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Home My WebLink AboutCOC DADCo-Oct-25-2010.pdf Please refer to pages 2-3 of this report for detailed disclosure and certification information. * D. A. Davidson & Co. makes a market in this security. RESEARCH NOTE Institutional Equity Research IDACORP, INC. October 25, 2010 IDA * – NYSE Rating: Buy Price: (10/22/10) $36.68 Price Targets: 12-18 month: ↑ $42.00 5-year: ↑ $48.00 Industry: Utilities James L. Bellessa, Jr., CFA 406.791.7230 jbellessa@dadco.com Michael Bates Research Associate 406.791.7216 mbates@dadco.com Jump in New Power Requests Supports a Higher Target Price. • Power request data point provides upside surprise. Idaho Power Company has told its state regulators that 75 large industrial and irrigation customers have requested power. We view this as a constructive development, suggesting that an upturn of the Idaho economy is on the horizon and pointing to future earnings growth for the company. We reiterate our BUY rating of the common stock of IDACORP, Inc., the utility’s parent company. • The potential new utility customers are located across the company’s Idaho territory, with load requirements from more than 1 MW up to 240 MW. The total demand and the time frames to satisfy the requests have not been disclosed, except for a single new customer with a load requirement of about 60 MW that is asking for power to start in the near term. • Utility’s resources are constrained. Idaho Power’s nameplate capacity is approximately 3,275 MW currently, and a new plant will add 300 MW when construction is completed in 2012. Even then, the utility’s system will remain limited and/or constrained. Thus, Idaho Power cannot accept all of the 75 new service requests unless it adds new transmission and generation. However, new investment would negatively impact the rates paid by existing customers. • A solution is proposed. To manage the impacts of the potential new large loads on its system, Idaho Power has asked its regulators to change the rules defining large load customers and irrigators. If the rules are changed, the company believes it can satisfy the new power requests, with the largest new customers using special contract arrangements. Idaho Power currently has only four special contract customers (Micron Technology, Inc. (MU - $7.69), the United States Department of Energy’s Idaho National Laboratory, JR Simplot Company, and Hoku Materials, Inc. (HOKU - $2.63)), whose load requirements range in size from 30 to 85 MW. In addition to these four special contract customers, Idaho Power currently has ~110 large power customers who use between 1MW and 25 MW. • Utility requests a rule change. The firm has requested authority to reduce from 25 MW to 20 MW the upper power requirement limit that defines its large power class. Under the company’s proposal, service at levels exceeding 20 MW would require special contracts. Such contracts would allow Idaho Power and the largest of customers to reach an agreement to curtail or interrupt power if Idaho Power is unable to provide service. Further, the new special contracts could include a marginal cost component for an initial term, thereby mitigating the financial impacts on existing customers. The special contracts could also require the largest customers to make upfront contributions for the installation of new distribution equipment or transmission lines needed for connection to the grid. Idaho Power points to its special contract with polysilicon producer Hoku Materials, which was signed two years ago, as an example of the benefits that accrue to the new customer, existing customers, and the utility from such flexible arrangements. • IPUC considering rule change request. The Idaho Public Utilities Commission plans to handle the special contract eligibility request in a modified procedure that uses written comments rather than conducting a hearing, unless customer comments by November 12th can demonstrate a need for a public hearing. We expect the IPUC will rule by year-end 2010. • We are raising our 12-18 month target price of $40.50 to $42.00 to reflect what we believe is a material improvement in power requests. Our new target equates to 14.5x (previously 14.0x) our unchanged 2011 EPS estimate of $2.90. Over the past five years, the shares of IDA have been accorded an average P/E valuation of 15.0x year-forward earnings. At the current price, we are maintaining our BUY rating for this stock that has a current dividend yield of 3.3%. 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., 2010. All rights reserved. 2 Required Disclosures D.A. Davidson & Co. expects to receive, or intends to seek, compensation for investment banking services from this company in the next three months. D.A. Davidson & Co. is a full service investment firm that provides both brokerage and investment banking services. James L. Bellessa, Jr., CFA and Michael Bates, the research analysts 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. We, James L. Bellessa, Jr., CFA and Michael Bates, attest that (i) all the views expressed in this research report accurately reflect our personal views about the common stock of the subject company, and (ii) no part of our 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. 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 9/30/10) Buy Hold Sell Corresponding Institutional Research Ratings Buy Neutral Underperform and Distribution 56% 39% 5% Corresponding Individual Investor Group Ratings Outperform Market Perform Underperform and Distribution 88% 12% 0% Distribution of Combined Ratings 60% 36% 4% Distribution of companies from whom D.A. Davidson & Co. has received compensation for investment banking services in last 12 mos. Institutional Coverage 7% 3% 18% Individual Investor Group Coverage 0% 33% 0% Distribution of Combined Investment Banking 6% 4% 18% D.A. Davidson & Co.’s Institutional Research Rating Scale (maintained since 7/9/02): Buy, Neutral, Underperform 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., 2010. All rights reserved. 3 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. 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. 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