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HomeMy WebLinkAboutIndustryReportNWPlantOutages071713.pdfDisclosures and Analyst Certifications can be found in Appendix A. NEW YORK, NY MELVILLE, NY BOSTON, MA MIAMI, FL NAPLES, FL BOCA RATON, FL HOUSTON, TX 520 Madison Avenue y New York, New York 10022 y Telephone: 212-409-2000 800-LAD-THAL Member: NYSE, NYSE MKT, FINRA, all other principal exchanges and SIPC NNOORRTTHHWWEESSTT PPOOWWEERR PPLLAANNTT OOUUTTAAGGEESS –– AAVVAA,, IIDDAA,, NNWWEE,, PPOORR Industry Update • Two generation stations in the Northwest United States recently tripped off-line: Montana-based coal-fired Colstrip Unit 4 (CS4) station and Oregon- based coal-fired Boardman station. According to reports, CS4 tripped off-line on July 1, 2013 following a planned outage. During inspections of the damage, repairs to the stator and rotor are necessary (among other components). The plant is expected to be off-line for at least six months. Total repair costs are estimated at $30m which will be shared proportionately among all plant owners and repair costs are likely to be capitalized ($2.5m insurance deductable is available for each event). The Boardman station also tripped off-line on July 1, 2013 as a result of a thermal water hammer event causing structural damage to the cold reheat piping line that runs between the turbine and the boiler. While inspections are ongoing, the station is expected to be off-line for at least one month. • The companies under our coverage that are impacted by the outages include: Avista Corp (AVA-$28.41-NEUTRAL), Idacorp (IDA-$51.36-NEUTRAL), Northwestern Corp (NWE-$42.27-BUY) and Portland General (POR-$31.84-BUY). The varying magnitude of margin impact to the previously mentioned utilities is contingent on plant net ownership interests, as well as, the differing/unique structures of the respective net variable cost recovery mechanisms and fuel clauses. While we consider the outages non-recurring events we adjust our 2013 outlooks accordingly to reflect the margin impact. • In terms of Avista Corp (AVA), our revised 2013 EPS estimate of $1.77 (previously $1.79) includes: Avista Utilities EPS of $1.67 (previously $1.69), Ecova EPS of $0.12, and Corporate EPS of $(0.02). Our 2013 EPS estimate reflects the estimated $6-$7m negative margin impact to the ERM balance as a result of the Colstrip Unit 4 outage. AVA owns a 15% interest in CS4 or 111 MW. We now assume AVA will record a negative ERM balance of $2m or $(0.02) p/s compared to our previous assumption of a net benefit within the $4-$10m sharing band or +$0.05 p/s. AVA retains 100% of the cost or benefit within the $4m “deadband” and retains 75%/25% of the costs/benefits within the $4-$10m deadband. • In terms of Idacorp (IDA), our 2013 EPS estimate of $3.35 remains unchanged. We assume insignificant impact of the Boardman outage on IDA margins. IDA owns 10% or 64 MW of the Boardman station representing 2.0% of total portfolio capacity. We also expect 2013 results to benefit from expected above average irrigation sales due to dry and hot weather in 2Q13-3Q13. Under the Power Cost Adjustment (PCA) mechanism 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 in Idaho. • In terms of Northwestern Corp (NWE), our 2013 EPS estimate of $2.52 remains unchanged. We assume insignificant impact of the CS4 outage on NWE margins due to the fuel pass-through mechanism. Replacement power costs are to be recovered through the monthly electric tracker (MPSC prudency review at the conclusion of the tracker year in 2014). NWE owns a 30% interest or 222 MW in CS4 and under the Reciprocal Sharing Agreement (RSA), NWE share of the costs are limited to 15% or total costs and NWE will continue to receive a 15% share of Colstrip Unit 3 (111 MW, net). NWE share of the capital expenditures of the CS4 outage is estimated at $4.5m. • In terms of Portland General (POR), our revised 2013 adjusted EPS estimate of $1.82 (previously $1.91 p/s) assumes $10-$12m of estimated replacement power costs or $(0.09) p/s for the CS4 and Boardman plant outages but excludes the $52m pre-tax Cascade Crossing write-down and the $9.2m pre-tax out-of-period adjustment related to a customer billing error to be recorded in 2Q13 results. POR owns 20% of CS4 or net capacity of 148 MW and owns 65% of Boardman or net capacity 374 MW. Under the Power Cost Adjustment Mechanism (PCAM) POR absorbs/retains 100% of the costs/savings within the deadband range of $30m//$15m above/below the baseline of net variable power costs. 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 17, 2013 Brian J. Russo, 646-432-6312 INDUSTRY UPDATE Ladenburg Thalmann & Co. Inc. PAGE - 2 - APPENDIX A: IMPORTANT RESEARCH DISCLOSURES ANALYST CERTIFICATION I, Brian 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, provided, however, that: The research analyst primarily responsible for the preparation of this research report has or will receive compensation based upon various factors, including the volume of trading at the firm in the subject security, as well as the firm’s total revenues, a portion of which is generated by investment banking activities. RISKS On top of normal economic and market risk factors that impact most all equities, the utility industry is uniquely at risk to: Political opposition to rate increases and demand elasticity. The rise in commodity prices and expectations of soaring customer utility bills have manifested into a political issue in a number of states. Rising fuel costs could adversely impact financial performance. High and volatile supply costs could negatively impact near-term results. Complex utility regulation which could adversely affect the Companies’ results of operations, financial position and cash flows. The outcome of retail rate proceedings which could have a material impact on the business and is largely outside the Companies’ control. Current and potential environmental requirements and the incurrence of environmental liabilities, any or all of which may adversely affect the business and financial results. Weather variations and demand fluctuations can directly impact results of operations. STOCK RATING DEFINITIONS Buy: The stock’s return is expected to exceed 12.5% over the next twelve months. Neutral: The stock’s return is expected to be plus or minus 12.5% over the next twelve months. Sell: The stock’s return is expected to be negative 12.5% 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 6/30/13) Buy: 78% (38% are banking clients) Neutral: 22% (10% are banking clients) Sell: 0% (0% are banking clients) INVESTMENT RATING AND PRICE TARGET HISTORY Brian J. Russo, 646-432-6312 INDUSTRY UPDATE Ladenburg Thalmann & Co. Inc. PAGE - 3 - Brian J. Russo, 646-432-6312 INDUSTRY UPDATE Ladenburg Thalmann & Co. Inc. PAGE - 4 - Brian J. Russo, 646-432-6312 INDUSTRY UPDATE Ladenburg Thalmann & Co. Inc. PAGE - 5 - COMPANY SPECIFIC DISCLOSURES: Avista Corp (AVA-$28.41-NEUTRAL) Idacorp (IDA-$51.36-NEUTRAL) Northwestern Corp (NWE-$42.27-BUY) Portland General (POR-$31.84-BUY) Ladenburg Thalmann & Co. Inc. does not make a market in any of the companies mentioned. Ladenburg Thalmann & Co. Inc. has not had an investment banking relationship with any of the companies mentioned nor received compensation for investment banking services in the past 12 months. 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