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Home My WebLink AboutDADavidson-Jan-8-2012.pdf Please refer to page 10 of this report for detailed disclosure and certification information. INDUSTRY UPDATE Institutional Equity Research January 9, 2013 Utility Monthly Prices: (1/8/13) Industry: Utilities Michael Bates 503.603.3045 mbates@dadco.com Precipitation Levels Slow; Stream Runoff Revised Upward  We chose ITC Holdings as our top utility pick for 2013. We continue to be enthusiastic about its strong record in executing expansion plans, predictable stream of earnings and dividend growth, enviable regulatory backdrop, and apparent immunity to short-term demand fluctuations.  On January 4th we upgraded shares of ALLETE from Neutral to BUY, as we believe the recent extension of federal production tax credits for renewable energy will prompt development of an additional wind project (Bison 4) in 2013-2014.  Temperatures in the fourth quarter were generally milder than normal in the regions served by utilities under our coverage. Although this could be a slight headwind to forecasted heating demand, weather was mostly colder than the same period one year ago.  Forecasted streamflows in key drainages for hydrogeneration in the Pacific Northwest are mostly in line or above normal levels.  Earnings within our utility coverage universe grew 12.3% on average in 2012 based on our current forecasts (as seen in Table 1), driven largely by rate base growth and a renewed focus on cost containment, but partially offset by weak retail and wholesale margins.  Weather was a mixed bag for utilties under our coverage in 2012, as extremely mild 1Q conditions were offset in several cases by hotter-than-normal summer temperatures. We expect utility EPS to expand 7.8% on average in 2013, driven by rate base growth, but partially offset by weak sales. Please refer to our most recent research reports for more detailed company information. Table 1: Forecasted EPS Growth 2011-2013 1D.A. Davidson & Co. makes a market in this security. 2Results exclude the impact of nonrecurring items discontinued operations. EPS % chg EPS % chg EPS % chg 2011 2011 2012e 2012e 2013e 2013e ALE₁₂ALLETE Inc. B $2.39 3.4% $2.58 8.1% $2.76 6.6% AVA₁Avista Corp. N $1.72 4.0% $1.50 -12.7% $1.78 18.2% BKH₁₂Black Hills Corp. N $1.69 -6.1% $2.07 22.4% $2.28 10.2% GXP₁₂Great Plains Energy Inc. N $1.25 -22.9% $1.29 3.3% $1.50 16.3% HE₁Hawaiian Electric Industries, Inc. N $1.35 11.1% $1.64 21.9% $1.75 6.5% IDA₁₂IDACORP Inc. B $3.36 13.9% $3.35 -0.5% $3.35 0.3% ITC₁₂ITC Holdings Corp. B $3.35 16.8% $4.13 23.0% $5.00 21.3% LNT₁₂Alliant Energy Corp. B $2.76 0.3% $2.97 7.7% $3.12 5.1% MDU₁₂MDU Resources Group, Inc. N $1.19 -8.7% $1.16 -2.9% $1.40 21.2% MGEE₁₂MGE Energy Inc. N $2.64 8.7% $2.88 9.3% $2.90 0.5% NWE₁₂NorthWestern Corp. N $2.41 18.1% $2.34 -2.8% $2.46 4.9% NWN₁Northwest Natural Gas Co. N $2.56 -0.9% $2.29 -10.6% $2.45 7.0% OTTR₁₂Otter Tail Corp. N $0.44 -16.3% $1.19 170.2% $1.26 5.8% POR₁Portland General Electric Co. B $1.95 17.4% $1.96 0.2% $1.96 0.2% STR₁Questar Corp. N $1.16 3.6% $1.18 1.4% $1.20 1.6% TEG₁₂Integrys Energy Group, Inc. B $3.38 8.1% $3.30 -2.5% $3.50 6.2% UNS₁₂UNS Energy Corporation N $2.56 -9.2% $2.20 -14.1% $2.60 18.2% WEC₁₂Wisconsin Energy Corp. N $2.18 13.8% $2.33 6.9% $2.41 3.1% WR₁Westar Energy, Inc. B $1.81 0.0% $2.01 10.8% $2.00 -0.5% XEL₁Xcel Energy, Inc. N $1.72 6.0% $1.84 7.0% $1.91 3.9% Median 3.8% 5.1% 6.0% Mean 3.0% 12.3% 7.8% Symbol Company Name Rating D.A. Davidson & Co. 2 As we consider which utilities under our coverage appear most likely to outperform the group in 2013, ITC Holdings stands out as a clear frontrunner. We believe the firm has positioned itself for strong and sustainable earnings growth as it invests in electric transmission infrastructure to strengthen the regional grid. Although we expect the transmission development landscape to become more competitive as federal and regional incentives continue to grow, spending required for compliance with EPA emissions standards will continue to limit many utilities’ ability to pursue discretionary transmission development. ITC’s niche as a wires-only utility represents a competitive advantage as it pursues development rights for future projects. With rates regulated solely by FERC, ITC benefits from a predictable revenue stream, minimal regulatory lag, and incentive-based returns. Concerns regarding the sustainability of regulatory support for transmission continue to weigh on ITC’s valuation, but an adverse change in FERC transmission policy appears unlikely in the foreseeable future. ITC’s proposed acquisition of Entergy Corp.’s (ETR - $62.70) transmission assets in the Mid- South and Gulf States region will extend and diversify the firm’s pipeline of development opportunities. Subject to regulatory approval, the transaction is expected to close in 2013. ITC has historically grown its common dividend at a rate well below the net income expansion. However, we expect payments to accelerate materially as the Board targets a mid-30% payout ratio going forward. ITC’s highly visible earnings and dividend growth profile and our expectation of continued regulatory support justify a premium valuation, which we believe is materially understated at the stock’s current valuation. We value the shares at $95 over the next 12-18 months, which equates to 16.4x our 2014 EPS estimate of $5.90. On January 4th we upgraded our rating on ALLETE from Neutral to BUY, as we believe the recent extension of federal production tax credits (PTC) for renewable energy projects will prompt development of an additional wind project (Bison 4) in the 2013-2014 timeframe. ALLETE completed the Bison 2 and 3 wind farms in central North Dakota in late 2012, with each 105 MW facility carrying a price tag of roughly $160 million. Assuming a Bison 4 project closely mirrors the size and cost of the two recently-completed facilities, the additional wind farm would add ~$160 million to Minnesota Power’s rate base, which would equate to ~$9 million (~$0.23 per share) of incremental regulated earnings power under the current rate structure. We assume the Bison 4 project will be well underway by year-end 2013 for a mid- 2014 completion (Minnesota Power’s renewable rider would allow a current return on the project’s CWIP balance). We believe the shares represent a compelling investment case at the current level, in light of the utility’s improving growth profile and above-average yield. We value the shares at $47 over the next 12-18 months, which equates to ~15.5x our 2014 EPS estimate of $3.06. Best Idea for 2013: ITC Holdings Corp. (ITC – BUY - $95 target) Recent Upgrade: ALLETE, Inc. (ALE – BUY – $47 target) D.A. Davidson & Co. 3 Recent Regulatory Developments On December 17th, BKH subsidiary Black Hills Power filed for a $13.7 million (+9.9%) electric rate increase with the South Dakota Public Utilities Commission (SDPUC). The rate increase is based on a 10.25% ROE with a 53.17% equity layer and an 8.54% return on an average rate base of $438 million. The case was built around a test year ended June 30, 2012. The replacement of aging infrastructure, cost of compliance with environmental mandates and a lack of revenue growth to offset increased operating costs were all cited as reasons for the rate increase. On December 13th, the Kansas Corporation Commission (KCC) authorized GXP subsidiary Kansas City Power & Electric to implement a $33.2 million (+6.7%) electric rate increase. The increase is based on an allowed 9.5% ROE, an equity layer of 51.82% and an 8.01% return on year end rate base valued at $1.80 billion. Rates were set based on a 2011 test year. KCP&L had originally filed for an electric rate base increase of $63.6 million (+12.9%) based on a 10.4% ROE, a 51.8% equity layer and an 8.57% return on a $1.82 billion rate base. On December 17th, the Public Service Commission of Wisconsin (PSCW) authorized MGE Energy to implement a $14.9 million (+3.8%) electric rate increase and a $1.6 million (+1.0%) gas rate increase. MGEE had originally requested an increase of $22.5 million (+5.8%) for electric operations and a $4.3 million (+2.6%) increase for natural gas operations. The rates were set based on an electric rate base of $417 million and a gas rate base of $136 million. The utility maintained its allowed ROE of 10.3% and was authorized an equity layer of 55%- 60% (set at 59.1% for ratemaking purposes). On December 21st, the Arizona Corporation Commission (ACC) staff recommended that the ACC authorize a $76.4 million (+9.2%) electric base rate increase for UNS subsidiary Tucson Electric Power (TEP). Staff’s recommendation is based on a 9.4% ROE with a 43.5% equity layer and a 7% return on the rate base of $1.5 billion. TEP originally filed for a $127.8 million (+15.3%) rate increase based on a 10.75% ROE with a 46% equity layer and a 7.74% return on the rate base of $1.519 billion. The requested rate increase is driven by recent investments in plant upgrades, increased operating expenses, cyber security enhancements and increased environmental requirements since 2008. We note that ACC staff’s recommendation represents a single view of the current rate case, and the Commission is not under an obligation to issue a decision in agreement with Staff’s view. Settlement discussions are expected to be held through much of 1Q’13, with the rate increase taking effect in 3Q’13. WEC subsidiary WEPCO has been granted approval for retail electric customer rate base adjustments of $70 million (+2.6%) for 2013 and $28 million (+1.0%) for 2014. The company has also been approved for a rate base decrease of $8 million (+1.9%) for natural gas customers, rate increases of $1.3 million (+6.0%) for 2013 and 2014 and rate increases of $1 million (+7.0%) in 2013 and $1 million (+6.0%) in 2014 for steam utility customers. The adjustments were effective January 1, 2013 and the company will maintain its allowed ROE of 10.4%. Effective January 1, 2013, WG implemented a rate decrease of $34 million (+5.5%) for its natural gas customers (no rate adjustment was approved for 2014). The utility will maintain its allowed ROE of 10.5% and 47.5% equity layer. Black Hills Corporation (BKH – NEUTRAL – $37 target) Great Plains Energy Incorporated (GXP – NEUTRAL – $21.50 target) MGE Energy, Inc. (MGEE – NEUTRAL – $51.00 target) UNS Energy Corporation (UNS – NEUTRAL – $43.50 target) Wisconsin Energy Corp. (WEC – NEUTRAL – $40 target) D.A. Davidson & Co. 4 As displayed in Figure 1, the mild temperatures we observed in November rolled over into December as almost all of the geographic areas displayed proved to have a milder month than the average. In aggregate, 4Q’12 temperatures have been mostly milder than normal but slightly cooler than 4Q’11. Figure 1: Heating Degree Day Data (HDD) –December and 4Q’12 Totals Source: National Weather Service’s Climate Prediction Center December % Dev % Dev 4Q'12 % Dev % Dev HDD v. Avg v. 2011 Total v. Avg v. 2011 Duluth, MN 1436 -10% 8% 3136 -8% 12% Cedar Rapids, IA 1110 -14% 6% 2476 -3% 14% Madison, WI 1080 -17% 2% 2382 -12% 9% Spokane, WA 1036 -11% -8% 2313 -12% -8% Colorado Springs, CO 1038 -6% -6% 2145 -12% -5% Lincoln, NE 1143 -4% 6% 2306 -3% 8% Rapid City, SD 1228 0% 7% 2629 -2% 4% Kansas City, MO 894 -15% 1% 1786 -10% 4% Boise, ID 887 -18% -15% 1845 -18% -12% Pocatello, ID 1103 -11% -17% 2393 -11% -14% Tri Cities, WA 763 -18% -21% 1691 -11% -11% Boise, ID 887 -18% -15% 1845 -18% -12% Bismarck, ND 1548 1% 26% 3311 1% 21% Madison, WI 1080 -17% 2% 2382 -12% 9% Great Falls, MT 1205 -3% 17% 2646 -6% 8% Sioux Falls, SD 1336 -7% 14% 2769 -6% 14% Portland, OR 683 -10% -14% 1433 -12% -14% Jamestown, ND 1594 0% 27% 3377 1% 24% Fergus Falls, MN 1436 -10% 8% 3136 -8% 12% Portland, OR 683 -10% -14% 1433 -12% -14% Salt Lake City, UT 924 -13% -16% 1795 -18% -18% Chicago, IL 885 -23% -4% 2025 -12% 10% Green Bay, WI 1118 -17% 1% 2508 -11% 10% Rochester, MN 1263 -15% 5% 2547 -17% 7% Tucson, AZ 351 -12% -28% 419 -33% -38% Milwaukee, WI 957 -20% -2% 2184 -11% 9% Topeka, KS 881 -14% 2% 1715 -13% 1% Denver, CO 1037 -4% -12% 2149 -8% -8% Minneapolis, MN 1281 -10% 11% 2641 -10% 16% Eau Claire, WI 1306 -11% 4% 2782 -8% 10% Westar Energy WR Xcel Energy XEL Otter Tail OTTR Portland General Electric POR Questar STR Integrys Energy Group TEG UNS Energy UNS Wisconsin Energy WEC Northwest Natural Gas NWN Stock Location ALLETE ALE Alliant Energy LNT Avista AVA Black Hills BKH Great Plains Energy GXP IDACORP IDA MDU Resources Group MDU MGE Energy MGEE NorthWestern NWE Temperatures Remain Mild in Dec., Still Colder than Last Year D.A. Davidson & Co. 5 As displayed in Figure 2, the National Weather Service is forecasting near-normal temperatures in the Northwest and upper Midwest over the next three months, but warmer than normal conditions in the rest of the continental United States could be a headwind for heating load. To date, we have experienced a milder winter season than average in much of our coverage area, but are experiencing a colder winter than last year. Figure 2: February ’13 – April ‘13 Temperature Forecast Source: National Weather Service Climate Prediction Center Hydro power is a substantial electric resource for Avista Corp., IDACORP, Inc. and Portland General Electric Co. State regulators have implemented rate mechanisms to limit the utilities’ financial exposure to swings in hydrogeneration (summarized below). From our observations and under their current mechanisms, results at POR are the most sensitive to streamflow conditions, followed by AVA; IDA carries the least financial exposure to variations from the baseline forecast.  Idaho - Power Cost Adjustment (PCA) mechanism shares 95% of the swing in costs with ratepayers and 5% with the utility.  Oregon - Power Cost Adjustment Mechanism (PCAM) provides a 90%/10% refund/surcharge after an asymmetrical deadband (+$30 million/-$15 million) and after applying an annual earnings test.  Washington - Energy Recovery Mechanism (ERM) shares’ annual power supply cost variability after a symmetrical deadband is $0-$4 million. If power costs are $4-$10 million above the amount built into rates, there is 50%-50% sharing between ratepayers and shareholders. If power costs are $4-$10 million below the amount built into rates, there is 75%-25% sharing between ratepayers and shareholders. Above or below $10 million of annual power supply cost variability, 90% of the swing in costs goes to ratepayers and 10% goes to the company. As noted in Figures 3-4, precipitation in the Pacific Northwest through November 2012 (the most recent data available) was still relatively strong, with most areas near or above long-term averages. Average river basin snow water content in the western region is mostly at or above normal in the entire region. While it is still early in the precipitation year, current conditions have kept our 2013 hydrogeneration outlook positive, which would benefit Avista Corp., IDACORP, Inc. and Portland General Electric Co. Cold Weather Remains Suppressed 2013 Hydrogene ation Outlook Remains Strong D.A. Davidson & Co. 6 Figure 3: Accumulated Northwestern Precipitation through November 2012 Source: National Weather Service Northwest River Forecast Center Figure 4: Western Region Snow Water Content Source: United States Department of Agriculture D.A. Davidson & Co. 7 The Northwest River Forecast Center’s projection released on January 5th calls for above normal streamflows in four of the six important drainages in the Northwest, while the other two are expected to have near normal drainage for the spring and summer months of 2013 (Figure 5). Figure 5: Streamflow Projections for Key Hydro Locations Source: National Weather Service Northwest River Forecast Center Global financial/economic concerns have prompted investors to take a more defensive stance since 2008-2009, prompting a flight to quality resulting in a significant strengthening of utility stock valuations. Equities in the sector currently trade at 14.8x expected 2013 earnings, moderately above the average forward P/E (13.1x) over the last five years. Utility shares currently trade at a ~16% premium P/E valuation relative to the S&P 500, which is materially above the 10% average premium accorded to the group. The sector carries an average dividend yield of 4.0%, slightly above the 3.8% 5-year average. Although utilities dividends have remained stable for some time now, they still remain very attractive relative to the average yield on S&P 500 equities and 10-year US Treasuries as shown in Figure 9. Figure 6: Utility Forward P/E Figure 7: Utility Forward P/E Relative to S&P 500 Source: Capital IQ Source: Capital IQ Figure 8: Utility Dividend Yields Figure 9: Utility Dividend Yields Relative to S&P 500 and 10-Year Treasuries Source: Capital IQ Source: Capital IQ % ofForecast Average Normal Coeur d'Alene Lake Inflow APR-SEP 2,692 2,468 109% Cabinet Gorge Dam APR-SEP 12,258 11,376 108% IDACORP IDA Brownlee Reservoir Inflow APR-SEP 6,420 6,853 94% Clackamas River APR-SEP 819 732 112% Deschutes River APR-SEP 1,875 1,916 98% The Dalles APR-SEP 98,553 92,704 106% Stock Location Time Period Runoff Forecast - KAF Avista AVA Portland General Electric POR Current Sector Valuations D.A. Davidson & Co. 8 As shown in Figure 10, the median total return of utilities stocks under our coverage was 0.8% for the month of December as compared to the S&P 500 which rose 0.7% and the XLU which finished roughly flat. Shares of ALE posted the strongest performance in December, rising 4.5% compared to the 0.8% group average. Utilities (and the market as a whole) proved to be relatively stable in the month leading up to the possibility of going over the fiscal cliff. As depicted in Figure 11, almost all of the utilities under our coverage underperformed the S&P 500 (up 13.4%) in 2012. The median total return among utilities we cover was 3.2%, as compared to the XLU, which has returned only 1.0%. Otter Tail and UNS Energy have outperformed the rest of the group with returns of 19.6% and 20.1%, respectively. Figure 10: D.A. Davidson Utility Coverage Figure 11: D.A. Davidson Utility Coverage Relative December Performance Relative Full-Year 2012 Performance Source: Capital IQ Source: Capital IQ ITC, ‐2.1% LNT, ‐2.0% WEC, ‐1.8% TEG, ‐1.8% XEL, ‐0.3% XLU, 0.0% GXP, 0.3% UNS, 0.6% S&P 500, 0.7% STR, 0.7% NWN, 0.8% MGEE, 0.8% Median, 0.8% WR, 0.9% HE, 0.9% NWE, 1.2% IDA, 1.5% AVA, 1.7% BKH, 1.8% POR, 2.2% OTTR, 3.2% MDU, 3.3% ALE, 4.5% ‐3.0%‐2.0%‐1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% NWN, ‐4.2% GXP, ‐2.8% AVA, ‐1.9% HE, ‐0.4% XEL, 0.5% XLU, 1.0% NWE, 1.2% TEG, 1.4% MDU, 2.1% ALE, 2.2% STR, 2.9% Median, 3.2% ITC, 3.4% LNT, 3.6% WR, 4.2% IDA, 5.6% WEC, 8.9% MGEE, 12.6% POR, 12.7% BKH, 13.1% S&P 500, 13.4% OTTR, 19.6% UNS, 20.1% ‐10.0%‐5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% Stock Performance D.A. Davidson & Co. 9 Figure 12: D.A. Davidson & Co. Utilities Coverage 1D.A. Davidson & Co. makes a market in this security. 2Results exclude the impact of nonrecurring items and discontinued operations. Source: D.A. Davidson & Co. estimates, company reports, and Capital IQ Electric Utilities - Regulated Price MC EV ROE ROA 1/8/13 ($B) ($B) 2011 2012e 2013e 2011 2012e 2013e (ttm) (ttm) ALE1,2 ALLETE Inc. B $42.41 $47.00 $1.6 $2.5 4.3% 69% 17.8 16.4 15.4 9.4 8.9 8.4 1.4 6.6% 2.4% 47% GXP1,2 Great Plains Energy Inc. N $20.47 $21.50 $3.1 $6.8 4.2% 58% 16.4 15.9 13.6 9.1 8.6 8.1 0.9 5.5% 2.0% 52% IDA1 IDACORP Inc. B $43.27 $50.00 $2.2 $3.7 3.5% 48% 12.9 12.9 12.9 12.2 9.6 8.9 1.2 6.2% 2.1% 47% ITC1,2 ITC Holdings Corp. B $78.85 $95.00 $4.1 $7.2 1.9% 33% 23.5 19.1 15.8 14.2 12.7 10.4 3.0 13.0% 3.3% 70% POR1 Portland General Electric Co. B $27.62 $31.00 $2.1 $3.7 3.9% 56% 14.2 14.1 14.1 6.8 6.5 6.5 1.2 7.4% 2.2% 50% UNS1 UNS Energy Corp. N $43.31 $43.50 $1.8 $3.5 4.0% 68% 16.9 19.7 16.7 7.7 8.1 7.3 1.7 8.5% 2.2% 63% WR1,2 Westar Energy Inc. B $28.83 $33.50 $3.7 $7.0 4.5% 68% 15.9 14.4 14.4 8.8 8.5 8.3 1.3 7.4% 2.3% 53% Peer Group Median $2.2 $3.7 4.0% 58% 16.4 15.9 14.4 9.1 8.6 8.3 1.3 7.4% 2.2% 52% Peer Group Mean $2.7 $4.9 3.8% 57% 16.8 16.1 14.7 9.7 9.0 8.3 1.5 7.8% 2.4% 55% Multi-Utilities Price MC EV ROE ROA 1/8/13 ($B) ($B) 2011 2012e 2013e 2011 2012e 2013e (ttm) (ttm) AV 1 Avista Corp. N $24.13 $25.00 $1.5 $2.8 4.8% 67% 14.0 16.1 13.6 8.0 8.2 7.5 1.2 6.9% 2.1% 52% LNT1,2 Alliant Energy Corp. B $45.01 $51.00 $5.0 $8.1 4.0% 60% 16.3 15.1 14.4 9.6 9.0 8.4 1.6 7.8% 2.4% 48% MGEE1,2 MGE Energy Inc. N $51.20 $50.00 $1.2 $1.5 3.1% 56% 19.4 17.8 17.7 9.4 9.0 8.9 2.1 11.3% 4.2% 39% NWE1,2 NorthWestern Corp. N $35.29 $36.50 $1.3 $2.4 4.2% 63% 14.6 15.1 14.4 8.9 9.3 8.4 1.5 7.0% 1.9% 55% TEG1,2 Integrys Energy Group Inc. B $53.15 $59.00 $4.2 $6.7 5.1% 78% 15.7 16.1 15.2 8.5 8.6 8.0 1.4 7.9% 2.4% 45% WEC1,2 Wisconsin Energy Corp. N $37.17 $40.00 $8.6 $13.7 3.2% 57% 17.0 15.9 15.5 10.2 9.4 9.1 2.1 13.1% 3.9% 55% XEL1,2 Xcel Energy Inc. N $27.06 $30.00 $13.2 $23.7 4.0% 58% 15.7 14.7 14.2 8.5 8.2 7.8 1.5 9.6% 2.7% 56% Peer Group Median $4.2 $6.7 4.0% 60% 15.7 15.9 14.4 8.9 9.0 8.4 1.5 7.9% 2.4% 52% Peer Group Mean $5.0 $8.4 4.0% 63% 16.1 15.8 15.0 9.0 8.8 8.3 1.6 9.1% 2.8% 50% Diversified Utilities Price MC EV ROE ROA 1/8/13 ($B) ($B) 2011 2012e 2013e 2011 2012e 2013e (ttm) (ttm) BKH1,2 Black Hills Corp. N $37.56 $37.00 $1.7 $3.0 3.9% 66% 22.2 18.1 16.4 9.4 7.7 7.4 1.4 6.0% 1.9% 57% HE1 Hawaiian Electric Industries Inc. N $25.66 $28.00 $2.5 $4.1 4.8% 71% 19.1 15.6 14.7 9.0 8.4 8.0 1.6 9.6% 1.6% 51% MDU1,2 MDU Resources Group Inc. N $21.63 $23.00 $4.1 $5.8 3.2% 50% 18.2 18.7 15.4 7.7 9.3 6.7 1.5 7.5% 3.0% 39% OTTR1,2 Otter Tail Corp. N $25.46 $25.00 $0.9 $1.4 4.7% 94% 57.6 21.3 20.1 11.0 9.8 9.3 1.7 5.3% 1.8% 44% Peer Group Median $2.1 $3.6 4.3% 68% 20.6 18.4 15.9 9.2 8.9 7.7 1.5 6.7% 1.8% 48% Peer Group Mean $2.3 $3.6 4.2% 70% 29.2 18.4 16.7 9.3 8.8 7.8 1.5 7.1% 2.1% 48% Gas Utilities Price MC EV ROE ROA 1/8/13 ($B) ($B) 2011 2012e 2013e 2011 2012e 2013e (ttm) (ttm) NWN1,2 Northwest Natural Gas Co. N $44.29 $43.50 $1.2 $2.0 4.1% 75% 17.3 19.4 18.1 9.1 9.0 8.9 1.7 9.3% 2.5% 53% STR1,2 Questar Corp. N $20.60 $20.00 $3.6 $5.0 3.3% 59% 17.7 17.5 17.2 9.2 8.9 8.8 3.5 19.4% 5.6% 57% Peer Group Median $2.4 $3.5 3.7% 67% 17.5 18.4 17.6 9.2 9.0 8.9 2.6 14.3% 4.0% 55% Peer Group Mean $2.4 $3.5 3.7% 67% 17.5 18.4 17.6 9.2 9.0 8.9 2.6 14.3% 4.0% 55% Industry Median $7.0 $12.8 3.9% 59% 18.9 16.7 15.7 9.6 8.6 8.2 1.6 8.7% 2.6% 53% Industry Mean $3.7 $6.2 4.0% 62% 16.8 16.1 15.1 9.2 8.6 8.2 1.6 8.8% 2.5% 53% Debt / Capital Debt / Capital Debt / Capital Debt / Capital Company Name Rating Price Target Symbol Company Name Rating Price Target Payout 2013eSymbol EV / EBITDA P / BVDividend Yield P/E EV / EBITDA P/EPayout 2013e P / BVDividend Yield P/ESymbol Company Name Rating Price Target Symbol Company Name Rating Price Target Dividend Yield Payout 2013e EV / EBITDA P / BV P/E EV / EBITDA Dividend Yield P / BV Payout 2013e D.A. Davidson & Co. Two Centerpointe Drive, Suite 400  Lake Oswego, Oregon 97035  (503) 603-3000  (800) 755-7848  www.dadavidson.com Copyright D.A. Davidson & Co., 2013. All rights reserved. 10 Required Disclosures D.A. Davidson & Co. expects to receive, or intends to seek, compensation for investment banking services from the companies mentioned in this report in the next three months. D.A. Davidson & Co. is a full service investment firm that provides both brokerage and investment banking services. Michael Bates, the research analyst principally responsible for the preparation of this report, will receive compensation that is based upon (among other factors) D.A. Davidson & Co.’s investment banking revenue. However, D.A. Davidson & Co.’s analysts are not directly compensated for involvement in specific investment banking transactions. I, Michael Bates, attest that (i) all the views expressed in this research report accurately reflect my personal views about the common stock of the subject company, and (ii) no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. Ratings Information D.A. Davidson & Co.’s Institutional Research Rating Scale (maintained since 7/9/02): Buy, Neutral, Underperform D.A. Davidson & Co. 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 9/30/12) Buy Hold Sell Corresponding Institutional Research Ratings Buy Neutral Underperform and Distribution 57% 41% 2% Corresponding Individual Investor Group Ratings Outperform Market Perform Underperform and Distribution 80% 20% 0% Distribution of Combined Ratings 57% 41% 2% Distribution of companies from whom D.A. Davidson & Co. has received compensation for investment banking services in last 12 mos. Institutional Coverage 5% 6% 0% Individual Investor Group Coverage 0% 0% 0% Distribution of Combined Investment Banking 5% 6% 0% Target prices are our Institutional Research Department’s evaluation of price potential over the next 12-18 months and 5 years, based upon our assessment of future earnings and cash flow, comparable company valuations, growth prospects and other financial criteria. Certain risks may impede achievement of these price targets including, but not limited to, broader market and macroeconomic fluctuations and unforeseen changes in the subject company’s fundamentals or business trends. For a copy of the most recent reports containing all required disclosure information for covered companies referenced in this report, please contact your D.A. Davidson & Co. representative or call 1-800-755-7848. Other Disclosures Information contained herein has been obtained by sources we consider reliable, but is not guaranteed and we are not soliciting any action based upon it. Any opinions expressed are based on our interpretation of data available to us at the time of the original publication of the report. These opinions are subject to change at any time without notice. Investors must bear in mind that inherent in investments are the risks of fluctuating prices and the uncertainties of dividends, rates of return and yield. Investors should also remember that past performance is not necessarily an indicator of future performance and D.A. Davidson & Co. makes no guarantee, express or implied, as to future performance. Investors should note this report was prepared by D.A. Davidson & Co.’s Institutional Research Department for distribution to D.A. Davidson & Co.’s institutional investor clients and assumes a certain level of investment sophistication on the part of the recipient. 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