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INDUSTRY UPDATE
Institutional Equity Research
October 26, 2012 Utilities Update
Prices: 10/25/12
Industry:
Utilities
Michael Bates
503.603.3045
mbates@dadco.com
Utilities Earnings Previews: Week of 10/29/12
This earnings preview covers six utility firms reporting 3Q’12 results next week.
In addition to normal variances related to rate relief and operating expenses, 3Q
temperatures were warmer than average for the third consecutive year. So far, utilities
have generally shown weather impacts similar to what was recorded in 3Q’11.
Temperature swings generally have a greater impact on the earnings of utilities
serving a relatively high proportion of residential/small commercial customers. 3Q’12
cooling degree day data and a customer mix breakdown for utilities under our
coverage are detailed in Tables 3 and 4.
Several firms are in the process of securing rate increases that should take effect in
January, and these efforts will likely be a key focus on conference calls with
management.
A schedule of our projections relative to year-ago results and consensus expectations
is shown below, followed by comments and earnings models on firms reporting next
week. For more detailed company information, please refer to our most recent
research reports.
Table 1: Utilities 3Q’12 Earnings Preview
Source: D.A. Davidson & Co. estimates and Capital IQ consensus
Table 2: Recently Reported 3Q Results
Source: D.A. Davidson & Co. estimates and Capital IQ consensus
Symbol Rating Price
10/25/12
EPS
Estimate
Prior
Year
Consensus
Estimate
Report
Date
Call
Date
Scheduled to Report the Week of 10/29/12
* ALE N $41.55 $0.74 $0.57 $0.74 10/31 10/31
* IDA B $44.58 $1.50 $2.16 $1.52 11/1 11/1
* MDU N $21.58 $0.41 $0.34 $0.39 10/31 11/1
* STR N $20.44 $0.20 $0.20 $0.18 10/30 10/31
* UNS N $42.49 $1.24 $1.35 $1.24 11/2 11/2
* WEC N $37.80 $0.58 $0.55 $0.58 10/31 10/31
Scheduled to Report the Week of 11/5/12
* AVA N $25.08 $0.21 $0.18 $0.20 11/6 11/6
* BKH N $35.92 $0.37 $0.35 $0.44 11/6 11/7
* GXP N $22.30 $1.01 $1.00 $0.98 11/8 11/9
* HE N $25.87 $0.43 $0.50 $0.43 11/7 11/8
* LNT B $44.49 $1.32 $1.12 $1.30 11/9 11/9
* MGEE N $53.02 $0.89 $0.91 $0.89 11/7 n.a.
* NWN N $47.89 ($0.31) ($0.31) ($0.30) 11/6 11/6
* OTTR N $24.01 $0.36 $0.20 $0.35 11/5 n.a.
* POR B $27.32 $0.43 $0.36 $0.48 11/8 11/8
* TEG B $53.85 $0.38 $0.43 $0.37 11/5 11/6
* WR B $29.58 $1.06 $0.98 $1.06 11/8 11/9
Symbol Rating Price
10/25/12
Report
Date
Reported
EPS
Prior
Year
Consensus
Estimate
* ITC B $78.89 10/23 $1.02 $0.85 $1.02
* NWE N $35.33 10/24 $0.48 $0.46 $0.38
* XEL N $28.03 10/25 $0.68 $0.69 $0.73
D.A. Davidson & Co.
2
ALLETE is scheduled to report 3Q’12 earnings on Wednesday, October 31st before the market
opens, and conduct a conference the same day at 10:00 AM ET/7:00 AM PT.
Earnings estimates, guidance & expectations. We are forecasting EPS of $0.74 for the
quarter, up from $0.57 reported in 3Q’11 and matching the consensus estimate. ALE has
provided an EPS guidance range of $2.45-$2.65 for 2012. Our forecast of $2.61 compares to
the Street consensus of $2.55.
Key Drivers and Areas of Focus:
Expecting strong regulated earnings. We expect strong results from ALE’s regulated
businesses, driven by a larger rate base at Minnesota Power. We also expect progress in
the construction of the Bison II and III wind farms (which are both expected to be
operational by year-end 2012) to drive higher current cost recovery rider revenue.
Temperatures. 3Q temperatures were well above normal and last year’s level, but we do
not believe electric usage was radically changed, as usage by weather-sensitive
residential customers makes up a relatively small proportion of the utility’s load (detailed in
Table 4).
Investments and other. We expect results from the firm’s unregulated segment to be
near breakeven, with earnings from BNI Coal being largely offset by losses at ALLETE
Properties.
NEUTRAL rated. Our $45 price target equates to 15.9x our 2013 EPS forecast of $2.84.
IDACORP is scheduled to report 3Q’12 earnings on Thursday, November 1st before the market
opens. Management’s conference call will be held the same day at 4:30 PM ET/1:30 PM PT.
Earnings estimates, guidance & expectations. We are forecasting EPS of $1.50, down
from $2.16 reported last year (including a net nonrecurring benefit of $0.65 per share related to
the utility’s change to a uniform capitalization tax method of accounting), and slightly below the
$1.52 Street consensus. IDA has provided an EPS guidance range of $3.20-$3.35 for 2012,
compared to $3.36 reported for 2011. We are currently forecasting $3.27 per share for 2012,
which matches the consensus estimate.
Key Drivers and Areas of Focus:
Langley Gulch. On June 29, 2012, Idaho Power added to the diversity of its generating
fleet with the addition of the new Langley Gulch plant, a 330 MW combined cycle unit, at a
total cost of ~$400 million. Cost recovery for the asset was built into customer rates
through a single-issue rate case when it was brought online.
Expecting margin improvement. We are forecasting quarterly gross margin of
$274 million, up ~30% from $213 million in 3Q’11. The expected increase should be
driven by higher retail rates and the commercial operation of the Langley Gulch plant, with
these benefits partially offset by higher operating expenses. Favorable weather and
streamflows likely provided an additional tailwind to results.
BUY rated. Our $48.50 price target equates to 14.9x our 2013 EPS estimate of $3.25.
ALLETE, Inc.
(ALE – NEUTRAL – $45.00 target)
IDACORP, Inc.
(IDA – BUY – $48.50 target)
D.A. Davidson & Co.
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MDU Resources is scheduled to report 3Q’12 earnings on Wednesday, October 31st after the
market closes, followed by a conference call the next day at 11:00 AM ET/8:00 AM PT.
Earnings estimates, guidance & expectations. We are forecasting EPS of $0.41 for the
quarter, up from $0.34 reported last year and above the $0.39 Street consensus. MDU has
provided 2012 EPS guidance of $1.00-$1.25. We are currently forecasting $1.20 per share,
which matches the Street consensus.
Key Drivers and Areas of Focus:
Construction segments. We are forecasting higher earnings from the construction
materials and services businesses ($0.25 per share versus $0.20 in 3Q’11), driven by an
improved cost structure and higher project margins.
Natural Gas & Oil. We are forecasting EPS of $0.14 from Fidelity E&P, versus $0.12 a
year earlier, based on a ~25% increase in oil production and a weighted average realized
oil price of $86/bbl, up from ~$81/bbl a year ago. We are also projecting a 15%
production decline in natural gas to ~10.0 Bcf, with a price decline of ~25% to $2.55/mcf.
Regulated segments. We expect breakeven results from the utilities, up from a net loss
of $0.02 per share in the year-ago quarter. We believe 3Q temperatures provided a
modest benefit to electric sales. We expect lower earnings from the Pipeline & Energy
Services segment ($0.02 versus $0.03), held back by narrower pricing differentials for
natural gas storage.
NEUTRAL rated. Our $23 price target equates to 16.4x our 2013 EPS estimate of $1.40.
Questar plans to report 3Q’12 earnings on Tuesday, October 30th after the market closes. A
conference call with management will be held the next day at 9:30 AM ET/6:30 AM PT.
Earnings estimates, guidance & expectations. We are forecasting EPS of $0.20 for the
quarter, flat with 2Q’11 and above the $0.18 consensus. STR has provided an earnings
guidance range of $1.15-$1.19 for 2012. We are currently forecasting $1.19 per share,
compared to the $1.18 consensus.
Key Drivers and Areas of Focus:
Wexpro. Higher production volumes and an expanded investment base should drive EPS
upward, but could be partially offset by lower commodity prices. We are forecasting $0.14
per share, flat with one year ago.
Questar Pipeline. Our forecast calls for EPS of $0.10, down from $0.11 a year ago.
Lower contracted capacity and reduced NGL sales likely placed pressure on the
segment’s contribution, partially offset by slightly higher transportation volumes.
Utility. We are modeling a seasonal net loss of $0.04 per share from regulated utility
operations, matching results from last year. Margins from this segment should have
moved higher due to a larger rate base and customer count, offset by higher operating
costs.
NEUTRAL rated. Our $21 price target equates to 16.4x our 2013 EPS estimate of $1.28.
MDU Resources Group, Inc.
(MDU – NEUTRAL – $23.00 target)
Questar Corp.
(STR – NEUTRAL – $21.00 target)
D.A. Davidson & Co.
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UNS Energy plans to report 3Q’12 earnings on Friday, November 2nd before the market opens.
A conference call with management will be held the same day at 11:00 AM ET/8:00 AM PT.
Earnings estimates, guidance & expectations. We are forecasting 3Q EPS of $1.24, down
from $1.35 (non-GAAP) reported a year ago. The consensus estimate is $1.24. UNS has
provided an earnings guidance range of $2.05-$2.35 for 2012. We are currently forecasting
$2.20 per share, which matches the consensus.
Key Drivers and Areas of Focus:
Margin outlook. We are forecasting gross margin of $259 million, down from
$269 million a year ago. The expected decline in margins is driven by less favorable
weather. Although temperatures in the Tucson area were above normal during the
summer, cooling degree days were ~7% below what was recorded a year ago (weather
boosted 3Q’11 results by $0.07 per share). We also expect results to be held back by an
unscheduled plant outage in July, as well as higher utility operating costs.
Regulatory update. We will be looking for an update in management’s view of TEP’s
general rate case, which was filed on July 2nd and marks the end of a multi-year rate
freeze. With ~$500 million of system investments poised to move into the utility’s rate
base with this proceeding, the utility’s ongoing financial wherewithal is closely tied to a fair
outcome. An early resolution to the TEP rate case could represent a source of upside
potential to our 2013 EPS forecast.
NEUTRAL rated. Our $43.50 price target equates to 16.4x our 2013 EPS estimate of $2.65.
Wisconsin Energy is scheduled to report 3Q’12 earnings on Wednesday, October 31st before
the market opens. A conference call with management will be held the same day at 2:00 PM
ET/11:00 AM PT.
Earnings estimates, guidance & expectations. We are forecasting EPS of $0.58 for the
quarter, up from $0.55 reported last year. The consensus estimate is $0.58. WEC has
provided an earnings guidance range of $2.28-$2.32 for 2012. We are currently forecasting
$2.38 per share, compared to the $2.22 consensus.
Key Drivers and Areas of Focus:
Utility margins. We are forecasting gross margin of $649 million, up from $633 million in
the year-ago quarter, driven by an expanded rate base and favorable summer weather.
3Q cooling degree days were ~10% higher than the year-ago quarter, when hot weather
drove an estimated EPS boost of $0.14. Results should also benefit from lower O&M
expenses tied to management’s cost cutting efforts, partially offset by higher depreciation
and property tax expenses.
General rate case update. We will be looking for commentary on WEC’s ongoing rate
case in Wisconsin, which was filed in late March. The primary driver for the electric rate
increase (natural gas rates are expected to decline modestly) is the recovery of costs tied
to the Glacier Hills wind farm and the Oak Creek units, as well as higher operating costs.
A final order from the Commission is expected to be handed down prior to year-end,
placing the new rates into effect in January 2013.
NEUTRAL rated. Our $41.00 target equates to 17.0x our 2013 EPS estimate of $2.41.
UNS Energy Corp.
(UNS – NEUTRAL – $43.50 target)
Wisconsin Energy Corp.
(WEC – NEUTRAL – $41.00 target)
D.A. Davidson & Co.
5
Table 3: Cooling Degree Day Data (CDD) – September and 3Q’12 Totals
Source: National Weather Service’s Climate Prediction Center
Se t % Dev % Dev 3Q'12 % Dev % Dev
CDD v. Avg v. 2011 Total v. Avg v. 2011
Duluth, MN 25 108% -22% 335 118% 10%
Cedar Rapids, IA 70 3% 37% 702 17% 7%
Madison, WI 73 52% 66% 731 76% 19%
Spokane, WA 33 27% -69% 515 54% 27%
Colorado Springs, CO 59 84% 18% 593 83% -10%
Lincoln, NE 100 -19% 67% 979 18% 6%
Rapid City, SD 68 15% 48% 740 50% 18%
Kansas City, MO 131 -13% 35% 1142 22% 6%
Honolulu, HI 458 -8% -8% 1421 -6% -5%
Hilo, HI 324 -4% -5% 972 -5% -3%
Kahului, HI 413 -2% 13% 1264 -3% 4%
Boise, ID 136 84% -37% 1076 67% 10%
Pocatello, ID 9 -61% 350% 481 44% 40%
Tri Cities, WA 100 -24% -43% 796 2% 7%
Boise, ID 136 84% -37% 1076 67% 10%
Bismarck, ND 33 10% 154% 491 32% 32%
Madison, WI 73 52% 66% 731 76% 19%
Great Falls, MT 20 5% -68% 458 98% 28%
Sioux Falls, SD 85 33% 85% 852 54% 35%
Portland, OR 83 60% -27% 401 22% 16%
Jamestown, ND 29 12% 32% 432 6% 3%
Fergus Falls, MN 25 108% -22% 335 118% 10%
Portland, OR 83 60% -27% 401 22% 16%
Salt Lake City, UT 167 59% 18% 1233 47% 21%
Chicago, IL 90 -1% 29% 860 43% 9%
Green Bay, WI 41 14% 21% 524 55% 6%
Rochester, MN 58 123% 26% 601 76% 19%
Tucson, AZ 518 9% -4% 1896 7% -6%
Milwaukee, WI 70 11% 13% 737 58% 10%
Topeka, KS 145 -13% 21% 1181 25% -9%
Denver, CO 115 102% 47% 876 64% 9%
Minneapolis, MN 96 71% 2% 801 59% 0%
Eau Claire, WI 57 104% 14% 594 50% 17%
NorthWestern
NWE
Stock Location
ALLETE
ALE
Alliant Energy
LNT
Avista
AVA
Black Hills
BKH
Great Plains Energy
GXP
Hawaiian Electric Industries
HE
IDACORP
IDA
MDU Resources Group
MDU
MGE Energy
MGEE
Wisconsin Energy
WEC
Westar Energy
WR
Xcel Energy
XEL
Northwest Natural Gas
NWN
Otter Tail
OTTR
Portland General Electric
POR
Questar
STR
Integrys Energy Group
TEG
UNS Energy
UNS
D.A. Davidson & Co.
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Table 4: Breakdown of Electric Utility Revenue Mix (2011)
Source: Company reports, regulatory & SEC filings, United States Department of Energy website
Residential Commercial Industrial Other
ALE ALLETE Inc.71% 29% 13% 13% 45% 1%
AVA Avista Corp.74% 26% 33% 28% 12% 1%
BKH Black Hills Corp.84% 16% 30% 35% 12% 6%
GXP Great Plains Energy Inc.91% 9% 41% 38% 8% 3%
HE Hawaiian Electric Industries Inc.100% - 32% 35% 33% 1%
IDA IDACORP Inc.84% 16% 40% 22% 14% 9%
LNT Alliant Energy Corp.89% 11% 37% 23% 28% -
MDU MDU Resources Group Inc.94% 6% 39% 41% 11% 3%
MGEE MGE Energy Inc.99% 1% 33% 52% 5% 10%
NWE NorthWestern Corp.91% 9% 37% 46% 5% 3%
OTTR Otter Tail Corp.89% 11% 31% 34% 22% 1%
POR Portland General Electric Co.96% 4% 48% 35% 12% -
TEG Integrys Energy Group Inc.81% 19% 31% 30% 20% 1%
UNS UNS Energy Corp.79% 21% 36% 24% 13% 6%
WEC Wisconsin Energy Corp.92% 8% 36% 31% 24% 1%
WR Westar Energy Inc.76% 24% 32% 28% 16% -
XEL Xcel Energy Inc.85% 15% 31% 18% 35% 1%
87% 14% 34% 31% 19% 3%
97% 3% 37% 34% 25% 0%
Other Breakdown of Retail Mix
Average Under Coverage
USA Total
Symbol Company Name Retail
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Ratings Information
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 9/30/12) Buy Hold Sell
Corresponding Institutional Research Ratings Buy Neutral Underperform
and Distribution 57% 41% 2%
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and Distribution 80% 20% 0%
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