COC Utilities Report 09-01-10.pdf

Please refer to page 12 of this report for detailed disclosure and certification information.
INDUSTRY UPDATE
Institutional Equity Research

September 14, 2010 Utility Monthly

Prices: (9/14/10)

Industry:
Utilities

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

Michael Bates
Research Associate
406.791.7216
[e-mail]

Regulators Continue to Consider Decoupling Mechanisms

• Our BUY-rated utilities are Avista Corp., Alliant Energy Corp., IDACORP, Inc.,
MDU Resources Group, and NorthWestern Corp. We currently rate Hawaiian
Electric Industries, Inc. and Otter Tail Corp. as UNDERPERFORM.
• American Transmission Company (the Wisconsin-based transmission utility
owned in part by Alliant Energy, ALLETE, and MGE Energy) released its
updated 10-year expansion plan. The new plan includes recommendations for
$3.4 billion in improvements by 2019, up from $2.5 billion a year ago.
• Avista Corp. announced that a settlement has been filed in its Washington
general rate case which (if approved) would bring the utility an additional
$34.1 million in electric and gas revenues.
• Regulators in Colorado approved a settlement in Black Hills Corp.’s general rate
case, granting the utility a $17.9 million revenue increase.
• Regulators in Hawaii handed down their approval of the decoupling mechanism
proposed by Hawaiian Electric Industries, Inc.
• IDACORP, Inc. closed a 15-month renewable energy RFP process without
awarding a new renewables contract, announcing that no competitive renewable
resources had been presented.
• ITC Holdings Corp. received approval from MISO to construct the Thumb Loop
project, and will now seek siting approval from the Michigan Public Service
Commission.
• MDU Resources Group filed a new electric general rate case for its Montana
customers.
• An agreement has been signed by WAPA and Tonbridge Power to provide ARRA
funding for a project that would compete with the first leg of NorthWestern
Corp.’s Renewable Collector System.
• Northwest Natural Gas Company submitted filings with regulators in Oregon
and Washington for its annual Purchased Gas Adjustment, pointing to a small rate
decrease in the upcoming heating year.
• Portland General Electric announced that the third and final phase of its 217-
turbine Biglow Canyon Wind Farm has been completed on schedule and under
budget.

D.A. Davidson & Co.
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Decoupled utility rate models are receiving more attention by regulators in several states
serviced by utilities under our research coverage. Utilities under the traditional (volume-based)
regulatory model face a financial disincentive when required to promote new energy efficiency
and conservation programs. Although regulators have typically allowed utilities to recover
costs associated with energy efficiency/conservation programs, a volume-based rate model
does not generally have provisions to make the utility whole for the corresponding decrease in
energy sales that occurs under such programs. To the extent that these expenses are not
recovered, the utility cannot realize the rate of return authorized by regulators. In an effort to
combat this issue, regulators in some states have shown a willingness to implement proposals
for various forms of decoupling initiatives designed to preserve the economic viability of utility
companies, while encouraging programs that result in lower energy usage.

Skeptics of decoupling contend that companies can be effective in promoting conservation
under traditional rate designs, and that decreases in sales due to factors unrelated to
conservation would give utilities an undeserved shelter from unfavorable circumstances such
as weather or recessions. To counter this argument, proponents assert that a properly-
constructed decoupling mechanism can reduce a company's risk of not fully recovering its
costs, averting a higher cost of capital for the utility and, by association, customer rates.

Decoupling initiatives normally involve a mechanism that tracks differences between
authorized revenues and revenues actually received. In practice, decoupling mechanisms are
adjusted regularly (typically once a year) for factors such as customer growth and inflation, and
are normally adjusted to exclude any weather-caused effects on consumption. Typical
limitations imposed by regulators include a cap on over- or under-collections in the balancing
account, reductions in the allowed ROE to reflect the reduced risk borne by the utility, and
regular reports which show the effect of conservation programs implemented by the utility.

Alliant Energy Corp. and MGE Energy, Inc.
In 2008 the Public Service Commission of Wisconsin (PSCW) initiated a proceeding to explore
the merits of implementing electric rate decoupling mechanisms for the utilities in that state,
including Alliant Energy and MGE Energy. During the course of the proceeding, the utilities
for the most part expressed apprehension to the idea of a uniform decoupling policy for all
utilities in the state, as opposed to creating a unique mechanism for each company. As of
now, the PSCW has not required either utility to further explore a decoupled revenue model.

Hawaiian Electric Industries, Inc.
On August 31, 2010, the Hawaiian Public Utilities Commission (HPUC) approved the
decoupling mechanism proposed by Hawaiian Electric in connection with the Hawaiian Clean
Energy Initiative (HCEI) signed between the utility and the state government in 2008 as a way
to encourage energy conservation and stabilize the utility's revenue stream. The utility’s initial
proposal has been under review by the Commission and intervenors since it was filed in
January 2009. The system includes a balancing account to track differences between actual
and forecasted margins caused by changes in usage. Over-collections are refunded to
ratepayers while under-collections are recovered in surcharges. The PUC also adjusts the
utilities’ revenue requirement annually to reflect inflation, changes in customer count, and other
factors.

IDACORP, Inc.
Since 2007, Idaho Power, the utility subsidiary of IDACORP, has utilized the Fixed Cost
Adjustment (FCA) pilot decoupling mechanism. The FCA functions independently from energy
sales volume and is designed to adjust rates up or down to recover the difference between the
fixed costs actually recovered in rates and the fixed costs authorized for recovery in the most
recent rate case. As implemented, the FCA covers approximately 64% of IPC’s total costs.

ITC Holdings Corp.
Although ITC Holdings is not a traditional, vertically-integrated electric utility, its network
transmission rates could technically be referred to as decoupled from weather or volume
sensitivity through a true-up mechanism, whereby ITC is able to refund or collect additional
revenues (with interest) in the event billed revenues deviate from the actual net revenue
requirements.

Portland General Electric Co.
As part of its 2008 general rate case, the Oregon Public Utilities Commission (OPUC) granted
Portland General Electric’s request to apply a decoupling mechanism for a 2-year test period
beginning on February 1, 2009. The OPUC’s authorization for the plan’s implementation was
Rate Decoupling
D.A. Davidson & Co.
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contingent on several conditions, including its acceptance of an ROE of 10%, rather than the
10.1% approved under the traditional ratemaking model. Under PGE’s decoupling plan, the
utility will receive revenues as if it had a flat distribution charge while customers continue to be
billed on a per-kWh basis. The mechanism includes a fixed cost recovery true-up mechanism
referred to as a Sales Normalization Adjustment (SNA), which tracks differences between
residential and commercial customer collections and the rates authorized in the recent rate
case. The mechanism also includes a Loss Recovery Rider (LRR) for large nonresidential
customers with loads less than 1 MW, based on the difference between energy efficiency
savings and the load forecast.

Avista Corp.
Since January 2007, a pilot natural gas decoupling mechanism has been in operation for
residential and small commercial customers of Avista Corp. in the state of Washington. The
mechanism adjusts for changes in load due to conservation and price elasticity, but does not
adjust for abnormal weather. The Washington Utilities and Transportation Commission
(WUTC) approval of the mechanism came with several provisions, including a 2% limit to
annual rate adjustments, the utility must prepare an annual report of its conservation activities
which must be verified by a third party, and the maximum allowed return on rate base is 8.2%.

MDU Resources Group, Inc.
On December 1, 2005 Cascade Natural Gas, a natural gas utility subsidiary of MDU
Resources Group, Inc., implemented the “Conservation Alliance Plan Decoupling
Mechanism” in Washington, which allows it to recover margin differences resulting from
residential and commercial customer energy conservation. As part of the utility’s agreement
with regulators, the utility was required to ramp up its advertising for conservation programs, as
well as contribute a portion of its revenues to agencies in the area which promote conservation
and assist low-income ratepayers. Cascade has also received regulatory approval from the
OPUC to decouple its margins from weather and conservation.

Northwest Natural Gas Co.
Since October 2002, NW Natural has operated under a natural gas rate decoupling
mechanism (referred to in that state as a conservation tariff), designed to adjust the margin
realized by the utility for changes in residential and commercial customers’ energy
conservation efforts. The effectiveness of Oregon’s decoupling model is reviewed periodically,
and the OPUC extended its use through at least October 2012. The OPUC has also approved
a weather normalization mechanism to stabilize the utility’s collection of fixed costs by
adjusting residential and commercial customer billings based on temperature variances from
average weather. We note that NW Natural has not been granted authority to implement a
decoupling or weather normalization mechanism in Washington, as regulators prefer to defer a
decision in that matter until the pilot decoupling program currently in use by Avista has been
more fully evaluated.

On August 5th Black Hills Corp. announced that the Colorado Public Utilities Commission
(CPUC) issued a decision approving the settlement in the utility’s general rate case. The utility
was granted a revenue increase of $17.9 million, based on a 10.5% ROE and a 52% equity
capital structure. The new rates took effect on August 6th.

*****

On August 18th Black Hills Corp. announced that the Nebraska Public Service Commission
(NPSC) issued a decision in its natural gas rate case in that state. The NPSC approved an
annual revenue increase of $8.7 million (~4.7%), versus the utility’s requested increase of
$12.1 million. The new rates are based on a 10.1% ROE and a 52% equity capital structure
and will take effect on September 1, 2010.

Importantly, Black Hills has been collecting interim rates since March 1, 2010 which would
translate into an annual increase of $12.1 million. Since the new rates approved by the NPSC
are lower than the interim rates, customers will receive refunds for the difference between the
two rates after the refund plan specified in the order has been filed and approved by the
NPSC.

*****

On September 1st Black Hills Corp. announced that it filed a settlement agreement in its Iowa
gas general rate case. The settlement calls for a $3.4 million (+2.1%) increase, compared to
REGULATORY DEVELOPMENTS
D.A. Davidson & Co.
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the utility’s original request for a $4.7 million (+2.9%) increase. An interim rate increase of
$2.6 million (+1.6%) has been in place since the case was filed in June 2010. The proposed
settlement is a “black box” agreement, meaning it remains silent regarding traditional rate case
parameters (rate base, ROE, capital structure, etc.). The settlement calls for the utility to
implement its proposed investment recovery mechanism on a pilot basis beginning in 2012 to
facilitate recovery of costs associated with infrastructure replacement projects and refrain from
filing its next rate case before April 1, 2013. IUB’s decision on permanent rates is expected by
April 2011, but may be issued earlier in light of September's settlement.

*****

On August 12th, the electric utility subsidiary of MDU Resources Group filed a request with
the Montana Public Service Commission (MPSC) for a $5.5 million (+13.0%) rate increase.
The rate increase is driven primarily by the need to recover investments made in generating
assets and infrastructure and is broken down as follows: ~47% is for wind generation
investments, ~18% for other infrastructure investments, ~16% from the loss of wholesale
sales, ~12% for generation development costs, and ~7% for recovery of various operating
expenses. The utility also requested interim rate relief of $3.1 million to take effect within 30
days of the application (filed on August 12, 2010). A final decision is expected to be handed
down by mid-May 2011, for a nine-month review period.

*****

On August 25th Avista Corp. announced that parties to its Washington general rate case had
reached a settlement agreement. Assuming the settlement is approved by the Washington
Utilities and Transportation Commission (WUTC), the utility will be granted an electric revenue
increase of $29.5 million (+7.2%) and a gas revenue increase of $4.6 million (+3.2%), versus
the utility’s original request for increases of $55.3 million (+13.4%) and $8.5 million (+6.0%) for
electric and gas rates, respectively. The most significant difference between the original
request and the amount in the settlement agreement is an $11.7 million decrease in forecasted
power supply costs since Avista's original filing in March 2010 due to the decline in natural gas
prices. Rates in the settlement are based on a 10.2% ROE (originally requested to be 10.9%)
and a 46.5% equity capital structure (originally requested to be 48.4%). The utility currently
expects the WUTC to hand down a final order in the case in time for the new rates to go into
effect on December 1st.

*****

On August 20th the electric utility subsidiary of Otter Tail Corp. filed a general rate case in
South Dakota, requesting an electric rate increase of $2.8 million (+10.0%). Primary drivers for
the rate case include recovery of the utility’s investment in the Luverne Wind Farm, costs of the
canceled Big Stone II plant, and higher operating expenses.

In the utility’s application, representatives reminded the South Dakota Public Utilities
Commission (SCPUC) that it intends to invest ~$641 million in its entire system through 2014.
The capex plan includes $110 million under the CapX 2020 transmission program, $120 million
to install environmental controls at the Big Stone I plant, and $245 million for additional
generation. Importantly, management stated in its testimony that the company “will need
access to unprecedented levels of debt and equity financing” to carry out these plans.

*****

Northwest Natural Gas Company submitted filings with regulators in Oregon and
Washington for its annual Purchased Gas Adjustment for the upcoming heating year. If the
utility’s proposals are approved, rates will decline slightly for residential and commercial
customers due to the continuation of low natural gas prices. The PGA filings will not have an
impact of the utility’s margins, as the cost of natural gas is a pass-through expense in the
ratemaking process.

On August 19th ITC Holdings Corp. received approval from MISO to construct the Thumb
Loop high-voltage transmission project, which is designed to serve as the backbone line to
facilitate additional wind farm construction in the area. The proposed system consists of
approximately 140 miles of double-circuit 345 kV lines and three new substations in the Thumb
region of Michigan's Lower Peninsula. ITC’s next step in the development process will be a
review by the Michigan Public Service Commission (MPSC) for expedited siting approval,
COMPANY DEVELOPMENTS
D.A. Davidson & Co.
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which by statute is defined as a maximum of six months. Expected construction costs for the
project are expected to be included in the company’s updated 5-year capital expenditures plan,
which will be unveiled at ITC’s annual analyst day on September 27th.

*****

On August 31st transmission developer Tonbridge Power Inc. (TBZ - $2.20) announced two
new memoranda of understanding (MOUs) with the Western Area Power Administration
(WAPA) to review and evaluate two potential projects near the Alberta-Montana border.
Tonbridge recently began construction of the Montana-Alberta Tie Line (MATL) project (a 230-
kV line running 214 miles between Lethbridge, Alberta, and Great Falls, Montana). The new
agreements would provide funding for an eventual upgrade to the MATL line and the
construction of a southern extension called the Green Line through WAPA’s Transmission
Infrastructure Program (TIP), in which ARRA funding is distributed to certain infrastructure
projects.

We view the MOU between Tonbridge and WAPA as significant, due to the fact that
Tonbridge’s Green Line project would be a direct competitor to the first leg of NorthWestern
Corporation’s Montana Renewable Collector System – an investment that is expected to be
in the magnitude of $200 million in ~2013. Both proposed transmission projects are subject to
regulatory approval. On September 13th NWE announced that that it had also entered into two
MOUs with WAPA to undertake joint planning and study work to determine how the Collector
System and the Mountain States Transmission Intertie (MSTI) projects may enhance WAPA’s
TIP mission of enabling renewable energy development. At this point it remains unclear which
of the competing projects will ultimately be constructed.

*****

On September 9th American Transmission Company (the Wisconsin-based transmission utility
owned in part by Alliant Energy, ALLETE, and MGE Energy) released its updated 10-year
expansion plan. The new plan includes recommendations for $3.4 billion in improvements by
2019, up from $2.5 billion a year ago. The plan is broken out as follows: • $1.0 billion of transmission network upgrades;
• $1.7 billion of interconnection projects, infrastructure replacements and smaller
network improvements; and
• $0.7 billion of regional multi-value projects.

We also note that this year’s sharp increase breaks the company’s 4-year downward trend in
transmission cost projections as management continues to shift ATC’s focus from its original
purpose of building system reliability in Wisconsin toward large regional projects based on
economic benefits and renewable energy standards. We also note that on August 26th MISO
added $1.2 billion in new projects to its 10-year expansion plan, which compares to $0.9 billion
in 2009 and $2.4 billion in 2008. We would view the successful implementation of ATC’s plan
as a positive for LNT, ALE, and MGEE, as 80% of the transmission company’s earnings are
distributed to its owners.

*****

Portland General Electric announced on September 8th that the third and final phase of its
217-turbine Biglow Canyon Wind Farm is complete. The 450-MW wind farm is the utility’s
largest renewable project and came at a total cost of ~$1 billion (the company stated that
phase III was completed on schedule and under budget, but the difference between actual and
budgeted cost remains unclear). As stated in POR’s current integrated resource plan (IRP),
the completed project is expected to bring the utility’s renewable portfolio up to 9% of total load
by year-end 2010.

*****

On August 13th IDACORP, Inc. announced that it closed its Request for Proposals (RFP)
process, which has been ongoing since May 2009, without awarding a new renewables
contract. Through the RFP, the utility had been seeking to purchase ~150 MW of wind-
powered generation by 2012. Although a larger number of proposals were submitted and
reviewed by the utility, changes in market conditions since mid-2009 ultimately led
management to conclude that no new renewable resources that had been presented were
competitive with alternatives that could be secured outside the RFP.

D.A. Davidson & Co.
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As displayed in Table 1, temperatures (as measured by cooling degree days) in the third
quarter have been mostly above normal for utilities under our coverage, with the most dramatic
deviations being logged in the Upper Midwestern states. The hot weather should bode well for
electric utilities in the third quarter, as company earnings guidance typically reflects an
assumption of weather conditions being in line with historical averages.

Table 1: Cooling Degree Day* Data (CDD) –3Q’10 QTD Totals
ALLETE, Inc. (ALE)
Minnesota Powe Duluth, MN 447 66% 266%
Superior Water, Light & Power Superior, WI 740 23% 126%
Alliant Energy, Inc. (LNT)
Interstate Power & Light Cedar Rapids, IA 324 -10% 161%
Wisconsin Power & Light Madison, WI 1116 45% 168%
Avista Corp. (AVA)
Avista Utilities Spokane, WA 562 3% -29%
Black Hills Corp. (BKH)
Black Hills Power Rapid City, SD 715 -10% 57%
Cheyenne Light Fuel & Power Cheyenne, WY 486 24% 71%
Black Hills Energy - Colorado Electric & Gas Colorado Springs, CO 946 67% 88%
Black Hills Energy - Iowa Gas Des Moines, IA 1701 27% 59%
Black Hills Energy - Kansas Gas Wichita, KS 2450 22% 33%
Black Hills Energy - Nebraska Gas Lincoln, NE 1673 14% 51%
Hawaiian Electric Industries, Inc. (HE)
Hawaiian Electric Co. Honolulu, HI 3672 2% -3%
IDACORP, Inc. (IDA)
Idaho Power Company Boise, ID 1138 6% -24%
Idaho Power Company Idaho Falls, ID 324 -29% 0%
MDU Resources Group, Inc. (MDU)
Cascade Natural Gas Co. Tri Cities, WA 1072 -12% -27%
Great Plains Natural Gas Co. Fergus Falls, MN 539 42% 182%
Intermountain Natural Gas Boise, ID 1138 6% -24%
Montana-Dakota Utilities Co. Bismarck, ND 697 8% 83%
MGE Energy, Inc. (MGEE)
Madison Gas & Electric Co. Madison, WI 1116 45% 168%
Portland General Electric Co. (POR)
Portland General Electric Portland, OR 650 38% 14%
Northwest Natural Gas Co. (NWN)
NW Natural Portland, OR 650 38% 14%
NorthWestern Corp. (NWE)
NorthWestern Energy Billings, MT 712 -10% -7%
NorthWestern Energy Great Falls, MT 279 -28% -18%
NorthWestern Energy Sioux Falls, SD 996 1% 67%
Otter Tail Corp. (OTTR)
Otter Tail Power Co. Fargo, ND 832 17% 110%
% From
2009
% From
Average
3Q'10
QTDParent Company & Utility Location
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
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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 ~22% as the market rallied.

The upper portion of Chart 1 depicts an overall ~29% 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 12.5x P/E ratio on year-forward earnings
estimates versus a 10-year norm of 13.8x. After reaching an all-time record of 18.8x in
December 2007, the group’s P/E ratio slumped to 9.1x in March 2009, before the recent rally.

Chart 2 provides two additional measurements of value (EV/EBITDA and P/BV), showing that
electric utility valuations remain below the 10-year average since reaching a peak in December
2007.

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 ~2.1x. After a prolonged 6-year
subsiding, utilities’ relative yields were in an upward trend from early 2009 until turning
downward early in the second quarter of 2010.

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 215% 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 151% relative yield compares to the 10-year average of 94%.

100
150
200
250
300
350
400
Electric Utilities
15-Sep-2000 to 10-Sep-2010 (Weekly) High: 387.80 Low: 150.18 Latest: 275.05
Price (USD)
'01 '02 '03 '04 '05 '06 '07 '08 '09 '108
10
12
14
16
18
20
©FactSet Research SystemsData Source: FactSet Aggregates, FactSet Aggregates
Average: 13.8 High: 18.8 Low: 9.1 Latest: 12.5
Price to Earnings - FY1
Source: FactSet
Valuation Met ics
Chart 1: Electric Utility Price Index
and Price-Earnings Ratio
D.A. Davidson & Co.
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6
6.5
7
7.5
8
8.5
9
9.5
10
Electric Utilities
15-Sep-2000 to 10-Sep-2010 (Weekly) Average: 8.0 High: 9.5 Low: 6.4 Latest: 7.0
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
15-Sep-2000 to 10-Sep-2010 (Weekly) Average: 3.8 High: 6.0 Low: 2.4 Latest: 4.2
Dividend Yield
'01 '02 '03 '04 '05 '06 '07 '08 '09 '101
1.5
2
2.5
3
3.5
4
4.5
©FactSet Research SystemsData Source: FactSet Aggregates,
Average: 2.24 High: 4.08 Low: 1.29 Latest: 2.10
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.
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'01 '02 '03 '04 '05 '06 '07 '08 '09 '1040%
60%
80%
100%
120%
140%
160%
180%
200%
220%
240%
Electric Utilities - Yield Relative to 10 Year U.S. Treasury Bond
Max: 215.11Min: 49.81Last: 151.72
Source: FactSet
Chart 4: Electric Utility Dividend
ield Relative to Yield on U.S. 10-
ear Treasury Bonds
D.A. Davidson & Co.
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Table 2: D.A. Davidson Utility Coverage Relative Performance
Price Price Ex-Dividend Monthly Year-to-Date
12/31/2009 8/31/2010 in August 2010 Total Return Total Return
ALLETE, Inc. (ALE) 32.68 35.57 $0.440 -0.1% 10.2%
Alliant Energy Corporation (LNT) 30.26 35.02 1.3% 15.7%
Avista Corp. (AVA) 21.59 20.87 $0.250 1.0% -2.2%
Black Hills Corporation (BKH) 26.63 30.43 $0.360 -3.5% 15.6%
Hawaiian Electric Industries (HE) 20.90 24.02 $0.310 3.3% 16.4%
IDACORP, Inc. (IDA) 31.95 35.06 $0.300 0.4% 10.7%
ITC Holdings Corp. (ITC) 52.09 57.96 $0.335 2.7% 11.9%
MDU Resources Group, Inc. (MDU) 23.60 18.81 -4.8% -20.3%
MGE Energy, Inc. (MGEE) 35.74 37.32 $0.375 0.6% 5.5%
Northwest Natural Gas Co. (NWN) 45.04 45.44 -4.2% 0.9%
NorthWestern Corporation (NWE) 26.02 28.12 -0.3% 8.1%
Otter Tail Corp. (OTTR) 24.82 18.53 $0.298 -8.4% -24.1%
Portland General Electric Co. (POR) 20.41 19.98 4.6% -2.1%
Mean -0.6% 3.6%
Median 0.4% 8.1%
Dow Jones Industrial Average (.DJIA) 10,428.05 10,014.72 $43.263 -3.9% -3.5%
Standard & Poors 500 (.SPX) 1,115.10 1,049.33 $2.632 -4.5% -5.7%
Dow Jones Utility Average (.UTIL) 398.01 388.97 $2.906 1.6% -1.5%
SNL Electric Companies Index 496.35 503.02 * -2.4% 1.3%
SNL Gas Companies Index 527.77 459.33 * -8.8% -13.0% *Ex-Dividend amount incorporated in index
Sources: Bloomberg and SNL Interactive
As shown in Table 2, total returns of electric utilities (as measured by SNL’s market weighted
index of 24 investor-owned electric utilities) outperformed the broader indices in August,
declining 2.4% versus steeper drops of 3.9% and 4.5% from the Dow Jones Industrials and the
S&P 500, respectively. Gas utilities had a much weaker month, falling 8.8%, which partially
offset strong performance in July (+11.1%). The mean total return in our coverage universe
was a modest decline of 0.6% in the month, though performance was a mixed bag. Portland
General Electric (+4.6%) and Hawaiian Electric Industries (+3.3%) gained the most ground,
while Otter Tail Corp. (-8.4%) and MDU Resources Group (-4.8%) posted moderate to
severe losses. (It is our feeling that the weakness in OTTR and MDU’s shares was primarily a
function of continued weakness in the economy and a disappointing unemployment report in
the month, as these diversified companies have significant exposure to the manufacturing and
construction industries.)

Leading our coverage universe from a year-to-date total return perspective are Hawaiian
Electric Industries and Black Hills, which have risen 16.4% and 15.6%, respectively. As
noted above, utilities with significant exposure to non-regulated businesses have posted
negative performance on a total return basis for the year, with the most pronounced being
Otter Tail Corp. (-24.1%) and MDU Resources Group (-20.3%). Although the utilities owned
by these two companies continue to be healthy, the continuing weakness in the nonregulated
operations has continued to hold the companies’ overall results hostage.

As depicted in Table 3, the utility peer group’s mean 2010 price-earnings ratio is 16.4x, up
from 16.2x on August 4th, the pricing date of our last Utility Monthly. The mean EV/EBITDA
ratio based on our 2010 forecast and the average dividend yield in our coverage universe
remain unchanged at 8.1x and 4.3%, respectively. Otter Tail sports the highest yield in the
group (currently 6.0%) with a payout ratio of 115% of projected 2010 earnings.

RELATIVE PERFORMANCE
D.A. Davidson & Co.
11
Table 3: D.A. Davidson & Co. Utilities Comparison

Price EPS EPS EPS P/E P/E P/E
9/14/10 2009 2010E 2011E 2009 2010E 2011E
ALLETE INC.1,2 ALE N 35.91 39.00 $1,282.0 2.04 2.27 2.60 15.1 14.5 12.7 1.2 5.0% 81% 43% 8.7 7.6% 3.0% Above
ALLIANT ENERGY CORP.1 LNT B 36.49 40.00 $4,042.9 1.95 2.60 2.92 18.8 14.0 12.5 1.5 4.3% 64% 52% 7.3 7.9% 2.7% Above
AVISTA CORP.1 AVA B 20.88 24.00 $1,145.0 1.58 1.59 1.83 13.2 13.1 11.4 1.0 4.8% 62% 52% 7.0 8.0% 2.4% Average
BLACK HILLS CORP.1 BKH N 30.98 30.00 $1,214.5 2.04 1.52 2.00 15.2 20.4 15.5 1.1 4.6% 76% 53% 7.4 7.9% 2.7% Average
HAWAIIAN ELECTRIC INDUSTRIES INC.1 HE U 23.19 19.00 $2,171.0 0.91 1.44 1.75 25.6 16.1 13.2 1.5 5.3% 82% 55% 7.7 6.4% 1.0% Below
IDACORP INC.1 IDA B 35.83 40.50 $1,725.7 2.64 2.78 2.90 13.6 12.9 12.3 1.2 3.3% 44% 51% 8.7 9.2% 3.0% Average
ITC HOLDINGS CORP. ITC N 61.65 60.00 $3,100.1 2.58 2.80 3.30 23.9 22.0 18.7 3.0 2.1% 47% 70% 12.2 13.6% 3.4% Above
MDU RESOURCES GROUP INC.1 MDU B 19.71 23.00 $3,718.7 1.38 1.30 1.55 14.3 15.2 12.8 1.4 3.3% 50% 37% 6.5 10.4% 4.4% Average
MGE ENERGY INC.1 MGEE N 38.92 38.00 $899.6 2.21 2.55 2.77 17.6 15.3 14.1 1.8 3.9% 59% 43% 8.5 10.1% 4.0% Above
NORTHWEST NATURAL GAS CO.1 NWN N 46.93 48.00 $1,247.2 2.83 2.75 2.70 16.6 17.1 17.4 1.8 3.6% 64% 51% 8.7 10.5% 3.0% Average
NORTHWESTERN CORP.1,3 NWE B 28.17 31.00 $1,019.2 2.02 2.00 2.20 12.9 13.1 11.9 1.2 4.8% 68% 55% 7.3 10.0% 2.8% Below
OTTER TAIL CORP.1 OTTR U 19.82 16.00 $712.2 0.71 0.78 1.02 28.0 25.3 19.4 1.1 6.0% 115% 46% 8.2 3.8% 1.4% Average
PORTLAND GENERAL ELECTRIC CO.1 POR N 20.53 21.50 $1,545.4 1.31 1.50 1.65 15.7 13.7 12.4 1.0 5.0% 76% 54% 6.8 6.0% 1.7% Average
Median, 13 Regional Utilities 15.7 15.2 12.8 1.2 4.6% 64% 52% 7.7 8.0% 2.8%
Mean, 13 Regional Utilities 17.7 16.4 14.2 1.4 4.3% 68% 51% 8.1 8.6% 2.7%
Payout
Ratio
2010E
ROAA
(ttm)
Debt /
Capital Company Name Symbol Price
Target
Mkt Cap
($M)P / BV
Dividend
Yield
2010E
EV /
EBITDA
2010E
Rating ROAE
(ttm)
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.
3Stock price of NWE used in P/E , P/EBITDA, and EV/EBITDA ratios has been adjusted downward by $2.00 for valuation of net operating loss (NOL).
Sources: Company reports and D.A. Davidson & Co. estimates
Regulatory
Rank

D.A. Davidson & Co.
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Copyright D.A. Davidson & Co., 2010. All rights reserved.
12
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mentioned in this report in the next three months.
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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. 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
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Corresponding Institutional Research Ratings Buy Neutral Underperform
and Distribution 59% 36% 5%
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and Distribution 88% 8% 4%
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