COC IDA 3Q08 Sell Side Notes.doc

IDA Sell Side Summary 11.07.08

D.A. Davidson
3Q’08 Earnings Preview: Rate Relief and PCA Mechanism Change Should Boost EPS. (James L. Bellessa, Jr., CFA)

We are looking for 3Q’08 EPS of $0.89 versus $0.65 per share in the same quarter a year ago, with the consensus of four analysts at $0.83 per share. Our full-year estimate for 2008 EPS is $2.12, a 14% year-over-year increase over 2007 earnings of $1.86, with the consensus among four analysts at $2.01 per share. We are the high on the Street for both quarterly and full-year estimates.

Change in PCA mechanism should boost results. A change in the power cost adjustment (PCA) mechanism implemented on June 1, 2008 is expected to boost 3Q’08 earnings by $0.22. The change in the mechanism is intended to smooth out power costs over the year, rather than follow the seasonal pattern that had been used previously. Therefore, the 3Q’08 boost more than offsets the $0.12 hit in 2Q’08 caused by the PCA mechanism revision. Note that on an annualized basis, the PCA mechanism change was not expected to change results. Also, a settlement agreement has been reached that would further alter several aspects of the PCA, including the monthly distribution of forecasted annual net power supply based on the shape of normalized monthly sales rather than the simplistic use of a distribution of 1/12 of the annual forecasted expense per month.

Hydro generation expected to be flat to up year-over-year. The utility’s strong second half should be helped by the aforementioned PCA change and better hydro conditions than were seen last year. Given first half 2008 hydroelectric generation of 3.7 million MWh and the company’s guidance that 2008 total hydro generation is expected to be in the range of 6.5-7.5 million MWh, second half hydro generation should be roughly 2.8-3.8 million MWh, compared with 2.8 million MWh in 2H’07.

Rate relief and gain likely to help quarter. Results were likely lifted by an annualized 5%, or $32 million, general rate increase in Idaho that became effective March 1, 2008. The quarterly comparison should be held back by the fact 3Q’08 temperatures, as measured by cooling-degree days, were 16% below 3Q’07, albeit 31% above normal, and results in 3Q’07 were bolstered in the order of $0.03 per share by gains on the sale of emissions allowances. Although we cannot fully predict what gains the utility may realize from the sale of emission allowances, we do not expect the impact of any 3Q’08 sales reached the same level as 3Q’07.

We currently rate the shares BUY, with a target price of $31, or approximately 13.7x our 2009 EPS estimate of $2.27. While management plans approximately $900 million of capital expenditures over the 2008-2010 timeframe and has $629 million remaining on two shelf registration statements, we do not believe there are any immediate financings in front of the utility, other than the company’s periodic share offerings under a sales agency agreement.