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.
Institutional Coverage 5% 6% 0%
Individual Investor Group Coverage 0% 0% 0%
Distribution of Combined Investment Banking 5% 6% 0%
Target prices are our Institutional Research Department’s evaluation of price potential over the next 12-18 months and 5 years, based
upon our assessment of future earnings and cash flow, comparable company valuations, growth prospects and other financial criteria.
Certain risks may impede achievement of these price targets including, but not limited to, broader market and macroeconomic
fluctuations and unforeseen changes in the subject company’s fundamentals or business trends.
For a copy of the most recent reports containing all required disclosure information for covered companies referenced in this report,
please contact your D.A. Davidson & Co. representative or call 1-800-755-7848.
Other Disclosures
Information contained herein has been obtained by sources we consider reliable, but is not guaranteed and we are not soliciting any
action based upon it. Any opinions expressed are based on our interpretation of data available to us at the time of the original
publication of the report. These opinions are subject to change at any time without notice. Investors must bear in mind that inherent in
investments are the risks of fluctuating prices and the uncertainties of dividends, rates of return and yield. Investors should also
remember that past performance is not necessarily an indicator of future performance and D.A. Davidson & Co. makes no guarantee,
express or implied, as to future performance. Investors should note this report was prepared by D.A. Davidson & Co.’s Institutional
Research Department for distribution to D.A. Davidson & Co.’s institutional investor clients and assumes a certain level of investment
sophistication on the part of the recipient. Readers, who are not institutional investors or other market professionals, should seek the
advice of their individual investment advisor for an explanation of this report’s contents, and should always seek such advisor’s advice
before making any investment decisions. Further information and elaboration will be furnished upon request.