2013-02_Moody's Regulated Industry Outlook.pdf

INDUSTRY OUTLOOK
INFRASTRUCTURE FEBRUARY 6, 2013

Table of Contents:
LOW NATURAL GAS PRICES CONTINUE
TO BENEFIT UTILITIES, CUSTOMERS AND
COMMISSIONS 2
REGULATORY SUPPORT IS A CREDIT
POSITIVE, DESPITE LOWER AUTHORIZED ROES 3
STATES TO WATCH IN 2013 5
STABLE FINANCIALS, BUT FALLING CASH
FLOW RATIOS FOR BIG SPENDERS 6
RATE SHOCK AND REGULATORY
CONTENTIOUSNESS ARE PRIMARY RISKS TO STABLE OUTLOOK 8
UTILITIES WILL NEED TO MANAGE CONTINUED FLAT VOLUME GROWTH DUE TO ECONOMY, ENERGY EFFICIENCY
AND DEMAND SIDE MANAGEMENT 9
APPENDIX A – PEER GROUP LISTING 12
APPENDIX B – CAPEX MODEL
ASSUMPTIONS 13
APPENDIX C – INFLECTION POINT DATA 14
MOODY’S RELATED RESEARCH 16

Analyst Contacts:
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Analyst
[e-mail]
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Senior Vice President
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Michael G. Haggarty +1.212.553.7172
Senior Vice President
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Managing Director – Utilities
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US Regulated Utilities:
Regulatory Support, Low Natural Gas Prices
Maintains Stability

Our outlook for the investor-owned US regulated electric and gas utility sector is stable.
This outlook reflects our expectations for the fundamental business conditions in the
industry over the next 12 to 18 months.

» The outlook for the US investor-owned regulated electric and gas utility sector is
stable. We expect a supportive regulatory environment to remain intact over the next
12 to 18 months, providing a timely recovery of prudently incurred costs and
investments through authorized rates. We see a sustained period of low natural gas
prices benefitting utilities seeking other rate base increases; steady and stabilizing
financial ratios, and average annual revenue increases between 3-5%.
» Capital markets remain highly accessible. The sector benefits from flight-to-quality
dynamics, with a return to long-term liquidity facilities as the norm.
» We expect high capital expenditures to continue for the foreseeable future. Large
capex will contribute to rate base growth; however, management must carefully address
the financing of corresponding negative free cash flow, along with the increased rate
pressure on customers.
» States to watch in 2013. We see regulation throughout the US in a business-as-usual
status over the near-term, but there are certain states where our perception of regulatory
supportiveness may change in 2013. States we view as prone to positive changes are
Maryland, Arizona, New Mexico and Texas. States we view as prone to negative
changes are the eastern states impacted by Hurricane Sandy, Illinois, North Carolina,
Ohio and Mississippi. We also see potential for negative changes at the FERC.
» We anticipate financial metrics stabilizing over the near term. Cash recovery of costs
through special recovery mechanisms and the extension of bonus depreciation should
help to offset reduced allowed returns on equity (ROE) and low customer demand.
Companies pursuing large capex plans will see a decline in financial metrics and are at
the highest risk for recovery delays.

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2 FEBRUARY 6, 2013 INDUSTRY OUTLOOK: US REGULATED UTILITIES:
REGULATORY SUPPORT, LOW NATURAL GAS PRICES MAINTAINS STABILITY
Low natural gas prices continue to benefit utilities, customers and commissions
The abundant supply of domestic natural gas is a material credit positive for regulated utilities. Low
natural gas prices have facilitated an easing of fuel costs and power prices throughout the nation and
should continue to provide a backdrop for continued supportive regulatory relationships over the next
12-18 months. The proliferation of shale gas supplies in the US has driven natural gas prices to new
lows as seen in Figure 1, below. This phenomenon, in combination with low customer demand due to
a sluggish recovering economy, mild weather and the effects of energy efficiency and demand side
management (DSM), has kept power prices low - a trend we expect to persist through 2013.
FIGURE 1 Natural Gas Prices and Assumptions1
Source:EIA.gov and Moody’s

Since a peak of over $12 per MMBtu in 2008, gas prices have been on a rather steady decline. Since
fuel and purchased power costs represent the single largest utility cost, and are typically a direct pass-
through to rate payers, customer bills benefit significantly from reduced commodity and procurement
costs.
These variable cost decreases have provided headroom in rates, enabling regulators to allow utilities to
recover rising non-fuel costs through increases in base rates without a material change to the aggregate
amount of a customer’s bill. The offset of fixed cost increases, with variable cost decreases, is largely
unnoticed by the typical residential consumer. The cost offset helps to avoid any negative customer
reaction that might place political pressure on utility commissions and lead to their reluctance to allow
some general rate increases for utilities.
Figure 1 also reflects our belief that the cost environment for natural gas will be low for several years.
We expect this environment to give regulators additional flexibility in maintaining their support for
the recovery of rising utility operating costs. Our natural gas price expectations are influenced by our
view that a sudden “game-changing” growth spurt in demand is unlikely over the near term and that a
gradual increase in gas consumption will occur throughout all corporate sectors in 2013. Our price
assumptions show Henry Hub natural gas at $3.50 per MMBtu for 2013 and at $4.00 thereafter.

1 Our natural gas price assumptions are derived from the Moody’s energy team and its Global Oil and Natural Gas outlook. These price assumptions are used for rating
purposes and as sensitivity inputs for production companies’ projected performance.
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3 FEBRUARY 6, 2013 INDUSTRY OUTLOOK: US REGULATED UTILITIES:
REGULATORY SUPPORT, LOW NATURAL GAS PRICES MAINTAINS STABILITY
Low commodity prices benefit industry liquidity
Low commodity costs have also bolstered utility liquidity profiles, as reduced collateral calls and
inexpensive hedges are increasingly replacing historical positions. The sector continues to benefit
from open and welcoming credit markets, as utilities remain a safe haven for investors looking for
steady and predictable returns. Furthermore, bank support via long-term credit facilities (e.g., 5
year tenors) has returned, following a contraction during the Great Recession.
We expect the industry axiom of open and welcoming markets to continue over the next 12 to 18
months; however, the flight from trouble in Europe may have potentially run its course, and Basel
III requirements on bank capital may weaken the appetite of lender interest in the sector. Since the
next round of refinancing may be more expensive, it will provide an indication of which issuers
refinance only opportunistically and which issuers refinance because maintaining longer-term
liquidity is a core tenet of their financial policy.
Regulatory support is a credit positive, despite lower authorized ROEs
Given the headroom created by lower fuel and purchased power costs, regulatory support for general
rate increases has continued throughout the nation with few states generating any prospect of
immediate concern. The general trend for approved rate increases in the US were 61% of requested
amounts granted in 2012, compared to 55% in 2011 and 57% in 2010. Our ongoing premise is that
regulatory commissions prefer to regulate financially healthy utilities and that utility managements
have core competencies in navigating the regulatory landscape, in order to support the long-term
financial wellbeing of the companies.
One point of interest to note is in the trend of falling allowed ROEs throughout the industry, which
includes several jurisdictions recently crossing below the 10.00% threshold. For example, several
issuers in Oregon (Northwest Natural Gas, A3, negative and Idaho Power, Baa1, stable) and
Washington (Puget Sound Energy, Baa2, stable and Avista Corp. Baa2, stable) dropped below 10.00%
allowed ROE in 2012, with some companies experiencing sub-10.00% allowed ROE in multiple
jurisdictions, such as PacifiCorp (Baa1, stable) and Kansas City Power & Light (Baa2, stable - its
Missouri rate case decision occurred in January 2013). According to SNL Financial, the average
allowed ROE for investor owned utilities, has dropped to 10.07% in 2012 versus 10.21% in 2011.
We have observed two oft-cited reasons behind a commission reducing a utility’s allowed ROE; those
being 1) the prevalence of single item rate making through specific riders and trackers, and 2) the
current low interest rate environment.
Many commissions have reasoned that a heightened use of special cost recovery mechanisms such as
environmental cost trackers, weather normalization adjustments, decoupling mechanisms, and the like,
have reduced the business and financial risk of a utility, thus justifying a reduction in allowed ROE.
Similarly, various commissions cite that due to the current low interest rate environment, a utility’s
cost of capital has been reduced to a point that warrants a lower allowed return and reduced rates for
customers. Figure 2 identifies the declining ROE trend in recent years, compared to the risk free rate
of return on the 30 year US Treasury bill.

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4 FEBRUARY 6, 2013 INDUSTRY OUTLOOK: US REGULATED UTILITIES:
REGULATORY SUPPORT, LOW NATURAL GAS PRICES MAINTAINS STABILITY
FIGURE 2
Authorized Returns on Equity, Treasury Rates and Spread
Source: SNL & Bloomberg
We expect the risk free rate of return to remain low through 2014 and that pressure on ROEs will
persist over the near-term. Despite this trend, we see evidence of cash recovery being sufficient to
sustain most utility financial profiles over the next 12 to 18 months. In Figure 3 below, we observe
that although ROE has declined over the past two years, cash flow from operations (CFO) as a
percentage of revenue has actually increased, potentially due to enhanced cost recovery provided by
trackers and certainly from federal tax incentives such as accelerated bonus depreciation.
FIGURE 3 Cash Generation versus Returns

[1] 2008 Moody’s Adjusted Net Income experienced significant reductions due to large losses in pension plan assets for several companies in our
peer group.
Source: Moody’s

If cash recovery is maintained near current levels, despite minor reductions in ROE, there should be
no negative impact on ratings. However, declining allowed ROE levels are negative because we often
regard the level of allowed ROE as a barometer of the relationship that a specific utility maintains with
its commission. Thus we view punitive reductions to ROE as a credit negative, although the
immediate impact is usually delayed, somewhat, by continued growth in rate base. Furthermore, we
could see negative rating actions if ROEs were to decline to levels near 9.00%, as reduced revenues will
eventually lead to declines in cash flow, or turn investor interest toward competing utilities in more
investor-friendly jurisdictions, or even to different sectors.
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Spread Return on Equity (Left Axis)30Y Treasury (Right Axis)
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30.0%
2005 2006 2007 2008 2009 2010 2011 LTM 3Q12
Avg. ROE [1]Avg. CFO / Revenue

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5 FEBRUARY 6, 2013 INDUSTRY OUTLOOK: US REGULATED UTILITIES:
REGULATORY SUPPORT, LOW NATURAL GAS PRICES MAINTAINS STABILITY
Our primary concern about the trend toward lower industry ROEs is the eventual return of higher
interest rates without the benefit of timely and commensurate adjustments toward higher allowed
ROEs. That is, when the relationship between interest rates and ROEs starts to converge (identified
by the green columns in Figure 2), there is risk for credit deterioration and negative rating impacts.
We view regulatory compacts that have annual updates to ROEs, such as the historical multi-year rate
plans evidenced in states like New York and Vermont, to be more credit supportive in circumstances
of a rising interest rate environment. The allowed ROEs in the historical rate plans of these states are
formulaic, with treasury bill rates as an automatic input to the outcome of an allowed ROE. They also
contain annual rate increases to capture rising costs and investment for the respective utility.
Conversely, in states where there are several years between rate cases, there is a higher risk of allowed
returns lagging interest rate growth and achieving all-in rates that do not reflect the reality of a more
costly economic environment.
States to watch in 2013
Although our general view of regulation throughout the US is business-as-usual over the near-term,
there are certain states where our perception of regulatory supportiveness may change in 2013. Figure
4 identifies those states we view a change in the current regulatory environment, either positive or
negative, as a real possibility in 2013, with a bias to the negative. We also describe the circumstances
motivating our vigilance in these states.
FIGURE 4
Potential Shifts in Regulatory Support
Positive Potential Negative Potential
State Comment State Comment
MD Governor recently wrote to Maryland Public Service
Commission urging them to adopt a task force
recommendation to allow cost recovery mechanism for
investments aimed at improving reliability of a utility's distribution system.
NY, NJ, CT Effects of Hurricane Sandy and potential for deferred recovery of
costs and heightened political influence over rate making.
AZ UNS Gas, Arizona Public Service, and Southwest all recently
received credit supportive rate case outcomes and included
shorter time frames for deciding cases and decoupling. Positive
outlook for UNS Energy and subsidiary Tucson Electric Power (TEP) reflects our expectation for a reasonable outcome in
upcoming TEP rate case.
IL Although recent legislation has improved Commonwealth Edison
and Ameren Illinois' cost recovery prospects, the regulatory and
political environment remains unpredictable with adverse
regulatory decisions continuing to be a continuing trend.
NM The state recently finalized rules allowing rates to be based on
a forward looking test year, but these new rules have yet to be
implemented in a rate order. The legislature is also expected
to promulgate rules following a recent referendum requiring more stringent qualifications for elected commissioners.

NC At Duke Energy, management changes and other developments
following the Progress Energy merger and a subsequent settlement
with North Carolina Utilities Commission has increased regulatory
risk at a time when both of its North Carolina utility subsidiaries are pursuing rate cases.

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6 FEBRUARY 6, 2013 INDUSTRY OUTLOOK: US REGULATED UTILITIES:
REGULATORY SUPPORT, LOW NATURAL GAS PRICES MAINTAINS STABILITY
FIGURE 4
Potential Shifts in Regulatory Support
Positive Potential Negative Potential
TX Political and regulatory intervention seeks to alter the market
structure to benefit generators.
OH Although Electric Security Plans provide some clarity through 2014,
the market transition toward fully deregulated generation could
negatively affect utility financials.
MS Unanimous Mississippi Public Service Commission vote to deny
Mississippi Power’s request of financing costs on Kemper County IGCC plant due to a pending Sierra Club lawsuit was a credit
negative. A settlement agreement on cost recovery has since been
reached.
FERC Changes already enacted to the FERC rate making methodology in
California and the current legal battle regarding New England transmission ROE reductions threaten pervasive changes to the
degree of financial support offered by the FERC.
Stable financials, but falling cash flow ratios for big spenders
In recent years, utilities have elected to take advantage of favorable tax policies which boost near term
cash flow in exchange for reduced rate base growth in the future – specifically, bonus depreciation.
This voluntary tax election also benefits utilities because it temporarily boosts key financial metrics
such as CFO pre-WC to debt2 and CFO pre-WC interest coverage. Since 2009, tax policy changes
such as those associated with accelerated bonus depreciation, uniform capitalization and capitalized
repairs have provided the industry with one-time changes to tax accounting methods that have
generated significant amounts of cash flow from tax savings or refunds.
We estimate that, on average, a utility company’s cash flow to debt metric benefitted anywhere from
200 to 300 basis points in any given year (2009-12), depending on the timing of when a given
company exercised accounting methodology changes. Although these one-time effects have largely run
their course, we note that the recent extension of 50% bonus depreciation will continue to support (or
inflate, if comparing to organic run-rate potential) cash flow levels in 2013.
As seen in Figure 5, even with benefits from 100% bonus depreciation in 2011 and 50% in 2012, cash
flow coverage of debt has declined for our peer group since the height of 2010.

2 Cash Flow from Operations before Working Capital to debt

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7 FEBRUARY 6, 2013 INDUSTRY OUTLOOK: US REGULATED UTILITIES:
REGULATORY SUPPORT, LOW NATURAL GAS PRICES MAINTAINS STABILITY
FIGURE 5
Key Cash Flow Metrics
Source: Moody’s

This inflation due to one-time benefits is a risk, as utilities will likely have lower cash flow when bonus
depreciation ends, all else being equal. In Figure 6, we estimate the magnitude of the effects of bonus
depreciation (assuming 70% of capex represents qualifying assets and a 35% tax rate) on the peer
group’s CFO pre-WC to debt. Without bonus depreciation, the financial profile of the group falls
from a level in-line with the low Baa1 rating range of our Regulated Electric & Gas rating
methodology, to a level solidly in the Baa3 range.
FIGURE 6 Effects of Bonus Depreciation

Source: Moody’s

Nevertheless, we expect financial metrics to remain relatively steady in 2013, given our assumptions of
ongoing rate relief, the continuance of low interest rates, cash flow stability provided by cost recovery
mechanisms, government policy from the extension of bonus depreciation, and the potential for the
Moving Ahead for Progress in the 21st Century Act (MAP-21) to reduce the funding requirements for
pension obligations. More importantly, we think managements will utilize a balanced mix of debt and
equity to keep the leverage and capitalization of their utilities in a conservative range and not test
negatively biased rating actions.
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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 LTM 3Q12
CFO pre-WC Interest Coverage (x)CFO pre-WC / Debt (%)CFO pre-WC less Div / Debt (%)
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CFO pre-WC / Debt
CFO pre-WC / Debt (x Bonus Depr)
Baa1 range
Baa2 range
Baa3 range

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8 FEBRUARY 6, 2013 INDUSTRY OUTLOOK: US REGULATED UTILITIES:
REGULATORY SUPPORT, LOW NATURAL GAS PRICES MAINTAINS STABILITY
Although we expect metrics for the industry to be stable, companies with robust capital programs, such
as Virginia Electric and Power Company (A3, stable), Indiana Michigan Power company (Baa2,
stable), SCANA Corporation (Baa3, stable), and Public Service Company of Oklahoma (Baa1, stable),
could experience a decline in financial metrics due to increased debt associated with growing free cash
flow deficits. In each of these cases, we anticipate that the resulting financial profile will still be
appropriate for each company’s current rating.
Rate shock and regulatory contentiousness are primary risks to stable outlook
Capital expenditure plans for most US utilities have rapidly outpaced depreciation and amortization
(D&A) levels in recent years. The need for environmental retrofits, growth in renewable energy use
and basic system maintenance and upgrades are the primary drivers for the capex growth trend
observed amongst our sample utility peer group (made up of 45 industry peers; see Appendix A).
Figure 7 shows the relationship between capex and D&A over the past ten years for these companies.
FIGURE 7 Capex Levels for Moody’s Peer Group
($ millions)
Source: Moody’s

We view capital investment in rate base positively over the longer term, as it contributes to growth in
operating cash flow. Given the low commodity price environment, we assume that these growth
investments will be recovered through base rate cases on a timely basis without contentious regulatory
proceedings. However, given the magnitude of these investments, corresponding increases in customer
bills and associated financing needs, we see the need for each company to carefully execute their capital
raising strategies in order to maintain stable credit profiles across the sector. We view the relationship
between rising customer bills and the current economic environment as a potential credit negative.
While the risk of this scenario (i.e., significant rate shock) is considered to be remote, if there were a
reversal in the plodding economic recovery, and lower variable costs were no longer sufficient to offset
the higher costs of capex programs, recovery of these costs could be delayed over the intermediate-term
in order to avoid customer rate shock and/or rate fatigue.
In order to gain an appreciation for the magnitude of these prospective risks, we analyzed the potential
rate impact of expected capex levels for companies involved in large capital programs. Figure 8 shows
the utilities that we believe have the largest potential rate increases over the near-term. The analysis
includes 2013-2014 capex data made available in 2011 10K company disclosures and assumptions
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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 LTM 3Q12
Capex ($)Capex / D&A (x)

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9 FEBRUARY 6, 2013 INDUSTRY OUTLOOK: US REGULATED UTILITIES:
REGULATORY SUPPORT, LOW NATURAL GAS PRICES MAINTAINS STABILITY
explained in Appendix B (also see our report “High Capital Expenditures Adding to Rate Pressure for
Utilities” (October 2012)). Although the time horizon of the capital expenditures extends outside of
our outlook horizon, we find it valuable to determine what companies will require substantial rate
increases to recover capital expenditures, in order to monitor management’s near-term response to
mitigate and/or absorb future risks to rate recovery. Proactive management strategies, in our opinion,
include implementing cost cutting measures, strengthening the balance sheet and bolstering liquidity.
Several of these utilities were recently awarded increases in rate cases that were determined in late
2012.
FIGURE 8
Largest Potential Rate Increases
Company Rating
Total Rate Increase for 2013-2014 Spending Estimated Capex 2013-2014 (millions) CFO pre-WC / Debt LTM 3Q12 Projected CFO pre-WC / Debt 2014 Metric Cushion Supportiveness of Regulation
Louisville Gas and Electric Baa1 18% $1,538 27% 23% 7% Above Average (A)
Mississippi Power A3 18% $1,235 14% 16% -4% Above Average (A)
South Carolina Electric & Gas Baa2 12% $2,600 17% 17% 0% Above Average (A)
Kentucky Utilities Baa1 11% $1,583 23% 21% 5% Above Average (A)
Southwestern Public Service Baa2 11% $1,160 24% 22% 6% Average (Baa)
PPL Electric Utilities Baa2 10% $1,689 22% 21% 5% Average (Baa)
Source: SNL, 10K and EIA filings, Moody’s

Over the next two years, some of these companies could find themselves poorly positioned within their
rating category as a result of their cash outlay. Although we assume a 50% debt financing of these
expenditures, negative ratings action could occur if management takes a more aggressive leverage
policy or if cash flow recovery is slower than expected. Thus, attention will be given to the progress of
each company’s capex program and the regulatory developments that dictate the timing and duration
of recovery.
Utilities will need to manage continued flat volume growth due to economy,
energy efficiency and demand side management
Another key to our outlook assumptions is the industry’s ability to pass through base rate increases
(aided by low commodity costs) without the benefit of robust organic growth in customers or usage
per customer. Flat to declining demand (see Figure 9) represents yet another key risk to the stability
of our outlook, as it places the full amount of rising cost pressure on a static amount of customer use.

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10 FEBRUARY 6, 2013 INDUSTRY OUTLOOK: US REGULATED UTILITIES:
REGULATORY SUPPORT, LOW NATURAL GAS PRICES MAINTAINS STABILITY
FIGURE 9
Retail Sales by Customer Class
*2012 data through November
Source: EIA.gov

Effects of a struggling economy, mild weather and continuing efforts promoting more efficient
appliances and customer conservation (aka demand side management, DSM) are all contributing to
very-low-to-declining demand growth across the majority of the sector. Whereas fiscal and monetary
policy is still attempting to prod the economy out of the Great Recession and spur growth, federal and
many state governments are taking significant measures to increase greater energy efficiency through
various means including appliance and equipment standards, building codes, transportation policies
and utility programs. These policies are gaining momentum across the country, with most states
increasing their budget allocation for efficiency programs in recent years.
The credit implication of these initiatives are largely twofold. On one hand, we view utilities having a
high degree of fixed cost recovery in the demand portion of rates as better positioned to withstand a
low demand environment. Thus, utilities in states such as California and New York, where
legislatively backed decoupling mechanisms have been implemented at essentially every utility, should
maintain relatively stable and predictable financial results, even with slumping energy sales. On the
other hand, utilities that have a greater portion of fixed costs in the energy or other variable portions of
the rate payer’s bill have greater exposure to fluctuations in demand and a higher potential for negative
rating action in a continuing low demand environment.
Since a growing utility can recover more fixed costs through margin expansion from new customers,
reducing the need for general rate increases, a low demand or no growth environment ups the ante for
utility asks in rate cases. Rate cases under no growth scenarios become must-haves for a utility, in
order to recover increasing operating costs. The addition of static growth to the aforementioned
mixture of rising consumer rates in a depressed economic environment might lead to breach of the
inflection point (i.e., the point at which customers complain to regulators about their inability to pay
for continued utility rate increases) in one or more states. Appendix C details a state-by-state
comparison of inflection point sensitivity, based on income, average utility bill and retail rates. States
that we suspect to be potential areas of inflection point concern (e.g., Kansas, Michigan, Missouri and
West Virginia) are those where utility bill rate increases have grown at a high rate since 2008, and also
where the utility bill represents a relatively high percentage of the rate payer’s discretionary income.
One point of growth differentiation is found with local distribution companies (LDCs) that are
benefitting from the attractive economics of heating one’s home or small business with natural gas
versus propane or oil. Service territories containing a large amount of customers who have historically
900,000
1,000,000
1,100,000
1,200,000
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1,400,000
1,500,000
2006 2007 2008 2009 2010 2011 2012*
MW
h
Residential Commercial Industrial

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11 FEBRUARY 6, 2013 INDUSTRY OUTLOOK: US REGULATED UTILITIES:
REGULATORY SUPPORT, LOW NATURAL GAS PRICES MAINTAINS STABILITY
Federal Government actions represent a wild card
Although Congress has approved a short-term extension of the debt ceiling, ultimate policies
regarding the debt ceiling and budget sequestrations are highly uncertain and have the potential
to impede the already sluggish economic growth. On January 30, the Commerce Department
reported that the economy shrunk by 0.1% in 4Q12 – the first economic contraction since the
recession ended in 2009. Uncertainties surrounding government spending and the economy’s
durability in 2013 could have negative effects that exacerbate an already low power demand
environment; a negative for the sector.
These economic vagaries are at play while newly re-elected President Obama’s eventual nominee
to replace Lisa Jackson, the head of the Environmental Protection Agency, may try to generate
renewed momentum for additional environmental compliance regulations. However, the slow
and litigious process for promulgating regulations means that their impact would be unlikely to
have a material impact in the near-term.

used propane or oil for heating have begun converting their heating systems to run on natural gas,
given the exceedingly low cost for natural gas. Many of these conversion opportunities are significant
for companies like UIL Corp. (Baa3 stable) and UGI Utilities (A3 stable) in the Northeast, which has
traditionally relied on oil for space heating and the natural gas grid has been late to develop.

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12 FEBRUARY 6, 2013 INDUSTRY OUTLOOK: US REGULATED UTILITIES:
REGULATORY SUPPORT, LOW NATURAL GAS PRICES MAINTAINS STABILITY
Appendix A – Peer group listing
MDY Rating MDY Outlook
Madison Gas and Electric [1] A1 Stable
PECO Energy A3 Stable
Public Service Electric and Gas A3 Stable
Wisconsin Energy A3 Stable
ALLETE, Inc. Baa1 Stable
Alliant Energy Baa1 Stable
Baltimore Gas and Electric [2] Baa1 Stable
Consolidated Edison, Inc. Baa1 Stable
Integrys Energy Group, Inc. Baa1 Stable
MidAmerican Energy Holdings Co. Baa1 Stable
NextEra Energy, Inc. Baa1 Stable
OGE Energy Corp. Baa1 Stable
PG&E Corporation Baa1 Stable
Sempra Energy Baa1 Stable
Southern Company (The) Baa1 Stable
Xcel Energy Inc. Baa1 Stable
American Electric Power Baa2 Stable
Commonwealth Edison [2] Baa2 Stable
Dominion Resources Inc. Baa2 Stable
DTE Energy Baa2 Positive
Duke Energy Baa2 Stable
Edison International Baa2 Stable
IDACORP, Inc. Baa2 Stable
ITC Holdings Corp. Baa2 Stable
Northeast Utilities Baa2 Stable
Pinnacle West Capital Corporation Baa2 Stable
TECO Energy, Inc. Baa2 Stable
Westar Energy, Inc. Baa2 Stable
Ameren Corporation Baa3 Stable
Black Hills Corporation Baa3 Positive
CenterPoint Energy, Inc. Baa3 Positive
Cleco Corporation Baa3 Stable
Entergy Corporation Baa3 Stable
FirstEnergy Corp. Baa3 Stable
Great Plains Energy Baa3 Stable
NiSource Inc. [3] Baa3 Stable
Pepco Holdings, Inc. Baa3 Stable
PPL Corporation Baa3 Stable
SCANA Corporation Baa3 Stable
UIL Holdings Baa3 Stable
CMS Energy Ba1 Positive
DPL Inc. Ba1 Under Review - Down
NV Energy Inc. Ba1 Stable
PNM Resources, Inc. Ba1 Stable
Puget Energy, Inc. Ba1 Stable
UNS Energy Ba1 Positive
[1] Madison Gas and Electric is used as a proxy for its parent, MGE Energy, which is not rated.
[2] Significant operating subsidiaries are used when its parent company is not rated under the Regulated Electric & Gas Utilities methodology.
[3] The Baa3 rating is the Senior Unsecured rating at its guaranteed financing subsidiary.

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13 FEBRUARY 6, 2013 INDUSTRY OUTLOOK: US REGULATED UTILITIES:
REGULATORY SUPPORT, LOW NATURAL GAS PRICES MAINTAINS STABILITY
Appendix B – Capex Model Assumptions
We calculated the revenue requirements for utilities assuming a 50/50 debt to equity capital structure,
10.00% ROE, and a 30-year expected life for the capex. Based on our estimates, the revenue
requirements associated with the capex is approximately 13.8% of the annual spending. Increases in
the equity ratio or equity and debt returns raise the revenue requirement, and increases in the useful
life of the asset reduce the revenue requirement. We also assumed underlying revenue growth of 1%
based on customer and usage growth. Based on our conversations with utilities, the revenue
requirement varies between 12-18% depending on the capital structure, allowed returns, and other
rate recovery treatment.
FIGURE 10 Generic Revenue Requirement Example

Step 1: Calculate the Weighted Average Cost of Capital
Debt
Equity
Step 2: Calculate Revenue Requirement
Capital Expenditures
Pre-Tax Debt Return x =
Pre-Tax Equity Return x =
Depreciation @ 30 years /=
Revenue Requirement
Step 3: Project Income Statement
Income Statement
Revenue Requirement
- D&A
- Interest Exp
= Pre-Tax Income
- Tax Expense
= Net Income
+ Depreciation
= Cash from Operations (NI + D&A)
CFO / Debt
Net Income
/ Equity
= Return on Equity
50%x =7.7%
% of Capitalization
50%x =
Pre-Tax WACC @ 35% rate
2.75%
100
100 2.75%
100 7.69%
100 30
7.75%WACC
2.7
5.0
3.3
2.8
7.7
After Tax Return
5.50%
10.00%
After Tax WACC
2.75%
5.00%
10.4%
10%
5.0
2.8
7.7
3.3
13.8
13.8
3.3
8.3
17%
50

INFRASTRUCTURE

14 FEBRUARY 6, 2013 INDUSTRY OUTLOOK: US REGULATED UTILITIES:
REGULATORY SUPPORT, LOW NATURAL GAS PRICES MAINTAINS STABILITY
Appendix C – Inflection point data
Average Bill / Disposable Income Average Retail Rate (cents per kilowatt hour)
2008 2009 2010 2011 2008 2009 2010 2011
2008 - 2011 CAGR
West Virginia 3.4% 3.7% 4.3% 4.2% 7.06 7.90 8.79 9.39 7.4%
Michigan 2.7% 2.9% 3.2% 3.3% 10.75 11.60 12.46 13.27 5.4%
Missouri 3.1% 3.3% 3.8% 3.8% 8.00 8.54 9.08 9.75 5.1%
Kansas 2.7% 3.0% 3.4% 3.4% 8.88 9.53 10.03 10.65 4.6%
Nebraska 2.7% 2.9% 3.1% 3.0% 7.87 8.52 8.94 9.32 4.3%
Pennsylvania 3.3% 3.3% 3.7% 3.7% 11.35 11.65 12.70 13.26 4.0%
Kentucky 3.9% 4.0% 4.4% 4.2% 7.94 8.37 8.57 9.20 3.7%
North Dakota 2.7% 2.9% 2.8% 2.8% 7.51 7.58 8.13 8.58 3.4%
Ohio 3.4% 3.5% 3.9% 3.7% 10.06 10.67 11.32 11.42 3.2%
Indiana 3.5% 3.7% 3.9% 3.9% 8.87 9.50 9.56 10.06 3.2%
Wisconsin 2.9% 3.0% 3.2% 3.1% 11.51 11.94 12.65 13.02 3.1%
South Dakota 2.7% 2.9% 3.0% 2.8% 8.27 8.49 8.97 9.35 3.1%
Minnesota 2.5% 2.6% 2.7% 2.7% 9.74 10.04 10.59 10.96 3.0%
Idaho 3.1% 3.6% 3.4% 3.3% 6.99 7.80 7.99 7.87 3.0%
Oregon 3.2% 3.3% 3.2% 3.4% 8.49 8.68 8.87 9.54 3.0%
Vermont 2.9% 2.9% 3.0% 3.0% 14.48 14.90 15.57 16.26 2.9%
Tennessee 4.3% 4.4% 4.7% 4.7% 8.91 9.32 9.23 9.98 2.9%
South Carolina 4.8% 5.1% 5.6% 5.3% 9.89 10.44 10.50 11.05 2.8%
Georgia 4.3% 4.5% 4.9% 4.9% 9.93 10.13 10.07 11.05 2.7%
Colorado 2.1% 2.2% 2.5% 2.5% 10.13 10.00 11.04 11.27 2.7%
Wyoming 2.0% 2.3% 2.2% 2.3% 8.21 8.58 8.77 9.11 2.6%
Virginia 3.5% 3.9% 3.9% 3.7% 9.62 10.61 10.45 10.64 2.6%
Iowa 2.9% 3.1% 3.3% 3.0% 9.49 9.99 10.42 10.46 2.5%
New Mexico 2.5% 2.6% 2.7% 2.8% 10.01 10.02 10.52 11.00 2.4%
Washington 2.5% 2.6% 2.6% 2.7% 7.54 7.68 8.04 8.28 2.4%
Utah 2.6% 2.7% 2.8% 2.8% 8.26 8.48 8.71 8.96 2.1%
Arizona 4.1% 4.5% 4.5% 4.4% 10.27 10.73 10.97 11.08 1.9%
North Carolina 4.0% 4.4% 4.8% 4.4% 9.52 9.99 10.12 10.26 1.9%
California 2.5% 2.8% 2.7% 2.6% 13.81 14.74 14.75 14.78 1.7%
Montana 2.9% 3.0% 2.9% 3.1% 9.13 8.93 9.16 9.75 1.7%
Hawaii 6.6% 4.9% 5.4% 6.2% 32.50 24.20 28.10 34.68 1.6%
Alabama 5.2% 5.3% 5.7% 5.4% 10.40 10.66 10.67 11.09 1.6%
Alaska 3.2% 3.4% 3.1% 3.3% 16.55 17.14 16.26 17.62 1.6%
Illinois 2.6% 2.7% 2.9% 2.8% 11.07 11.27 11.52 11.78 1.6%
New Hampshire 2.9% 3.1% 3.0% 3.0% 15.68 16.26 16.32 16.52 1.3%
District of Columbia 1.8% 1.9% 2.1% 1.8% 12.79 13.76 14.01 13.40 1.2%

INFRASTRUCTURE

15 FEBRUARY 6, 2013 INDUSTRY OUTLOOK: US REGULATED UTILITIES:
REGULATORY SUPPORT, LOW NATURAL GAS PRICES MAINTAINS STABILITY
Average Bill / Disposable Income Average Retail Rate (cents per kilowatt hour)
2008 2009 2010 2011 2008 2009 2010 2011
2008 - 2011 CAGR
Oklahoma 3.6% 3.6% 4.0% 4.0% 9.09 8.49 9.14 9.47 1.0%
United States 3.4% 3.6% 3.7% 3.6% 11.26 11.51 11.54 11.72 1.0%
New Jersey 3.0% 3.0% 3.3% 3.0% 15.66 16.31 16.57 16.23 0.9%
New York 3.1% 3.0% 3.2% 3.1% 18.30 17.50 18.74 18.26 -0.1%
Florida 4.3% 5.0% 4.6% 4.3% 11.65 12.39 11.44 11.51 -0.3%
Delaware 4.4% 4.5% 4.7% 4.3% 13.93 14.07 13.80 13.70 -0.4%
Mississippi 5.4% 5.3% 5.6% 5.3% 10.39 10.22 9.87 10.17 -0.5%
Nevada 3.8% 4.4% 4.1% 3.7% 11.93 12.86 12.36 11.61 -0.7%
Arkansas 4.1% 4.1% 4.3% 4.1% 9.27 9.14 8.86 9.02 -0.7%
Maryland 4.1% 4.4% 4.4% 3.7% 13.84 14.98 14.32 13.31 -1.0%
Maine 3.1% 3.0% 2.9% 2.8% 16.20 15.65 15.71 15.38 -1.3%
Connecticut 3.6% 3.9% 3.6% 3.3% 19.55 20.33 19.25 18.11 -1.9%
Louisiana 4.6% 3.7% 4.3% 4.1% 10.28 8.10 8.98 8.96 -3.4%
Texas 4.9% 5.0% 4.7% 4.6% 13.04 12.38 11.60 11.08 -4.0%
Massachusetts 2.9% 2.8% 2.6% 2.4% 17.68 16.87 14.59 14.67 -4.6%
Rhode Island 3.3% 2.9% 3.0% 2.6% 17.45 15.60 15.92 14.33 -4.8%
The inflection point data contains average household income statistics from the Bureau of Economic
Analysis (BEA) and average retail electric prices according to the Energy Information Administration
(EIA). As the EIA information contains average retail prices throughout each state, including the rates
charged by municipal utilities and generation and transmission cooperatives, a specific investor owned
utility’s rates and CAGR may differ from the averages presented here.

INFRASTRUCTURE

16 FEBRUARY 6, 2013 INDUSTRY OUTLOOK: US REGULATED UTILITIES:
REGULATORY SUPPORT, LOW NATURAL GAS PRICES MAINTAINS STABILITY
Moody’s Related Research
Industry Outlooks:
» 2013 Utilities and Power Outlook Presentation, December 2012 (148183)
» Six Month Update: US Regulated Utilities Outlook Stable, But Plentiful Gas Changes The
Landscape, July 2012 (143891)
» Six Month Update: US Unregulated Power Companies, July 2012 (143650)
» US Regulated Electric and Gas Utilities: Stable Despite Rising Headline Rhetoric, January 2012
(137878)
» US Unregulated Power Companies: Hunkering Down in Hope for Better Prices, January 2012
(138140)
Special Comments:
» Global Oil and Natural Gas Industry: Oil Prices Support Global Investment in 2013, But
Demand Challenges Remain, January 2013 (148596)
» Global Infrastructure Focus Newsletter, January 2013 (148638)
» US Extends Tax Credit for Wind Power, a Credit Positive for Developers and Utilities, January
2013 (148915)
» Questioning the New York-New Jersey Metropolitan Electrical Grid After Hurricane Sandy,
December 2012 (147995)
» Sandy Hits New York Area Utilities Hard But Leaves Credit Quality Intact, November 2012
(147069)
» Pacific Northwest Utilities: Regulatory Support Paves Way for Improving Credit Profiles,
November 2012 (146170)
» US Unregulated Utilities and Power Companies: Rising Rate Pressure for Investment-Grade
Issuers as Speculative-Grade Restructurings Move Center Stage, November 2012 (146765)
» US Utilities: Low Gas Prices and Weak Demand are Masking US Nuclear Plant Reliability Issues,
November 2012 (146663)
» US Investor-Owned Utilities: High Capital Expenditures Adding to Rate Pressure for Utilities,
October 2012 (144792)
» US Investor-Owned Utilities: Bonus Depreciation and Pension Adjustments Create Short Term
Cash Bridge But Longer Term Issues Persist, October 2012 (146039)
» Decoupling and 21st Century Rate Making: Increased Usage of Decoupling Mechanisms is Credit
Positive, November 2011 (136797)
Rating Methodologies:
» Regulated Electric and Gas Utilities, August 2009 (118481)
» Natural Gas Pipelines, November 2012 (146415)
To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients.

INFRASTRUCTURE

17 FEBRUARY 6, 2013 INDUSTRY OUTLOOK: US REGULATED UTILITIES:
REGULATORY SUPPORT, LOW NATURAL GAS PRICES MAINTAINS STABILITY

Report Number: 149379
Author
Ryan Wobbrock
Production Associate
Ken Jiang
Associate Analysts
Stacy Nemeroff
Sid Menon

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[e-mail]
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[e-mail]
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Vice President – Senior Credit Officer
[e-mail]
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Vice President – Senior Analyst
[e-mail]
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[e-mail]
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[e-mail]
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