOR was December’s big winner.The merger valuation bump was evident there. AES Corp. has been on a $500 million stock repurchase binge. Dynegy’s prices were helped by Icahn’s bid. Natural gas seemed to be the common denominator among most of December’s top 10 winners. Rate cases and being the acquiring company seemed to be the common denominator among the bottom 10.

2010 was the year of natural gas, regulated and less regulated. But wait, is that not what we said in 2004, 2005, 2006, 2007 and 2009? The only year in this group where Less Regulated Natural Gas did not lead the C Three Index pack was 2008. In 2010 the LDC index, the more heavily regulated natural gas distribution company group, almost kept pace with its less regulated siblings.

Speaking of the LDC group, a “passionate investor” of Piedmont Natural Gas recently wrote, “The lower natural gas prices have plagued natural gas utility profits recently.” The companies to which he refers all have a substantial part of the natural gas price risk hedged through gas cost recovery provisions, decoupling mechanisms or both. None of these companies has substantial upstream holdings. Why do lower natural gas prices hurt local distribution companies if they have their price risk mitigated? This frustration probably keeps a few LDC executives up at night.

The LDCs excellent investment in 2010 outperformed other groups over five years except for the Less Regulated Gas. Over shorter and longer terms, the Less Regulated Gas Group has been the clear winner. This analysis factors dividends for any company paying one. The methodology used to measure the values presented in these charts is explained in more detail at the end of this presentation. See the chart for the month-over-month change in C Three’s Composite Equity Index during 2010.

Natural gas also will play a major role in balancing new renewable electricity sources.Thirty-three natural gas-fired power plants came online in 2010 with nearly 5,000 MW of capacity. During 2010 C Three added to its power plant database more than 35 new projects accounting for more than 30,000 MW of planned new capacity coming online between 2011 and 2020. As long as natural gas prices remain relatively low, the trend should continue.

Methodology and Components of Each Index Tracked by The C Three Group Less Regulated Electric Focus. More than 50 percent of revenues come from nonstate-regulated sources and/or more than 33 percent of assets are nonstate-regulated.

Less Regulated Gas Focus. More than 50 percent of revenues come from nonstate-regulated natural gas distribution and/or more than 33 percent of assets are nonstate-regulated.

Regulated Electric. No more than 20 percent of revenues can come from natural gas distribution and no more than 49 percent of revenues and 33 percent of assets can be associated with nonregulated activities.

LDC. No more than 20 percent of revenues can come from electric distribution or generation and no more than 50 percent of revenues and 33 percent of assets can be associated with nonregulated activities.

Regulated Electric and Gas Combination. More than 20 percent of revenues derived from natural gas distribution, no more than 50 percent of revenues and 33 percent of assets from nonregulated activities.

The C Three Index. The C Three Index is the nonweighted average of each of the companies included in the groupings above. The C Three Indices are developed based on a straightforward premise: If you invested $100 in each of the stocks of the companies we track, what would those shares be worth after a certain time? Historical share prices are adjusted for dividends, splits and spin-offs.

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1101 Exec Digest.Market in Brief

Six major deals were announced or completed in 2010 and the first few days of 2011. FirstEnergy and Allegheny merged. PPL acquired the old LGE Energy companies in Kentucky from E.On. Mirant and Reliant Resources merged and created GenOn Energy. Northeast Utilities and NStar merged. Carl Icahn acquired Dynegy, the successful spin-off of QEP Resources by Questar. AGL Resources acquired Nicor. And Duke Energy purchased Progress Energy.

There was other big news, as well: the death of cap and trade; the Environmental Protection Agency’s flexing its muscles; a House majority change; striking down California’s Proposition 23  by a 61 percent to 39 percent vote; and extending renewable energy credits through 2011.

NICOR was December’s big winner.The merger valuation bump was evident there. AES Corp. has been on a $500 million stock repurchase binge. Dynegy’s prices were helped by Icahn’s bid. Natural gas seemed to be the common denominator among most of December’s top 10 winners. Rate cases and being the acquiring company seemed to be the common denominator among the bottom 10.

2010 was the year of natural gas, regulated and less regulated. But wait, is that not what we said in 2004, 2005, 2006, 2007 and 2009? The only year in this group where Less Regulated Natural Gas did not lead the C Three Index pack was 2008. In 2010 the LDC index, the more heavily regulated natural gas distribution company group, almost kept pace with its less regulated siblings.

Speaking of the LDC group, a “passionate investor” of Piedmont Natural Gas recently wrote, “The lower natural gas prices have plagued natural gas utility profits recently.” The companies to which he refers all have a substantial part of the natural gas price risk hedged through gas cost recovery provisions, decoupling mechanisms or both. None of these companies has substantial upstream holdings. Why do lower natural gas prices hurt local distribution companies if they have their price risk mitigated? This frustration probably keeps a few LDC executives up at night.

The LDCs excellent investment in 2010 outperformed other groups over five years except for the Less Regulated Gas. Over shorter and longer terms, the Less Regulated Gas Group has been the clear winner. This analysis factors dividends for any company paying one. The methodology used to measure the values presented in these charts is explained in more detail at the end of this presentation. See the chart for the month-over-month change in C Three’s Composite Equity Index during 2010.

Natural gas also will play a major role in balancing new renewable electricity sources.Thirty-three natural gas-fired power plants came online in 2010 with nearly 5,000 MW of capacity. During 2010 C Three added to its power plant database more than 35 new projects accounting for more than 30,000 MW of planned new capacity coming online between 2011 and 2020. As long as natural gas prices remain relatively low, the trend should continue.

Methodology and Components of Each Index Tracked by The C Three Group Less Regulated Electric Focus. More than 50 percent of revenues come from nonstate-regulated sources and/or more than 33 percent of assets are nonstate-regulated.

Less Regulated Gas Focus. More than 50 percent of revenues come from nonstate-regulated natural gas distribution and/or more than 33 percent of assets are nonstate-regulated.

Regulated Electric. No more than 20 percent of revenues can come from natural gas distribution and no more than 49 percent of revenues and 33 percent of assets can be associated with nonregulated activities.

LDC. No more than 20 percent of revenues can come from electric distribution or generation and no more than 50 percent of revenues and 33 percent of assets can be associated with nonregulated activities.

Regulated Electric and Gas Combination. More than 20 percent of revenues derived from natural gas distribution, no more than 50 percent of revenues and 33 percent of assets from nonregulated activities.

The C Three Index. The C Three Index is the nonweighted average of each of the companies included in the groupings above. The C Three Indices are developed based on a straightforward premise: If you invested $100 in each of the stocks of the companies we track, what would those shares be worth after a certain time? Historical share prices are adjusted for dividends, splits and spin-offs.