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HomeMy WebLinkAboutCOC Northwest Hydro Update 011011.pdfDisclosures and Analyst Certifications can be found in Appendix A. NEW YORK, NY MELVILLE, NY PRINCETON, NJ MIAMI, FL BOCA RATON, FL 520 Madison Avenue New York, New York 10022 y Telephone: 212-409-2000 800-LAD-THAL Member: NYSE, NYSE Amex, FINRA, all other principal exchanges and SIPC NNOOAAAA FFoorreeccaasstt –– EEaarrllyy IInnddiiccaattiioonnss ffoorr AAbboovvee-- NNoorrmmaall NNoorrtthhwweesstt HHyyddrroo CCoonnddiittiioonnss Industry Update • On January 7, 2011, the National Oceanic and Atmospheric Administration (NOAA) issued its January Official Forecast (Final) for 2011 water supply for the Northwest United States. • Following heavy storms in December 2010, as well as, continuation of cold and wet weather year- to-date (partly due to the La Nina weather pattern), early indications are for above normal water supply levels, an early indication that the 2011 hydro season could be above normal. This follows below normal hydro conditions experienced in 2010 (despite solid run-off in late spring). The NOAA is also forecasting colder and wetter than average conditions this winter for the Northwest, which could help replenish water supply conditions and support solid run-off this spring. See Table 1. • As of January 7, 2011, forecast stations St. Regis, Cabinet Gorge Dam, and Near Plains along the Clark Fork River are forecasted to have water supplies 102%, 104%, and 102% respectively, of their 30-year averages. The Spokane forecast station in Spokane and Coeur D’Alene Lake in northern Idaho, primary outflow is the Spokane River, are forecasted to have water supplies 101% and 98% of their 30-year averages, respectively. AVA’s (AVA-$23.08-NEUTRAL) hydroelectric generating facilities are located along the Clark Fork River (~80% or 794 MW) in Idaho and Montana and the Spokane River (~20% or 180 MW) in Washington. See Table 2 and Table 3. • Brownlee and Hells Canyon, IDA’s largest hydroelectric generation facility, are forecasted to have water supplies 112% and 112% of their 30-year averages, respectively. IDA’s (IDA-$37.22- NEUTRAL) hydroelectric facilities are primarily located on the Snake River along the Idaho/Oregon border. See Table 4. • Benham Falls on the Deschutes River is forecasted to have water supply 102% of its 30-year average and the Estacada forecasting station along the Clackamas River is forecasted to be 106% of its average. POR’s (POR-$21.92-NEUTRAL) wholly-owned hydro facilities (~190MW) are located on the Clackamas River in northern Oregon, and POR’s jointly-owned facilities (66.7% ownership in ~300MW) are on the Deschutes River in Oregon. See Table 5. Brian J. Russo, CFA 646-432-6312 brusso@ladenburg.com Power and Utilities Sector Industry Update January 10, 2011 Brian Russo 646.432.6312 INDUSTRY UPDATE Ladenburg Thalmann & Co. Inc. PAGE - 2 - NOAA July 2010 Official Forecast On January 7, 2011, the National Oceanic and Atmospheric Administration (NOAA) issued its January Official Forecast (Final) for 2011 water supply for the Northwest United States Within the Ladenburg Thalmann utility universe, Avista Corp (AVA-$23.08-NEUTRAL), Portland General Electric (POR-$21.92- NEUTRAL), and IDACORP (IDA-$37.22-NEUTRAL) are the companies primarily affected by these reports as their generation portfolios all contain substantial hydroelectric assets. Table 1: NOAA Water Supply Updates – 2010 & 2011 NOAA Water Supply Updates (% of 30-year avg) Dec1 Jan2 Jan3 Jan1 Feb2 Feb3 Feb1 Clark Fork St Regis 111% 102% 2010 77% 81% 74% 71% 58% 62% 57% Near Plains 110% 104% 2010 81% 85% 79% 77% 66% 70% 65% Cabinet Gorge Dam 108% 102% 2010 80% 83% 77% 75% 64% 70% 66% Spokane At Spokane 111% 101% 2010 94% 83% 83% 82% 66% 57% 57% *Couer D'Alene Lake 110% 98% 2010 88% 77% 77% 75% 59% 49% 48% Clackamas Estacada 104% 106% 2010 111% 90% 88% 88% 82% 81% 78% Deschutes Benham Falls 106% 102% 2010 95% 80% 84% 80% 73% 77% 76% Snake Brownlee Dam 105% 112% 2010 61% 63% 60% 59% 52% 56% 54% Hells Canyon 106% 112% 2010 61% 63% 60% 59% 51% 56% 54% Note: 1 Mid-Month Update, Early Bird (Preliminary Forecast), 3 Official Forecast (Final)*feeder lake for Spokane River Apr - Sept 2010 Source: Ladenburg Thalmann & Co, Inc., NOAA Avista Corp – Spokane and Clark Fork River AVA’s hydroelectric generating facilities are located along the Clark Fork River (~80% or 794 MW) in Idaho and Montana and the Spokane River (~20% or 180 MW) in Washington. In a normal year, hydroelectric capacity totals 4.6m MWh. Under the Energy Recovery Mechanism (ERM), there is a 50% customer sharing when actual power supply expenses are higher than the amount between $4- $10m, there is a 75% customer sharing when actual power supply expenses are lower (rebate to customer) than the amount included in base rates between $4- $10m, AVA receives 100% of the cost or benefit within the $4m “deadband”, and 10% of the cost variance when power supply costs exceed $10m. The ERM is expected to be in a positive balance for full year 2011 because the fuel factor embedded in rates is higher than market commodity prices. As of January 7, 2011, forecast stations St. Regis, Cabinet Gorge Dam, and Near Plains along the Clark Fork River are forecasted to have water supplies 102%, 104%, and 102% respectively, of their 30-year averages. Brian Russo 646.432.6312 INDUSTRY UPDATE Ladenburg Thalmann & Co. Inc. PAGE - 3 - Table 2: NOAA – Clark Fork River Water Supply (% of normal) 45% 55% 65% 75% 85% 95% 105% 115% Dec Jan Feb Feb Mar Apr Apr May Jun Jun Jul St Regis 2010 St Regis 2011 Near Plains 2010 Near Plains 2011 Cabinet Gorge 2010 Cabinet Gorge 2011 Source: Ladenbur Thalmann & Co Inc. NOAA The Spokane forecast station in Spokane and Coeur D’Alene Lake in northern Idaho, primary outflow is the Spokane River, are forecasted to have water supplies 101% and 98% of their 30-year averages, respectively. Table 3: NOAA – Spokane River Water Supply (% of normal) 40% 50% 60% 70% 80% 90% 100% 110% 120% Dec Jan Feb Feb Mar Apr Apr May Jun Jun Jul Spokane 2010 Spokane 2011 Couer D'Alene Lake 2010 Couer D'Alene Lake 2011 Source: Ladenburg Thalmann & Co, Inc., NOAA IDACORP – Snake River IDA’s hydroelectric facilities are primarily located on the Snake River along the Idaho/Oregon border. IDA begins monitoring hydro conditions in the northwest in November particularly snowpack and forecasted stream flows. The majority of IDA’s water supply is held at the Brownlee Reservoir. In a normal year, Brian Russo 646.432.6312 INDUSTRY UPDATE Ladenburg Thalmann & Co. Inc. PAGE - 4 - hydroelectric capacity totals 8.6m MWh. This compares to the expected 2010 hydro electric generation range of 7.0-7.5m MWh. Any shortfall (as compared with the median) is generally replaced with purchase power from the open markets and 95% of those costs are recovered through the PCA mechanism in Idaho. IDA was authorized by the Idaho Public Utility Commission (IPUC) in January 2009 to change its sharing mechanism to 95/5 (previously 90/10 sharing with customers), as well as, the implementation of a forward-looking model forecasting fuel costs. This greatly reduces volatility in earnings regarding seasonal hydro conditions. As of January 7, 2011, Brownlee and Hells Canyon, IDA’s largest hydroelectric generation facility, are forecasted to have water supplies 112% and 112% of their 30-year averages, respectively. Water supply forecasts are for the April- September 2011 period. Table 4: NOAA – Snake River Water Su l % of normal 40% 50% 60% 70% 80% 90% 100% 110% Dec Jan Feb Feb Mar Apr Apr May Jun Jun Jul Brow nlee Dam 2010 Brow nlee Dam 2011 Hells Canyon 2010 Hells Canyon 2011 Source: Ladenburg Thalmann & Co, Inc., NOAA Portland General Electric – Clackamas River and Deschutes River POR’s wholly-owned hydro facilities (~190MW) are located on the Clackamas River in northern Oregon, and POR’s jointly-owned facilities (66.7% ownership in ~300MW) are on the Deschutes River in Oregon. In a normal year, hydroelectric capacity totals 4.6m MWh. This compares to 3Q10 year-to-date actual hydro generation output of 3.2m MWh. POR utilizes a Power Cost Adjustment Mechanism (PCAM) to adjust rates to reflect differences between forecast and actual power costs. POR absorbs 100% of the costs/benefits within the deadband of $35m-($17m), and amounts above or below the deadband are shared with customers/shareholders 90/10. An earnings test is also conducted that further mitigates cost pressures with Brian Russo 646.432.6312 INDUSTRY UPDATE Ladenburg Thalmann & Co. Inc. PAGE - 5 - customer surcharge if actual ROE is no greater than 9.0% and customer refund if actual ROE is no less than 11.0%. As of January 7, 2011, Benham Falls on the Deschutes River is forecasted to have April-September 2011 water supply 102% of its 30-year average and the Estacada forecasting station along the Clackamas River is forecasted to be 106% of its average. Table 5: NOAA – Clackamas and Deschutes Rivers Water Su lies % of normal 70% 80% 90% 100% 110% 120% 130% Dec Jan Feb Feb Mar Apr Apr May Jun Jun Jul Estacada (Clackamas) 2010 Estacada (Clackamas) 2011 Benham Falls (Deschutes) 2010 Benham Falls (Deschutes) 2011 Source: Ladenburg Thalmann & Co, Inc., NOAA Brian Russo 646.432.6312 INDUSTRY UPDATE Ladenburg Thalmann & Co. Inc. PAGE - 6 - APPENDIX A: IMPORTANT RESEARCH DISCLOSURES ANALYST CERTIFICATION I, Brian J. Russo, attest that the views expressed in this research report accurately reflect my personal views about the subject security and issuer. Furthermore, no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation or views expressed in this research report. The research analyst(s) primarily responsible for the preparation of this research report have received compensation based upon various factors, including the firm’s total revenues, a portion of which is generated by investment banking activities. STOCK RATING DEFINITIONS Buy: The stock’s return is expected to exceed 15% over the next twelve months. Neutral: The stock’s return is expected to be plus or minus 15% over the next twelve months. Sell: The stock’s return is expected to be negative 15% or more over the next twelve months. Investment Ratings are determined by the ranges described above at the time of initiation of coverage, a change in risk, or a change in target price. At other times, the expected returns may fall outside of these ranges because of price movement and/or volatility. Such interim deviations from specified ranges will be permitted but will become subject to review. RATINGS DISPERSION AND BANKING RELATIONSHIPS (As of 12/31/10) Buy 73% (24% are banking clients) Neutral 26% (16% are banking clients) Sell 1% (0% are banking clients) COMPANY SPECIFIC DISCLOSURES: Avista Corp (AVA-$20.87-NEUTRAL) IDACORP (IDA-$35.27-NEUTRAL) Portland General Electric (POR-$19.17-NEUTRAL) Ladenburg Thalmann & Co. Inc. does not make a market in Avista (AVA), IDACORP (IDA), Portland General Electric (POR). Ladenburg Thalmann & Co. Inc. has not had an investment banking relationship with AVA, IDA, POR nor received compensation for investment banking services in the past 12 months. Neither the Analyst, nor members of the Analyst’s household own any securities issued by AVA, IDA, POR. For Company-specific information, please write to Ladenburg Thalmann & Co., Inc, Attention: Research Department, 520 Madison Ave, New York, NY 10022, or call 212-409-2000 or 800-LAD-THAL GENERAL DISCLAIMERS Information and opinions presented in this report have been obtained or derived from sources believed by Ladenburg Thalmann & Co. Inc. to be reliable. The opinions, estimates and projections contained in this report are those of Ladenburg Thalmann & Co. Inc. as of the date of this report and are subject to change without notice. Ladenburg Thalmann & Co. Inc. accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to Ladenburg Thalmann & Co. Inc. This report is not to be relied upon in substitution for the exercise of independent judgment. Ladenburg Thalmann & Co. Inc. may have issued, and may in the future issue, other reports that are inconsistent with, and reach different conclusions from, the information presented in this report. Those reports reflect the different assumptions, views and analytical methods of the analysts who prepared them and Ladenburg Thalmann & Co. Inc. is under no obligation to ensure that such other reports are brought to the attention of any recipient of this report. Some companies that Ladenburg Thalmann & Co. Inc. follows are emerging growth companies whose securities typically involve a higher degree of risk and more volatility than the securities of more established companies. The securities discussed in Ladenburg Thalmann & Co. Inc. research reports may not be suitable for some investors. Investors must make their own determination as to the Brian Russo 646.432.6312 INDUSTRY UPDATE Ladenburg Thalmann & Co. Inc. 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