COC IDA-20100208.pdf

FOR IMPORTANT DISCLOSURES AND CERTIFICATIONS, PLEASE REFER TO PAGES 5 - 6 OF THIS NOTE.
1
ACTION STATEMENT
IDA's Idaho regulatory settlement acts to put a floor of 9.5% on the Company's
earned ROE in the Idaho jurisdiction, where approximately 95% of regulated assets
are held. Further, this ROE is calculated on the year-end equity balance, which we
view favorably during a period of elevated capital expenditure. The settlement offers
earnings stability through 2011. Historically IDA has seen under-earnings and
earnings volatility driven by regulatory lag and variability in hydro conditions.After
updating our estimates to incorporate IDA's Idaho regulatory settlement, we
are upgrading our rating from HOLD to BUY with a $33 price target.
KEY INVESTMENT POINTS
We view several attributes of the settlement as constructive, particularly the aspect of
putting a 9.5% floor on the Idaho jurisdictional ROE. We believe the settlement offers
protection from water variability and feel comfortable that IDA can manage through
the "stay-out" moratorium precluding the Company from filing for new rates to be
effective before January 2012.
We are raising our 2009 and 2010 estimates to $2.60 and $2.75 from $2.40 and
$2.55, respectively.We are introducing a 2011 estimate of $2.80 per share. Our
estimates are meaningfully higher than respective consensus estimates of $2.43,
$2.53 and $2.62 per share.
Beyond 2011, we note attractive investment opportunities in transmission and
generation of roughly $1.3 billion.
We believe IDA has seen a move toward more constructive regulation over the past
few years.
Including a 3.9% yield, our price target represents total return potential of over 12%.
VALUATION
Based upon our revised 2010 estimate, shares of IDA sell at an 8% discount to the
group average P/E of 12.0x. We believe shares warrant an average valuation given
stability of earnings under the settlement and attractive investment opportunities. We
derive our $33 price target by capitalizing our 2010 estimate of $2.75 at the group
average P/E multiple of 12.0x.
RISKS
We believe the primary risks that could impede the stock from achieving our price
target are well below normal precipitation levels for a few years, worsening demand
trends and high inflation, which could exert pressure, given IDA's inability to file a
near-term general rate case.
February 8, 2010 KeyBanc
ENERGY: Utilities Capital Markets
Estimates Change / Rating Change
IDACORP, Inc.:
IDA: Idaho Settlement Underappreciated, Upgrade to BUY
KeyBanc Capital Markets Inc.
Member NYSE/FINRA/SIPC
Paul T. Ridzon:[phone] —[e-mail]
Timothy Yee:[phone] —[e-mail]
Investors should assume that we are seeking or will seek investment banking
or other business relationships with the company described in this report.
Rating BUY
Price $30.51
12-Mo. Price Target $33.00
Dividend $1.20
Yield 3.9%
52-Wk. Range $21-$33
Trading Volume 233
Market Cap. (mm)$1,437.0
Shares Out. (mm)47.10
Book Value/Share $28.97
Fiscal Year End December
2010E $2.75
2009E $2.60
2008A $2.23
2010 P/E 11.1x
2009 P/E 11.7x
First Call 2010E $2.53
First Call 2009E $2.43
Next Quarter December
Estimate $0.51
Vs.$0.26
First Call Estimate $0.29
2
DISCUSSION
As discussed, we are raising our estimates for IDA. We are increasing our EPS estimates from $2.40 to $2.60 for 2009, and from
$2.55 to $2.75 for 2010. We are also introducing a 2011 estimate of $2.80 per share, which reflects an anticipated equity issuance in
early 2011. Given the higher earnings outlook afforded by IDA's Idaho regulatory settlement, we are upgrading shares to BUY with a
$33 price target.
OVERVIEW OF SETTLEMENT
We view IDA's approved Idaho settlement favorably. Under the terms of this stipulation, IDA has meaningful downside earnings
protection through the ability to accelerate $45 million of its $70 million bank of accumulated deferred income tax credits (ADITC). If
necessary, IDA may accelerate the amortization of these credits if the Company is going to earn a return on equity (ROE) below
9.5%. We note that the ROE calculation is based upon the year-end equity balance, which we believe is favorable during a period of
elevated capital expenditures in that it alleviates regulatory lag.
In 2009, IDA may accelerate up to $15 million of these credits. In each of the subsequent years (2010 and 2011), up to $25 million
may be utilized. The total available in the three years covered by the settlement is $45 million. In our view, utilizing the entire $45
million would only be necessary under a scenario of very poor hydro conditions and weak demand.
As part of the settlement, IDA has agreed to split evenly with ratepayers any earnings in excess of an earned ROE of 10.5%. We
note that approximately 95% of IDA's regulated rate base is within the state of Idaho, and is therefore covered by the stipulation. We
believe this offers substantial downside earnings protection.
We believe that this stipulation was made possible by a combination of factors. Firstly, interveners were likely more willing to
negotiate to avoid the risk of a meaningful rate hike in a fragile economy after IDA had given notice it would be filing. Secondly,
interveners appear to have been aware of IDA's capital program and sought the benefit of financial stability in attracting capital to
finance new generation and transmission investment. Lastly, under IDA's power cost adjustment (PCA) mechanism, customers were
set to receive a rate reduction (in the form of lower power supply costs). This PCA-based rate reduction will be split between
ratepayers and shareholders on a sliding scale, giving the Company a rate increase without a full rate case, while still providing a
net benefit to ratepayers.
This PCA adjustment is expected to be a $160 million reduction, although the actual amount will be determined in an April filing
based upon observations of hydro conditions and fuel and power prices. We discuss the sharing dynamics below.
We are fairly comfortable with the moratorium on new general rates until January 2012. The $45 million offers meaningful
headroom, in our view, for a materially worse economy or poor hydro. Additionally, the settlement does not preclude rate
adjustments for several items including: the annual PCA, Fixed Cost Adjustment, pension recovery, and riders related to energy
efficiency and advanced metering investments.
PCA SHARING AGREEMENT
Under the terms of the stipulation, the reduction of the PCA surcharge will benefit ratepayers and shareholders. The first $40 million
of reduction is split 50%/50%. The next $20 million (from $40 million to $60 million) is fully retained by ratepayers. The next $75
million ($60 million to $135 million) is applied to offset expected increases in net power supply expenses (NPSE). The next $10 is
split 50%/50%. Any reduction above $145 million benefits ratepayers. At the time the settlement was being discussed, the
anticipated PCA reduction was $160 million ($25 million to shareholders, $60 million to ratepayers and $75 million for increased
supply costs). The final adjustment is set annually in April, when parties have increased visibility of hydro conditions and fuel pricing.
We believe the meaningful reduction in this bill component greatly facilitated the settlement, with opportunity for all parties to benefit.
Company NoteFebruary 8, 2010
3
EARNINGS OUTLOOK
Below we present our regulated rate base forecast based on IDA's capital expenditure forecast and estimated depreciation. We
assume IDA earns a 9.5% ROE in Idaho, but note upside given this is the floor under the settlement, and strong hydro conditions
could offer upside. For Oregon, we assume earned ROE's between 6.25% and 7%. Unregulated earnings are forecast at a modest
$1 million to $1.5 million annually. We assume IDA completes its current continuous offering (2.1 million shares remaining) and
issues $100 million of equity early in 2011, allowing the Company to maintain its targeted goal of a 50% equity component of capital.
Company NoteFebruary 8, 2010
4
EPS (Net)Summary
2008A %CHG 2009E %CHG 2010E %CHG
1Q $0.48 -14.3%$0.44A -8.3%----
2Q $0.35 -14.6%$0.49A 40.0%----
3Q $1.14 81.0%$1.16A 1.8%----
4Q $0.26 13.0%$0.51 96.2%----
YEAR $2.23 22.5%$2.60 16.6%$2.75 5.8%
Source: KeyBanc Capital Markets Inc. estimates
Company NoteFebruary 8, 2010
5
KeyBanc Capital Markets Inc.Disclosures and Certifications
IDACORP, Inc. - IDA
For the three-year history represented in this chart, this stock has been rated HOLD.
IDACORP, Inc. is an investment banking client of ours.
We have received compensation for investment banking services from IDACORP, Inc. during the past 12 months
We expect to receive or intend to seek compensation for investment banking services from IDACORP, Inc. within the next
three months.
During the past 12 months, IDACORP, Inc. has been a client of the firm or its affiliates for non-securities related services.
Reg A/C Certification
The research analyst(s) responsible for the preparation of this research report certifies that:(1) all the views expressed in
this research report accurately reflect the research analyst's personal views about any and all of the subject securities or
issuers; and (2) no part of the research analyst's compensation was, is, or will be directly or indirectly related to the
specific recommendations or views expressed by the research analyst(s) in this research report.
Three-Year Rating and Price Target History
Rating Disclosures
Distribution of Ratings/IB Services Firmwide and by Sector
KeyBanc Capital Markets
IB Serv/Past 12 Mos.
Rating Count Percent Count Percent
BUY [BUY]0 0.00 35 0.00
HOLD [HOLD]0 0.00 51 0.00
SELL [UND]0 0.00 1 0.00
ENERGY
IB Serv/Past 12 Mos.
Rating Count Percent Count Percent
BUY [BUY]0 0.00 9 0.00
HOLD [HOLD]0 0.00 25 0.00
SELL [UND]0 0.00 0 0.00
Company NoteFebruary 8, 2010
6
Rating System
BUY - The security is expected to outperform the market over the next six to 12 months; investors should consider adding
the security to their holdings opportunistically, subject to their overall diversification requirements.
HOLD - The security is expected to perform in line with general market indices over the next six to 12 months; no buy or sell
action is recommended at this time.
UNDERWEIGHT - The security is expected to underperform the market over the next six to 12 months; investors should
reduce their holdings opportunistically.
The information contained in this report is based on sources considered to be reliable but is not represented to be complete and its
accuracy is not guaranteed. The opinions expressed reflect the judgment of the author as of the date of publication and are subject to
change without notice. This report does not constitute an offer to sell or a solicitation of an offer to buy any securities. Our company
policy prohibits research analysts and members of their families from owning securities of any company followed by that analyst,
unless otherwise disclosed. Our officers, directors, shareholders and other employees, and members of their families may have
positions in these securities and may, as principal or agent, buy and sell such securities before, after or concurrently with the
publication of this report. In some instances, such investments may be inconsistent with the opinions expressed herein. One or more of
our employees, other than the research analyst responsible for the preparation of this report, may be a member of the Board of
Directors of any company referred to in this report. The research analyst responsible for the preparation of this report is compensated,
based in part, on investment banking revenue which may include revenue derived from the Firm's performance of investment banking
services for companies referred to in this report, although such compensation is not based upon specific investment banking services
transactions for these or any other companies. In accordance with industry practices, our analysts are prohibited from soliciting
investment banking business for our Firm.
Copyright 2010, KeyBanc Capital Markets Inc. All rights reserved.
Securities, mutual funds and other investment products are:
•Not Insured by the FDIC.
•Not deposits or other obligations of, or guaranteed by KeyBanc Capital Markets Inc., KeyBank, N.A. or any of
their affiliates.
•Subject to investment risks, including possible loss of the principal amount invested.
Company NoteFebruary 8, 2010