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HomeMy WebLinkAboutUtility Monthly 12-03-12.pdf Please refer to page 9 of this report for detailed disclosure and certification information. INDUSTRY UPDATE Institutional Equity Research December 5, 2012 Utility Monthly Prices: (12/4/12) Industry: Utilities Michael Bates 503.603.3045 mbates@dadco.com 4Q’12 Precipitation Levels off to a Strong Start; Bodes Well for Hydro  Temperatures in the southern portion of the Northwest are expected to be well above average while the extreme upper Midwest is expected to be much cooler than normal. This should bode well for the electric utilities’ demand and earnings. Accordingly, heating degree days have been a bit of a mixed bag for the utilities that we track.  Strong precipitation in the Northwest bodes well for 2013 hydro. Typically, greater than normal precipitation means a plentiful supply for hydrogeneration in the Northwest. While streamflows are projected to be flat to slightly down this year compared to last year’s strong runoff, revisions may have to come if the precipitation continues at such a furious pace. Forecasted streamflows in key drainages for hydrogeneration used by Portland General Electric are near normal levels, while the reservoir feeding much of IDACORP’s hydro system is expected to see lighter runoff than normal. The wet season has just begun and, for that reason, it is still a bit early to put too much weight on these forecasts.  ALLETE, Inc. and Wisconsin Energy Corp. were both issued final rate case decisions by the Wisconsin Public Service Commission In November. Xcel Energy, Inc. filed an electric rate case in Texas during November as well. D.A. Davidson & Co. 2 Recent Regulatory Developments On November 28th, the Wisconsin Public Service Commission (WPSC) issued a final decision in Superior Water, Light and Power Company’s (SWL&P) request to increase retail electric, natural gas, and water rates. The utility was allowed an electric rate increase of $588,000 (+1.25%), a gas rate decrease of $15,000 (-0.21%), and a water rate increase of $1,163,000 (+13.79%). The company originally requested rate increases of $573,000, $104,000, and $1,131,000, respectively. Rates were based on a 9.66% (9.62% requested) return, a combined rate base of $53 million, a 55% equity layer, and a 10.9% allowed ROE. On November 28th the WPSC handed down a preliminary decision in WEPCO’s electric and gas rate case. Although little detail will be available until the commission issues a final written order, the preliminary decision points to an electric rate increase of $180 million in 2013 and an incremental $35 million increase taking effect in 2014. The 2013 increase is partially offset by $60 million tied to the receipt of a renewable energy tax grant and the 2014 increase excludes the expiration of the 2013 offset and a 2014 tax grant-related offset of $20 million, which points to a net incremental rate increase of $75 million). The utility had originally requested a electric rate increases of $172.6 million in 2013 and $37.4 million in 2014 (excluding the impact of the aforementioned tax grants). The WPSC also ordered an $8 million decrease in WEPCO’s retail gas rates, which compares to the utility’s original request for a decrease of $1.2 million. WEPCO’s 10.4% allowed ROE and 51% equity layer were not contested in the case. The WPSC also issued a preliminary decision in WG’s retail gas rate case, ordering a $34 million rate decrease, which compares to the utility’s original request for a decrease of $16 million. The utility’s 10.5% allowed ROE and 46.7% equity layer were not contested in the case. The utility’s rate request was driven primarily by a reduction in bad debt escrow amortizations. New rates will take effect on January 1, 2013. On November 15th, Southwestern Public Service Company (SPS) filed an electric rate case with the Public Utility Commission of Texas (PUCT), requesting a $90.2 million electric rate increase. SPS has requested an ROE of 10.65%, a jurisdictional electric base of $1.15 billion, and an equity ratio of 52%. The decision by PUCT should be finalized in 2Q’13. ALLETE, Inc. (ALE – NEUTRAL – $45 target) Wisconsin Energy Corp. (WEC – NEUTRAL – $40 target) Xcel Energy, Inc. (XEL – NEUTRAL – $30 target) D.A. Davidson & Co. 3 As displayed in Figure 1, early indications of the current heating season have been mixed, with mild November temperatures standing in contrast to a relatively cold October. In aggregate, 4Q’12 temperatures have been milder than normal but slightly cooler than 4Q’11. Figure 1: Heating Degree Day Data (HDD) –November Totals and 4Q’12 QTD Source: National Weather Service’s Climate Prediction Center November % Dev % Dev 4Q'12 % Dev % Dev HDD v. Avg v. 2011 Total v. Avg v. 2011 Duluth, MN 1015 -10% 7% 1700 -6% 16% Cedar Rapids, IA 823 -3% 11% 1366 8% 22% Madison, WI 800 -10% 8% 1302 -7% 15% Spokane, WA 773 -14% -12% 1277 -12% -8% Colorado Springs, CO 635 -25% -11% 1107 -17% -4% Lincoln, NE 702 -13% -6% 1163 -2% 9% Rapid City, SD 820 -12% -11% 1401 -4% 2% Kansas City, MO 543 -19% -6% 892 -5% 8% Boise, ID 602 -22% -18% 958 -18% -10% Pocatello, ID 743 -18% -22% 1290 -11% -11% Tri Cities, WA 593 -10% -7% 928 -5% -2% Boise, ID 602 -22% -18% 958 -18% -10% Bismarck, ND 1082 -3% 8% 1763 1% 17% Madison, WI 800 -10% 8% 1302 -7% 15% Great Falls, MT 787 -19% -13% 1441 -8% 1% Sioux Falls, SD 867 -13% 2% 1433 -5% 15% Portland, OR 478 -15% -20% 750 -15% -14% Jamestown, ND 1089 -4% 11% 1783 2% 21% Fergus Falls, MN 1015 -10% 7% 1700 -6% 16% Portland, OR 478 -15% -20% 750 -15% -14% Salt Lake City, UT 575 -23% -24% 871 -23% -21% Chicago, IL 727 -4% 22% 1140 -2% 24% Green Bay, WI 840 -9% 11% 1390 -5% 18% Rochester, MN 789 -22% 1% 1284 -18% 9% Tucson, AZ 66 -66% -62% 68 -70% -63% Milwaukee, WI 767 -5% 16% 1227 -2% 20% Topeka, KS 513 -23% -13% 834 -12% 0% Denver, CO 631 -24% -16% 1112 -12% -3% Minneapolis, MN 829 -15% 8% 1360 -9% 23% Eau Claire, WI 868 -13% 6% 1476 -5% 16% Northwest Natural Gas NWN Stock Location ALLETE ALE Alliant Energy LNT Avista AVA Black Hills BKH Great Plains Energy GXP IDACORP IDA MDU Resources Group MDU MGE Energy MGEE NorthWestern NWE Westar Energy WR Xcel Energy XEL Otter Tail OTTR Portland General Electric POR Questar STR Integrys Energy Group TEG UNS Energy UNS Wisconsin Energy WEC Temperatures Milder than Normal, Still Colder than Last Year D.A. Davidson & Co. 4 As displayed in Figure 2, the National Weather Service is forecasting near-normal temperatures in most regions served by utilities under our coverage over the next three months, but warmer than normal conditions in parts of the Midwest and Rocky Mountain region could be a headwind for heating load. By contrast, temperatures in the extreme upper Midwest should be below normal and drive relatively strong usage. Figure 2: December ’12 – February ‘13 Temperature Forecast Source: National Weather Service Climate Prediction Center Hydro power is a substantial electric resource for Avista Corp., IDACORP, Inc. and Portland General Electric Co. State regulators have implemented rate mechanisms to limit the utilities’ financial exposure to swings in hydrogeneration (summarized below). From our observations and under their current mechanisms, results at POR are the most sensitive to streamflow conditions, followed by AVA; IDA carryies the least financial exposure to variations from the baseline forecast.  Idaho - Power Cost Adjustment (PCA) mechanism shares 95% of the swing in costs with ratepayers and 5% with the utility.  Oregon - Power Cost Adjustment Mechanism (PCAM) provides a 90%/10% refund/surcharge after an asymmetrical deadband (+$30 million/-$15 million) and after applying an annual earnings test.  Washington - Energy Recovery Mechanism (ERM) shares’ annual power supply cost variability after a symmetrical deadband is $0-$4 million. If power costs are $4-$10 million above the amount built into rates, there is 50%-50% sharing between ratepayers and shareholders. If power costs are $4-$10 million below the amount built into rates, there is 75%-25% sharing between ratepayers and shareholders. Above or below $10 million of annual power supply cost variability, 90% of the swing in costs goes to ratepayers and 10% goes to the company. As noted in Figures 3-4, precipitation in the Pacific Northwest has been plentiful since October 1st. Average river basin snow water content in the western region is mostly at or above normal in the entire region as of December 3, 2012. While it is still early in the precipitation year (October 1st to September 30th), current conditions are a positive indicator for hydrogeneration output in 2013, which would benefit Avista Corp., IDACORP, Inc. and Portland General Electric Co. Another Moderate Winter on the Way? Early Indications for 2013 Hydrogeneration Appear Strong D.A. Davidson & Co. 5 Figure 3: Accumulated Precipitation: October 2012 Source: National Weather Service Northwest River Forecast Center Figure 4: Western Region Snow Water Content Source: United States Department of Agriculture D.A. Davidson & Co. 6 The Northwest River Forecast Center’s projection released on December 3rd calls for at or near-normal streamflows in drainages that are important to hydrogeneration assets owned by Avista, IDACORP and Portland General Electric for the spring and summer months of 2013 (Figure 5). Figure 5: Streamflow Projections for Key Hydro Locations Source: National Weather Service Northwest River Forecast Center Global financial/economic concerns have prompted investors to take a more defensive stance since 2008-2009, prompting a flight to quality resulting in a significant strengthening of utility stock valuations. Equities in the sector currently trade at 14.6x expected 2013 earnings, moderately above the average forward P/E (13.1x) over the last five years. Utility shares currently trade at a 20% premium P/E valuation relative to the S&P 500, which is materially above the 10% average premium accorded to the group. The sector carries an average dividend yield of 3.85%, slightly above the 3.82% 5-year average. Although utilities dividends have remained stable for some time now, they still remain very attractive relative to the average yield on S&P 500 equities and 10-year US Treasuries as shown in Figure 9. Figure 6: Utility Forward P/E Figure 7: Utility Forward P/E Relative to S&P 500 Source: Capital IQ Source: Capital IQ Figure 8: Utility Dividend Yields Figure 9: Utility Dividend Yields Relative to S&P 500 and 10-Year Treasuries Source: Capital IQ Source: Capital IQ % DevForecast Average v. Av Coeur d'Alene Lake Inflow APR-SEP 2,379 2,650 -10% Cabinet Gorge Dam APR-SEP 11,996 12,460 -4% IDACORP IDA Brownlee Reservoir Inflow APR-Sep 6,318 7,801 -19% Clackamas River APR-SEP 748 748 0% Deschutes River APR-SEP 1,876 1,941 -3% The Dalles APR-SEP 97,178 98,650 -1% Avista AVA Portland General Electric POR Time PeriodLocationStock Runoff Forecast - KAF Current Sector Valuations D.A. Davidson & Co. 7 As shown in Figure 10, the median total return of utilities stocks under our coverage was -1.8% over the last month as compared to the S&P 500 and the XLU, which fell 0.6% and 3.2%, respectively, in the same time frame. The clear winner of the past month has been Otter Tail with a total return of 3.4%. Utilities (and the market as a whole) have struggled to produce returns over the past month as investors continue to price in concerns relating to the fiscal cliff and other headwinds. As depicted in Figure 11, almost all of the utilities under our coverage have underperformed the S&P 500 (up 11.7%) year to date. The median total return among utilities we cover is 2.7%, as compared to the XLU, which has returned only 0.4%. Otter Tail and UNS Energy have outperformed the rest of the group with returns of 17.1% and 19.3%, respectively. Figure 10: D.A. Davidson Utility Coverage Figure 11: D.A. Davidson Utility Coverage Relative 1-Month Performance Relative YTD Performance Source: Capital IQ Source: Capital IQ OTTR, 3.4% BKH, 1.7% UNS, 1.4% LNT, 1.0% ITC, 0.4% TEG, 0.2% S&P 500, ‐0.6% MGEE, ‐0.7% POR, ‐0.8% WEC, ‐1.4% HE, ‐1.5% Median, ‐1.8% NWE, ‐2.0% STR, ‐2.2% NWN, ‐2.9% MDU, ‐3.0% XLU, ‐3.2% ALE, ‐3.2% XEL, ‐3.4% WR, ‐3.5% AVA, ‐3.9% IDA, ‐4.1% GXP, ‐7.9% ‐10.0%‐8.0%‐6.0%‐4.0%‐2.0% 0.0% 2.0% 4.0% UNS, 19.3% OTTR, 17.1% S&P 500, 11.7% MGEE, 11.7% BKH, 10.9% WEC, 10.4% POR, 9.6% ITC, 5.1% LNT, 5.0% IDA, 3.5% TEG, 2.8% Median, 2.7% WR, 2.7% STR, 1.9% XLU, 0.4% XEL, 0.3% HE, ‐0.7% NWE, ‐0.8% ALE, ‐1.8% MDU, ‐1.9% GXP, ‐3.5% AVA, ‐3.6% NWN, ‐5.5% ‐10.0%‐5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% Stock Performance D.A. Davidson & Co. 8 Figure 12: D.A. Davidson & Co. Utilities Coverage 1D.A. Davidson & Co. makes a market in this security. 2Results exclude the impact of nonrecurring items and discontinued operations. Source: D.A. Davidson & Co. estimates, company reports, and Capital IQ Electric Utilities - Regulated Price MC EV ROE ROA 12/5/12 ($B) ($B) 2011 2012e 2013e 2011 2012e 2013e (ttm) (ttm) ALE1,2 ALLETE Inc. N $39.80 $45.00 $1.5 $2.4 4.6% 67% 16.7 15.4 14.0 9.0 8.6 7.7 1.3 6.6% 2.4% 47% GXP1,2 Great Plains Energy Inc. N $20.19 $21.50 $3.1 $6.8 4.2% 58% 16.2 15.6 13.4 9.1 8.6 8.1 0.9 5.5% 2.0% 52% IDA1 IDACORP Inc. B $42.48 $50.00 $2.1 $3.7 3.6% 48% 12.6 12.7 12.7 12.1 9.5 8.8 1.2 6.2% 2.1% 47% ITC1,2 ITC Holdings Corp. B $77.77 $90.00 $4.0 $7.1 1.9% 32% 23.2 18.9 15.6 13.9 12.5 10.2 2.9 13.0% 3.3% 70% POR1 Portland General Electric Co. B $26.75 $31.00 $2.0 $3.6 4.0% 56% 13.7 13.7 13.7 6.6 6.4 6.4 1.2 7.4% 2.2% 50% UNS1 UNS Energy Corp. N $42.72 $43.50 $1.8 $3.5 4.0% 68% 16.7 19.4 16.4 7.7 8.1 7.3 1.6 8.5% 2.2% 63% WR1,2 Westar Energy Inc. B $28.53 $33.50 $3.6 $6.9 4.6% 68% 15.8 14.2 14.3 8.7 8.4 8.2 1.2 7.4% 2.3% 53% Peer Group Median $2.1 $3.7 4.0% 58% 16.2 15.4 14.0 9.0 8.6 8.1 1.2 7.4% 2.2% 52% Peer Group Mean $2.6 $4.8 3.9% 57% 16.4 15.7 14.3 9.6 8.8 8.1 1.5 7.8% 2.4% 55% Multi-Utilities Price MC EV ROE ROA 12/5/12 ($B) ($B) 2011 2012e 2013e 2011 2012e 2013e (ttm) (ttm) AVA1 Avista Corp. N $23.65 $26.00 $1.4 $2.7 4.9% 69% 13.8 15.8 13.7 7.9 8.1 7.5 1.1 6.9% 2.1% 52% LNT1,2 Alliant Energy Corp. B $44.33 $51.00 $4.9 $8.0 4.1% 60% 16.1 14.9 14.2 9.5 8.9 8.3 1.6 7.8% 2.4% 48% MGEE1,2 MGE Energy Inc. N $50.57 $50.00 $1.2 $1.5 3.1% 56% 19.2 17.5 17.5 9.3 8.9 8.8 2.0 11.3% 4.2% 39% NWE1,2 NorthWestern Corp. N $34.46 $36.50 $1.3 $2.4 4.3% 63% 14.3 14.7 14.0 8.8 9.2 8.3 1.4 7.0% 1.9% 55% TEG1,2 Integrys Energy Group Inc. B $52.55 $59.00 $4.1 $6.6 5.2% 78% 15.5 15.9 15.0 8.4 8.5 7.9 1.4 7.9% 2.4% 45% WEC1,2 Wisconsin Energy Corp. N $37.02 $40.00 $8.5 $13.6 3.2% 56% 17.0 15.9 15.4 10.1 9.4 9.1 2.1 13.1% 3.9% 55% XEL1,2 Xcel Energy Inc. N $26.74 $30.00 $13.0 $23.5 4.0% 58% 15.5 14.5 14.0 8.5 8.1 7.7 1.5 9.6% 2.7% 56% Peer Group Median $4.1 $6.6 4.1% 60% 15.5 15.8 14.2 8.8 8.9 8.3 1.5 7.9% 2.4% 52% Peer Group Mean $4.9 $8.3 4.1% 63% 15.9 15.6 14.8 8.9 8.7 8.2 1.6 9.1% 2.8% 50% Diversified Utilities Price MC EV ROE ROA 12/5/12 ($B) ($B) 2011 2012e 2013e 2011 2012e 2013e (ttm) (ttm) BKH1,2 Black Hills Corp. N $35.43 $37.00 $1.6 $2.9 4.2% 66% 20.9 17.1 15.5 9.1 7.5 7.2 1.3 6.0% 1.9% 57% HE1 Hawaiian Electric Industries Inc. N $25.09 $28.00 $2.4 $4.0 4.9% 71% 18.6 15.3 14.4 8.8 8.3 7.8 1.5 9.6% 1.6% 51% MDU1,2 MDU Resources Group Inc. N $20.47 $23.00 $3.9 $5.6 3.4% 50% 17.2 17.7 14.6 7.4 9.0 6.5 1.4 7.5% 3.0% 39% OTTR1,2 Otter Tail Corp. N $24.30 $25.00 $0.9 $1.3 4.9% 94% 55.0 20.3 19.2 10.7 9.5 9.0 1.7 5.3% 1.8% 44% Peer Group Median $2.0 $3.5 4.5% 68% 19.8 17.4 15.1 9.0 8.6 7.5 1.5 6.7% 1.8% 48% Peer Group Mean $2.2 $3.5 4.3% 70% 27.9 17.6 15.9 9.0 8.6 7.6 1.5 7.1% 2.1% 48% Gas Utilities Price MC EV ROE ROA 12/5/12 ($B) ($B) 2011 2012e 2013e 2011 2012e 2013e (ttm) (ttm) NWN1,2 Northwest Natural Gas Co. N $43.52 $43.50 $1.2 $2.0 4.2% 75% 17.0 19.0 17.8 9.0 8.9 8.8 1.6 9.3% 2.5% 53% STR1,2 Questar Corp. N $19.51 $20.00 $3.4 $4.8 3.5% 59% 16.8 16.5 16.3 8.8 8.5 8.5 3.3 19.4% 5.6% 57% Peer Group Median $2.3 $3.4 3.8% 67% 16.9 17.8 17.0 8.9 8.7 8.6 2.5 14.3% 4.0% 55% Peer Group Mean $2.3 $3.4 3.8% 67% 16.9 17.8 17.0 8.9 8.7 8.6 2.5 14.3% 4.0% 55% Industry Median $6.8 $12.6 4.0% 59% 18.1 16.3 14.9 9.4 8.5 7.9 1.6 8.6% 2.5% 53% Industry Mean $3.6 $5.8 4.0% 62% 16.5 16.0 14.9 8.9 8.5 8.0 1.5 8.8% 2.5% 52% Symbol Company Name Rating Price Target Dividend Yield Payout 2013e P/E Symbol Company Name Rating Price Target Dividend Yield Payout 2013e EV / EBITDA P / BV Debt / Capital P/E EV / EBITDA P / BV Dividend Yield Debt / Capital Payout 2013e P/ESymbol Company Name Rating Price Target P / BVSymbol Company Name Rating Price Target Dividend Yield Payout 2013e EV / EBITDA P / BV Debt / Capital P/E EV / EBITDA Debt / Capital D.A. Davidson & Co. Two Centerpointe Drive, Suite 400  Lake Oswego, Oregon 97035  (503) 603-3000  (800) 755-7848  www.dadavidson.com Copyright D.A. Davidson & Co., 2012. All rights reserved. 9 Required Disclosures D.A. Davidson & Co. expects to receive, or intends to seek, compensation for investment banking services from the companies mentioned in this report in the next three months. D.A. Davidson & Co. is a full service investment firm that provides both brokerage and investment banking services. Michael Bates, the research analyst principally responsible for the preparation of this report, will receive compensation that is based upon (among other factors) D.A. Davidson & Co.’s investment banking revenue. However, D.A. Davidson & Co.’s analysts are not directly compensated for involvement in specific investment banking transactions. I, Michael Bates, attest that (i) all the views expressed in this research report accurately reflect my personal views about the common stock of the subject company, and (ii) no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. Ratings Information D.A. Davidson & Co.’s Institutional Research Rating Scale (maintained since 7/9/02): Buy, Neutral, Underperform 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% Corresponding Individual Investor Group Ratings Outperform Market Perform Underperform and Distribution 80% 20% 0% Distribution of Combined Ratings 57% 41% 2% Distribution of companies from whom D.A. Davidson & Co. has received compensation for investment banking services in last 12 mos. 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