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HomeMy WebLinkAboutNorthwest Hydro Update 011112.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 JJaannuuaarryy 22001122 NNoorrtthhwweesstt WWaatteerr SSuuppppllyy FFoorreeccaasstt –– HHyyddrroo CCoonnddiittiioonnss BBeellooww NNoorrmmaall Industry Update • On January 10, 2012, the National Oceanic and Atmospheric Administration (NOAA) issued its January Forecast for 2012 water supply for the Northwest United States. Based on water supply levels and run-off year-to-date, hydro conditions are below normal (reflecting a dryer regional climate) and well below the comparable period a year ago. According to the NOAA, for April-September 2012, hydro conditions are 86% of normal based on the 30-year average. See Table 1 for water supply data and Table 7 for run-off data. See Table 6 for Mid-C spot power prices. • Importantly, it is very early in the season, and hydro conditions can change rapidly due to changes in precipitation and temperatures. However, a repeat of last year’s historically-high hydro conditions is highly unlikely, in our opinion. Last year’s hydro season benefited from heavy storms in December 2010, as well as, continuation of cold and wet weather into early 2011 (partly due to the La Nina weather pattern). While La Nina conditions are still forecasted for this year, the conditions are far less extreme, according to NOAA representatives. • As a reminder, during below normal hydro conditions, northwest utilities will have a lower proportion of low-cost hydro capacity in their generation fuel mix. Also, with less hydro capacity, utilities will rely more on higher-cost fossil fuel plant capacity and/or rely more on wholesale power markets to meet forecasted retail load. As a result, actual average fuel costs increase relative to average fuel costs embedded in rates. Depending on the specific sharing mechanism, which varies among northwest utilities, below normal hydro conditions is margin negative. Further, most sharing mechanisms are asymmetric, meaning utilities tend to absorb more of the costs when hydro capacity is scarce compared to the retention of the cost savings when hydro capacity is abundant. • Within the Ladenburg Thalmann utility universe (and in order of sensitivity to changes in hydro conditions), Portland General Electric (POR-$24.66-NEUTRAL), Avista Corp (AVA-$25.22-NEUTRAL), and IDACORP (IDA-$41.79-BUY) are the companies primarily affected by these reports as their generation portfolios all contain substantial hydroelectric assets. • As of January 10, 2012, forecast stations St. Regis, Near Plains and Cabinet Gorge Dam along the Clark Fork River are forecasted to have water supplies 92%, 82%, and 83% 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 90% and 85% 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 80% and 79% 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 95% of its 30-year average and the Estacada forecasting station along the Clackamas River is forecasted to be 88% 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 January 11, 2012 Brian Russo 646.432.6312 INDUSTRY UPDATE Ladenburg Thalmann & Co. Inc. PAGE - 2 - NOAA July 2011 Official Forecast On January 10, 2012, the National Oceanic and Atmospheric Administration (NOAA) issued its January Forecast for 2012 water supply for the Northwest United States. Based on water supply levels and run-off year-to-date, hydro conditions are below normal (reflecting a dryer regional climate) and well below the comparable period a year ago. Within the Ladenburg Thalmann utility universe (and in order of sensitivity to changes in hydro conditions), Portland General Electric (POR-$24.66-NEUTRAL), Avista Corp (AVA-$25.22-NEUTRAL), and IDACORP (IDA-$41.79-BUY) are the companies primarily affected by these reports as their generation portfolios all contain substantial hydroelectric assets. Table 1: NOAA Water Supply Updates –2011/2012 NOAA Water Supply Updates (% of 30-year avg) Jan Feb Ma pr May Jun Jul Clark Fork St Regis 92% 2011 102% 110% 112% 122% 134% 159% 166% Near Plains 82% 2011 104% 112% 114% 124% 140% 156% 160% Cabinet Gorge Dam 83% 2011 102% 102% 113% 124% 140% 157% 159% Spokane At Spokane 90% 2011 101% 102% 109% 126% 151% 170% 176% *Coeur D'Alene Lake 85% 2011 98% 104% 108% 124% 151% 167% 168% Clackamas Estacada 88% 2011 106% 94% 94% 100% 120% 130% 138% Deschutes Benham Falls 95% 2011 102% 95% 100% 109% 119% 113% 111% Snake Brownlee Dam 80% 2011 112% 99% 91% 115% 133% 159% 153% Hells Canyon 79% 2011 112% 99% 91% 115% 135% 163% 159% April - September Source: Ladenburg Thalmann & Co, Inc., NOAA, as of January 10, 2012 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. Recall, in 2011, AVA was in the 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. Brian Russo 646.432.6312 INDUSTRY UPDATE Ladenburg Thalmann & Co. Inc. PAGE - 3 - As of January 10, 2012, forecast stations St. Regis, Cabinet Gorge Dam, and Near Plains along the Clark Fork River are forecasted to have water supplies 92%, 82%, and 83% respectively, of their 30-year averages. Table 2: NOAA – Clark Fork River Water Supply (% of normal) 45% 65% 85% 105% 125% 145% 165% Jan Feb Mar Apr May Jun Jul St Regis 2012 St Regis 2011 Near Plains 2012 Near Plains 2011 Cabinet Gorge 2012 Cabinet Gorge 2011 Source: Ladenburg Thalmann & Co, Inc., NOAA, as of January 10, 2012 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 90% and 85% of their 30-year averages, respectively. Table 3: NOAA – Spokane River Water Supply (% of normal) 40% 60% 80% 100% 120% 140% 160% 180% Jan Feb Mar Apr May Jun Jul Spokane 2012 Spokane 2011 Couer D'Alene Lake 2012 Couer D'Alene Lake 2011 Source: Ladenbur Thalmann & Co Inc. NOAA as of Januar 10 2012 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. 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, we believe IDA has manageable sensitivity to changes in supply costs due to recent changes in base rates (including ADITC extension) and adjustments in the annual PCA filing. As of January 10, 2012, Brownlee and Hells Canyon, IDA’s largest hydroelectric generation facility, are forecasted to have water supplies 80% and 79% of their 30-year averages, respectively. Table 4: NOAA – Snake River Water Supply (% of normal) 40% 60% 80% 100% 120% 140% 160% Jan Feb Mar Apr May Jun Jul Brownlee Dam 2012 Brownlee Dam 2011 Hells Canyon 2012 Hells Canyon 2011 Source: Ladenburg Thalmann & Co, Inc., NOAA, as of January 10, 2012 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- Columbia River totaling 507 MW and a long-term agreement for output of the Pelton/Round Butte hydroelectric project totaling 150 MW. POR utilizes a Power Cost Adjustment Mechanism (PCAM) to adjust rates to reflect differences between forecast and actual power costs. 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 Brian Russo 646.432.6312 INDUSTRY UPDATE Ladenburg Thalmann & Co. Inc. PAGE - 5 - 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%. Recall, due to favorably hydro conditions in 2011, POR lower supply costs exceeded the $15m deadband and POR credited customers cost savings above the deadband. As of January 10, 2012, Benham Falls on the Deschutes River is forecasted to have water supply 95% of its 30-year average and the Estacada forecasting station along the Clackamas River is forecasted to be 88% of its average. Table 5: NOAA – Clackamas and Deschutes Rivers Water Su lies % of normal 70% 80% 90% 100% 110% 120% 130% 140% 150% Jan Feb Mar Apr May Jun Jul Estacada (Clackamas) 2012 Estacada (Clackamas) 2011 Benham Falls (Deschutes) 2012 Benham Falls (Deschutes) 2011 Source: Ladenburg Thalmann & Co, Inc., NOAA, as of January 10, 2012 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) 0.00 5.00 10.00 15.00 20.00 25.00 30.00 35.00 40.00 1/11/11 2/10/11 3/12/11 4/11/11 5/11/11 6/10/11 7/10/11 8/9/11 9/8/11 10/8/11 11/7/11 12/7/11 1/6/12 $/ M W h Mid-Columbia Spot Power Index Off-Peak SNL Source: Ladenburg Thalmann & Co, Inc., SNL Table 7: NOAA Monthly Runoff Summary (2010/2011/2012) (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 211 185 252 450 644 750 205 889 404 643 1,116 1,754 1,221 455 45 30 Year Avg *356 446 623 870 1,002 548 184 356 446 623 870 1,002 548 184 103 % Avg 59% 41% 40% 52% 64% 137% 111% 250% 91% 103% 128% 175% 223% 247% 44% Clark Fork at St Regis Observed Volumes 154 127 169 324 564 1,167 409 247 194 245 533 1,621 2,451 1,293 56 30 Year Avg 201 208 292 536 1,215 1,278 489 201 208 292 536 1,215 1,278 489 58 % Avg 77% 61% 58% 60% 46% 91% 84% 123% 93% 84% 99% 133% 192% 264% 96% 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 279 149 186 233 224 253 79 331 153 265 319 271 209 94 67 30 Year Avg 281 249 238 222 208 136 74 281 249 238 222 208 136 74 82 % Avg 99% 60% 78% 105% 108% 186% 106% 118% 61% 111% 144% 130% 154% 126% 82% Deschutes Adjusted Volumes 67 52 57 57 67 82 70 78 60 69 74 92 95 93 20 30 Year Avg 81 72 80 80 93 90 87 81 72 80 80 93 90 87 24 % Avg 83% 72% 71% 71% 72% 91% 80% 96% 83% 86% 93% 99% 106% 107% 85% 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 899 817 979 1,002 1,232 1,905 704 1,209 1,000 1,571 2,787 3,531 3,105 1,363 278 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 1,682 827 369 % Avg 71% 62% 53% 51% 61% 113% 85% 95% 76% 85% 141% 176% 185% 165% 75% (Units: Thousands of Acre-feet) *30 Year Avg adjusted to reflect days in current period 2010 2010 2010 2011 2011 2011 2012 2011 2011 Source: Ladenburg Thalmann & Co, Inc., NOAA, as of January 10, 2012 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 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 12/31/11) Buy 77% (33% are banking clients) Neutral 23% (13% are banking clients) Sell 0% ( 0% are banking clients) COMPANY SPECIFIC DISCLOSURES: Avista Corp (AVA-$25.22-NEUTRAL) IDACORP (IDA-$41.79-BUY) Portland General Electric (POR-$24.66-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. Brian Russo 646.432.6312 INDUSTRY UPDATE Ladenburg Thalmann & Co. Inc. PAGE - 8 - 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. 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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 © 2012 - Ladenburg Thalmann & Co. Inc. All Rights Reserved.