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HomeMy WebLinkAboutCOC Northwest Hydro Update 050911.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 MMaayy 22001111 NNoorrtthhwweesstt WWaatteerr SSuuppppllyy OOffffiicciiaall FFoorreeccaasstt –– HHyyddrroo CCoonnddiittiioonnss WWeellll AAbboovvee NNoorrmmaall Industry Update • On May 6, 2011, the National Oceanic and Atmospheric Administration (NOAA) issued its May 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. • In general, 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 illustrated (to varying degrees) in solid 1Q11 financial results of several northwest regulated utilities. Avista Corp (AVA-$24.39-NEUTRAL) cited above average 1Q11 hydro conditions as the primary driver of results exceeding expectations (along with weather driven demand). Portland General (POR-$24.90- NEUTRAL) cited significantly lower year-over-year power supply costs as its higher-cost fossil fuel generation was displaced by its lower-cost hydro capacity. Idacorp (IDA-$39.20-BUY) noted above normal hydro conditions and raised its annual hydro generation output. • As of May 6, 2011, forecast stations St. Regis, Near Plains and Cabinet Gorge Dam along the Clark Fork River are forecasted to have water supplies 134%, 140%, and 140% 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 151% and 151% 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 133% and 135% 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 119% of its 30-year average and the Estacada forecasting station along the Clackamas River is forecasted to be 120% 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 May 9, 2011 Brian Russo 646.432.6312 INDUSTRY UPDATE Ladenburg Thalmann & Co. Inc. PAGE - 2 - NOAA July 2010 Official Forecast On May 6, 2011, the National Oceanic and Atmospheric Administration (NOAA) issued its May Official Forecast (Final) for 2011 water supply for the Northwest United States Within the Ladenburg Thalmann utility universe, Avista Corp (AVA- $24.39-NEUTRAL), Portland General Electric (POR-$24.90-NEUTRAL), and IDACORP (IDA-$39.20-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) Jan3 Jan1 Feb2 Feb3 Feb1 Mar2 Mar3 Mar1 Apr2 Apr3 Apr1 May2 May3 Clark Fork St Regis 102% 106% 108% 110% 110% 113% 112% 114% 120% 122% 136% 143% 134% 2010 74% 71% 58% 62% 57% 57% 54% 50% 52% 51% 49% 48% 51% Near Plains 104% 105% 106% 112% 112% 113% 114% 118% 124% 124% 136% 142% 140% 2010 79% 77% 66% 70% 65% 65% 64% 59% 59% 59% 57% 56% 61%Cabinet Gorge Dam 102% 103% 103% 102% 108% 110% 113% 117% 124% 124% 136% 140% 140% 2010 77% 75% 64% 70% 66% 66% 64% 61% 61% 60% 57% 57% 61%Spokane At Spokane 101% 95% 93% 102% 102% 104% 109% 116% 116% 126% 139% 135% 151% 2010 83% 82% 66% 57% 57% 55% 53% 51% 55% 52% 52% 51% 55% *Coeur D'Alene Lake 98% 98% 100% 104% 104% 104% 108% 111% 118% 124% 136% 135% 151% 2010 77% 75% 59% 49% 48% 46% 44% 41% 43% 43% 43% 42% 46% Clackamas Estacada 106% 102% 102% 94% 89% 88% 94% 96% 100% 100% 120% 132% 120% 2010 88% 88% 82% 81% 78% 74% 73% 70% 72% 72% 75% 79% 85% DeschutesBenham Falls 102% 98% 104% 95% 90% 90% 100% 106% 113% 109% 124% 125% 119% 2010 84% 80% 73% 77% 76% 74% 73% 70% 74% 75% 76% 78% 78%Snake Brownlee Dam 112% 107% 105% 99% 88% 89% 91% 96% 109% 115% 126% 128% 133% 2010 60% 59% 52% 56% 54% 51% 49% 48% 49% 51% 48% 50% 52% Hells Canyon 112% 107% 105% 99% 88% 89% 91% 96% 109% 115% 129% 130% 135% 2010 60% 59% 51% 56% 54% 51% 49% 47% 49% 50% 49% 51% 53% Note: 1 Mid-Month Update, Early Bird (Preliminary Forecast), 3 Of *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. 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 May 6, 2011, forecast stations St. Regis, Cabinet Gorge Dam, and Near Plains along the Clark Fork River are forecasted to have water supplies 134%, 140%, and 140% 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% 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: 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 151% and 151% of their 30-year averages, respectively. Table 3: NOAA – Spokane River Water Supply (% of normal) 40% 60% 80% 100% 120% 140% 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: 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 June 1, 2011 to May 21, 2012) and customer sharing (95/5). As of May 6, 2011, Brownlee and Hells Canyon, IDA’s largest hydroelectric generation facility, are forecasted to have water supplies 133% and 135% 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) 40% 60% 80% 100% 120% 140% 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. POR’s also has long-term purchase power contracts for output of 4 hydroelectric projects in the mid- Brian Russo 646.432.6312 INDUSTRY UPDATE Ladenburg Thalmann & Co. Inc. PAGE - 5 - 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 May 6, 2011, Benham Falls on the Deschutes River is forecasted to have April-September 2011 water supply 119% of its 30-year average and the Estacada forecasting station along the Clackamas River is forecasted to be 120% of its average. Table 5: NOAA – Clackamas and Deschutes Rivers Water Su lies % of normal 70% 80% 90% 100% 110% 120% 130% 140% 150% 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 - Table 6: 2010-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 $/ 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) 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 1182 470 129 211 185 252 450 644 750 205 889 404 643 1116 na na na 30 Year Avg *356 446 623 870 1002 548 184 356 446 623 870 1002 548 184 356 446 623 870 na na na % Avg 128% 54% 91% 114% 118% 86% 70% 59% 41% 40% 52% 64% 137% 111% 250% 91% 103% 128% na na na Clark Fork at St Regis Observed Volumes 258 182 256 647 1448 1324 429 154 127 169 324 564 1167 409 247 194 245 533 na na na 30 Year Avg 201 208 292 536 1215 1278 489 201 208 292 536 1215 1278 489 201 208 292 536 na na na % Avg 128% 88% 88% 121% 119% 104% 88% 77% 61% 58% 60% 46% 91% 84% 123% 93% 84% 99% na na 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 na na na 30 Year Avg 281 249 238 222 208 136 74 281 249 238 222 208 136 74 281 249 238 222 na na na % Avg 128% 53% 87% 122% 171% 94% 89% 99% 60% 78% 105% 108% 186% 106% 118% 61% 111% 144% na na na Deschutes Adjusted Volumes 72 59 69 67 95 88 71 67 52 57 57 67 82 70 78 60 69 74 na na na 30 Year Avg 81 72 80 80 93 90 87 81 72 80 80 93 90 87 81 72 80 80 na na na % Avg 89% 82% 86% 84% 102% 98% 82% 83% 72% 71% 71% 72% 91% 80% 96% 83% 86% 93% na na 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 1383 1710 1687 981 899 817 979 1002 1232 1905 704 1209 1000 1571 2787 na na na 30 Year Avg 1271 1316 1849 1978 2006 1682 827 1271 1316 1849 1978 2006 1682 827 1271 1316 1849 1978 na na na % Avg 57% 49% 50% 70% 85% 100% 119% 71% 62% 53% 51% 61% 113% 85% 95% 76% 85% 141% na na 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 4/30/11) Buy 72% (37% are banking clients) Neutral 28% (18% are banking clients) Sell 0% ( 0% are banking clients) COMPANY SPECIFIC DISCLOSURES: Avista Corp (AVA-$24.39-NEUTRAL) IDACORP (IDA-$39.20-BUY) Portland General Electric (POR-$24.90-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 Brian Russo 646.432.6312 INDUSTRY UPDATE Ladenburg Thalmann & Co. Inc. PAGE - 8 - Thalmann & Co. Inc. research reports may not be suitable for some investors. 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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.