Utilities | Stock Recommendation Nihar Shah Michael Song

Recommendation Decrease weight in SIM portfolio by 73 bps Final: Underweight 151 bps Total weight of SIM: 200 bps

Introduction Utilities Sector –Size: B –Industries IndustryMarket CapP/EROE %Div. Yield %Price to Book Diversified Utilities135.0B %4.69%1.84 Electric Utilities301.6B %3.95%1.81 Foreign Utilities1170.9B %1.58%1.98 Gas Utilities104.3B %3.99%3.31 Water Utilities9.5B %3.47%1.75 Source: Yahoo Finance as of 2/23/10

S&P/SIM Weight (.78)%

S&P/Sector Performance (YTD) Outperform

Exelon Corp (EXC) Exelon is a diversified utility company which operates through three subsidiaries: Generation, PECO, and ComEd Generation consists of owned and contracted electric generating facilities with 24,850 MW of capacity, of which 17,009 MW (68.5%) is nuclear ComEd delivers energy to retail customers in northern Illinois

Exelon Corp (EXC) Absolute Valuation HighLowMedianCurrent Target Multiple Target E,S,B/Share Target Price P/Forward E P/S P/B P/EBITDA P/CF Multiples Valuation:

Exelon Corp (EXC) Year2010E2011E2012E2013E2014E2015E2016E2017E2018E2019E2020E Revenue 17,664 18,548 19,475 20,449 21,471 22,545 23,672 24,856 26,098 27,403 28,773 % Growth5.0% Operating Income 5,028 5,343 5,649 5,930 6,227 6,538 6,865 7,208 7,569 7,947 8,344 Operating Margin28.5%28.8%29.0% Interest Income (768) (807) (847) (890) (934) (981) (1,030) (1,081) (1,135) (1,192) (1,252) Interest % of Sales-4.4% Taxes 1,651 1,758 1,861 1,953 2,051 2,153 2,261 2,374 2,493 2,618 2,748 Tax Rate38.8% Net Income 2,609 2,778 2,941 3,087 3,242 3,404 3,574 3,753 3,940 4,137 4,344 % Growth6.5%5.9%5.0% Add Depreciation/Amort1,8111,8551,9472,0452,1472,2542,3672,4862,6102,7402,877 % of Sales10.3%10.0% Plus/(minus) Changes WC % of Sales0.4%1.1% Subtract Cap Ex3,3563,4313,5053,5793,6503,7203,7883,8533,9153,9734,028 Capex % of sales19.0%18.5%18.0%17.5%17.0%16.5%16.0%15.5%15.0%14.5%14.0% Free Cash Flow ,1621,3291,5031,6901,8932,1122,3482,6032,877 % Growth-0.7%17.2%14.4%13.1%12.5%12.0%11.6%11.2%10.8%10.5% NPV of Cash Flows 10,95234% NPV of terminal value 20,86166% Terminal EV/EBIT DA 5.4 Terminal Value 49,385 Projected Equity Value 31,813100% Free Cash Flow Yield3.31% Terminal P/E 11.4 Free Cash Yield5.83% Shares Outstanding 662 Current Price $ Implied equity value/share $ Upside/(Downside) to DCF5.6% Terminal Discount Rate: 9.0% Terminal FCF Growth: 3.0%

Exelon Corp (EXC) Valuation Current Price: $45.50 Target Price: $48.06 Upside: 5.6% Dividend Yield: $2.10 / 4.6% $30.1 Billion Recommendation: Sell 100% TGR 2.00%2.50%3.00%3.50%4.00% TDR 8.00% % % % % Sensitivity Analysis:

Public Service Enterprise Group (PEG) PEG is a diversified utility company with operations primarily in the Northeastern and Mid-Atlantic United States 3 Primary Businesses (% of total revenue): Power (74.7%) - Selling electricity, natural gas, capacity, and emissions credits under contract or on spot market PSE&G (20.4%) - Provides electric transmission and electric and gas distribution to residential, commercial and industrial customers in New Jersey. Currently increasing level of renewable generation Energy Holdings (4.5%) - Manages leveraged lease investments and operates domestic generation projects. Also pursuing solar and other renewable generation projects.

PEG/S&P Performance (5 year)

Relative Multiple Valuation Relative to Industry HighLowMedianCurrent P/Trailing E P/Forward E P/B P/S P/CF P/EBITDA Relative to S&P 500 HighLowMedianCurrent P/Trailing E P/Forward E P/B P/S P/CF P/EBITDA

Absolute Valuation HighLow Media n Current #Your Target Multiple *Your Target E, S, B, etc/Sha re Your Target Price (F x G) A.B.C.D.E.F.G.H. P/Forward E P/S P/B P/EBITDA P/CF

Public Service Enterprise Group Inc. (PEG) Analyst: Nihar ShahTerminal Discount Rate =9.0% 3/6/2010Terminal FCF Growth =5.0% (Millions) Year2010E2011E2012E2013E2014E2015E2016E2017E2018E2019E2020E Revenue 15,259 15,717 16,346 17,000 17,680 18,387 19,122 19,887 20,683 21,510 22,370 % Growth3.0%4.0% Operating Income 3,392 3,285 3,463 3,655 3,819 3,990 4,169 4,355 4,530 4,711 4,899 Operating Margin22.2%20.9%21.2%21.5%21.6%21.7%21.8%21.9% Interest Income (641) (644) (654) (680) (707) (735) (765) (795) (827) (860) (895) Interest % of Sales-4.2%-4.1%-4.0% Taxes 1,149 1,103 1,173 1,242 1,299 1,359 1,421 1,486 1,546 1,607 1,672 Tax Rate41.8% Net Income 1,602 1,538 1,636 1,733 1,813 1,896 1,983 2,074 2,157 2,243 2,333 % Growth-4.0%6.4%5.9%4.6% 4.0% Add Depreciation/Amort ,0201,0611,1031,1471,1931,2411,2911,342 % of Sales6.5%6.3%6.0% Plus/(minus) Changes WC % of Sales4.8%0.7%1.0% Subtract Cap Ex1,9401,6801,6451,7111,7791,8501,9242,0012,0812,1642,251 Capex % of sales12.7%10.7%10.1% Free Cash Flow(83) ,0151,0671,1101,1541,200 % Growth-977.1%12.2%7.2%5.2% 5.1%4.0% NPV of Cash Flows 6,08531% NPV of terminal value 13,30769%Terminal Value 31,503 Projected Equity Value 19,392100% Free Cash Flow Yield-0.52%Free Cash Yield3.81% Current P/E Terminal P/E 13.5 Projected P/E Current EV/EBITDA Terminal EV/EBITDA 6.2 Projected EV/EBITDA Shares Outstanding 507 Current Price $ Implied equity value/share $ Upside/(Downside) to DCF22.6%

PEG Current Price: $31.2 Upside: 19.5% Yield: 4.4% $15.5 Billion DCF: Discount Rate = 9%, Pgrowth = 5% Recommendation: Buy 200 BPS TGR 4.00%4.50%5.00%5.50%6.00% TDR 8.00% % % % % Valuation (Weighted): $ DCF +.3 P/FE +.1 P/B +.1 P/S +.1 P/CF +.1 P/EBITDA

AEP Current Price: $34.21 Valuation (Weighted): $36.17 –.3 DCF +.3 P/FE +.1 P/B +.1 P/S +.1 P/CF +.1 P/EBITDA Upside: 7.1% Yield: 4.9%

Questions?

Old Slides

Utilities – Catalysts/Risks Catalysts –Rate Regulation Increase –Weather Patterns –Improvement in Economy –Green Policy (Nuclear/Water) Risks –Rate Regulation Neutral/Decrease –Inconsistent or over-demand –Commodity Prices –Green Policy (Electric/Diversified/Gas)

Largest Companies in (SPUT) CompanyMarket CapSales (in M)EPS5 Yr Growth LT GrowthROEYieldROE + Yield SPUT355.0 BN/A 8.00%5.00%12.30%4.60%16.90% EXC29.5 B17.32 B %0.00%22.90%4.70%27.60% SO25.9 B15.74 B %4.00%13.00%5.40%18.40% NGG24.7 B24.13 B %7.00%25.20%4.60%32.90% DUK21.40 B12.73 B %4.00%7.40%5.80%13.20% FPL19.40 B15.65 B %7.00%13.60%4.30%17.90% AEP16.10 B13.44 B %4.00%12.00%4.90%16.90% FE12.10 B12.97 B %3.00%13.60%5.50%19.10% EIX11.00 B12.54 B %3.00%11.30%3.70%15.00% OKE4.60 B10.23 B %10.00%14.40%4.00%18.40%

Business Analysis Electric Water Gas Foreign Diversified

Industry vs Sector Performance

Sector vs S&P Performance Correlation: 80.93% Outperform

Economic Analysis

Forecast: GDP will very slowly increase over the short term

Economic Analysis

Forecast: Interest Rate will increase in the short term

Economic Analysis

Forecast: Natural Gas Price will stay relatively constant in the short term

Economic Analysis

Forecast: Potential for long term growth

Regulation State commissions are responsible for determining utilities’ proper rate bases and allowable operating expenses. Individual states’ rulings often differ with regard to these determinations. They also differ in allowed accounting treatments for depreciation accruals and investment tax credits. Although rulings are often presumed to be based solely on the public interest, commissions actually seek to provide a balance between investor and consumer interests.

Green Policy (Update) On June 26, 2009, the House of Representatives passed, by a narrow 217– 205 margin, its version of a new energy bill, H.R Included in the bill, called the American Clean Energy and Security Act, 2005–2050, were provisions for a cap-and-trade system that would incrementally reduce GHG emissions, beginning with a cap on 2012 emissions that is 3% below 2005 levels. The bill, whose principal sponsor was Henry Waxman (D.– California), also included a requirement that utilities get 15% of their electricity from renewable energy sources and, through increasing their energy efficiencies, reduce their electricity use 5% by Individual states, however, would be allowed to vary these two percentages as long as the total came to 20%.

Financial Analysis Sector

Financial Analysis

Margins Net Profit N/A

Summary AnalysisConclusionsView BusinessMature industry, cyclical in natureNeutral EconomicExpect slow growth Slightly Negative FinancialDeclining Revenue, stable profit margin stable ROE, and declining Net Profit Margin. Negative ValuationSector seems to be trading at a slight discount. Slightly positive Overall: Slightly negative for short term

Recommendation Decrease weight in SIM portfolio by 72 bps Final: Underweight 150 bps

Questions