Exclusive C Three Equity Index

First Positive Month Since August 2008

March roared out with 63 component companies positive for the month, with only 30 down. For the most part, C Three’s indices were driven by general market trends, but none kept up with the overall market.

The Dow Jones Industrials and the S&P 500 were up 7.6 percent and 8.5 percent respectively. The best performing index was the Less Regulated Electric Index, which was up 5.44 percent.

Otter Tail continues to be a favorite because of its small holdings in wind energy manufacturing. The Minnesota PUC, however, issued its order on allowing the building of transmission lines from Otter Tail’s proposed Big Stone plant. Essentially, it places significant environmental restrictions on the plant output, which will add to the cost and feasibility of the proposed coal-fired unit.

Mergers and acquisitions rumors are swirling again around Calpine.

Pipelines continue to hold their own.

ITC Holdings received Federal Energy Regulatory Commission tariffs for its proposed Kansas projects.

While 63 component companies were in positive territory in March, 30 were not.

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PEPCO’s $5 billion in planned capital expenditures and the financial requirements it will require were not considered good news. Ohio regulatory rulings helped drive down both AEP and FirstEnergy. National Grid’s multinational presence and its lack of detailed U.S. financial filings obscure the drivers of its downward slide. It has a heavy presence in New England, an area not known for being particularly regulatory-friendly. AES’s perceived balance sheet weakness and expensive debt offering pulled it further down during March.

Year to date, only 10 index components are in positive territory. Pipelines generally lead the pack. Less regulated electric as a group brings up the rear. Over a five-year window, the less regulated gas index still comes out on top, even with the steep declines it has seen since July. All of the indices have outperformed the Dow Jones Industrial Index during the past five years.

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Many pundits say we have not hit bottom yet. GE CEO Jeffrey Immelt recently said the economy is in a “reset.” The electric sector is on the cusp of a major reset. Are the days of rapidly increasing unit sales behind us for a while?

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 tracked, 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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Exclusive C Three Equity Index

OUCH! Only 13 of the 102 companies in our equity indices saw positive movement during June. On average, the companies we track saw a drop in stock value of 5.3 percent during the month. Is the luster leaving the utility sector? Now you are hearing the phrase “overdue correction.” Components of the Dow Jones Utility Index still have amazingly high P/E ratios, with an average of 20.28 as of the last week of June. Some Wall Street utility wags are saying that a more normal P/E for the sector should be in the 14 percent to 16 percent range. If this is true, and if this is truly a correction, then there is still a fair amount of room for further downturn.

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However, contrarians are saying there is a lot of infrastructure to be built, much of which will be put in rate base, and generation is still very much a growth industry. So regulated and non-regulated companies both stand to gain.

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Exposure to coalAre companies with coal exposure in for a rocky market road with the increased focus on climate change? Is the five-year market love affair with the sector in general about over? While one month does not make a trend, 15 of the 20 biggest losers in May have significant coal exposure.

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De-coupling continues to gain steam in the LDC universe, being driven by decreasing natural gas unit sales per customer. However, the stock market continues to highly value this sector: seven of the top 20 annual gainers are LDCs and our LDC index continues to outperform all but the Merchant Index for the past 12 months.

Recent and pending acquisitions

In May, Kinder Morgan completed the transaction that took the company private and DQE’s transaction with a consortium led by Macquarie Infrastructure Partners was completed on May 30. Pending acquisitions include KeySpan Energy, Aquila, Cascade Natural Gas, SEMCO, TXU and NorthWestern Corp.

For more information on the equity index or any of the C Three Group’s reports, visit www.cthree.net.