COC Utilities Report 01-01-09.pdf

Please refer to page 18 of this report for detailed disclosure and certification information.
INDUSTRY UPDATE
Institutional Equity Research

UTILITY MONTHLY
January 5, 2009

Prices: (1/5/09)

Industry:
Utilities

James L. Bellessa, Jr., CFA
406.791.7230
[e-mail]

Transmission Plans Continue to Take Shape in Northern Tier of Nation

• Our BUY-rated utility picks include ALLETE, Inc., Avista Corp., Black Hills
Corporation, IDACORP, Inc., MDU Resources Group, and Portland
General Electric Co.
• The proposed takeover of Puget Energy, Inc. by a consortium of infrastructure
investors received the approval of Washington state regulators.
• Regulators approved rate cases for Portland General Electric and Avista Corp.
The new rates went into effect on January 1, 2009.
• DMI Industries, the wind tower manufacturing subsidiary of Otter Tail Corp.
announced a 20% reduction in headcount due to lower-than-expected demand.
• Avista Corp. announced a $150 million settlement agreement with the Coeur
d’Alene Tribe for the operation of its Spokane River Hydroelectric projects and a
50-year license from the FERC.
• Black Hills Corp. announced the successful extension of the $383 million bridge
loan used in its 2008 Aquila asset acquisition.

Transmission Build-Out by Utilities under Our Coverage
As the call for additional renewable energy resources grew louder throughout 2008,
so did the need for transmission infrastructure. Several research groups published
studies over the year detailing the inability of the current electrical grid to transport
large amounts of power generated by wind farms in the Midwest to the nation’s
population centers. Later in the year, some progress was made as government and
industry officials announced various plans to confront the transmission problem. For
example, the governors of Iowa, Minnesota, North Dakota, South Dakota and
Wisconsin announced the creation of the “Upper Midwest Transmission Development
Initiative,” an effort aimed at promoting and sharing the cost of the development of
electric transmission resources in the region. The group is expected to collaborate
with transmission companies, utilities, independent power producers, and other
parties for the next year with the objective of developing a concrete plan or tariff
proposal for the Midwest Independent Transmission System Operator (MISO).
The MISO board of directors approved a new transmission expansion plan later in the
year, calling for $2.4 billion in new transmission projects. The proposed projects
would be expected to be in service by 2013, and MISO expects the new infrastructure
to create over $1 billion in annual economic benefit to the region by 2013, consisting
of $950 million in saved production costs and $60-$111 million in savings due to
decreased capacity losses. Of the 332 projects recommended in the plan, the four
largest proposals comprise $1.75 billion of the plan’s total price tag. When
developing the plan, MISO created scenarios incorporating possible changes in the
legislative and economic environments, including a $25 per ton carbon tax, limited
natural gas supplies, and a region-wide 20% renewable portfolio standard.
The following narrative gives a picture of projects being planned or constructed by
the utilities under our coverage.
D.A. Davidson & Co.
2
The largest project in the MISO expansion plan is a 345 kV transmission line from Fargo,
North Dakota to the Twin Cities, Minnesota. This project would bridge a gap in the
currently-existing 345 kV system, allowing power generated from wind farms in the upper
Midwest to be transmitted east to more densely populated areas. The Fargo to Twin Cities
project would be developed by several utilities in the region, including Otter Tail Power, the
utility subsidiary of Otter Tail Corp., and Minnesota Power, the utility subsidiary of
ALLETE, Inc.
In mid-2008, Minnesota Power announced a proposal to purchase a major direct current (DC)
transmission line from the Square Butte Electric Cooperative for approximately $80 million.
The 465-mile transmission line extends from the Milton R. Young Generating Station in
central North Dakota to the Arrowhead Substation in northeastern Minnesota. Allete plans to
use the DC line to transmit up to 600 MW of wind energy generated from the area, while
phasing out its generation rights of coal-based electricity from Young Unit 2.

The transmission acquisition does not materially change the 5-year capital expenditure
forecast disclosed previously by Minnesota Power, and is expected to be completed in early
2009, subject to various definitive agreements and regulatory approvals.
In addition to the Minnesota Power projects, ALLETE, Inc. has invested roughly $74 million
to gain a 7.8% ownership interest in ATC, a Wisconsin-based utility that owns transmission
assets in several Midwestern states. In early January, ATC placed the 220-mile Arrowhead-
Weston 345-kilovolt transmission line into service at a final cost of $439 million. ATC
projects approximately $2.8 billion in transmission grid infrastructure investment in its
service territory within the next decade, and has several high-voltage projects currently in the
planning stages.
A large project has been proposed by California-based PG&E Corp. (PCG - $38.73), which
would link the Selkirk Substation in British Columbia to the Tesla Substation in the San
Francisco Bay area and integrate wind resources along that corridor. Several regional utilities
have partnered with PG&E in the process, including Portland General Electric. The
proposed 500-kV line has been estimated to cost anywhere from $3-$7 billion and is targeted
to be energized in 2015.
As part of its participation in PG&E’s proposed 500-kV transmission line from British
Columbia to the San Francisco Bay area, Portland General Electric has proposed a 225-mile
500-kV transmission line, known as the “Southern Crossing Project.” The line would stretch
from the vicinity of PGE’s Boardman plant to its Bethel substation in Salem, Oregon. To
accomplish this, the utility plans to utilize a portion of the utility’s existing Bethel-Round
Butte 230-kV line, rebuilt for 500-kV line operation, as well as construct a new 500-kV line
from PGE’s new substation in the Olallie/Maupin area to its Boardman plant.
Avista Corp. also has an interest in the PG&E project. Although it is not at this time an
official partner in the project, the Spokane-based utility is on the project steering committee
and plans to build a 230-kV interconnection to the line at Devils Gap. The interconnection
would be an upgrade of an existing Avista 115-kV station near Spokane, Washington and
would include 230-kV phase shifting transformers and two 230-kV lines. The proposed
project is still in the planning stages.
Idaho Power, the utility subsidiary of IDACORP, Inc., has issued a notice of intent to prepare
an environmental impact statement for its proposed 278-mile, 500-kV transmission line from
the proposed Boardman Substation in Oregon to the proposed Hemingway substation south of
Boise, Idaho. The company has also filed a project proposal in October with the Northern
Tier Transmission Group, requesting approval of the costs and benefits of the project. This
approval is not expected to come until the second half of 2009, and if approved, construction
is expected to last from January 2011-June 2013. Idaho Power is currently exploring
opportunities to partner with one or more companies for up to 50% of the proposed
$600 million project. Idaho Power stated in the proposal that the transmission is needed to
ALLETE, Inc. &
Otter Tail Corp.
ALLETE, Inc.
Portland General Electric &
Avista Corp.
IDACORP, Inc.
D.A. Davidson & Co.
3
relieve existing congestion and capacity constraints, which reduce the reliability of power
service in the affected areas, as well as deliver of up to 1,500 MW of electricity to areas in
Idaho and Utah. The project’s direct connection with the existing Boardman plant would also
allow for interconnection with utilities’ transmission efforts throughout the northwest.
Idaho Power announced in May 2007 that it planned to partner with Rocky Mountain Power,
a subsidiary of PacifiCorp, to build more than 1,000 miles of 500-kV transmission lines
across Wyoming and southern Idaho in what the utility refers to as the “Gateway West
Project.” Planning studies will continue into 2009, evaluating the best routes for the proposed
lines. The bulk of the $2 billion project currently centers on six planned segments, stretching
from the proposed Hemingway transmission station southwest of Boise, Idaho to the planned
Windstar substation near Glenrock, Wyoming.
High-voltage transmission lines will also be required for the proposed 500-580 MW Big
Stone II facility, a joint venture of several developers which include Otter Tail Power and
Montana-Dakota Utilities, the utility subsidiary of MDU Resources Group, Inc. Developers
of this project continue to wait for the last two of eight major governmental approvals needed
for the project to move forward. The two approvals that remain are a federal environmental
impact statement (expected to be completed in early 2009), and a transmission certificate of
need from the Minnesota Public Utilities Commission (MPUC). The project would include
approximately 140 miles of transmission lines (50 miles of which will be new construction),
and several new or upgraded substations. The project would require roughly 38 miles of
transmission line in South Dakota and the remainder in Minnesota. Although studies continue
as to what transmission corridors would be optimal for the area (transmission studies are
being conducted through MISO), the developers have submitted two routes which appear the
most beneficial. If the project is approved by the MPUC, either of the two proposed routes
would require 345 kV, with construction expected to be complete by 2012 at a cost of $225-
$275 million, depending on the route chosen. The MPUC is expected to issue its decision in
early 2009.

The 3-member Washington Utilities and Transportation Commission (WUTC) voted 2-1 on
December 30, 2008 to approve a stipulated agreement, including 78 commitments and
conditions, reached by all but one party in the proposed takeover of Puget Energy, Inc. by an
Australian- and Canadian-led infrastructure consortium. Public Counsel’s sustained
opposition to the merger due to leverage and risks of the transaction were ultimately
determined by the two supporting commissioners to be inaccurate. The supporting
commissioners also agreed that the deal will give Puget additional access to capital needed for
the expected $5.7 billion in infrastructure build-out over the next few years.
The takeover of Puget Energy has a total transaction value of $7.4 billion, funded with
$3.4 billion in cash, $2.6 billion of assumed debt held by PSE, and $1.45 billion of newly
issued debt. Of the $1.45 billion of incremental debt, approximately $600 million will be
used to replace or refinance existing debt held by PSE and $850 million is net new debt held
by Puget Energy. The leveraged buyout ratio of 20% ($1.421 billion new debt - $375 million
in retired long-term debt - $196 million in retired short-term debt = $850 million net new debt
used to purchase Puget Energy stock; stock purchase requires $3.4 billion equity +
$850 million debt = $4.25 billion; 850,000,000/4,250,000,000 = 20%) is less than the
previously-approved takeovers of Cascade Natural Gas by MDU Resources Group and
PacifiCorp by Mid-American Energy, according to the majority opinion.
The buying consortium is investing $3.4 billion of it own funds as the equity component of
the transaction. The members of the consortium manage investments largely for government
pension funds, corporate pension funds, endowments and foundations, and Taft-Hartley (i.e.,
labor union pension) funds.
Parties in the case were given 10 calendar days to request that the WUTC reconsider or clarify
its decision, or if no such request is made, 30 calendar days in which parties can appeal the
MDU Resources Group, Inc. &
Otter Tail Corp.
ACQUISITIONS
D.A. Davidson & Co.
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ruling to a superior court. It is unclear whether the buyers will wait the full appeal’s period to
close the transaction. The merger agreement provides for 15 business days to close the deal
after all closing conditions have been met.
*****
On December 5, 2008 Puget Sound Energy, the utility subsidiary of Puget Energy, Inc.
completed the purchase of the Mint Farm generating facility. The 310 MW combined cycle
(powered by natural gas and steam) facility was purchased by the utility for $240 million.
The transaction was the result of an RFP issued by the utility in January 2008, seeking up to
1,340 MW of new power supply resources by 2015, and received prompt regulatory approval
following the deal’s announcement on September 25, 2008.
The plant purchase follows Puget’s aggressive resource acquisition activity over the last three
years, which has added over 1,600 MW of capacity to the utility’s portfolio. Other recent
acquisitions include the Hopkins Ridge (157 MW) and Wild Horse (229 MW) wind farms,
the Goldendale (277 MW) and Sumas (125 MW) gas-fired power plants, 50 MW of
purchased from the Klondike III wind facility, and a long-term power-purchase contract for
nearly 500 MW of hydropower from the Chelan County Public Utility District.

An interim rate increase of $4.8 million (+4.07%), subject to refund, went into effect on
January 2, 2009 in the case of Otter Tail Power’s request from the North Dakota Public
Service Commission (NDPSC) for an electric rate increase of $6.1 million (5.14% over
current electric rates). The utility is also requesting that the current declining block rate
structure, in which customers pay less per kWh as more electricity is consumed, be
eliminated. The NDPSC is expected to make a final decision in the case by July 2009.

*****

In December, the NDPSC granted permission for Otter Tail Power to build and operate a
49.5 MW portion of the proposed 108 MW Luverne Wind farm in east-central North Dakota.
State inspectors have certified that the proposed wind farm will not affect wetlands or
historically significant sites, a decision which was delayed earlier this year due to the fact that
fast-growing crops at the site impeded these inspections. If Otter Tail decides to proceed with
the now-approved project, it will most likely be a joint project with M-Power LLC.

*****

On December 29, 2008, the Washington Utilities and Transportation Commission (WUTC)
approved the settlement agreement in Avista Corp.’s electric and gas rate case, allowing the
new rates to take effect on January 1, 2009. The electric rate increase amounts to an overall
increase of 9.1% ($32.5 million) versus the requested 10.3% ($36.6 million). The gas portion
of the rate increase requests an overall increase of 2.4% ($4.8 million), versus the requested
3.3% ($6.6 million). Importantly, the agreement also allows Avista to accumulate the
expenses related to relicensing the five hydro projects on the Spokane River for later
recovery. Avista will also be allowed a return on rate base of 8.22%, a common equity ratio
of 46.3%, and a 10.2% return on equity. According to the company, the need to hike rates is
driven by increases in capital investments to increase capacity and improve reliability of the
utility’s infrastructure.

The Commission also approved a modification to the Energy Recover Mechanism (ERM), an
accounting method used to track differences between actual power supply costs and the
amount included in base retail rates. The approved mechanism for sharing variances below
$4 million and above $10 million remains unchanged; however, the asymmetrical mechanism
for sharing variances between $4 million and $10 million has been modified as reflected in
Table 1.

REGULATORY
DEVELOPMENTS
D.A. Davidson & Co.
5

Table 1: New Structure of Avista Corp. Energy Recovery Mechanism (ERM)
Annual Power Supply Cost
Variability
Deferred for Future
Surcharge or Rebate to
Customers
Expense or Benefit
to the Company
+/- $0-$4 million 0% 100%
+ between $4-$10 million 50% 50%
- between $4- $10 million 75% 25%
+/- excess over $10 million 90% 10% Source: Company Reports

*****
On December 31, 2008, Avista Corp. filed requests with Idaho and Washington regulators to
reduce natural gas prices for Idaho and Washington customers by 4.7% and 3.0%
respectively, to be effective in January 2009. The request is in response to the decline in
natural gas prices since the utility filed its annual Purchase Gas Cost Adjustments (PGA) in
September. The utility’s next PGA’s were due in September 2009, but the early adjustment
will provide a short-term benefit to ratepayers. The PGA is a pass-through mechanism for gas
costs, and the reduced rates will not impact Avista’s earnings.
*****

On December 29, 2008, the Public Utility Commission of Oregon (OPUC) issued its decision
in the Portland General Electric’s 2009 test year rate case, allowing the new rates to go into
effect on January 1st. The approved 7.6% increase in electric rates will be partially offset by
other adjustments, resulting in an overall increase of 5.6%, subject to a final order to be issued
in early 2009. The rate increase amounts to $121.0 million, consisting of $95.4 million for
power costs and $25.6 million for all other costs. This compares with the utility's adjusted
request to recover approximately $56 million of other costs, such as O&M expenses and
system investment costs. PGE will also be allowed a return on rate base of 8.33%, a common
equity ratio of 50%, and a 10.1% return on equity. With this approval, the utility’s rate base
of has grown roughly $121 million to total approximately $2.358 billion.

The rate case also included a request for a decoupling mechanism, which PGE refers to as a
“Sales Normalization Agreement” (SNA). The company argues that decoupling is necessary
because the traditional regulatory model creates a disincentive for utilities to aggressively
promote energy efficiency programs due to the fact that earnings fall when customers
conserve energy. The OPUC indicated in the order that it would consider a "properly
constructed decoupling mechanism," and would provide suggestions for that mechanism in its
final order, expected in early 2009.

*****

Portland General Electric has requested additional flexibility from regulators at the Oregon
Department of Environmental Quality (DEQ) in its $360-$470 million plan to improve
emission controls at its coal-fired Boardman plant. Because it has been determined that
emissions from the facility have a significant impact on visibility in wilderness of national
park areas, the utility is required to evaluate possible mitigation options and install the “Best
Available Retrofit Technology” (BART). The requirement comes as part of the 2008 Oregon
Regional Haze Plan, a regional outgrowth of the Clean Air Act.

The DEQ’s plan, issued on August 14, 2008, consists of three phases. The first phase requires
PGE to install burners to lower NOx emissions by 2011 at an estimated cost of $32.6 million.
The second phase requires the company to install a system to reduce sulfur dioxide emissions
by 2014, estimated to cost $247 million. The third phase requires the installation of selective
D.A. Davidson & Co.
6
catalytic reduction technology to control oxides of nitrogen by 2018, costing an estimated
$192 million.

The utility has requested that the DEQ allow it more time to consider specific parts of the plan
separately and to evaluate information about possible technologies or environmental
regulations that may develop within the next few years. The DEQ will evaluate the utility’s
request and hold public meeting in January, with a final vote on the rules coming in April.

*****

The Minnesota Public Utilities Commission (MPUC) has set the date for final arguments in
the case of the transmission certificate of need for the proposed Big Stone II project. The
hearings are scheduled for January 13th, and the commission expects to begin its deliberations
on January 15th. A ruling on the permits could come as early as that day. If the MPUC gives
its approval for the joint venture which includes Otter Tail Corp. and MDU Resources
Group, only one of the eight major governmental approvals needed for the project would
remain, with the last being a federal environmental impact statement (expected to be
completed in early 2009).

DMI Industries, the wind tower manufacturing subsidiary of Otter Tail Corp., announced on
January 5th a 20% headcount reduction across all three of its manufacturing facilities. The
company stated that the layoffs are due to “declining demand as difficult credit conditions
continue to impact the ability of wind energy developers to secure needed project financing.”
The move appears to be consistent with estimates within the industry, with some expecting
2009 production to decline as much as 25%-30% from 2008 levels, on a megawatt basis.
According to company officials, the reduction will leave the total DMI headcount at roughly
750.

*****

Avista Corp. announced on December 16th that an agreement was reached with the Coeur
d’Alene Tribe, supporting the issuance of a 50-year license from the Federal Energy
Regulatory Commission (FERC) for the operation of its Spokane River Hydroelectric
projects, including the Post Falls dam. The settlement was a key step in the relicensing
process of the hydro projects, and calls for the payment of over $150 million to the Tribe over
the life of the license—$39 million of which will be paid in the next three years in order to
compensate the Tribe for past use of Tribal land for water storage. Future water storage was
also included in the settlement, with Avista paying the Tribe $400,000 annually for the first
20 years of the license and $700,000 thereafter. Pending FERC approval of the settlement,
Avista has agreed to place $100 million over the course of the license into a resource
protection trust fund. Payments to the Tribe are expected to be included in the utility’s rate
base and recovered over the life of the license, pending the approval of rate cases likely to be
filed in early 2009.

*****

Seven of the ten Clipper Windpower turbines installed at the Taconite Ridge wind farm have
been shut down for blade repairs, due to flaws found in a recent inspection. The $50 million
wind farm, which became fully operational in July, is owned by Minnesota Power, the utility
subsidiary of ALLETE, Inc. The turbine blades, although structurally sound, were showing
“wrinkles” that would affect the blades’ operations if left untreated. The blade repairs are
covered under warranty, and the utility expects all ten turbines at the 25 MW facility to be
operational by the end of January. In the interim period, the company has other resources to
substitute for lost production from the wind farm, with management expecting minimal
financial impacts from the disruption.

*****

COMPANY DEVELOPMENTS
D.A. Davidson & Co.
7
On December 15th, Puget Energy, Inc. announced an agreement with RES Americas to
jointly develop new wind energy facilities in Washington’s Columbia and Garfield counties.
Planning for the potential projects is still in the initial stages, but Puget and RES Americas
have applied to the Bonneville Power Administration (BPA) for up to 1,250 MW of
transmission interconnection to support future development in southeastern Washington.
Puget Energy’s Hopkins Ridge and Wild Horse wind farms were also developed and
constructed by RES Americas.
*****
On December 29th, Portland General Electric announced that on January 1st, Maria Pope
became the company’s new senior vice president of finance, chief financial officer and
treasurer. Pope filled the position left by Jim Piro when he became the utility’s CEO and
president on the same day. Since January 2006, Pope served as a member of PGE’s Board of
Directors and was a member of both the Audit and Finance Committees. Ms. Pope has
resigned from PGE’s Board of Directors effective December 31, 2008. Pope was previously
employed as vice president, chief financial officer at Mentor Graphics Corp. (MENT –
BUY- $5.13), an Oregon-based software company.

*****

Puget Sound Energy, the utility subsidiary of Puget Energy, Inc., reported that colder-than-
normal temperatures resulted in new records for both electricity and natural gas usage in
December. Electricity usage peaked at 4,906 MW, breaking the previous record of 4,847
MW set in December 1998. Natural gas usage peaked at 780,000 MMBtu, versus the
previous record of 741,881 MMBtu set in November 2006 (the average daily December
natural gas send-out is 500,000 MMBtu).

*****

Avista Corp. announced on December 16, 2008 that it had issued in a private placement
$30 million of 7.25% First Mortgage Bonds due in 2013. The proceeds from the debt
issuance (net of roughly $0.1 million to cover placement agent fees and Avista’s expenses)
were used to repay $25 million of expiring medium-term notes and a portion of its 5-year
$320 million committed line of credit.

*****

Portland General Electric announced that on December 19, 2008 it is issuing in a private
placement $130 million of First Mortgage Bonds. The bonds are expected to be issued in two
series on January 15th, with the first series totaling $67 million at 6.80%, due in January 2016.
The second series will total $63 million, paying 6.50%, will mature in January 2014.

The $130 million private placement is over 40% of the $300 million in long-term debt
expected to be issued by the company by the end of 2009. The expected total long-term debt
proceeds, along with $230 million of equity financing, are needed to fund the utility’s 2009
and 2010 capital expenditure budgets of approximately $760 million and $450 million,
respectively.

*****

Cold temperatures in the Northwest resulted in a new electricity usage record at Avista Corp.
on the evening of December 16th. Avista reached a peak load of 1,821 MW, breaking the
previous record of 1,796 MW set in February 1996. The utility did not see a new record for
natural gas usage.

*****

D.A. Davidson & Co.
8
On December 17th, Montana-Dakota Utilities, the utility subsidiary of MDU Resources
Group, Inc., announced plans to expand its Diamond Willow wind farm by an additional
10.5 MW, bringing the site’s total capacity to 30 MW. The utility also announced plans to
develop a new 19.5 MW wind farm near Rhame, North Dakota. Both of the proposed
projects would require the installation of new 1.5 MW turbines. The projects are expected to
be operational in late 2009 and are subject to regulatory approval.

*****

On December 15th, a Montana district judge ruled that water pumped to the surface during
coalbed methane extraction should be classified as groundwater, overturning the definition
used in a 2001 Montana law that created a special category for CBM discharge water. Being
classified as groundwater is relevant in appropriating the water under water-rights laws. The
reclassification allowed the judge to void a state permit used by Fidelity Exploration and
Production Company, MDU Resources Group’s oil & gas exploration & production
subsidiary. The permit allowed Fidelity to market CBM discharge water to coal mines and
farmers without proving it did not adversely affect senior water rights certain
environmentalist groups wanted protected. The extraction of coalbed methane has raised
environmental questions and has been the subject of lawsuits for several years, and we expect
uncertainties over these issues and related litigation to continue.
Fidelity also operates in Northern Montana’s Bowdoin field, where it received approval from
the U.S. Bureau of Land Management (BLM) on December 5th to expand operations. The
approved project would include up to 635 new wells, to replace well sites that have been
retired, as well as construction of access roads, disposal of produced water with evaporation
ponds at each well site, and the installation of necessary transmission lines.
Although the court ruling may eventually have an impact on Fidelity’s coalbed methane
production strategy going forward, we do not expect that there will be a material impact to the
overall company.

*****

Black Hills Corp. announced on December 18, 2008 that it has successfully extended to
December 29, 2009 the maturity date of a $383 million bridge loan that was set to expire on
February 5, 2009. The bridge loan was used to complete the Aquila transaction in July 2008.
Although the original intent was to secure long-term financing for the transaction by late
2008, the permanent financing has been delayed with the hope that current difficult capital
market conditions will improve in 2009, allowing the company to secure long-term funding
under more favorable terms. We believe investor worries surrounding the need for long-term
financing in the midst of the recent credit market malaise has penalized the stock price.

*****

On December 22nd, Hawaiian Electric Company, the utility subsidiary of Hawaiian Electric
Industries, Inc., announced that Richard Rosenblum has been named President and CEO,
replacing Michael May, who stepped down in August, 2008. Rosenblum has 32 years of
utility experience, where he most recently served as Senior Vice President of Generation at
Southern California Edison, California’s largest electric utility, which is a subsidiary of
Edison International (EIX - $33.43). We view his appointment, which went into effect on
January 1st, as a positive for HECO. Rosenblum has extensive experience in systems
integration, which is required as the utility moves toward becoming an energy service
company with the assist of the Hawaiian Clean Energy Initiative. Although much of
Rosenblum’s prior training has dealt with nuclear power, we do not anticipate his
appointment to cause any near-term shift toward nuclear power generation, as this method of
power generation is forbidden by Hawaiian state law.

*****
D.A. Davidson & Co.
9

Hawaiian Electric Industries announced on December 23rd that it entered into a 15-year
definitive agreement with Sensus Metering Systems for the supply of automatic meter reading
systems. The agreement came following a successful 2-year trial period, in which the meters
were tested under a variety of settings on Oahu. The meters are designed to allow for new
pricing options and demand-response initiatives. The $98 million deal was described by
Hawaiian Electric officials as a “key action” to help achieve the utility’s goals in the
Hawaiian Clean Energy Initiative (HCEI).

The utility projects that the smart meters will result in a $25 million benefit stemming from
reduced energy theft, improved readings, and lower operating expenses. If successful, the
smart meters would be deployed from 2009-2015 to roughly 430,000 residential and
commercial customer locations, which would reduce the utility’s dependence on field
representatives who currently read the meters. Before the metering system, which includes a
planned network of 19 two-way radio frequency support towers, can be put into the utility’s
rate base, the plan needs the approval of the Hawaiian Public Utilities Commission (HPUC).
The utility also commented that a decision to expand the program to the faraway islands of
Lana'i and Moloka'i would be made at a later date.

The Department of the Interior announced on December 18th that it plans to open 190 million
acres of federal lands for geothermal exploration and development. The action coincides with
the department’s estimate that by 2015 roughly 5.5 GW of new generating capacity from
geothermal sources will be installed, with that number growing to 12.1 GW by 2025. The
Bureau of Land Management held a lease sale the following day to auction off parcels slated
for the geothermal, oil, and natural gas development. Although the geothermal energy goal
has had the support of the Sierra Club and other environmental groups, the groups were
critical of the lease sale due to the inclusion of potential oil & gas development.

*****

The Idaho Office of Energy Resources announced in December that it has disbanded the
state’s wind power think tank. The state’s energy office director, Paul Kjellander, is known to
be a strong supporter of nuclear development within the state. The shift caused some
members of the Idaho Strategic Energy Alliance (which includes Idaho Power, the utility
subsidiary of IDACORP, Inc., and Avista Corp.), to comment that the state’s lack of a
renewable portfolio standard, as well as its lack of support for wind power, will reduce the
likelihood of new developers considering the state for wind projects. Although the state
currently ranks 13th in wind power potential, Idaho has only 75 MW of installed capacity,
with another 71 MW in projects under construction. According to Kjellander, the change was
made with the intent to shift attention to other sources of renewable energy.

RENEWABLE ENERGY
DEVELOPMENTS

D.A. Davidson & Co.
10
As displayed in Table 2, temperatures in December 2008 were colder than normal in the
service territories for utilities under our coverage, with Boise, Idaho-based IDACORP, Inc.
(5% warmer) being the only exception. The cold temperatures were most pronounced in the
northern-tier of the Midwest, specifically in the service territories of Black Hills Corp. (18%
colder than normal) and MDU Resources Group, Inc. (17% colder). Despite the
exceptionally cold December, temperatures in the fourth quarter of 2008 were just slightly
colder than normal for most utilities under our coverage, with IDACORP, Inc. as the
exception (10% warmer than normal). In terms of cooling degree days, and as displayed in
Table 3, Hawaiian Electric Industries service territory was roughly 6% warmer than normal
during the month of December.

Overall, temperatures during the fourth quarter showed little variation from last year, with the
two largest (colder-than-normal) divergences happening at Black Hills and MDU.

Table 2: Heating Degree Day* Data (HDD) – Monthly and 4Q’08 Quarterly Data

Monthly
Total From Norm From LYR
4Q'08
QTD From Norm From LYR
ALLETE, Inc. (ALE) 1,790 203 197 3,495 102 303
Avista Corp. (AVA) 1,328 160 197 2,627 8 63
Black Hills Corporation (BKH) 1,454 221 143 2,836 148 284
IDACORP, Inc. (IDA) 1,031 -52 33 2,024 -225 -80
MDU Resources Group, Inc. (MDU) 1,803 264 262 3,400 124 301
Otter Tail Corp. (OTTR) 1,831 219 142 3,380 17 220
Portland General Electric Co. (POR) 851 95 112 1,659 24 -26
Puget Energy, Inc. (PSD) 863 109 93 1,730 1 -79
ALLETE, Inc. (ALE)1,790 13% 12%3,495 3% 9%
Avista Corp. (AVA)1,328 14% 17%2,627 0% 2%
Black Hills Corporation (BKH)1,454 18% 11%2,836 6% 11%
IDACORP, Inc. (IDA)1,031 -5% 3%2,024 -10% -4%
MDU Resources Group, Inc. (MDU)1,803 17% 17%3,400 4% 10%
Otter Tail Corp. (OTTR)1,831 14% 8%3,380 1% 7%
Portland General Electric Co. (POR)851 13% 15%1,659 1% -2%
Puget Energy, Inc. (PSD)863 14% 12%1,730 0% -4%
December 2008
Percentage Difference

Table 3: Cooling Degree Day* Data (CDD) – Monthly and 4Q’08 Quarterly Data

Monthly
Total From Norm From LYR 4Q'08 From Norm From LYR
Hawaiian Electric Industries, Inc. (HE) 322 19 -15 1,131 11 -4
Hawaiian Electric Industries, Inc. (HE)322 6% -4%1,131 1% 0%
Percentage Difference
December 2008

Source: National Weather Service’s Climate Prediction Center

egree ay s a quant tat ve n ex emonstrate to re ect eman or energy to eat or coo ouses an
businesses. This index is derived from daily temperature observations at nearly 200 major weather stations in
the contiguous United States. The "heating year" during which heating degree days are accumulated extends
from July 1st to June 30th and the "cooling year" during which cooling degree data are accumulated extends
from January 1st to December 31st. A mean daily temperature (average of the daily maximum and minimum
temperatures) of 65°F is the base for both heating and cooling degree day computations. Heating degree days
are summations of negative differences between the mean daily temperature and the 65°F base; cooling degree
days are summations of positive differences from the same base. For example, cooling degree days for a
station with daily mean temperatures during a seven-day period of 67, 65, 70, 74, 78, 65 and 68, are 2, 0, 5, 9,
13, 0 and 3, for a total for the week of 32 cooling degree days.
TEMPERATURES
D.A. Davidson & Co.
11

Figure 1 shows accumulated precipitation in the Pacific Northwest from October 1, 2008 –
December 29, 2008. It should be noted that the “precipitation year” extends from October 1st
to September 30th. Utilities in the region, including Portland General Electric, and Puget
Energy, Inc. appear to be off to a below-normal start to the precipitation year. Whereas,
IDACORP’s utility subsidiary, Idaho Power, may be off to an above-average start.

Figure 1: Accumulated Precipitation – October 1, 2008 – December 29, 2008

Source: National Weather Service Northwest River Forecast Center
PRECIPITATION
D.A. Davidson & Co.
12
“Early bird” streamflow forecasts currently being made by the National Weather Service
Northwest River Forecast Center for periods in 2009 are depicted in Table 4. These
predictions forecast below-normal levels for Avista Corp., IDACORP, Inc., and Puget
Energy. By observation, the snows of the past three weeks may not be fully reflected in the
River Forecast Center’s projections, and we will be watching for an improvement in the next
official forecast scheduled for January 8, 2009.

Table 4: Streamflow Projections for Key Hydrogeneration Measurement Locations

Location of Forecasted % Forecast as %
Company Streamflow Forecast Period of Normal - 1/2/09 of Prior-Year Steamflows
Avista Corp. Coeur d'Alene Lake Inflow, ID April-July 85% 57%
Avista Corp. Whitehorse Rapids, ID April-Sept. 89% 81%
IDACORP, Inc. Brownlee Reservoir Inflow April-July 70% 102%
Portland General Electric Clackamas River, OR April-Sept. 105% 67%
Portland General Electric Deschutes River, OR April-Sept. 103% 108%
Portland General Electric The Dalles, OR April-Sept. 87% 87%
Puget Energy, Inc. Grand Coulee, WA April-Sept. 90% 92% Source: National Weather Service Northwest River Forecast Center

Figure 2 depicts that average river basin snow water content in the western region is mostly
above average as of January 2, 2009. This suggests that hydrogeneration in 2008 could be
normal or above normal for Puget Energy and Portland General Electric Co. However,
there is still plenty of wintertime ahead for accumulations or depletions from normal for the
current snowpack year.

Figure 2: Western Region Snow Water Content

Source: United States Department of Agriculture

D.A. Davidson & Co.
13
After reaching all-time highs on an absolute and relative basis in May 2007, valuations within
the electric utility sector retreated in a saw-tooth pattern until the October stock market crash.
Hence, utility valuations as measured by pre-earnings (P/E) ratios are now materially below
their 10-year norm.

The upper portion of Chart 1 depicts a 10-year equal-weighted index of over 60 electric
utilities. It paints a picture of an overall 29% decline in the index since the May 2007 high.

The lower portion of Chart 1 depicts the group’s 11.8x P/E ratio on year-forward earnings
estimates. After reaching an all-time record of 17.6x in May 2007, the group’s P/E ratio is
nearly 11% below the 10-year median of 13.3x.

Chart 2 provides two additional measurements of value involving ratios of earnings before
interest, taxes, depreciation and amortization (EBITDA). These measurements reflect
valuations are modestly below their 10-year medians.

Dividends have been ascending for nearly five years, as depicted in the top panel of Chart 3.
Additionally, the sector’s current average dividend yield of 4.7% is materially above the 10-
year average of 4.2%. Yields in the electric group relative to 10-year Treasury Bonds, as
depicted in the lower panel of Chart 3, sharply improved from May 2007 to the end of March
2008 due to the flight to quality during the subprime mortgage crisis, reaching 118% of the
yields on T-Bonds. As those fears subsided, the relative yield subsided to 88% by the third
week of June 2008. Since then the credit default swap crisis broadened and relative yields in
the utility sector spiked to 230% of parity with T-bonds, as the flight to quality left the yield
on T-bonds at their lowest level since the U.S. Treasury started selling them. The current high
190% relative yield compares to the 10-year norm of 89%.

As depicted in the top panel of Chart 4, the P/E ratio of the equal-weighted electric utility
index is approximately 38% above the decade median P/E ratio of the S&P 400, a proxy for
non-utility stocks. Additionally, the relative yield of electric utility stocks remains toward the
lower end of a 10-year range of the S&P 400.

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
UTILITY: ELECTRIC POWER E-Wtd (153A)
PRICE 28.48 DATE 01-02-2009PRICE 28.48 DATE 01-02-2009
StockVal®
1414
1616
1818
2020
2222
2424
2626
2828
3232
3636
40
44
48
D.A. DAVIDSONRESEARCH
PRICE / YR-FORWARD EPS ESTS
8
10
12
14
16
18
HI 17.7
LO 9.2
ME 13.3
CU 11.8
01-01-1999
01-02-2009
Source: StockVal
ELECTRIC UTILITY
VALUATION METRICS
Chart 1: Electric Utility Index and
Price-Earnings Ratio
D.A. Davidson & Co.
14

StockVal®UTILITY: ELECTRIC POWER E-Wtd (153A) Price 28.48
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
PRICE / EBITDA
2.4
2.8
3.2
3.6
4.0
4.4
4.8
5.2
5.6
6.0
HI 5.9
LO 2.7
ME 4.1
CU 4.0
01-01-1999
01-02-2009
ENTERPRISE VALUE/EBITDA
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
HI 10.0
LO 6.4
ME 8.0
CU 7.8
01-01-1999
01-02-2009
Source: StockVal

StockVal®UTILITY: ELECTRIC POWER E-Wtd (153A) Price 28.48
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
DIVIDENDS-PER-SHARE
1.0
1.1
1.2
1.3
1.4
HI 1.39
LO 1.08
ME 1.21
CU 1.39
GR 0.7%
03-31-1999
09-30-2008
DIVIDEND YIELD %
3
4
5
6
7
HI 6.2
LO 3.3
ME 4.2
CU 4.7
01-01-1999
01-02-2009
DIVIDEND YIELD / 10-YEAR T-BOND YIELD
0.6
0.9
1.2
1.5
1.8
2.1
2.4
HI 2.30
LO 0.68
ME 0.89
CU 1.90
01-01-1999
01-02-2009
Source: StockVal
Chart 2: Electric Utility Ratios of
EBITDA
Chart 3: Electric Utilit Dividends,
Yields, and Relative Yield
D.A. Davidson & Co.
15

StockVal®UTILITY: ELECTRIC POWER E-Wtd (153A) Price 28.48
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
PRICE / YR-FORWARD EPS ESTS RELATIVE TO S&P INDUSTRIAL INDEX (SP4)
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
1.1
HI 1.02
LO 0.32
ME 0.66
CU 0.91
01-01-1999
01-02-2009
DIVIDEND YIELD RELATIVE TO S&P INDUSTRIAL INDEX (SP4)
1
2
3
4
5
6
7
HI 6.86
LO 1.95
ME 2.74
CU 2.12
01-01-1999
01-02-2009
Source: StockVal
Chart 4: Electric Utility Dividend
Yield Relative to Yield on S&P 400
D.A. Davidson & Co.
16
Table 5: D.A. Davidson Utility Coverage
Monthly Total Returns:
(12/31/07 - 12/31/08)
Price Price Ex-Dividend Monthly Year-to-Date
Stocks: 12/31/2007 12/31/2008 in December 2008 Total Return Total Return
ALLETE, Inc. (ALE) 39.58 32.27 -5.7% -15.2%
Avista Corp. (AVA) 21.54 19.38 0.18 10.7% -7.7%
Black Hills Corporation (BKH) 44.10 26.96 4.5% -36.5%
Hawaiian Electric Industries (HE) 22.77 22.14 -18.8% 1.3%
IDACORP, Inc. (IDA) 35.22 29.45 -3.1% -13.8%
MDU Resources Group, Inc. (MDU) 27.61 21.58 $0.155 6.9% -20.2%
Otter Tail Corp. (OTTR) 34.60 23.33 24.2% -30.0%
Portland General Electric Co. (POR) 27.78 19.47 $0.245 7.7% -27.3%
Puget Energy, Inc. (PSD) 27.43 27.27 11.4% 3.1%
Average 4.2% -16.3%
Various Indices:
Dow Jones Industrial Average (.DJIA) 13,264.82 8,776.39 17.46 -0.4% -31.8%
Standard & Poors 500 (.SPX) 1,468.36 903.25 2.38 1.0% -36.9%
Dow Jones Utility Average (.UTIL) 532.53 370.76 0.91 -2.8% -27.8%
SNL Electric Companies Index 611.18 451.7 * -1.2% -26.1%
SNL Gas Companies Index 590.99 403.32 * -2.9% -31.8%
*Ex-Dividend amount incorporated in index. Sources: Bloomberg, SNL Interactive

As shown in Table 5, utility indices were down in December, with total returns (including
dividends) of gas utilities down 2.9% and electric utilities down 1.2%. The Dow Jones
Industrials and S&P 500 were mixed, with returns of -0.4% and +1.0%, respectively.
Monthly performance in the majority of our utility coverage universe was up, showing a mean
gain of 4.2%. Strong advances led by Otter Tail Corp. (+24.2%), Puget Energy, Inc
(+11.4%), and Avista Corp. (+10.7%) were offset by declines by Hawaiian Electric
Industries, Inc. (-18.8%), and ALLETE, Inc. (-5.7%).

Total returns from a full-year were disappointing, with the stocks of Puget Energy, Inc.
(+3.1%) and Hawaiian Electric Industries, Inc. (+1.3%) posting the only gains. We believe
the stock of Puget was spared due to the now-approved takeover by a consortium of
infrastructure investors. The performance of Hawaiian Electric was likely due to the
restructuring of its American Savings Bank subsidiary and the allure of the Hawaiian Clean
Energy Initiative. The heaviest year-to-date losses were from Black Hills Corp. (-36.5%),
Otter Tail Corp. (-30.0%), Portland General Electric Co. (-27.3%).

Since the previous Utility Monthly, our rating on Otter Tail Corporation has been lowered
from NEUTRAL to UNDERPERFORM, and our 2008 and 2009 EPS estimates have been
adjusted for third quarter earnings reports, as summarized in Table 6.

Table 6: Summary of EPS Adjustments
Company
Current
2008 EPS
Estimate
Previous
2008 EPS
Estimate
Current
2009 EPS
Estimate
Previous
2009 EPS
Estimate
ALE $2.77 $2.85 $2.28 $2.63
AVA 1.43 1.45 NC 1.55
BKH 2.03 2.15 2.07 2.40
HE NC 1.73 1.68 1.76
IDA NC 2.30 NC 2.36
MDU NC 2.08 NC 1.60
OTTR 1.15 1.10 1.45 1.60
POR NC 1.45 NC 1.82
PSD NC 1.50 NC 1.60 Source: D.A. Davidson estimates
As depicted in Table 7, our coverage group’s average estimated 2008 price-earnings ratio is
14.2x, up from 13,0x on December 3, 2008, the pricing date of our last Utility Monthly. Also,
the average EV/EBITDA ratio of 7.6x is up from 7.3x and the average yield for the group is
4.5% (versus 4.8%) - ALLETE Corp. having the highest yield at 5.3%.
VALUATIONS, RISKS &
REWARDS
D.A. Davidson & Co.
17
Table 7: D. A. DAVIDSON UTILITY COVERAGE COMPARISON

Company Name Symbol Rating Stock
Price
12/5/08
Target
Price
(12-18
month)
Market
Value
($Millions)
2006
EPS
2007
EPS
2008E
EPS
2009E
EPS
PE '07 PE '08 PE '09 Price/
Book
Value
Dividend
Yield % on
2008E
Dividend
Estimated
2008
Payout
Ratio %
Estimated
2008E
EBITDA
($Millions)
Ratio of
EBITDA to
Interest/Pfd.
Expense
2008E
Price/
2008E
EBITDA
Ratio
Total Debt /
Total Capital
%
Enterprise
Value Less
Cash
($Millions)
EV/EBITDA
(Enterprise
Value Excludes
Cash; EBITDA
is 2008E)
ALLETE INCORPORATED ALE B $32.01 $35.00 $1,012 2.77 3.08 2.77 2.28 10.4 11.6 14.0 1.26 5.4% 62.1% $174 6.0 5.8 40.7% $1,497 8.6
AVISTA CORPORATION AVA B $19.67 22.50 $1,070 1.47 0.72 1.43 1.55 27.2 13.8 12.7 1.09 3.7% 50.5% $282 3.7 3.8 50.6% $2,057 7.3
BLACK HILLS CORPORATION BKH B $27.36 29.00 $1,042 2.21 2.68 2.03 2.07 10.2 13.5 13.2 0.91 5.1% 68.9% $240 4.6 4.3 49.6% $2,009 8.4
HAWAIIAN ELECTRIC INDUSTRIES HE N $22.36 25.00 $1,902 1.33 0.96 1.73 1.68 23.2 13.0 13.3 1.44 5.5% 71.9% $456 5.8 4.2 51.5% $3,176 7.0
IDACORP INCORPORATED IDA B $29.49 32.00 $1,344 2.34 1.86 2.30 2.36 15.8 12.8 12.5 1.06 4.1% 52.1% $346 4.8 3.9 53.9% $2,771 8.0
MDU RESOURCES GROUP INC MDU B $22.52 21.50 $4,126 1.69 1.76 2.08 1.60 12.8 10.8 14.1 1.49 2.8% 29.9% $1,039 12.8 4.0 36.4% $5,679 5.5
OTTER TAIL CORPORATION* OTTR U $22.93 19.50 $811 1.69 1.78 1.15 1.45 12.9 19.9 15.8 1.20 5.2% 103.2% $143 4.9 5.7 39.8% $1,264 8.9
PORTLAND GENERAL ELECTRIC POR B $19.38 25.50 $1,212 1.14 2.33 1.45 1.82 8.3 13.4 10.6 0.90 5.1% 67.5% $426 4.8 2.8 49.1% $2,513 5.9
PUGET ENERGY INCORPORATED PSD N $27.49 30.00 $3,565 1.52 1.61 1.50 1.60 17.1 18.3 17.2 1.44 3.6% 66.5% $780 4.0 4.6 56.9% $6,650 8.5
Median -- 9 Diversified Regional Utilities $1,212 1.60 1.77 1.61 1.64 12.9 13.4 13.3 1.20 5.1% 66.5% 4.8 4.2 49.6% $2,513 8.0
Mean -- 9 Diversified Regional Utilities $1,787
1.69 1.78 1.73 1.68
15.3 14.1 13.7 1.20 4.5% 63.6% 5.7 4.3 47.6% $3,069 7.6
*D.A. Davidson & Co. makes a market in this security.
B = BUY; N = NEUTRAL; U = UNDERPERFORM
Sources: Estimates of all companies made by D.A. Davidson & Co.
James L. Bellessa, Jr., CFA, D.A. Davidson & Co., 406-791-7230

D.A. Davidson & Co.
Two Centerpointe Drive, Suite 400 • Lake Oswego, Oregon 97035 • [phone] • [phone] • www.dadavidson.com
Copyright D.A. Davidson & Co., 2009. All rights reserved.
18
Required Disclosures
D.A. Davidson & Co. expects to receive, or intends to seek, compensation for investment banking services from the companies
mentioned in this report in the next three months.
D.A. Davidson & Co. is a full service investment firm that provides both brokerage and investment banking services. James L.
Bellessa, Jr., CFA, the research analyst principally responsible for the preparation of this report, will receive compensation that is
based upon (among other factors) D.A. Davidson & Co.’s investment banking revenue. However, D.A. Davidson & Co.’s analysts are
not directly compensated for involvement in specific investment banking transactions.
I, James L. Bellessa, Jr., CFA, attest that (i) all the views expressed in this research report accurately reflect my personal views about
the common stock of the subject company, and (ii) no part of my compensation was, is, or will be, directly or indirectly, related to the
specific recommendations or views expressed in this report.

Ratings Information
D.A. Davidson & Co.’s Institutional Research Rating Scale (maintained since 7/9/02): Buy, Neutral, Underperform

D.A. Davidson & Co. Ratings Buy Neutral Underperform
Risk adjusted return potential Over 15% total return
expected on a risk adjusted
basis over next 12-18 months
>0-15% return potential
on a risk adjusted basis
over next 12-18 months
Likely to remain flat or lose
value on a risk adjusted basis
over next 12-18 months
Distribution of Ratings (as of 9/30/08) Buy Hold Sell
Corresponding Institutional Research Ratings Buy Neutral Underperform
and Distribution 44% 52% 4%
Corresponding Private Client Research Ratings Outperform Market Perform Underperform
and Distribution 81% 19% 0%
Distribution of Combined Ratings 47% 49% 4%
Distribution of companies from whom D.A. Davidson & Co. has received compensation for investment banking services in last 12 mos.
Institutional Coverage 4% 6% 0%
Private Client Coverage 0% 0% 0%
Distribution of Combined Investment Banking 4% 5% 0%

Target prices are our Institutional Research Department’s evaluation of price potential over the next 12-18 months and 5 years, based
upon our assessment of future earnings and cash flow, comparable company valuations, growth prospects and other financial criteria.
Certain risks may impede achievement of these price targets including, but not limited to, broader market and macroeconomic
fluctuations and unforeseen changes in the subject company’s fundamentals or business trends.

Other Disclosures

Information contained herein has been obtained by sources we consider reliable, but is not guaranteed and we are not soliciting any
action based upon it. Any opinions expressed are based on our interpretation of data available to us at the time of the original
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express or implied, as to future performance. Investors should note this report was prepared by D.A. Davidson & Co.’s Institutional
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