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INDUSTRY UPDATE
Institutional Equity Research
February 8, 2013 Utility Monthly
Prices: (2/8/13)
Industry:
Utilities
Michael Bates
503.603.3045
mbates@dadco.com
January Proves Dry, Seasonal Precipitation Still Above Average
Temperatures for the beginning of the 1st 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.
Much of the Northwest saw precipitation levels far below average in January. This
was a stark contrast to the extremely wet 4Q. Lower than average precipitation
levels could be a headwind to certain utilities in 1Q. However, precipitation levels
remain at or above average levels in much of the Northwest over the entirety of
the rainy season.
Forecasted streamflows in key drainages for hydrogeneration in the Pacific
Northwest have been revised down to below average levels. This was most likely
a reflection of the weaker precipitation levels in January.
Avista Corp. and Great Plains Energy, Inc. were both issued final rate case
decisions. A multi-party settlement was filed in UNS Energy Corp.’s general rate
case.
D.A. Davidson & Co.
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Regulatory Developments
On February 4th, parties involved in Tucson Electric Power’s (UNS Energy’s primary
subsidiary) general rate case entered into a settlement agreement. Assuming the settlement is
approved by the Arizona Corporation Commission (ACC), TEP will be granted a non-fuel
revenue increase of roughly $76 million (+9%) per year, compared to the original request for a
$128 million (+15%) increase. The increased rate is structured on a ~$1.5 billion rate base, a
43.5% equity layer and a 10.0% allowed ROE. The proposed settlement also includes cost
adjustment mechanisms, an energy efficiency resource plan, and modifications to TEP’s
Purchased Power and Fuel Adjustment clause (PPFAC). The case is expected to be reviewed
by an ALJ in early March.
On February 7th AVA reached a settlement in its Idaho-based electric and gas rate cases.
Electric rates will increase $7.8 million (+3.1%) on October 1st of this year, compared to the
original request for an increase of $11.4 million (+4.6%). Gas revenues will increase
$4.4 million (+6.9%) in two steps on April 1st and October 1st of this year, compared to the
original request for an increase of $4.6 million (+7.2%). The allowed ROE of 9.8% was in line
with other recent rate case outcomes, but below the 10.9% the utility requested.
On January 9th, the MPSC issued final orders for three general rate cases filed by GXP’s three
Missouri based subsidiaries. KCP&L-Missouri was issued a $64 million (+9.1%) electric rate
base increase compared to the requested increase of $106 million (+15.1%). KCP&L-GMO
MPS was issued a $28 million (+5.2%) electric rate base increase compared to the requested
increase of $58 million (+10.9%). KCP&L-GMO L&P was issued a $21 million (+12.2%) electric
rate increase compared to the requested increase of $25 million (+14.6%). Overall, the
commission granted combined revenue increases of ~$113 million, compared to the
$190 million increase that was originally requested. The Commission granted an allowed ROE
of 9.7% on an equity layer of 52.56%.
Other Developments
On January 28, 2013, HE and the Consumer Advocate signed a settlement to write-off
$40 million of costs in lieu of conducting the regulatory audit of the CIP CT-1 and the CIS
projects. If the settlement is approved by the Commission, the utility will include the remaining
$52 million of excess project costs into rate base as of year-end 2012. HE also agreed to
withdraw its current rate case for HELCO and delay filing a new rate case at HECO until
January 2014.
On January 31st, NWE announced a plan to upgrade its electric transmission infrastructure in
Stillwater and Carbon counties (Montana). The upgrade will improve the reliability to
NorthWestern’s customers in the area and will take place in phases over 10 years. The first
phase is expected to begin in early 2013 and will cost $34-$39 million. Construction is
expected to begin in 2015.
UNS Energy Corp.
(UNS – NEUTRAL – $45 target)
Avista Corp.
(AVA – NEUTRAL – $25 target)
Great Plains Energy, Inc.
(GXP – NEUTRAL – $21.50 target)
Hawaiian Electric Industries, Inc.
(HE – NEUTRAL – $28 target)
NorthWestern Corporation
(NWE – NEUTRAL – $36.50 target)
D.A. Davidson & Co.
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As displayed in Figure 1, the mild temperatures we have observed all winter have rolled over
into January as almost all of the geographic areas displayed proved to have a milder month
than the average. 1Q’13 seems to have picked up where 4Q’12 left off, temperatures remain
warmer than their long-term averages, but are substantially cooler on a year-over-year basis.
Figure 1: Heating Degree Day Data (HDD) –January and 1Q’13Totals
Source: National Weather Service’s Climate Prediction Center
January % Dev % Dev 1Q'13 % Dev % Dev
HDD v. Avg v. 2011 Total v. Avg v. 2011
Duluth, MN 1637 -8% 13% 1637 -8% 13%
Cedar Rapids, IA 1294 -11% 7% 1294 -11% 7%
Madison, WI 1338 -10% 10% 1338 -10% 10%
Spokane, WA 1248 7% 16% 1248 7% 16%
Colorado Springs, CO 1061 -6% 20% 1061 -6% 20%
Lincoln, NE 1226 -8% 14% 1226 -8% 14%
Rapid City, SD 1239 -6% 15% 1239 -6% 15%
Kansas City, MO 991 -16% 8% 991 -16% 8%
Boise, ID 1399 28% 51% 1399 28% 51%
Pocatello, ID 1551 22% 41% 1551 22% 41%
Tri Cities, WA 1000 6% 17% 1000 6% 17%
Boise, ID 1399 28% 51% 1399 28% 51%
Bismarck, ND 1578 -8% 21% 1578 -8% 21%
Madison, WI 1338 -10% 10% 1338 -10% 10%
Great Falls, MT 1097 -17% -2% 1097 -17% -2%
Sioux Falls, SD 1466 -6% 16% 1466 -6% 16%
Portland, OR 837 9% 13% 837 9% 13%
Jamestown, ND 1684 -4% 21% 1684 -4% 21%
Fergus Falls, MN 1637 -8% 13% 1637 -8% 13%
Portland, OR 837 9% 13% 837 9% 13%
Salt Lake City, UT 1401 26% 43% 1401 26% 43%
Chicago, IL 1182 -11% 10% 1182 -11% 10%
Green Bay, WI 1412 -8% 11% 1412 -8% 11%
Rochester, MN 1466 -11% 13% 1466 -11% 13%
Tucson, AZ 463 15% 61% 463 15% 61%
Milwaukee, WI 1254 -9% 11% 1254 -9% 11%
Topeka, KS 940 -20% 7% 940 -20% 7%
Denver, CO 1061 -5% 20% 1061 -5% 20%
Minneapolis, MN 1479 -8% 15% 1479 -8% 15%
Eau Claire, WI 1511 -8% 10% 1511 -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
Great Plains Energy
GXP
IDACORP
IDA
MDU Resources Group
MDU
MGE Energy
MGEE
NorthWestern
NWE
Northwest Natural Gas
NWN
Stock Location
ALLETE
ALE
Alliant Energy
LNT
Avista
AVA
Black Hills
BKH
Janua y More Mild than Average,
but Colder than 2011
D.A. Davidson & Co.
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As displayed in Figure 2, the National Weather Service is forecasting cooler temperatures in
the Northwest over the next three months, but warmer than normal conditions in the South and
far Northeast, which could be a heating load headwind to utilities in those regions. 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 3-5, aggregate precipitation levels in the Pacific Northwest have been at or
above long-term averages in the current precipitation year (which began in October 2012).
However, January proved to be a dry month as most regions in the Northwest saw well below
average precipitation levels. Including the dry January, 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.
Temperatures Appear Mixed
2013 Precipitation Levels
D.A. Davidson & Co.
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Figure 3: Accumulated Northwestern Precipitation through January 2013
Source: National Weather Service Northwest River Forecast Center
Figure 4: Accumulated Northwestern Precipitation October 2012 – January 2013
Source: National Weather Service Northwest River Forecast Center
D.A. Davidson & Co.
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Figure 5: Western Region Snow Water Content
Source: United States Department of Agriculture
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The Northwest River Forecast Center’s projection released on February 4th calls for near
normal streamflows in four of the six important drainages in the Northwest, while the other two
are expected to have below normal drainage for the spring and summer months of 2013
(Figure 6). This is a stark contrast from the prediction a month ago, which expected above
normal streamflows in four important drainages, but we note that most utility-scale hydro-
generation resources can operate at a healthy level with stream flows as low as 80% of
normal.
Figure 6: 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 15.1x expected 2013 earnings, moderately above the
average forward P/E (13.1x) over the last five years. Utility shares currently trade at a ~19%
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 3.9%, in line with the 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 10.
Figure 7: Utility Forward P/E Figure 8: Utility Forward P/E Relative to S&P 500
Source: Capital IQ Source: Capital IQ
Figure 9: Utility Dividend Yields Figure 10: 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 2,199 2,468 89%
Cabinet Gorge Dam APR-SEP 10,424 11,376 92%
IDACORP
IDA Brownlee Reservoir Inflow APR-AUG 4,833 6,121 79%
Clackamas River APR-SEP 747 732 102%
Deschutes River APR-SEP 1,813 1,916 95%
The Dalles APR-SEP 86,138 92,704 93%
Portland General Electric
POR
Stock Location Time Period Runoff Forecast - KAF
Avista
AVA
Current Sector Valuations
D.A. Davidson & Co.
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As shown in Figure 11, all of our utilities under coverage have had an impressive start to 2013.
The YTD median total return of utilities stocks under our coverage was 6.7% as compared to
the S&P 500 which rose 4.9% and the XLU which finished up 5.0%. Shares of STR have been
the most impressive, rising 17.5% YTD and outperforming the S&P 500 by 1260bp. On a YTD
basis, no utility under our coverage has had a negative return.
Figure 11: D.A. Davidson Utility Coverage – 2013 Stock Performance YTD
Source: Capital IQ
MGEE, 2.2%
NWN, 3.3%
XEL, 3.9%
POR, 4.5%
S&P 500, 4.9%
XLU, 5.0%
LNT, 5.4%
TEG, 5.5%
GXP, 5.6%
ITC, 5.6%
WR, 5.7%
NWE, 6.7%
Median, 6.7%
UNS, 6.8%
AVA, 6.9%
HE, 7.0%
OTTR, 7.3%
WEC, 7.5%
IDA, 7.9%
MDU, 8.6%
BKH, 11.1%
ALE, 12.2%
STR, 17.5%
0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0%
Stock Performance
D.A. Davidson & Co.
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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.
BKH, MDU, WEC and XEL 2012 EPS represents actual results.
Source: D.A. Davidson & Co. estimates, company reports, and Capital IQ
Electric Utilities - Regulated
Price MC EV ROE ROA
2/8/13 ($B) ($B) 2012e 2013e 2014e 2012e 2013e 2014e 2012e 2013e 2014e (ttm) (ttm)
ALE1,2 ALLETE Inc. B $46.86 $53.00 $1.7 $2.6 4.1% 68% $2.58 $2.76 $3.06 18.1 17.0 15.3 10.1 9.2 8.3 1.5 6.6% 2.4% 47%
GXP1,2 Great Plains Energy Inc. N $21.63 $21.50 $3.3 $7.0 4.0%55% $1.29 $1.50 $1.61 16.8 14.4 13.5 8.7 8.0 7.7 1.0 5.5% 2.0% 52%
IDA1 IDACORP Inc. B $46.47 $50.00 $2.3 $3.9 3.3% 48% $3.35 $3.35 $3.40 13.9 13.9 13.7 10.2 9.6 9.4 1.3 6.2% 2.1% 47%
ITC1,2 ITC Holdings Corp. B $81.10 $95.00 $4.2 $7.3 1.8% 33% $4.13 $5.00 $5.90 19.7 16.2 13.7 12.5 10.4 9.0 3.1 13.0% 3.3% 70%
POR1 Portland General Electric Co. B $28.60 $32.00 $2.2 $3.7 3.8% 58% $1.96 $1.96 $2.06 14.6 14.6 13.9 6.8 6.8 6.4 1.3 7.4% 2.2% 50%
UNS1 UNS Energy Corp. N $45.86 $45.00 $1.9 $3.6 3.8% 67% $2.20 $2.60 $2.95 20.8 17.6 15.5 8.6 7.7 6.9 1.8 8.5% 2.2% 63%
WR1,2 Westar Energy Inc. B $30.64 $33.50 $3.9 $7.2 4.3% 67%$2.01 $2.00 $2.16 15.3 15.3 14.2 8.7 8.4 7.7 1.3 7.4% 2.3% 53%
Group Average $2.8 $5.0 3.6% 57% 17.0 15.6 14.3 9.4 8.6 7.9 1.6 7.8% 2.4% 55%
Multi-Utilities
Price MC EV ROE ROA
2/8/13 ($B) ($B) 2012e 2013e 2014e 2012e 2013e 2014e 2012e 2013e 2014e (ttm) (ttm)
AVA1 Avista Corp. N $26.08 $25.00 $1.6 $2.9 4.5% 70% $1.50 $1.78 $1.83 17.4 14.7 14.2 8.5 7.6 7.2 1.2 6.9% 2.1% 52%
LNT1,2 Alliant Energy Corp. B $46.34 $51.00 $5.1 $8.2 4.1% 59%$2.97 $3.12 $3.18 15.6 14.8 14.6 9.2 8.6 7.9 1.6 7.8% 2.4% 48%
MGEE1,2 MGE Energy Inc. N $52.57 $50.00 $1.2 $1.5 3.0% 56% $2.88 $2.90 $2.95 18.2 18.2 17.8 9.2 8.9 8.6 2.1 11.3% 4.2% 39%
NWE1,2 NorthWestern Corp. N $37.67 $36.50 $1.4 $2.5 3.9% 65% $2.34 $2.46 $2.63 16.1 15.3 14.3 9.4 8.6 7.8 1.6 7.0% 1.9% 55%
TEG1,2 Integrys Energy Group Inc. B $55.56 $59.00 $4.3 $6.9 4.9%79% $3.30 $3.50 $3.65 16.9 15.9 15.2 10.7 9.5 9.0 1.4 7.9% 2.4% 45%
WEC1,2 Wisconsin Energy Corp. N $39.95 $42.00 $9.2 $14.5 3.4% 56%$2.35 $2.45 $2.55 17.0 16.3 15.6 10.5 10.1 9.8 2.2 12.9% 3.7% 56%
XEL1,2 Xcel Energy Inc. N $27.74 $28.00 $13.5 $24.0 3.9% 58% $1.83 $1.91 $1.98 15.1 14.5 14.0 8.6 8.2 7.7 1.5 9.6% 3.0% 56%
Group Average $5.2 $8.6 3.9% 63% 16.6 15.7 15.1 9.4 8.8 8.3 1.7 9.1% 2.8% 50%
Diversified Utilities
Price MC EV ROE ROA
2/8/13 ($B) ($B) 2012e 2013e 2014e 2012e 2013e 2014e 2012e 2013e 2014e (ttm) (ttm)
BKH1,2 Black Hills Corp. N $40.78 $42.00 $1.8 $3.2 3.7% 66% $2.09 $2.28 $2.39 19.5 17.9 17.0 8.1 8.0 7.5 1.5 6.9% 2.8% 57%
HE1 Hawaiian Electric Industries Inc N $27.62 $28.00 $2.7 $4.3 4.5% 73% $1.64 $1.75 $1.78 16.8 15.8 15.5 9.3 8.9 8.5 1.7 9.6% 1.6% 51%
MDU1,2 MDU Resources Group Inc. N $23.31 $25.00 $4.4 $6.1 3.0% 51%$1.15 $1.35 $1.48 20.3 17.3 15.8 9.5 8.2 6.6 1.6 7.9% 3.2% 39%
OTTR1,2 Otter Tail Corp. N $27.33 $25.00 $1.0 $1.4 4.4% 95% $1.19 $1.26 $1.56 22.9 21.6 17.6 10.3 9.4 7.9 1.9 5.3% 1.8% 44%
Group Average $2.5 $3.7 3.9% 71% 19.9 18.2 16.5 9.3 8.6 7.6 1.7 7.5% 2.3% 48%
Gas Utilities
Price MC EV ROE ROA
2/8/13 ($B) ($B) 2012e 2013e 2014e 2012e 2013e 2014e 2012e 2013e 2014e (ttm) (ttm)
NWN1,2 Northwest Natural Gas Co. N $45.38 $43.50 $1.2 $2.0 4.0%74% $2.29 $2.45 $2.56 19.8 18.5 17.7 9.3 9.0 8.8 1.7 9.3% 2.5% 53%
STR1,2 Questar Corp. N $23.58 $21.00 $4.1 $5.5 2.9% 58% $1.18 $1.20 $1.28 20.0 19.7 18.4 9.8 9.8 9.2 4.0 19.4% 5.6% 57%
Group Average $2.7 $3.8 3.4% 66% 19.9 19.1 18.1 9.5 9.4 9.0 2.8 14.3% 4.0% 55%
Industry Average $4.0 $6.4 3.8% 63% 16.8 15.9 15.1 9.0 8.3 7.9 1.6 8.6% 2.5% 53%
EPS P/E
P/E EV / EBITDA
EPS P/E EV / EBITDA
Debt /
Capital
Debt /
Capital
Debt /
Capital
Debt /
Capital Rating Price
Target
Symbol Company Name Rating Price
Target
Payout
2013eSymbol
EPS P / BVDividend
Yield
Payout
2013e
P / BVDividend
YieldCompany Name
Symbol Company Name Rating Price
Target
Symbol Company Name Rating Price
Target
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Yield
Payout
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EV / EBITDA
EPS P/E EV / EBITDA
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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
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stock of the subject company, and (ii) no part of my compensation was, is, or will be, directly or indirectly, related to the specific
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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. 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 12/31/12) Buy Hold Sell
Corresponding Institutional Research Ratings Buy Neutral Underperform
and Distribution 54% 43% 3%
Distribution of companies from whom D.A. Davidson & Co. has received compensation for investment banking services in last 12 mos.
Institutional Coverage 7% 5% 0%
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