COC Utilities Report 01-11-11.pdf

Please refer to page 14 of this report for detailed disclosure and certification information.
INDUSTRY UPDATE
Institutional Equity Research

January 11, 2011 Utility Monthly

Prices: (1/11/11)

Industry:
Utilities

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

Michael Bates
Research Associate
406.791.7216
[e-mail]

Forecasting Moderate Utility Earnings Growth Though 2012

• Our BUY-rated utilities are Alliant Energy Corp., IDACORP, Inc., ITC Holdings
Corp., and MDU Resources Group.
• Since publishing our last Utility Monthly, we initiated coverage of Xcel Energy,
Inc. with a NEUTRAL rating and upgraded Hawaiian Electric Industries, Inc.
from Underperform to NEUTRAL.
• We have chosen the stock of ITC Holdings Corp. as our top utility pick for 2011,
based on our expectation of strong (>15%) annual EPS growth potential over the
next five years and the potential for increased support from the federal
government for the build out of the nation’s transmission grid. Including the
current 2% yield, our $75 price target points toward ~17% of total return potential
over the next 12-18 months.
• Within our utility coverage universe, we are forecasting average EPS growth of
15.6% in 2011 and 11.1% in 2012 (as seen in Table 1). This strong growth is
attributable in large part to several outliers, as we expect earnings to rebound at
several of our companies with significant non-utility operations (including Otter
Tail Corp., Black Hills Corp., and Hawaiian Electric Industries, Inc.). Turning
to median growth rates, we are forecasting more moderate earnings growth of
7.6% and 7.0% in 2011 and 2012, respectively. Please refer to our most recent
research reports for more detailed company information.

Table 1: Forecasted EPS Growth 2010-2012
ALLETE Inc.1 ALE N $2.27 11.0% $2.53 11.6% $2.69 6.3%
Alliant Ener Cor .1 LNT B $2.75 41.4% $2.87 4.1% $3.05 6.5%
Avista Cor .1 AVA N $1.73 9.4% $1.80 3.5% $1.92 7.0%
Black Hills Cor .1 BKH N $1.46 -28.1% $2.07 41.0% $2.75 33.3%
Hawaiian Electric Industries, Inc.1 HE N $1.23 35.1% $1.58 28.7% $1.81 14.6%
IDACORP Inc.1 IDA B $2.89 9.8% $2.80 -3.2% $3.00 7.1%
ITC Holdin s Cor .1 ITC B $2.84 10.3% $3.30 16.1% $4.23 28.1%
MDU Resources Grou , Inc.1 MDU B $1.24 -9.9% $1.46 17.4% $1.74 19.4%
MGE Ener Inc.1 MGEE N $2.63 18.8% $2.83 7.6% $2.97 5.0%
Northwest Natural Gas Co.1 NWN N $2.72 -3.9% $2.78 2.4% $2.87 3.4%
NorthWestern Cor .1 NWE N $2.09 3.7% $2.20 4.8% $2.30 4.7%
Otter Tail Cor .1 OTTR N $0.71 0.8% $1.30 81.8% $1.53 18.2%
Portland General Electric Co.1 POR N $1.75 34.3% $1.90 8.4% $1.90 -0.1%
Questar Cor .1 STR N $1.07 4.2% $1.11 4.0% $1.19 7.1%
Xcel Ener , Inc.1 XEL N $1.63 8.5% $1.72 5.8% $1.82 5.6%
Mean 9.7% 15.6% 11.1%
Median 9.4% 7.6% 7.0%
Company Name Symbol Rating % chg% chg% chgEPS
2010E
EPS
2011E
EPS
2012E

1D.A. Davidson & Co. makes a market in this security.

D.A. Davidson & Co.
2
As we peer into our crystal ball in search of a company most likely to outperform the group in
2011, we see ITC Holdings Corp. as the clear frontrunner. The transmission-only utility is
poised for strong earnings growth and has positioned itself well to capitalize on opportunities to
upgrade and expand the transmission grid, particularly in the Upper Midwest. We continue to
forecast annual earnings growth of 15% over the next five years, fueled by the build-out of the
transmission “superhighway” and largely funded through a dependable stream of operating
cash flow.

In our view, 2011 will be an extremely important year for regional transmission developers. In
addition to the existing benefits of incentive-based ROEs and the ability to add projects to rate
base without filing rate cases, ITC stands to benefit from FERC’s likely rule changes that
increase its already strong regulatory support for regional transmission development, including
more predictable cost allocation and planning policies.

Our $75 price target points to a nearly 25% upside potential and equates to 17.7x our 2012
EPS estimate of $4.23. We believe a premium valuation is merited by: 1) ITC’s highly visible
prospects for EPS growth without additional equity issuances; 2) the likelihood that
legislative/regulatory support will remain strong (and even improve); and 3) our belief that
further consolidation of the transmission industry will create new acquisition and partnership
opportunities for ITC.

In December President Obama signed into law a one-year extension of the investment tax
credit for developing renewable energy sources. The American Wind Energy Association
(AWEA) stated its belief that orders for wind infrastructure products will be on the rise because
of the passage.

*****

In December the U.S. Environmental Protection Agency (EPA) issued its plan for establishing
greenhouse gas pollution standards under the Clean Air Act, with emissions from the electric
power industry being one of the first sectors to be regulated. Under the plan, the EPA expects
to propose standards for power plants in July 2011 and for oil refineries in December 2011,
with final standards to be issued in May 2012 and November 2012, respectively. We
anticipate the new rules could result in significant capex for utilities, as coal-fired power plants
are retrofitted with emissions control equipment to comply with the new rules. Although utility
spending for these projects will lead to rate base growth, the risk also exists that the fragile
state of the economy could prompt regulators to reduce allowed ROEs allowed as utilities seek
recovery of these investments in future rate cases.

*****

On February 16, 2011 a draft version of ColumbiaGrid's updated 10-year transmission plan will
be considered for initial approval. (ColumbiaGrid is a voluntary group of Pacific Northwest
member utilities, including Avista Corp. and IDACORP, which coordinates to plan investment
in the region’s transmission system). The updated plan includes nearly $1.2 billion in
transmission development needed in the next ten years. IDACORP’s Hemingway-Boardman
500-kV project comprised the largest portion of the plan, with total construction costs expected
to be roughly $600 million (IDACORP expects to hold a 30%-50% share of the project) and a
2015 anticipated completion date.

The current estimated cost for Idaho Power’s share of the project is between $180 million and
$300 million. Initial phases of the project could be completed by 2014. Idaho Power’s share
may change and the timing of the project’s segments may be deferred and constructed as
demand requires.

On December 17th the Oregon Public Utility Commission (OPUC) announced its approval of a
3.9% revenue increase in Portland General Electric’s 2011 general rate case, which went
into effect on January 1, 2011. The majority of the rate increase was driven by the utility’s
receipt of cost recovery for the recently completed Biglow Canyon Wind Farm and
improvements to hydroelectric facilities. The approved rate structure includes a 50% equity
capital structure and a 10.0% ROE, which matched the utility’s previous rate case. In addition
to the price changes, the OPUC approved a three-year extension of PGE’s decoupling
mechanism.

Choosing ITC Holdings
as our Best Idea for 2011
Industry Developments
REGULATORY DEVELOPMENTS
D.A. Davidson & Co.
3
*****

On December 29, 2010, ALLETE Inc. received FERC approval for incentive rate treatment for
its portion of two CapX2020 transmission lines (the 68-mile, 230-kV Bemidji project and the
250-mile, 345-kV Fargo project). Approval for the incentive rate treatment (with inclusion of
100% of prudently incurred construction-work-in-progress (CWIP) in rate base and 100%
recovery of prudently incurred costs of facilities later canceled or abandoned for reasons
beyond the company's control) was expected, given the fact that other CapX2020 participants,
including Xcel Energy Inc. and Otter Tail Corp. had already requested and received rate
incentives related to their involvement in the transmission grid expansion effort. ALLETE's
share of the construction cost of the two lines is currently estimated at $80-$125 million.

*****

In December the Idaho Public Utilities Commission (IPUC) approved a sales agreement
between IDACORP, Inc. and AgPower Jerome LLC, for a 4.5 MW anaerobic digester project.
The project is a Qualified Facility (QF) under the provisions of the federal Public Utility
Regulatory Policies Act (PURPA), which requires electric utilities to offer to buy power
produced by small power producers or cogenerators (Idaho Power has many other QFs within
its generation portfolio). The rate utilities pay project developers is at the “avoided cost rate,”
which is determined and published by state commissions. The avoided cost rate is to be equal
to the cost the electric utility avoids if it would have had to generate the power itself or
purchase it from another source.

*****

On December 20, 2010, Alliant Energy Corporation announced that it expects to incur non-
cash pre-tax asset valuation charges of $29-$36 million (roughly $0.19-$0.23 per share) in
4Q’10 based on the oral decision handed down in its Iowa rate case (the detail in the written
decision will determine the amount of the charge). The charge was mostly driven by the
disallowance of cost overruns at the Whispering Willow-East wind project, an impairment
charge for a flooded and now abandoned plant, and a rate refund based on final rates being
below the interim rates in effect since March 2010.

Unrelated to the rate case, on December 29, 2010, a district court in Wisconsin issued an
order in a class action lawsuit against the Alliant Energy cash balance pension plan. The
utility believes the order will result in total pre-tax damages of $20-$23 million, or $0.13-$0.15
per share (Alliant Energy previously reserved $9 million related to the lawsuit), which will be a
non-recurring hit to 4Q’10 results.

*****

On December 16, 2010, the Minnesota Public Utilities Commission (MPUC) approved an
interim rate increase of $123 million in Xcel Energy’s newly-filed Minnesota rate case. The
interim rates went into effect on January 3, 2011.

On December 20, 2010, Xcel Energy filed a request with the North Dakota Public Service
Commission (NDPSC) for a $19.8 million (+12.0%) rate increase. The rate case is based on a
2011 forecast test year and includes a requested ROE of 11.25 percent, an electric rate base
of approximately $328 million and an equity ratio of 52.56 percent. The utility also requested
an additional increase of $4.2 million, or 2.6 percent, effective January 1, 2012. An interim rate
increase of $17.4 million has also been proposed, which would go into effect on February 19,
2011.

*****

On December 22nd the Public Service Commission of Wisconsin (PSCW) voted to approve an
approximate $8.0 million (+2.3%) electric rate increase in MGE Energy’s 2011 test year rate
case, versus the utility’s request for a $32.8 million (+9.4%) increase. The utility was also
granted a $2.0 million (+1.0%) increase in gas utility rates, versus its request for a $4.4 million
(+2.0%) increase. The utility was granted a 10.3% ROE, versus its request for 10.4%. The
majority of the difference between the utility’s original request and what was ultimately
approved by the Commission lies in a reduction in expected fuel costs, which would not
typically have an impact on the bottom line.

*****
D.A. Davidson & Co.
4
On December 29th the Hawaiian Public Utilities Commission (HPUC) announced final approval
for a $74 million (+5.7%) revenue increase in Hawaiian Electric Industries’ 2009 test year
general rate case (most of the increase has been embedded in the utility’s rates on an interim
basis for over a year). As part of the ruling, the commission also approved the utility’s
decoupling mechanism, which is designed to encourage the development of renewable energy
without negatively impacting the utility. The utility continues to await a decision in its 2011 test
year general rate case (filed in July 2010) in which it is requesting an additional $74 million
(+4.3%) in revenues.

On January 7th a startup company known as Kuokoa Inc. announced a proposal to take
Hawaiian Electric Industries private in an LBO transaction. The company’s plan would
involve selling off the American Savings Bank subsidiary and investing roughly $35 billion over
the next decade to reinvent the utility’s power-generation system (from one largely dependent
on fossil fuel to one entirely reliant on renewable energy), reduce electricity rates, and build
free Wi-Fi access into the utility's smart grid. Little or no detail is available about how the plan
could be feasibly executed, and at this point we place very little likelihood on its success.

*****

In December 2010 a district judge in Montana denied an attempt by Tonbridge Power to
exercise eminent domain rights to complete construction of its 214-mile Montana-Alberta Tie
Line (MATL). In response, a new bill has been introduced at the Montana Legislature (HB
198) which would explicitly grant condemnation authority to private companies that are
awarded a permit to build a transmission line or other facilities under the Major Facilities Siting
Act, including Tonbridge Power Inc.

The success of this legislation is significant for both NorthWestern Corporation and MDU
Resources, which both own significant utility assets within the state. In addition to this, a
subsidiary of MDU is acting as lead contractor for the MATL line. In our view, the absence of
condemnation rights would all but eliminate NorthWestern’s chance to successfully construct
the Mountain States Transmission Intertie (MSTI) or Renewable Collector projects.

*****

Taconite production is showing continued signs of improvement in Minnesota, which points to
increased demand at ALLETE, Inc. On December 30, 2010 the Minnesota Department of
Natural Resources approved the final Environmental Impact Statement (EIS) on the proposed
U.S. Steel Keetac Mine Expansion, signaling that the company may be issued state permits if
it can meet certain other requirements. The proposed project would increase Keetac’s annual
taconite pellet production output by ~60% and is expected to begin in 2012 or 2013. We also
note that foundation construction at Essar Steel Minnesota’s $1.6 billion facility is progressing,
and taconite pellet production could begin by the fourth quarter of 2012. The success of the
Keetac and Essar projects could point to extremely healthy demand growth over the next
several years for ALLETE, which is the most likely entity to provide electric power to these
projects.

*****

On January 10th Standard & Poor's Ratings Services revised its outlook on ITC Holdings and
its subsidiaries to positive from stable, while affirming all of the company’s current BBB credit
rating. We see the revision in the rating agency’s outlook as justified, given the company’s
strong cash flow generation and our belief that it will continue to grow its rate base and
earnings, as well as benefit from the Federal Energy Regulatory Commission's (FERC)
constructive regulation. It was stated that an upgrade would be based on a continuation of the
company’s strong cash flows and demonstration of the company’s ability to expand outside of
its historical service territory, which is currently underway in Kansas via the KETA and V-Plan
projects.

S&P also pointed to a belief that it is unlikely that ITC will acquire another electric transmission
system at some point in the next few years because of higher competition within the electric
transmission sector. Although we acknowledge competition would likely be strong if an
acquisition target arose, we hesitate to fully agree with S&P’s view and believe ITC would be
able to successfully execute an additional small to mid-size transmission system acquisition in
the next five years, while maintaining its financial plans.

COMPANY DEVELOPMENTS
D.A. Davidson & Co.
5
*****

NorthWestern Corp. has announced two new memoranda of understanding (MOU) to
purchase wind projects in Montana. The first (a 25 MW project in Judith Basin County) is
being developed by Compass Wind, while the other (a 24 MW project in Cascade County)
would be developed by Invenergy. The assets are intended to be placed into rate base and
contribute to the utility’s compliance with the state’s renewable portfolio standard (RPS).
Assuming the MPSC grants its approval, the projects could commence operations in late 2012
or early 2013.

*****

On December 20, 2010, Avista Corp. issued $52.0 million of 3.89% First Mortgage Bonds due
in 2020 and $35.0 million of 5.55% First Mortgage Bonds due in 2040 in private placement
transactions. Proceeds from the sale of the new bonds were used to redeem $75.0 million of
long-term debt at higher interest rates.

*****

On December 28, 2010 Xcel Energy announced the commencement of operations of its new
Nobles Wind Project in southwestern Minnesota. The 201 MW wind farm is expected to
precede the inauguration of the 150 MW Merricourt Wind Project (to be constructed in North
Dakota) by one year.

*****

NorthWestern Corporation announced that the Mill Creek Generating Station east of
Anaconda, Montana commenced commercial operations on January 1, 2011. Although final
costs have yet to be announced, it is our belief that the 150 MW gas-fired plant regulating
reserve plant was brought online at or slightly below its $200 million budget. The utility will
collect a return on this investment on an interim basis until the MPSC completes a prudency
review and formally places it into the utility’s rate base.

D.A. Davidson & Co.
6

As displayed in Table 2, temperatures in the fourth quarter were a mixed bag. Although
weather was slightly colder than both the historical average and the same period one year ago
in the service territories of many utilities under our coverage, the areas served by Black Hills,
MDU Resources, and Questar Corp. showed up as especially mild (it is important to note that
Questar’s gas utility revenues are adjusted for fluctuations in weather and are not a material
driver to earnings).

In terms of cooling degree days (see Table 3) temperatures in the service territory of Hawaiian
Electric Industries were not materially different than historical averages or the year-ago
figures.

Table 2: Heating Degree Day* Data (HDD) –4Q’10 Totals
Parent Compan & Utilit Location
ALLETE, Inc. (ALE)
Minnesota Powe Duluth, MN 1609 1% -1% 3195 -6% -1%
Superior Water, Light & Power Superior, WI 1609 1% -1% 3195 -6% -1%
Alliant Energy, Inc. (LNT)
Interstate Power & Light Cedar Rapids, IA 1441 12% 7% 2575 1% 3%
Wisconsin Power & Light Madison, WI 1401 8% 6% 2582 -4% 0%
Avista Corp. (AVA)
Avista Utilities Spokane, WA 1091 -7% -13% 2502 -4% -9%
Black Hills Corp. (BKH)
Black Hills Power Rapid City, SD 1238 0% -18% 2583 -4% -16%
Cheyenne Light Fuel & Power Cheyenne, WY 1056 -9% -22% 2436 -9% -20%
Black Hills Energy - Colorado Electric & Gas Colorado Springs, CO 938 -15% -27% 2067 -15% -23%
Black Hills Energy - Iowa Gas Des Moines, IA 1276 4% -2% 2233 -8% -6%
Black Hills Energy - Kansas Gas Wichita, KS 949 -2% -12% 1609 -12% -18%
Black Hills Energy - Nebraska Gas Lincoln, NE 1229 3% -12% 2294 -3% -9%
IDACORP, Inc. (IDA)
Idaho Power Company Boise, ID 923 -15% -22% 1955 -13% -18%
MDU Resources Group, Inc. (MDU)
Cascade Natural Gas Co. Tri Cities, WA 906 -2% -18% 1949 2% -8%
Great Plains Natural Gas Co. Fergus Falls, MN 1654 4% 2% 3148 -5% 2%
Intermountain Natural Gas Boise, ID 923 -15% -22% 1955 -13% -18%
Montana-Dakota Utilities Co. Bismarck, ND 1650 7% -2% 3243 -1% -1%
MGE Energy, Inc. (MGEE)
Madison Gas & Electric Co. Madison, WI 1401 8% 6% 2582 -4% 0%
Portland General Electric Co. (POR)
Portland General Electric Portland, OR 696 -8% -23% 1571 -4% -9%
Northwest Natural Gas Co. (NWN)
NW Natural Portland, OR 696 -8% -23% 1571 -4% -9%
NorthWestern Corp. (NWE)
NorthWestern Energy Billings, MT 1236 3% -17% 2616 0% -11%
NorthWestern Energy Sioux Falls, SD 1500 5% -3% 2839 -4% -4%
Otter Tail Corp. (OTTR)
Otter Tail Power Co. Fargo, ND 1699 5% -1% 3226 -4% -1%
Questar Corp. (STR)
Questar Corp. Salt Lake City, UT 964 -10% -24% 964 -10% -24%
Xcel Energy, Inc. (XEL)
NSP-Minnesota Minneapolis, MN 1498 5% 2% 1498 5% 2%
NSP-Minnesota Fargo, ND 1699 5% -1% 1699 5% -1%
NSP-Minnesota Sioux Falls, SD 1500 5% -3% 1500 5% -3%NSP-Wisconsin Eau Claire, WI 1530 4% 4% 1530 4% 4%
PSCo Denver, CO 934 -13% -25% 934 -13% -25%
SPS Clovis, NM 717 -11% -26% 717 -11% -26%
% From
Average
December
Total
% From
2009
% From
Average
4Q'10
Total
% From
2009
Source: National Weather Service’s Climate Prediction Center
Table 3: Cooling Degree Day* Data (CDD) –4Q’10 Totals
Hawaiian Electric Industries, Inc. (HE)
Hawaiian Electric Co. Honolulu, HI 312 3% 8% 1173 1% -4%
Maui Electric Co. Kahului, HI 277 7% 23% 971 -3% -2%
Hawaiian Electric Light Co. Hilo, HI 254 14% 4% 822 0% -4%
% From
Average
December
Total
% From
2009
% From
Average
4Q'10
Total
% From
2009
Source: National Weather Service’s Climate Prediction Center
*A degree day is a quantitative index demonstrated to reflect demand for energy to heat or cool houses and 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.
TEMPERATURE DAT
D.A. Davidson & Co.
7

The Northwest River Forecast Center continues to forecast normal or above-normal water
supply in the northwestern region of the United States through the spring and summer of 2011
due in part to a very strong La Niña effect that is expected to continue for several months. As
depicted in Figure 1, accumulated precipitation in the Pacific Northwest from October 1, 2010
to December 31, 2010 (the “precipitation year” extends from October 1st to September 30th),
current forecasts project above-normal precipitation in the coming months, which stands in
contrast with the extremely dry conditions one year ago.

Figure 1: Accumulated Precipitation: October-December 2010
Source: National Weather Service Northwest River Forecast Center

The heavy precipitation over the last three months has gone far in replenishing key drainages
for hydrogeneration in the region, including those used by Avista Corp., IDACORP, Inc. and
Portland General Electric Co. This is evidenced in figure 2, which depicts that average river
basin snow water content in the western region is mostly near normal as of January 10, 2011.

Figure 2: Western Region Snow Water Content
Source: United States Department of Agriculture
Hydrogeneration Outlook
D.A. Davidson & Co.
8
The Northwest River Forecast Center’s projection released on January 7th calls for streamflows
in the Northwest to be near or above normal through the spring and summer months of 2011,
as seen in Table 4. This stands in contrast to 2010’s hydrogeneration season, which had an
extremely slow start and gradually recovered to near-normal levels.

Table 4: Streamflow Projections for Key Hydrogeneration Measurement Locations
Location of Forecasted % Forecast as %
Company Streamflow Forecast Period of Normal - 1/7/11 of Prior-Year Steamflows
Avista Corp. Coeur d'Alene Lake Inflow, ID April-July 98% 122%
Avista Corp. Whitehorse Rapids, ID April-Sept. 102% 132%
IDACORP, Inc. Brownlee Reservoir Inflow April-July 115% 158%
Portland General Electric Grand Coulee, WA April-Sept. 94% 117%
Portland General Electric Clackamas River, OR April-Sept. 106% 87%
Portland General Electric Deschutes River, OR April-Sept. 102% 124%
Portland General Electric The Dalles, OR April-Sept. 97% 116% Source: National Weather Service Northwest River Forecast Center
D.A. Davidson & Co.
9

After reaching all-time highs on an absolute and relative basis in December 2007, valuations
within the electric utility sector retreated as the market weakened in 2008. Further market
declines in early 2009 took the group’s valuation below the October 2008 lows by early March
2009, with price-earnings (P/E) ratios dropping materially below their 10-year norm.
Subsequently, the average P/E valuation has risen ~38% as the market rallied.

The upper portion of Chart 1 depicts an overall ~26% price decline in a market-weighted index
of 56 investor-owned electric and combination utilities since reaching its peak in December
2007. The lower portion depicts the group’s 12.7x P/E ratio on year-forward earnings
estimates, which is at parity with the 10-year average. After reaching an all-time record of
16.6x in December 2007, the group’s P/E ratio slumped to 9.2x in March 2009, before rallying
to its current level of 12.7x.

Chart 2 provides two additional measurements of value (EV/EBITDA and P/BV), showing that
electric utility valuations remain below the 10-year average, based on these metrics.

As shown in the top panel of Chart 3, the sector’s current average dividend yield of 4.2%
exceeds the 10-year average of 3.8%. The bottom panel depicts the yield of the electric utility
index relative to the yield of the S&P 500 is currently at ~2.4x. After a prolonged 6-year
subsidence, utilities’ relative yields were in an upward trend from early 2009 until turning
downward early in the second quarter of 2010 and eventually finally returning to the current 5-
year relative high.

As depicted in Chart 4, yields in the electric group relative to 10-year Treasury Bonds sharply
improved from mid-2007 to the end of March 2009, due to the flight to quality during the
worldwide financial crisis, reaching 193% of parity with T-bonds in December 2008. The flight
to quality left the yield on T-bonds at their lowest level since the U.S. Treasury started selling
them. The current 129% relative yield compares to the 10-year average of 96%.

100
150
200
250
300
350
400
Electric Utilities
31-Jan-2001 to 11-Jan-2011 (Monthly) High: 376.47 Low: 158.37 Latest: 278.24
Price (USD)
'01 '02 '03 '04 '05 '06 '07 '08 '09 '108
9
10
11
12
13
14
15
16
17
©FactSet Research SystemsData Source: FactSet Aggregates, FactSet Aggregates
Average: 12.7 High: 16.6 Low: 8.7 Latest: 12.7
Price to Earnings - FY2
Source: FactSet
Valuation Metrics
Chart 1: Electric Utility Price Index
and Price-Earnings Ratio
D.A. Davidson & Co.
10

6
6.5
7
7.5
8
8.5
9
9.5
10
Electric Utilities
31-Jan-2001 to 11-Jan-2011 (Monthly) Average: 8.0 High: 9.5 Low: 6.5 Latest: 6.9
Enterprise Value to EBITDA
'01 '02 '03 '04 '05 '06 '07 '08 '09 '101
1.2
1.4
1.6
1.8
2
2.2
2.4
2.6
©FactSet Research SystemsData Source: , FactSet Aggregates
Average: 1.7 High: 2.4 Low: 1.1 Latest: 1.4
Price to Book
Source: FactSet

2
2.5
3
3.5
4
4.5
5
5.5
6
6.5
Electric Utilities
31-Jan-2001 to 11-Jan-2011 (Monthly) Average: 3.8 High: 6.0 Low: 2.5 Latest: 4.2
Dividend Yield
'01 '02 '03 '04 '05 '06 '07 '08 '09 '101
1.5
2
2.5
3
3.5
4
©FactSet Research SystemsData Source: FactSet Aggregates,
Average: 2.18 High: 3.55 Low: 1.30 Latest: 2.36
Dividend Yield - Relative to S&P 500
Source: FactSet

Chart 2: Electric Utility Ratios of
EV/EBITDA and P/BV
Chart 3: Electric Utility Dividend
ields and Yield Relative to Yield
on S&P 500

D.A. Davidson & Co.
11
'01 '02 '03 '04 '05 '06 '07 '08 '09 '1040%
60%
80%
100%
120%
140%
160%
180%
200%
220%
Electric Utilities Relative to 10-Year Treasuries
Max: 193.4
Min: 52.8Last: 128.9
Recession Periods - United States
Source: FactSet
Chart 4: Electric Utility Dividend
ield Relative to Yield on U.S. 10-
ear Treasury Bonds
D.A. Davidson & Co.
12

Table 5: D.A. Davidson Utility Coverage Relative Performance
Price Price Ex-Dividend Monthly 2010
12/31/2009 12/31/10 in December Total Return Total Return
ALLETE, Inc. (ALE) $32.68 $35.26 -0.2% 13.3%
Alliant Energy Corporation (LNT) 30.26 36.77 1.3% 26.7%
Avista Corp. (AVA) 21.59 22.52 5.4% 8.9%
Black Hills Corporation (BKH) 26.63 30.00 -1.2% 18.1%
Hawaiian Electric Industries (HE) 20.90 22.79 4.1% 15.0%
IDACORP, Inc. (IDA) 31.95 36.98 1.8% 19.5%
ITC Holdings Corp. (ITC) 52.09 61.98 2.4% 21.5%
MDU Resources Group, Inc. (MDU) 23.60 20.27 0.16 0.0% -11.4%
MGE Energy, Inc. (MGEE) 35.74 42.76 3.6% 23.8%
Northwest Natural Gas Co. (NWN) 45.04 46.47 -4.8% 6.9%
NorthWestern Corporation (NWE) 26.02 28.83 0.34 1.2% 16.0%
Otter Tail Corp. (OTTR) 24.82 22.54 9.6% -4.4%
Portland General Electric Co. (POR) 20.41 21.70 0.26 3.7% 11.4%
Questar Corp. (STR) 13.21 17.41 4.8% 33.9%
Xcel Energy Inc. (XEL)1 21.22 23.55 0.25 1.3% 15.7%
Mean 2.2% 14.3%
Median 1.8% 15.7%
Dow Jones Industrial Average (.DJIA) $10,428.05 $11,577.51 14.85 5.3% 13.8%
Standard & Poors 500 (.SPX) 1,115.10 1,257.64 1.79 6.7% 14.8%
Dow Jones Utility Average (.UTIL) 398.01 404.99 1.00 3.7% 6.1%
SNL Electric Companies Index 496.35 528.30 0.2% 6.4%
SNL Gas Companies Index 527.77 549.78 2.7% 4.2% 1Prices for Questar Corp. prior to 7/1/10 are adjusted for the spin-off of QEP Resources.
*Ex-Dividend amount incorporated in index
Sources: Bloomberg and SNL Interactive

As shown in Table 5, total returns of electric utilities (as measured by SNL’s market weighted
index of 24 investor-owned electric utilities) lagged the broader indices in 2010, climbing 6.4%
versus gains of 13.8% and 14.8% from the Dow Jones Industrials and the S&P 500,
respectively. Gas utilities lagged the electrics in 2010, rising just 4.2%. Leading our coverage
universe from a total return perspective in 2010 were Questar Corp. and Alliant Energy
Corp., which rose 33.9% (adjusted) and 26.7%, respectively. Two of our utilities posted
negative total returns in 2010, including MDU Resources Group (-11.4%) and Otter Tail
Corp. (-4.4%). Although the utilities owned by these two companies continue to be healthy,
the continuing weakness in the nonregulated operations has continued to hold back the
companies’ shares.

As depicted in Table 6, the utility peer group’s mean 2012 price-earnings ratio is 13.2x, while
the mean EV/EBITDA ratio based on our 2012 forecast and the average dividend yield in our
coverage universe are currently 7.1x and 4.0%, respectively. Otter Tail sports the highest
yield in the group (currently 5.3%) with a payout ratio of 92% of projected 2011 earnings.

RELATIVE PERFORMANCE
D.A. Davidson & Co.
13
Table 6: D.A. Davidson & Co. Utilities Comparison

Price EPS EPS EPS EPS P/E P/E P/E
1/11/11 2009 2010E 2011E 2012E 2010E 2011E 2012E
ALLETE Inc.1,2 ALE N $37.47 $39.00 $1,341 $2.04 $2.27 $2.53 $2.69 15.2 13.6 12.8 92% 1.3 4.8% 70% 5.6 5.5 5.2 44.6% 9.2 9.0 8.5 8.6% 3.3%
Alliant Energy Corp.1 LNT B $37.47 $41.00 $4,154 $1.95 $2.75 $2.87 $3.05 13.6 13.1 12.3 99% 1.4 4.2% 55% 4.5 4.1 3.9 50.5% 7.5 6.9 6.6 10.5% 3.4%
Avista Corp.1 AVA N $22.95 $24.00 $1,298 $1.58 $1.73 $1.80 $1.92 13.2 12.8 11.9 90% 1.2 4.4% 56% 3.9 3.7 3.5 50.2% 7.0 6.7 6.3 8.2% 2.4%
Black Hills Corp.1 BKH N $30.82 $33.00 $1,209 $2.04 $1.46 $2.07 $2.75 21.0 14.9 11.2 81% 1.1 4.7% 70% 3.7 3.5 2.9 55.3% 7.7 7.3 5.9 6.3% 2.0%
Hawaiian Electric Industries, Inc.1 HE N $24.54 $22.00 $2,310 $0.91 $1.23 $1.58 $1.81 20.0 15.6 13.6 98% 1.6 5.1% 79% 5.5 4.7 4.4 53.1% 8.6 7.4 6.9 7.2% 1.2%
IDACORP Inc.1 IDA B $37.57 $42.00 $1,846 $2.64 $2.89 $2.80 $3.00 13.0 13.4 12.5 92% 1.2 3.2% 43% 5.5 4.7 4.3 51.6% 9.8 8.4 7.6 10.1% 3.4%
ITC Holdings Corp.1 ITC B $65.31 $75.00 $3,307 $2.58 $2.84 $3.30 $4.23 23.0 19.8 15.4 74% 3.0 2.0% 39% 7.2 6.5 5.3 69.3% 12.4 11.2 9.1 13.6% 3.4%
MDU Resources Group, Inc.1 MDU B $20.42 $24.00 $3,843 $1.38 $1.24 $1.46 $1.74 16.4 14.0 11.7 88% 1.5 3.2% 45% 4.9 4.4 3.9 36.6% 6.8 6.1 5.5 9.2% 3.9%
MGE Energy Inc.1 MGEE N $42.92 $40.50 $992 $2.21 $2.63 $2.83 $2.97 16.3 15.2 14.5 100% 1.9 3.5% 53% 6.5 6.2 6.0 41.5% 8.9 8.5 8.2 11.6% 4.7%
Northwest Natural Gas Co.1 NWN N $45.44 $48.00 $1,211 $2.83 $2.72 $2.78 $2.87 16.7 16.3 15.8 101% 1.8 3.7% 60% 5.3 5.0 4.9 54.1% 8.8 8.3 8.1 11.3% 3.1%
NorthWestern Corp.1 NWE N $28.96 $30.00 $1,048 $2.02 $2.09 $2.20 $2.30 12.9 12.3 11.7 85% 1.2 4.7% 62% 4.1 3.8 3.7 56.7% 8.3 7.6 7.3 9.9% 2.8%
Otter Tail Corp.1 OTTR N $22.51 $20.00 $809 $0.71 $0.71 $1.30 $1.53 31.5 17.3 14.7 95% 1.3 5.3% 92% 5.4 4.4 4.0 46.1% 9.0 7.3 6.7 3.0% 1.1%
Portland General Electric Co.1 POR N $22.02 $23.00 $1,658 $1.31 $1.75 $1.90 $1.90 12.6 11.6 11.6 94% 1.0 4.7% 54% 3.2 3.0 2.9 53.3% 6.6 6.3 6.0 6.8% 2.0%
Questar Corp.1 STR N $17.86 $18.50 $3,183 $1.03 $1.07 $1.11 $1.19 16.7 16.0 15.0 103% 3.2 2.9% 47% 6.2 5.8 5.5 55.5% 8.6 8.1 7.7 8.8% 3.3%
Xcel Energy, Inc.1 XEL N $23.48 $24.00 $10,803 $1.50 $1.63 $1.72 $1.82 14.4 13.6 12.9 103% 1.4 4.3% 59% 4.1 3.8 3.6 55.3% 7.7 7.0 6.6 10.6% 3.1%
Median, 15 Regional Utilities 16.3 14.0 12.8 94% 1.4 4.3% 56% 5.3 4.4 4.0 53.1% 8.6 7.4 6.9 9.2% 3.1%
Mean, 15 Regional Utilities 17.1 14.6 13.2 93% 1.6 4.0% 59% 5.0 4.6 4.3 51.6% 8.5 7.7 7.1 9.1% 2.9%
Price/
EBITDA
2012E
EV /
EBITDA
2012E
1D.A. Davidson & Co. makes a market in this security.
2For purposes of calculating P/E, P/EBITDA, and EV/EBITDA ratios, the stock price of ALE has been reduced by our $3.00/sh point estimate of the value of ALLETE Properties.
Sources: Company reports and D.A. Davidson & Co. estimates
Payout
Ratio
2011E
ROAA
(ttm)
Debt /
Capital
Price/
EBITDA
2011E
Price
Target
Mkt Cap
($M)
PE '12E /
10 yr
Median
Dividend
YieldCompany Name Symbol Rating
Price/
EBITDA
2010E
P / BV ROAE
(ttm)
EV /
EBITDA
2010E
EV /
EBITDA
2011E

D.A. Davidson & Co.
Two Centerpointe Drive, Suite 400 • Lake Oswego, Oregon 97035 • [phone] • [phone] • www.dadavidson.com
Copyright D.A. Davidson & Co., 2011. All rights reserved.
14
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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 and Michael Bates the research analysts principally responsible for the preparation of this report, will receive
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Ratings Information
D.A. Davidson & Co.’s Institutional Research Rating Scale (maintained since 7/9/02): Buy, Neutral, Underperform

D.A. Davidson & Co. Institutional Research Ratings Buy Neutral Underperform
Risk adjusted return potential azbycx 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 9/30/10) Buy Hold Sell
Corresponding Institutional Research Ratings Buy Neutral Underperform
and Distribution 56% 39% 5%
Corresponding Individual Investor Group Ratings Outperform Market Perform Underperform
and Distribution 88% 12% 0%
Distribution of Combined Ratings 60% 36% 4%
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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
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