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HomeMy WebLinkAboutNorthwest Hydro Update 050912.pdfDisclosures and Analyst Certifications can be found in Appendix A. NEW YORK, NY MELVILLE, NY BOSTON, MA 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 MMaayy 22001122 NNoorrtthhwweesstt WWaatteerr SSuuppppllyy FFoorreeccaasstt –– CCoonnddiittiioonnss AAtt oorr AAbboovvee NNoorrmmaall Industry Update • On May 8, 2012, the National Oceanic and Atmospheric Administration (NOAA) issued its May Forecast for 2012 water supply for the Northwest United States. In general, water supply conditions are at/above normal but still below last year’s record-setting levels. According to the NOAA, for April-September 2012, water supply forecasts at the Columbia - Dalles Dam are 113% 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. • Within the Ladenburg Thalmann utility universe (and in order of sensitivity to changes in hydro conditions), Portland General Electric (POR-$24.87-NEUTRAL), Avista Corp (AVA-$25.78-NEUTRAL), and IDACORP (IDA-$39.20-BUY) are the companies primarily affected by these reports as their generation portfolios all contain substantial hydroelectric assets. • As of May 8, 2012, forecast stations St. Regis, Near Plains and Cabinet Gorge Dam along the Clark Fork River are forecasted to have water supplies 111%, 110%, and 112% 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 148% and 130% 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 93% and 91% 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. • The Estacada forecasting station along the Clackamas River is forecasted to be 132% 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@ladenbur .com Power and Utilities Sector Industry Update May 9, 2012 Brian Russo 646.432.6312 INDUSTRY UPDATE Ladenburg Thalmann & Co. Inc. PAGE - 2 - NOAA May 2012 Official Forecast On May 8, 2012, the National Oceanic and Atmospheric Administration (NOAA) issued its May Forecast for 2012 water supply for the Northwest United States. Water supply levels are generally at or above normal. Within the Ladenburg Thalmann utility universe (and in order of sensitivity to changes in hydro conditions), Portland General Electric (POR-$24.86-NEUTRAL), Avista Corp (AVA-$25.78-NEUTRAL), and IDACORP (IDA-$39.20-BUY) are the companies primarily affected by these reports as their generation portfolios all contain substantial hydroelectric assets. As a reminder, during above normal hydro conditions, northwest utilities will have a higher proportion of low-cost hydro capacity in their generation fuel mix. Also, with more hydro capacity, utilities will rely less on higher-cost fossil fuel plant capacity and/or rely less on wholesale power markets to meet forecasted retail load. As a result, actual average fuel costs decrease relative to average fuel costs embedded in rates. Depending on the specific sharing mechanism, which varies among northwest utilities, above normal hydro conditions is margin positive. Also, 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. 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. Importantly, water supply levels are subject to change due to a variety of factors, including weather. Table 1: NOAA Water Supply Updates –2011/2012 NOAA Water Supply Updates (% of 30-year avg) Jan Feb Mar p May Jun Jul Clark Fork St Regis 92% 99% 101% 112% 111% 2011 102% 110% 112% 122% 134% 159% 166% Near Plains 82% 92% 96% 110% 110% 2011 104% 112% 114% 124% 140% 156% 160% Cabinet Gorge Dam 83% 93% 96% 112% 112% 2011 102% 102% 113% 124% 140% 157% 159% Spokane At Spokane 90% 94% 105% 136% 148% 2011 101% 102% 109% 126% 151% 170% 176% *Coeur D'Alene Lake 85% 89% 99% 121% 130% 2011 98% 104% 108% 124% 151% 167% 168% Clackamas Estacada 88% 94% 94% 111% 132% 2011 106% 94% 94% 100% 120% 130% 138% Snake Brownlee Dam 80% 84% 85% 102% 93% 2011 112% 99% 91% 115% 133% 159% 153% Hells Canyon 79% 80% 79% 100% 91% 2011 112% 99% 91% 115% 135% 163% 159% April - September Source: Ladenburg Thalmann & Co, Inc., NOAA, as of May 8, 2012 Brian Russo 646.432.6312 INDUSTRY UPDATE Ladenburg Thalmann & Co. Inc. PAGE - 3 - 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. As of May 8, 2012, forecast stations St. Regis, Near Plains and Cabinet Gorge Dam along the Clark Fork River are forecasted to have water supplies 111%, 110%, and 112% 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: Ladenbur Thalmann & Co Inc. NOAA as of Ma 8 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 148% and 130% of their 30-year averages, respectively. Brian Russo 646.432.6312 INDUSTRY UPDATE Ladenburg Thalmann & Co. Inc. PAGE - 4 - 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 Ma 8 2012 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. IDA is forecasting 2012 hydro output of 7.5-9.5m 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. As of May 8, 2012, Brownlee and Hells Canyon, IDA’s largest hydroelectric generation facility, are forecasted to have water supplies 93% and 91% of their 30-year averages, respectively. Brian Russo 646.432.6312 INDUSTRY UPDATE Ladenburg Thalmann & Co. Inc. PAGE - 5 - 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 May 8, 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 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%. Estacada forecasting station along the Clackamas River is forecasted to be 132% of its average. Brian Russo 646.432.6312 INDUSTRY UPDATE Ladenburg Thalmann & Co. Inc. PAGE - 6 - Table 5: NOAA – Clackamas Water Supply (% of normal) 70% 80% 90% 100% 110% 120% 130% 140% 150% Jan Feb Mar Apr May Jun Jul Estacada (Clackamas) 2012 Estacada (Clackamas) 2011 Source: Ladenburg Thalmann & Co, Inc., NOAA, as of May 8, 2012 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 01/01/2011 04/01/2011 06/30/2011 09/28/2011 12/27/2011 03/26/2012 $/ M W h Source: Ladenburg Thalmann & Co, Inc., SNL Brian Russo 646.432.6312 INDUSTRY UPDATE Ladenburg Thalmann & Co. Inc. PAGE - 7 - Table 7: NOAA Monthly Runoff Summary (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 Adjusted Volumes 889 404 643 1,116 1,754 1,221 455 165 235 788 1,669 304 30 Year Avg *356 446 623 870 1,002 548 184 356 446 623 870 1,002 % Avg 250% 91% 103% 128% 175% 223% 247% 46% 53% 126% 192% 157% Clark Fork at St Regis Observed Volumes 247 194 245 533 1,621 2,451 1,293 203 185 312 1,054 263 30 Year Avg 201 208 292 536 1,215 1,278 489 201 208 292 536 1,215 % Avg 123% 93% 84% 99% 133% 192% 264% 101% 89% 107% 197% 112% Portland General (POR) Clackamas JAN FEB MAR APR MAY JUNE JULY JAN FEB MAR APR MAY JUNE JULY Observed Volumes 331 153 265 319 271 209 94 406 239 358 348 82 30 Year Avg 281 249 238 222 208 136 74 281 249 238 222 208 % Avg 118% 61% 111% 144% 130% 154% 126% 144% 96% 150% 157% 204% IDACORP (IDA) Snake at Hells Canyon JAN FEB MAR APR MAY JUNE JULY JAN FEB MAR APR MAY JUNE JULY Adjusted Volumes 1,209 1,000 1,571 2,787 3,531 3,105 1,363 1,060 974 1,528 2,166 424 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 % Avg 95% 76% 85% 141% 176% 185% 165% 83% 74% 83% 110% 109% (Units: Thousands of Acre-feet) *30 Year Avg adjusted to reflect days in current period 2012 2011 2011 2012 2012 2011 Source: Ladenburg Thalmann & Co, Inc., NOAA, as of May 8, 2012 Brian Russo 646.432.6312 INDUSTRY UPDATE Ladenburg Thalmann & Co. Inc. PAGE - 8 - 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 4/30/12) Buy: 75% (33% are banking clients) Neutral: 24% (8% are banking clients) Sell: 1% (0% are banking clients) COMPANY SPECIFIC DISCLOSURES: Avista Corp (AVA-$25.78-NEUTRAL) IDACORP (IDA-$39.20-BUY) Portland General Electric (POR-$24.87-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. 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 Brian Russo 646.432.6312 INDUSTRY UPDATE Ladenburg Thalmann & Co. Inc. PAGE - 9 - 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.