COC IDA080708.doc

IDACORP, Inc.
August 8, 2008 IDA – NYSE

Rating:
BUY

Price: (8/8/08) $30.18

Price Targets:
12-18 month: $34
5-year: $41

Industry:
Utilities

James L. Bellessa, Jr., CFA
406.791.7230
[e-mail]

Company Description:
Boise, ID -- IDACORP, Inc. is the holding company for the Idaho Power Company, an electric public utility that serves an approximate 24,000 square mile area in Southern Idaho and Eastern Oregon. Non-regulated subsidiaries include an affordable housing project finance company and an operator of small hydroelectric generation projects.


FY (Dec) 2007A 2008E Y-O-Y Growth 2009E Y-O-Y Growth Revenue ($M) $879.4 $972.9 11% $1,158.0 19% Previous - $976.2 $1,127.5 Price/Revenue ratio 1.5x 1.4x 1.2x EPS Revised $1.86 $2.12 14% $2.27 7% Previous - $2.09 NC Price/EPS ratio 16.2x 14.3x 13.3x EBITDA ($M) $293.0 $339.2 16% $358.7 6% EV/EBITDA ratio 9.5x 8.2x 7.8x
Quarterly Data: EPS EPS Revenue Revenue EBITDA Previous ($M) Previous ($M) 3/31/08A $0.48 - $213.4 - $80.0 6/30/08A $0.39 $0.34 $230.2 $245.4 $0.0 9/30/08E $0.89 $0.86 $289.4 $282.7 $105.7 12/31/08E $0.36 $0.41 $239.9 $234.7 $74.4

Valuation Data Trading Data
Long-term growth rate (E) 5% Shares outstanding (M) 45.2 Total Debt/Cap (6/30/08) 54.1% Market Capitalization ($M) $1,365 Cash per share (6/30/08) $0.20 52-week range $28.09 - $26.72 Book value per share (6/30/08) $27.07 Average daily volume (3 mos.) (K) 407 Dividend (yield) $1.20 (4.0%) Float 97% Return on Equity (T-T-M) 7% Index Membership S&P 400 MidCap
Quarterly Results Exceed Expectations Despite PCA Mechanism Change.
IDACORP reported 2Q'08 EPS of $0.39 versus $0.42 a year earlier and our forecast of $0.34. The primary reason for the earnings decline was a change in the power cost adjustment (PCA) mechanism implemented on June 1, 2008, which pushed EPS approximately $0.12 lower than if the PCA formula had not been changed. (The change should be neutral to earnings over a 12-month period; however, 3Q’08 EPS should be boosted by $0.22, which is incorporated into our earnings forecast.)
Idaho Power produced EPS of $0.39 versus $0.37. Rate relief and more favorable (but still below-normal) hydro conditions offset the negative impact of the PCA mechanism change. IDACORP Financial Services earned $0.02 versus $0.04.
Strong 2H’08 expected. Our 2008 EPS forecast is being increased from $2.09 to $2.12, to reflect the second quarter’s positive variance from forecast and other overall modest changes. If our projection is achieved, 2H’08 EPS would be up in excess of 40%. For 2009, our EPS estimate is being maintained at $2.27, helped by 2008 rate decisions and a pending Idaho general rate case that could go into effect by February 1, 2009
We are maintaining our 12-18 month target price of $34, or 15x our 2009 EPS estimate. At the current price, we are maintaining a BUY rating for total return prospects, including a 4% yield.
Price Chart

Source: Thomson One

EPS Exceeds Forecast
IDACORP reported 2Q'08 EPS of $0.39. This result compares to $0.42 in 2Q'07 and our forecast of $0.34.

The primary reason for the earnings decline was a change in the power cost adjustment (PCA) mechanism that was implemented on June 1, 2008. The change required an equal-weighted monthly expensing of annual base power supply costs. Also, since the effective date of the change was March 1, 2008, Idaho Power had to recognize an additional $6.4 million of PCA expense in its second quarter, which related to the month of March. Hence, 2Q’08 EPS was approximately $0.12 lower than if the PCA formula had not been changed.

Additionally, Bridger Coal Company’s earnings dropped $0.02 per share due to increased coal production costs, and higher corporate interest charges stripped out $0.03 per share in earnings, due to increased rates on variable rate instruments. Cool weather reduced irrigation load, dragging earnings lower by an unspecified amount.

Further explaining the drop in net income were a $0.02 per share earnings decline at IDACORP Financial Services, a $0.03 per share widening in the loss at the holding company, and a higher tax rate of 28.4% compared to 15.7% a year ago.

Helping results by unspecified amounts were a general rate increase (+5.2%), which became effective March 1, 2008, and improved hydroelectric conditions. Improved hydro conditions are reflected in the company’s calculation that inflows into the Brownlee reservoir for April through July 2008 were 70% of normal, compared to 44% of normal for the same period a year earlier. Additionally, the sale of a portion of the Southwest Intertie Project rights-of-way increased EPS by $0.04. Also, benefiting the quarter was customer growth (+1.6%), which added $2.2 million to revenues, but an EPS contribution was not provided.

Improved Hydroelectric Generation Boosts Utility Results
The company’s principal subsidiary, Idaho Power, reported 2Q’08 EPS of $0.39, compared to $0.37 a year ago and our forecast of $0.32.

Electric revenues of $229 million increased $16 million from $213 million. The $27 million increase in general business revenues to $189 million overwhelmed the $11 million drop in off-system sales to $26 million. The 16% increase in general business revenues was due to three factors: 1) the effects of rate changes (+$31.2 million); 2) decreased customer usage (-$6.9 million), which was chiefly due to reduced irrigation load (-$6.4 million); and 3) continued customer growth (+$2.2 million). The 31% decline in off-system sales were associated with lower financial hedge activity.

Higher electric revenues were partially offset by a $12 million, or 7%, climb in electric operating expenses to $189 million. These higher expenses were primarily explained by a $41 million reduction in the PCA credit, as net power supply costs (fuel and purchased power less off-system sales) dropped relative to the amount built into the annual PCA forecast, offset by a $29 million decline in fuel and purchased power expenses. The reduction in these costs was largely a result of improved hydroelectric generating conditions this year. A 37% decrease in megawatt hour (MWh) purchases combined with a 2% decrease in average costs per MWh.

Additionally, utility operations and maintenance (O&M) expenses of $76 million declined $3 million, or 4%, due primarily to lower outage costs.

Downward Swing in IFS Results Reduce Non-Regulatory Earnings
IDACORP Financial Services (IFS) contributed EPS of $0.02 versus $0.04 last year, due to lower tax benefits from aging investments. IFS earnings were primarily generated from $1.5 million of tax credits from affordable housing project investments, with assets of approximately $125 million. The Holding Company had a loss of approximately $0.04 per share in 2Q’08 versus a loss of $0.01 in 2Q’07, largely reflecting a jump in intra-period tax allocations, which should be reversed in 2H’08.
Adjusting 2008 EPS Estimate, and Maintaining 2009 Forecast
Our 2008 EPS forecast is being increased from $2.09 to $2.12, to reflect the second quarter’s positive variance from forecast and other overall modest changes.

First half 2008 EPS was $0.87 versus $0.98 in the same period a year earlier. We are forecasting second half 2008 EPS of $1.25 versus $0.88. The utility’s second half of 2008 should be substantially stronger than the second half of 2007. The aforementioned PCA mechanism adjustment should cause 3Q’08 to be very strong, adding an estimated $0.22 per share. Also helping should be rate relief and better hydro conditions than last year. The company’s guidance that 2008’s total hydroelectric generation will be in the range of 6.5-7.5 million megawatt-hours (MWh) suggests the second half of 2008 should experience flat-to-up generation from the 2.8 million MWh produced in the second half of 2007. Given first half 2008 hydroelectric generation of 3.7 million MWh, the guidance range suggests 2.8-3.8 million MWh for the second half of 2008.

For 2009, our EPS estimate is being maintained at $2.27, helped by 2008’s rate decisions and a pending general rate case decision that could go into effect by February 1, 2009 (see details of this rate case below.)

Maintaining Target Price and BUY
We are maintaining our 12-18 month target price of $34, or 15x our 2009 EPS estimate. A 15x PE multiple is a slight premium to the stock’s median multiple of 14.8x year-forward earnings over the past decade. With over 15% total return prospects, including a current yield of 4%, we find the stock attractive for total return prospects; hence, our stock rating of BUY is being maintained.

James L. Bellessa, Jr., CFA
Vice President and Senior Research Analyst
406.791.7230

Recent Rate Relief Decisions/Filings

Current General Rate Case
Idaho Power filed a general rate case with Idaho state regulators on June 27, 2008, requesting an increase of $67 million (+9.9%) in revenues. This revenue increase was based on a $2.1 billion rate base and a proposed overall return of 8.55%. Using a 49.27% equity ratio, the company asked for an allowed ROE of 11.25%. The company stated that the new increase is needed to recover investments made to respond to a growing demand for electricity in it service area. The new rates are requested to go into effect on February 1, 2009.

In February, 2008 state regulators approved a settlement agreement associated with Idaho Power’s June 2007 rate request. The order approves a general electric rate increase of $32.1 million, or 5.2%, effective March 1, 2008. The agreement did not identify a rate base, equity ratio, or an allowed ROE. Idaho Power had originally filed its rate case requesting an increase of approximately $64 million, or 10.35%, and a return on equity of 11.5%. The then-allowed authorized rate of return of 8.1% remained unchanged.

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Danskin 1 Power Plant Application
Idaho Power received authorization from the IPUC to increase customer rates by 1.39%, translating to $8.9 million in additional revenues in order to recover $64.2 million in construction costs associated with the new natural gas power plant and associated transmission and interconnection upgrades located near Mountain Home, ID. The 170-MW addition to the Danskin Generating Unit is primarily used as a peaking facility and began commercial operation on March 11, 2008. New retail rates associated with the Danskin facility became effective on June 1st.

New Idaho Power Cost Adjustment Mechanism
Idaho Power filed its 2008/2009 Power Cost Adjustment (PCA) in April 2008, requesting recovery of approximately $87 million in power supply and fuel expenses incurred from April 15, 2007 through April 15, 2008. However, subsequent to its PCA filing, state regulators ordered that $16 million of proceeds plus interest from the sale of SO2 credits in 2007 be used to reduce the impact of the PCA filing from $87 million to approximately $71 million. On May 30, 2008, the IPUC ordered a change in Idaho Power’s methodology in calculating the PCA. The new methodology results in an equal amount of power supply costs across all months, compared with the older, more seasonal allocation that would have recognized significantly more power supply costs in the third quarter and less in the first and second quarters. The new PCA mechanism went into effect on June 1st, as well as an approved increase to existing revenues of $73.3 million (+10.7%). While the new PCA mechanism is not expected to have any material impact on annual financial results during the first 12 months of enactment, the 2Q’08 negative impact was $5.6 million, or $0.12 per share, and the 3Q’08 positive impact is expected to be approximately $10 million, or $0.22 per share.

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Oregon Power Cost Adjustment MechanismIn April 2008, state regulators in Oregon approved a stipulation agreement regarding Idaho Power’s August 2007 filing for a purchased cost adjustment mechanism (PCAM) in the state of Oregon. The mechanism differs from the Idaho PCA in that it reestablishes the base net power supply costs annually. In Idaho, the base net power supply costs are set by a general rate case. On May 20, 2008, the OPUC approved Idaho Power’s request, with the new rates effective June 1, 2008.  The approved annual power cost update results in a $4.8 million, or 15.7%, increase in Oregon revenues.

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PPL Purchase Power agreement
Idaho Power Company (IPC) filed a request with the Idaho Public Utilities Commission (IPUC) to approve a 2-year power purchase agreement with PPL EnergyPlus, LLC (a PPL Montana subsidiary). This agreement allows IPC to buy 83 MW per hour of electricity during heavy load times during June through August, at a price of $110 per MWh. Idaho Power maintains that the price is competitive, as it has already purchased heavy-load energy for August 2008 at prices between $110-$120 per MWh. Idaho Power also requested that the expenses associated with the energy purchase and transmission be included in its annual Power Cost Adjustment (PCA), filed each April and becoming effective for customers on June 1st.

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Advanced Metering Infrastructure Case
On August 4, 2008, Idaho Power filed a request with the Idaho Public Utilities Commission for permission to install Advanced Metering Infrastructure (AMI) technology throughout its service territory at a cost of $71 million. The installations would begin in January 2009 and conclude in 2011. Approximately two-thirds of the AMI costs are included in the company’s 2008-2010 capital expenditure guidance. Idaho Power noted that it will not seek a change in customer rates at this time, even though the 2009 revenue requirement from deployment of the AMI is estimated to be $12.2 million. However, rate impacts will be addressed in subsequent proceedings after a deployment plan is approved by the Commission.

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, 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, James L. Bellessa, Jr., CFA, 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. Ratings Buy Neutral Underperform Risk adjusted return potential 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 6/30/08) Buy Hold Sell Corresponding Institutional Research Ratings Buy Neutral Underperform and Distribution 43% 53% 4% Corresponding Private Client Research Ratings Outperform Market Perform Underperform and Distribution 86% 14% 0% Distribution of Combined Ratings 47% 49% 4% Distribution of companies from whom D.A. Davidson & Co. has received compensation for investment banking services in last 12 mos. Institutional Coverage 5% 4% 0% Private Client Coverage 0% 0% 0% Distribution of Combined Investment Banking 4% 4% 0%

D.A. Davidson & Co.’s Institutional Research Rating Scale (maintained since 7/9/02): Buy, Neutral, Underperform

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. 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.

D.A. Davidson & Co.

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Please refer to pages 8-9 of this report for detailed disclosure and certification information.

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