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HomeMy WebLinkAboutCOC IDA080609.pdf Please see page 2 for rating definitions, important disclosures and required analyst certifications Wells Fargo Securities, LLC does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of the report and investors should consider this report as only a single factor in making their investment decision. u ust 6, 2009 Equit Research IDACORP, Inc. IDA: Tax Benefits, Hydro And Oregon Power Cost Deferral Help 09 Rate Relief Key In 2010 • We Are Maintaining Our 09E EPS of $2.45. Going into second quarter results we were concerned that our 09E EPS of $2.45 was too high based on weaker than expected Q1 results and the fact that the majority of the non-fuel related rate increase approved earlier in the year was cash recovery of AFUDC rather than an actual base rate increase. However, based on (1) IDA’s expectations that the effective consolidated tax rate will be 19-24% versus 24- 28% previously, (2) the narrowing of hydro generation output guidance to the upper end of the range and (3) a $6.4mm pre-tax (roughly $0.08 per share after- tax) benefit in Q2 related to the deferral of previously incurred power costs in Oregon, we are maintaining our estimate of $2.45. • What About 2010? By our calculations, 2010 EPS faces a roughly $0.23 per share headwind based on an assumed return to a more normalized tax rate ($0.15) and the absence of the Oregon power cost deferral benefit ($0.08). While EPS growth could be challenging in 10, we are maintaining our $2.50 estimate based on the following positive drivers: (1) continued rate recognition of IDA’s AMI investment, (2) higher AFUDC earnings related to the Langley Gulch plant, (3) mid-year rate relief in Oregon and (4) mid-year rate relief in Idaho. Notably, IDA is still in the process of evaluating the need for rate relief in 2010 in Idaho. Other swing variables 2010 will be sales growth, cost controls and hydro conditions. • Project Update. IDA is currently awaiting Commission approval of the $427mm Langley Gulch combined cycle plant, which is expected in 3Q. The company also continues to pursue two major transmission projects, Gateway West and Boardman-Hemingway, although mgmt warned that planning, siting and constructing hundreds of miles of transmission lines it is a “stop and go process.” Estimated in-service dates for the projects are 2014 and 2015, respectively. • Reiterate Market Perform Rating. IDA has made significant progress on the regulatory front over the past 12-months, particularly relating to its power cost adjustment mechanism (PCAM). Those efforts appear to be bearing fruit as Idaho Power’s trailing twelve month ROE rose to 8.3% vs. 7.9% in calendar year 08 and 7.1% in 07. A 29% increase in hydro generation in 1H09 also contributed to the improvement. Other positive features include rate base growth opportunities and limited external equity needs through 2010 (even with Langley Gulch CapEx). Our Market Perform rating reflects a below average regulatory environment and valuation considerations. Valuation Range: $27.00 to $29.00 from $26.00 to $27.00 We value IDA under P/E multiple (apply an 11.0-11.5X multiple to our 10E EPS of $2.50) and dividend discount analysis. Risks to our valuation include project delays or cancellations and consistently below average hydroelectric conditions. Investment Thesis: We are attracted to Idaho's service territory and strong rate base growth potential, and are encouraged by recent regulatory improvements. Our neutral rating reflects lingering regulatory concerns and valuation considerations. Market Perform Sector: Regulated Electric Utilities Market Weight Earnings Reported 2008 2009E 2010E EPS Curr. Prior Curr. Prior Q1 (Mar.) $0.48 $0.40 A NC NE Q2 (June) 0.39 0.58 A 0.53 NE Q3 (Sep.) 1.14 1.11 1.15 NE Q4 (Dec.) 0.16 0.35 0.37 NE FY $2.17 $2.45 NC $2.50 NC CY $2.17 $2.45 $2.50 FY P/E 12.8x 11.3x 11.1x Rev.(MM $960 $1,008 $1,024 Source: Company Data, Wells Fargo Securities, LLC estimates, and Reuters NA = Not Available, NC = No Change, NE = No Estimate, NM = Not Meaningful Ticker IDA Price (08/06/2009) $27.79 52-Week Range: $20-34 Shares Outstanding: (MM) 46.9 Market Cap.: (MM) $1,303.4 S&P 500: 997.08 Avg. Daily Vol.: 263,750 Dividend/Yield: $1.20/4.3% LT Debt: (MM) $1,283.6 LT Debt/Total Cap.: 46.2% ROE: 9.0% 3-5 Yr. Est. Growth Rate: 5.0% CY 2009 Est. P/E-to-Growth: 2.3x Last Reporting Date: 08/06/2009 Before Open Source: Company Data, Wells Fargo Securities, LLC estimates, and Reuters Neil Kalton, CFA, Senior Analyst (314) 955-5239 / neil.kalton@wachovia.comSarah Akers, Associate Analyst (314) 955-6209 / sarah.akers@wachovia.com Jonathan Reeder, Associate Analyst (314) 955-2462 / jonathan.reeder@wachovia.com WELLS FARGO SECURITIES, LLC Utilities EQUITY RESEARCH DEPARTMENT 2 Company Description: IDACORP (IDA) is the holding company for Idaho Power Company (IPC), a regulated electric utility serving more than 485,000 customers in southern Idaho, including Boise and surrounding areas, and eastern Oregon. In addition, IDACORP Financial Services (IFS), a non-utility business, invests in affordable housing tax credits. Required Disclosures $18.00 $20.00 $22.00 $24.00 $26.00 $28.00 $30.00 $32.00 $34.00 $36.00 $38.00 $40.00 $42.00 $44.00 $46.00 8/1 / 0 6 8/2 9 / 0 6 9/2 6 / 0 6 10 / 2 4 / 0 6 11 / 2 1 / 0 6 12 / 1 9 / 0 6 1/1 6 / 0 7 2/1 3 / 0 7 3/1 3 / 0 7 4/1 0 / 0 7 5/8 / 0 7 6/5 / 0 7 7/3 / 0 7 7/3 1 / 0 7 8/2 8 / 0 7 9/2 5 / 0 7 10 / 2 3 / 0 7 11 / 2 0 / 0 7 12 / 1 8 / 0 7 1/1 5 / 0 8 2/1 2 / 0 8 3/1 1 / 0 8 4/8 / 0 8 5/6 / 0 8 6/3 / 0 8 7/1 / 0 8 7/2 9 / 0 8 8/2 6 / 0 8 9/2 3 / 0 8 10 / 2 1 / 0 8 11 / 1 8 / 0 8 12 / 1 6 / 0 8 1/1 3 / 0 9 2/1 0 / 0 9 3/1 0 / 0 9 4/7 / 0 9 5/5 / 0 9 6/2 / 0 9 6/3 0 / 0 9 7/2 8 / 0 9 Se c u r i t y P r i c e IDACORP, Inc. (IDA) 3-yr. Price PerformanceIDACORP, Inc. (IDA) 3-yr. Price Performance Date Date Publication Price ($) Rating Code Val. Rng. Low Val. Rng. High Close Price ($) 8/1/2006 Brothwell 8/1/2006 NA 2 30.00 32.00 37.23 z 8/10/2006 NA 2 35.00 38.00 36.93 z 1/19/2007 NA 2 34.00 37.00 37.22 dz 2/16/2007 NA 3 31.00 33.00 35.60 z 5/10/2007 NA 3 30.00 33.00 32.84 z 6/11/2007 NA 3 30.00 32.00 31.78 z 8/9/2007 NA 3 32.00 34.00 34.77 c 8/30/2007 32.29 2 32.00 34.00 32.52 z 11/1/2007 34.89 2 33.00 35.00 33.70 „ 11/14/2007 Kalton z 11/14/2007 33.79 2 34.00 35.00 33.85 z 2/15/2008 32.04 2 31.00 33.00 31.46 z 12/18/2008 29.19 2 30.00 32.00 29.24 z 2/19/2009 24.39 2 26.00 27.00 24.39 Source: Wells Fargo Securities, LLC estimates and Reuters data Symbol Key Rating Code Key d Rating Downgrade ‹ Initiation, Resumption, Drop or Suspend 1 Outperform/Buy SR Suspended c Rating Upgrade „ Analyst Change 2 Market Perform/Hold NR Not Rated z Valuation Range Change ˆ Split Adjustment 3 Underperform/Sell NE No Estimate Additional Information Available Upon Request I certify that: 1) All views expressed in this research report accurately reflect my personal views about any and all of the subject securities or issuers discussed; and 2) No part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by me in this research report. WELLS FARGO SECURITIES, LLC IDACORP, Inc. EQUITY RESEARCH DEPARTMENT 3 ƒ Wells Fargo Securities, LLC or its affiliates managed or comanaged a public offering of securities for IDACORP, Inc. within the past 12 months. ƒ Wells Fargo Securities, LLC or its affiliates intends to seek or expects to receive compensation for investment banking services in the next three months from IDACORP, Inc. ƒ Wells Fargo Securities, LLC or its affiliates received compensation for investment banking services from IDACORP, Inc. in the past 12 months. ƒ IDACORP, Inc. currently is, or during the 12-month period preceding the date of distribution of the research report was, a client of Wells Fargo Securities, LLC. Wells Fargo Securities, LLC provided investment banking services to IDACORP, Inc. ƒ IDACORP, Inc. currently is, or during the 12-month period preceding the date of distribution of the research report was, a client of Wells Fargo Securities, LLC. Wells Fargo Securities, LLC provided noninvestment banking securities-related services to IDACORP, Inc. Risks to our valuation include project delays or cancellations and consistently below average hydroelectric conditions. Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions. Wells Fargo Securities, LLC’s research analysts receive compensation that is based upon and impacted by the overall profitability and revenue of the firm, which includes, but is not limited to investment banking revenue. STOCK RATING 1=Outperform: The stock appears attractively valued, and we believe the stock's total return will exceed that of the market over the next 12 months. BUY 2=Market Perform: The stock appears appropriately valued, and we believe the stock's total return will be in line with the market over the next 12 months. 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