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HomeMy WebLinkAboutDADCO-Feb-8-2013.pdf Please refer to page 10 of this report for detailed disclosure and certification information. 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. 2 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. 3 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. 4 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. 5 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. 6 Figure 5: 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 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. 8 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. 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. 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 Dividend Yield Payout 2013e P / BVDividend Yield P / BV Payout 2013e EV / EBITDA EPS P/E EV / EBITDA 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 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% 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. 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