Loading...
HomeMy WebLinkAboutCOC Northwest Hydro Update 071211.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 y 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 JJuullyy 22001111 NNoorrtthhwweesstt WWaatteerr SSuuppppllyy OOffffiicciiaall FFoorreeccaasstt Industry Update • On July 8, 2011, the National Oceanic and Atmospheric Administration (NOAA) issued its July Official Forecast (Final) for 2011 water supply for the Northwest United States. Based on water supply levels and run-off year-to- date, hydro conditions remain well above normal and well above the comparable period a year ago. See Table 1 for water supply data and Table 7 for run-off data. Historically-high hydro conditions are also illustrated by mid-single digit Mid-C power prices, as well as, the Bonneville Power Administration (BPA) curtailment of wind generation. See Table 6 for Mid-C spot power prices. • As a reminder, during above normal hydro conditions, northwest utilities will have a greater proportion of low cost hydro capacity in their generation fuel mix. Also, with more hydro capacity, utilities will rely less on higher cost fossil fuel plant capacity and/or rely less on wholesale power markets to meet forecasted retail load. As a result, actual average fuel costs decline relative to average fuel costs embedded in rates. Depending on the specific sharing mechanism, which varies among northwest utilities, above normal hydro conditions is margin positive. This dynamic was evident in solid 1Q11 financial results and updated 2011 outlooks of the northwest regional utilities. • With that said, as fuel costs decline further due to the persistence of abundant low-cost hydroelectric power and depressed regional power prices, fuel savings are incrementally skewed to the customer benefit. POR has already exceeded the lower-end of its deadband ($15m/$30m below/above, $19m 1Q11 actual benefit) and we expect 90% customer sharing for the remainder of the year. AVA recorded a $4.9m ERM benefit in 1Q11 and we expect AVA to be in the 90% sharing (+$10m) for the full year. IDA, viewed as least sensitive to fluctuations in fuel costs due to 95/5 sharing and related PCA structure, is forecasting 8.5-10.5m MWh of hydroelectric generation, up from the previous estimate of 7.5-9.5m MWh and compared to 8.6m MWh in a normal year. • As of July 8, 2011, forecast stations St. Regis, Near Plains and Cabinet Gorge Dam along the Clark Fork River are forecasted to have water supplies 166%, 160%, and 159% 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 176% and 168% of their 30-year averages, respectively. 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. See Table 2 and Table 3. • Brownlee and Hells Canyon, IDA’s largest hydroelectric generation facility, are forecasted to have water supplies 153% and 159% of their 30-year averages, respectively. IDA’s 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 111% of its 30-year average and the Estacada forecasting station along the Clackamas River is forecasted to be 138% of its average. 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. POR’s also has long- term purchase power contracts for output of 4 hydroelectric projects in the mid-Columbia River totaling 507 MW and a long-term agreement for output of the Pelton/Round Butte hydroelectric project totaling 150 MW. See Table 5. Brian J. Russo, CFA 646-432-6312 brusso@ladenburg.com Ira Reibeisen 212-409-2051 ireibeisen@ladenburg.com Power and Utilities Sector Industry Update July 12, 2011 Brian Russo 646.432.6312 INDUSTRY UPDATE Ladenburg Thalmann & Co. Inc. PAGE - 2 - NOAA July 2011 Official Forecast On July 8, 2011, the National Oceanic and Atmospheric Administration (NOAA) issued its July Official Forecast (Final) for 2011 water supply for the Northwest United States. Within the Ladenburg Thalmann utility universe, Avista Corp (AVA-$25.91-NEUTRAL), Portland General Electric (POR-$25.63-NEUTRAL), and IDACORP (IDA-$39.95-BUY) 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) Mar2 Mar3 Mar1 Apr2 Apr3 Apr1 May2 May3 May1 Jun2 Jun3 Jun1 Jul2 Jul3 Clark ForkSt Regis 113% 112% 114% 120% 122% 136% 143% 134% 141% 159% 159% 165% 166% 166%2010 57% 54% 50% 52% 51% 49% 48% 51% 51% 53% 60% 64% 68% 69%Near Plains 113% 114% 118% 124% 124% 136% 142% 140% 142% 156% 156% 160% 161% 160%2010 65% 64% 59% 59% 59% 57% 56% 61% 60% 61% 66% 71% 75% 74%Cabinet Gorge Dam 110% 113% 117% 124% 124% 136% 140% 140% 142% 157% 157% 160% 160% 159% 2010 66% 64% 61% 61% 60% 57% 57% 61% 61% 61% 66% 70% 74% 74% Spokane At Spokane 104% 109% 116% 116% 126% 139% 135% 151% 153% 170% 170% 174% 174% 176%2010 55% 53% 51% 55% 52% 52% 51% 55% 60% 62% 65% 81% 87% 76%*Coeur D'Alene Lake 104% 108% 111% 118% 124% 136% 135% 151% 154% 167% 167% 169% 169% 168%2010 46% 44% 41% 43% 43% 43% 42% 46% 51% 54% 58% 72% 78% 78%ClackamasEstacada 88% 94% 96% 100% 100% 120% 132% 120% 123% 130% 130% 130% 134% 138% 2010 74% 73% 70% 72% 72% 75% 79% 85% 90% 98% 110% 120% 123% 124% Deschutes Benham Falls 90% 100% 106% 113% 109% 124% 125% 119% 119% 113% 113% 125% 120% 111%2010 74% 73% 70% 74% 75% 76% 78% 78% 78% 79% 80% 80% 80% 80%Snake Brownlee Dam 89% 91% 96% 109% 115% 126% 128% 133% 137% 159% 159% 159% 160% 153%2010 51% 49% 48% 49% 51% 48% 50% 52% 51% 51% 61% 73% 73% 72%Hells Canyon 89% 91% 96% 109% 115% 129% 130% 135% 143% 163% 163% 165% 165% 159% 2010 51% 49% 47% 49% 50% 49% 51% 53% 54% 54% 63% 79% 81% 80% Note: 1 Mid-Month Update, 2 Early Bird (Preliminary Forecast), 3 Official Forecast (Final) 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. We expect AVA to be in the 90% sharing band (+$10m) of its ERM due to favorable year-to- date hydro conditions, expectations for continued above normal hydro, and lower expected fossil fuel costs relative to the level in customer rates later in the year. As of July 8, 2011, forecast stations St. Regis, Cabinet Gorge Dam, and Near Plains along the Clark Fork River are forecasted to have water supplies 166%, 160%, and 159% 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% 65% 85% 105% 125% 145% 165% 185% Dec Jan Feb Mar Apr May Jun Jul St Regis 2010 St Regis 2011 Near Plains 2010 Near Plains 2011 Cabinet Gorge 2010 Cabinet Gorge 2011 Source: Ladenburg 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 176% and 168% of their 30-year averages, respectively. Table 3: NOAA – Spokane River Water Supply (% of normal) 35% 55% 75% 95% 115% 135% 155% 175% 195% Dec Jan Feb Mar Apr May Jun Jul Spokane 2010 Spokane 2011 Couer D'Alene Lake 2010 Couer D'Alene Lake 2011 Source: Ladenbur Thalmann & Co Inc. NOAA Brian Russo 646.432.6312 INDUSTRY UPDATE Ladenburg Thalmann & Co. Inc. PAGE - 4 - 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, hydroelectric capacity totals 8.6m MWh. IDA is now forecasting hydroelectric generation to increase to 8.5m-10.5m MWh from its previous estimate of 7.5m- 9.5m 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. Therefore, despite favorable hydro conditions, IDA has manageable sensitivity to changes in supply costs due to recent changes in base rates and adjustments in the annual PCA filing (March 2011 filing for a $40.4m reduction effective July 1, 2011 to May 21, 2012) and customer sharing (95/5). As of July 8 2011, Brownlee and Hells Canyon, IDA’s largest hydroelectric generation facility, are forecasted to have water supplies 153% and 159% of their 30-year averages, respectively. Water supply forecasts are for the April- September 2011 period. Table 4: NOAA – Snake River Water Supply (% of normal) 45% 65% 85% 105% 125% 145% 165% 185% Dec Jan Feb Mar Apr May 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 Brian Russo 646.432.6312 INDUSTRY UPDATE Ladenburg Thalmann & Co. Inc. PAGE - 5 - ~300MW) are on the Deschutes River in Oregon. POR’s also has long-term purchase power contracts for output of 4 hydroelectric projects in the mid- Columbia River totaling 507 MW and a long-term agreement for output of the Pelton/Round Butte hydroelectric project totaling 150 MW. In 2010, hydro generation and hydro purchased power contributed 4.2m MWh. POR utilizes a Power Cost Adjustment Mechanism (PCAM) to adjust rates to reflect differences between forecast and actual power costs. For 2011, the PCAM deadband range is from $15m below to $30m above the baseline of net variable power costs. 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 customer surcharge if actual ROE is no greater than 9.0% and customer refund if actual ROE is no less than 11.0%. Due to favorably hydro conditions and lower supply costs, POR has benefited by $19m in 1Q11 and will be refunding to customers approximately $4m for the quarter under its PCAM. As of July 8, 2011, Benham Falls on the Deschutes River is forecasted to have April-September 2011 water supply 111% of its 30-year average and the Estacada forecasting station along the Clackamas River is forecasted to be 138% of its average. Table 5: NOAA – Clackamas and Deschutes Rivers Water Su lies % of normal 60% 70% 80% 90% 100% 110% 120% 130% 140% 150% Dec Jan Feb Mar Apr May 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 - Table 6: 2011-YTD Mid-Columbia Off-Peak Power Prices (5.00) 0 5 10 15 20 25 30 35 40 45 50 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 $/ M W h Mid-Columbia Spot Pow er Index Off-Peak Source: Ladenburg Thalmann & Co, Inc., Bloomberg Table 7: NOAA Monthly Runoff Summary (2009/2010/2011) (Units: Thousands of Acre-feet) Avista (AVA) Spokane at Spokane JAN FEB MAR APR MAY JUNE JULY JAN FEB MAR APR MAY JUNE JULY JAN FEB MAR APR MAY JUNE JULY Adjusted Volumes 457 242 564 991 1,182 470 129 211 185 252 450 644 750 205 889 404 643 1,116 1,754 1,221 na 30 Year Avg *356 446 623 870 1,002 548 184 356 446 623 870 1,002 548 184 356 446 623 870 1,002 548 na % Avg 128% 54% 91% 114% 118% 86% 70% 59% 41% 40% 52% 64% 137% 111% 250% 91% 103% 128% 175% 223% na Clark Fork at St Regis Observed Volumes 258 182 256 647 1,448 1,324 429 154 127 169 324 564 1,167 409 247 194 245 533 1,621 2,451 na 30 Year Avg 201 208 292 536 1,215 1,278 489 201 208 292 536 1,215 1,278 489 201 208 292 536 1,215 1,278 na % Avg 128% 88% 88% 121% 119% 104% 88% 77% 61% 58% 60% 46% 91% 84% 123% 93% 84% 99% 133% 192% na Portland General (POR) Clackamas JAN FEB MAR APR MAY JUNE JULY JAN FEB MAR APR MAY JUNE JULY JAN FEB MAR APR MAY JUNE JULY Observed Volumes 360 132 208 271 357 128 66 279 149 186 233 224 253 79 331 153 265 319 271 209 na 30 Year Avg 281 249 238 222 208 136 74 281 249 238 222 208 136 74 281 249 238 222 208 136 na % Avg 128% 53% 87% 122% 171% 94% 89% 99% 60% 78% 105% 108% 186% 106% 118% 61% 111% 144% 130% 154% na Deschutes Adjusted Volumes 72 59 69 67 95 88 71 67 52 57 57 67 82 70 78 60 69 74 92 95 na 30 Year Avg 81 72 80 80 93 90 87 81 72 80 80 93 90 87 81 72 80 80 93 90 na % Avg 89% 82% 86% 84% 102% 98% 82% 83% 72% 71% 71% 72% 91% 80% 96% 83% 86% 93% 99% 106% na IDACORP (IDA) Snake at Hells Canyon JAN FEB MAR APR MAY JUNE JULY JAN FEB MAR APR MAY JUNE JULY JAN FEB MAR APR MAY JUNE JULY Adjusted Volumes 719 640 927 1,383 1,710 1,687 981 899 817 979 1,002 1,232 1,905 704 1,209 1,000 1,571 2,787 3,531 3,105 na 30 Year Avg 1,271 1,316 1,849 1,978 2,006 1,682 827 1,271 1,316 1,849 1,978 2,006 1,682 827 1,271 1,316 1,849 1,978 2,006 1,682 na % Avg 57% 49% 50% 70% 85% 100% 119% 71% 62% 53% 51% 61% 113% 85% 95% 76% 85% 141% 176% 185% na (Units: Thousands of Acre-feet) *30 Year Avg adjusted to reflect days in current period *April-to-date 2011 run-off expected April 11, 2011 2011 2011 2011 2010 2010 20102009 2009 2009 Source: Ladenburg Thalmann & Co, Inc., NOAA Brian Russo 646.432.6312 INDUSTRY UPDATE Ladenburg Thalmann & Co. Inc. PAGE - 7 - 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 6/30/11) Buy 75% (35% are banking clients) Neutral 25% (15% are banking clients) Sell 0% ( 0% are banking clients) COMPANY SPECIFIC DISCLOSURES: Avista Corp (AVA-$25.91-NEUTRAL) IDACORP (IDA-$39.95-BUY) Portland General Electric (POR-$25.63-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. PAGE - 8 - appropriateness of an investment in any securities referred to herein, based on their specific investment objectives, financial status and risk tolerance. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. The price, value of and income from any of the securities mentioned in this report can fall as well as rise. The value of securities is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities. Investors in securities such as ADRs, the values of which are influenced by currency volatility, effectively assume this risk. Securities recommended, offered or sold by Ladenburg Thalmann & Co. Inc. (1) are not insured by the Federal Deposit Insurance Company; (2) are not deposits or other obligations of any insured depository institution; and (3) are subject to investment risks, including the possible loss of some or all of principal invested. Indeed, in the case of some investments, the potential losses may exceed the amount of initial investment and, in such circumstances; you may be required to pay more money to support these losses. The information and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy any securities mentioned herein. This publication is confidential for the information of the addressee only and may not be reproduced in whole or in part, copies circulated, or disclosed to another party, without the prior written consent of Ladenburg Thalmann & Co. Inc. Ratings and pricing reflected in this report constitute the current ratings and pricing as of the date of this report. Ladenburg Thalmann & Co. Inc has no obligation to update, modify or amend this information or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. This report provides general information only. Member: NYSE, NYSE Amex, FINRA, all other principal exchanges and SIPC Additional Information Available Upon Request © 2011 - Ladenburg Thalmann & Co. Inc. All Rights Reserved.