HomeMy WebLinkAboutNorthwest Hydro Update 040513.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 NNOOAAAA AApprriill 22001133 NNoorrtthhwweesstt WWaatteerr SSuuppppllyy FFoorreeccaasstt –– CCoonnddiittiioonnss SSttiillll BBeellooww--ttoo--NNeeaarr NNoorrmmaall Industry Update • On April 4, 2013, the National Oceanic and Atmospheric Administration (NOAA) issued its April Forecast for 2013 water supply for the Northwest United States. In general, water supply conditions remain below-to-near normal with heavy precipitation in Fall 2012 followed by dryer conditions year-to-date. Conditions also remain well-below last year’s level. According to the NOAA, 2013 water supply forecasts at the Columbia - Dalles Dam are 94% of normal based on the 30-year average. See Table 1 for water supply data and Table 2 for runoff data. See Table 7 for Mid-C spot power prices. See Table 8 for October 2012-April 2013 Seasonal Precipitation. • Snowpack and precipitation are essential throughout the winter season, followed by average temperatures in early spring that allow for steady run-off and favorable hydroelectric generation. Also, potential additional snow pack accumulation through April/May can support improved conditions. • Within the Ladenburg Thalmann utility universe (and in order of sensitivity to changes in hydro conditions), Portland General Electric (POR-$30.52-NEUTRAL), Avista Corp (AVA-$27.05-NEUTRAL), and IDACORP (IDA-$47.57-NEUTRAL) are the companies primarily affected by these reports as their generation portfolios all contain substantial hydroelectric assets. See Table 9 for Sharing Mechanism Descriptions. • As of April 4, 2013, forecast stations St. Regis, Near Plains and Cabinet Gorge Dam along the Clark Fork River are forecasted to have water supplies 78%, 91%, and 92% 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 93% and 93% 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 3 and Table 4. • Brownlee and Hells Canyon, IDA’s largest hydroelectric generation facility, are forecasted to have water supplies 65% and 62% of their 30-year averages, respectively. IDA’s hydroelectric facilities are primarily located on the Snake River along the Idaho/Oregon border. While conditions appear to be weakest at Brownlee and Hells Canyon, we note that IDA is the least sensitive to hydro conditions relative to its Northwest peers. See Table 5. • The Estacada forecasting station along the Clackamas River is forecasted to be 90% 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 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 6. Brian J. Russo, CFA 646-432-6312 brusso@ladenburg.com Ira Reibeisen 212-409-2051 ireibeisen@ladenburg.com Power and Utilities Sector Industry Update April 5, 2013 Brian Russo 646.432.6312 INDUSTRY UPDATE Ladenburg Thalmann & Co. Inc. PAGE - 2 - NOAA March 2013 Official Forecast Table 1: NOAA Water Supply Updates –2012/2013 Jan Feb Mar pr May Jun Jul Clark Fork St Regis 95% 86% 81% 78% 2012 92% 99% 101% 112% 111% 111% 112% Near Plains 96% 86% 88% 91% 2012 82% 92% 96% 110% 110% 114% 122% Cabinet Gorge Dam 98% 90% 89% 92% 2012 83% 93% 96% 112% 112% 115% 121% Spokane At Spokane 101% 91% 94% 93% 2012 90% 94% 105% 136% 146% 148% 160% Coeur D'Alene Lake 93% 85% 89% 93% 2012 85% 89% 99% 121% 130% 136% 150% Clackamas Estacada 103% 101% 99% 90% 2012 88% 94% 94% 111% 132% 130% 133% Snake Brownlee Dam 82% 79% 72% 65% 2012 82% 82% 85% 103% 92% 84% 87% Hells Canyon 78% 74% 71% 62% 201 79% 80% 79% 100% 91% 92% 94% April - September Source: Ladenburg Thalmann & Co, Inc., NOAA, as of April 4, 2013 Table 2: NOAA Monthly Runoff Summary (2012/2013) Avista (AVA) Spokane at Spokane JAN FEB MAR APR MAY JUNE JULY JAN FEB MAR APR MAY JUNE JULY Adjusted Volumes 165 235 788 1,669 1,153 1,011 283 244 267 492 41 30 Year Avg 356 446 623 870 1,002 548 184 330 426 604 845 % Avg 46% 53% 126% 192% 115% 184% 154% 74% 63% 94% 91% Clark Fork at St Regis Observed Volumes 203 185 312 1,054 1,303 1,200 443 178 161 221 20 30 Year Avg 201 208 292 536 1,215 1,278 489 184 188 272 523 % Avg 101% 89% 107% 197% 112% 94% 91% 97% 85% 81% 59% Portland General (POR) Clackamas JAN FEB MAR APR MAY JUNE JULY JAN FEB MAR APR MAY JUNE JULY Observed Volumes 406 239 358 348 280 163 87 173 153 209 17 30 Year Avg 281 249 238 222 208 136 74 263 234 229 220 % Avg 144% 96% 150% 157% 204% 120% 117% 66% 66% 91% 114% IDACORP (IDA) Snake at Hells Canyon JAN FEB MAR APR MAY JUNE JULY JAN FEB MAR APR MAY JUNE JULY Adjusted Volumes 1,060 974 1,528 2,166 1,797 1,088 726 677 697 807 54 30 Year Avg 1,271 1,316 1,849 1,978 2,006 1,682 827 1,090 1,133 1,574 1,688 % Avg 83% 74% 83% 110% 109% 65% 88% 61% 62% 47% 48% (Units: Thousands of Acre-feet) *References 1971-2000 data for 30 year average **30 Year average adjusted from 1971-2000 to 1981-2010 2013** 2013** 2013**2012* 2012* 2012* Source: Ladenburg Thalmann & Co, Inc., NOAA, as of April 4, 2013 Brian Russo 646.432.6312 INDUSTRY UPDATE Ladenburg Thalmann & Co. Inc. PAGE - 3 - Table 3: NOAA – Clark Fork River Water Supply (% of normal) Table 4: NOAA – Spokane River Water Supply (% of normal) 70% 80% 90% 100% 110% 120% 130% Jan Feb Mar Apr May Jun Jul St Regis 2013 St Regis 2012 Near Plains 2013 Near Plains 2012 Cabinet Gorge 2013 Cabinet Gorge 2012 75% 95% 115% 135% 155% 175% Jan Feb Mar Apr May Jun JulSpokane at Spokane 2013 Spokane at Spokane 2012 Couer D'Alene Lake 2013 Couer D'Alene Lake 2012 Source: Ladenburg Thalmann & Co, Inc., NOAA, as of April 4, 2013 Table 5: NOAA – Snake River Water Supply (% of normal) Table 6: NOAA – Clackamas Water Supply (% of normal) 55% 65% 75% 85% 95% 105% Jan Feb Mar Apr May Jun Jul Brownlee Dam 2013 Brownlee Dam 2012 Hells Canyon 2013 Hells Canyon 2012 85% 95% 105% 115% 125% 135% Jan Feb Mar Apr May Jun Jul Estacada (Clackamas) 2013 Estacada (Clackamas) 2012 Source: Ladenburg Thalmann & Co, Inc., NOAA, as of April 4, 2013 Brian Russo 646.432.6312 INDUSTRY UPDATE Ladenburg Thalmann & Co. Inc. PAGE - 4 - Table 7: 2012-YTD Mid- Columbia Off-Peak Spot Power Prices Table 8: October 2012 -April 2013 Seasonal Precipitation 0 5 10 15 20 25 30 35 40 45 1/ 5 / 1 2 3/ 5 / 1 2 5/ 5 / 1 2 7/ 5 / 1 2 9/ 5 / 1 2 11 / 5 / 1 2 1/ 5 / 1 3 3/ 5 / 1 3 5/ 5 / 1 3 $/M W h Source: Ladenburg Thalmann & Co, Inc., Bloomberg, NOAA Table 9: Sharing Mechanism Description Avista Corp 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. Idacorp 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. Portland General 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 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%. Source: Ladenburg Thalmann & Co, Inc., Company Reports Brian Russo 646.432.6312 INDUSTRY UPDATE Ladenburg Thalmann & Co. Inc. PAGE - 5 - 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 3/31/13) Buy: 74% (38% are banking clients) Neutral: 25% (6% are banking clients) Sell: 1% (0% are banking clients) COMPANY SPECIFIC DISCLOSURES: Avista Corp (AVA-$27.05-NEUTRAL) IDACORP (IDA-$47.57-NEUTRAL) Portland General Electric (POR-$30.52-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 Brian Russo 646.432.6312 INDUSTRY UPDATE Ladenburg Thalmann & Co. Inc. PAGE - 6 - 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. 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