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HomeMy WebLinkAboutCOC IDANote022410.pdf Power and Utilities Sector Company Update February 24, 2010 NEUTRAL Disclosures and Analyst Certifications can be found in Appendix A. NEW YORK, NY MELVILLE, NY PRINCETON, NJ LOS ANGELES, CA MIAMI, FL LINCOLNSHIRE, IL BOCA RATON, FL 520 Madison Avenue y New York, New York 10022 y Telephone: 212-409-2000 800-LAD-THAL Member: NYSE, NYSE Amex, FINRA, all other principal exchanges and SIPC IIDDAACCOORRPP ((IIDDAA)) 4Q09 Results and 2010 Outlook – Maintaining NEUTRAL due to Recent Price Strength Highlights • We are maintaining our NEUTRAL rating on IDA shares. Our revised price target of $35 per share (previously $33 p/s) is based on a 2010/2011/2012 P/E of 12.9x/11.7x/11.4x our EPS of $2.72/$3.00/$3.08 (previously $2.61/$2.72/$2.93). Given recent price strength (+2.8% yesterday) we maintain our current rating. With that said, we view IDA as a compelling small-cap growth story with minimal regulatory risk (rate moratorium through 2011), minimal downside earnings risk (new rate structure allows for a 9.5% return-on year-end equity floor through 2011) and solid rate base growth due to Langley Gulch power plant and longer-term growth supported by IRP-related transmission projects needed for reliability. • We have updated our estimates to reflect the January 2010 IPUC order approving the previously filed Idaho Power rate stipulation. In summary, IDA can earn a minimum ROE of 9.5% (up to 10.5% with sharing above 10.5%) and can utilize a specified amount of ADITC per year through 2011 to enhance its ROE based on year-end equity balance. The ADITC credits along with the $75m fuel base rate increase (pending PCA filing) supports our revised earnings outlook. New rates are effective June 1, 2010 and the updated PCA filing is April 15, 2010. The new rate structure allows IDA the opportunity to utilize Accumulated Deferred Investment Tax Credits (ADITC) to help achieve a minimum ROE of 9.5% on year-end equity balance in Idaho jurisdiction and is limited to $25m each year for 2010 and 2011, thereby, supporting earnings growth through 2011 until the next rate filing in mid-2011 for new rates effective 2012. Year-end 2009 equity balance is $1.27b. The Order also provides sharing with customers the expected 2010 Power Cost Adjustment (PCA) reduction (estimated at $160m in November 2009) expected to be filed on April 15, 2010 for the 2010-2011 PCA year subject to revisions for new base rates June 1, 2010. On January 19, 2010, IDA filed a request with the IPUC to increase base power supply costs by $74.8m prior to implementing the PCA pending PUC approval. • Our 2010 EPS estimate of $2.72 assumes Idaho Power can earn at least 9.5% ROE and is in-line with guidance. Our 2011 EPS estimate of $3.00 assumes Idaho Power can earn at least 9.5% ROE based on $1.54b of year-end equity balance (supported by $84m of deferred energy recovery in 2010, modest 2010/2011 DRIP-related and sales agency agreement equity issuances, retained earnings partially offset by dividends). The company has 2.1m shares remaining on its sales agency agreement. Our 2011 year-end diluted shares outstanding total 48.9m. Our preliminary 2012 EPS estimate of $3.08 assumes IDA will file a rate case in mid-2011 (with forward test year) for new rates effective January 2012 to recover incremental costs over the 2010-2012 period including inclusion of Langley Gulch in rates. Despite current uncertain hydro conditions (Snake River water supply levels at 56% of 30-yr average as of NOAA report on February 5, 2010) which may change the forecasted total $160m, PCA rate reduction and potential adjustments to the $75m pending base rate increase, we believe the 95/5 sharing and more accurate forward-looking hydro supply forecasting methodology helps to mitigate risks to PCA adjustments. • On February 23, 2010, IDA reported 4Q09 and Full Year 2009 financial results. 4Q09 net income totaled $23.5m or $0.49 per share compared to a net income of $7.4m or $0.16 per share in 4Q08 and our estimate of $0.30 per share. Full Year 2009 net income totaled $124.4m or $2.64 per share compared with $98.4m or $2.17 per share in 2008. IDA also announced 2010 earnings guidance range of $2.65- $2.80 per share. Key drivers of 2010 guidance: O&M expense of approximately $295m-$305m, Capital expenditures of $355m-$365m, hydroelectric generation of 6.5-8.5m MWh, Non-regulated earnings of $0-$3m, the use of investment tax credits to achieve 9.5% ROE floor and an effective income tax rate of 6%-10%. COMPANY & MARKET DATA Price $33.61 Price Target, Excl Dividends (YE10)$35.00 Prior Target $33.00 52 - Week Range $20.91-$33.97 Mkt. Capitalization (mill)$1,602 Enterprise Value (mill)$2,483 FD Shares Outstanding (mill)48 Avg. Daily Trading Vol. (000)307 Book Value per Share (3Q09A)$28.97 Dividend (FY10E) / Yield $1.20 3.6% FY2008A FY2009A FY2010E Revenue (mill) $992 $1,037 $1,086 1Q EPS $0.48 $0.40 2Q EPS $0.35 $0.58 3Q EPS $1.14 $1.16 4Q EPS $0.16 $0.49 EPS $2.17 $2.64 $2.72 Prior EPS $2.61 Consensus EPS $2.63 P/E 15.5x 12.7x 12.4x EV/EBITDA 8.0x 9.0x 8.3x P/FCF -25.0x -25.0x -94.9x ESTIMATES Volume in Millions 0.0 1.0 2.0 3.0 $20 $25 $30 $35 $40 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 50-day average 200-day average Chart data: Bloomberg Brian J. Russo, CFA 646-432-6312 brusso@ladenburg.com Brian Russo 646.432.6312 IDACORP (IDA) Ladenburg Thalmann & Co. Inc. Page - 2 - APPENDIX A: IMPORTANT RESEARCH DISCLOSURES ANALYST CERTIFICATION I, Brian Russo, attest that the views expressed in this research report accurately reflect my personal views about the subject security and issuer. Furthermore, no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation or views expressed in this research report. The research analyst(s) primarily responsible for the preparation of this research report have received compensation based upon various factors, including the firm’s total revenues, a portion of which is generated by investment banking activities. COMPANY BACKGROUND Headquartered in Boise, Idaho, IDACORP, Inc., (IDA) is a holding company formed in 1998 that is primarily engaged in the generation, transmission, distribution, sale and purchase of energy. IDA serves over 466,000 retail customers across its 24,000sq mile service territory in both Idaho and Oregon, and owns approximately 3,267MW of generating capacity. IDA’s principal operating subsidiary is Idaho Power Company (IPC). The company’s unregulated utilities include IDACORP Financial (IFS) that invests in affordable housing and real estate and Ida-West Energy Company (Ida-West) that operates small hydroelectric generation projects. VALUATION METHODOLOGY We value equities utilizing a multi-faceted approach which includes; sum-of-the-parts, net asset value, discounted cash flow, leading P/E, EV/EBITDA. RISKS On top of normal economic and market risk factors that impact most all equities, Idacorp (IDA) is uniquely at risk to: Because of IPC’s predominantly hydroelectric generating base and heavy reliance on hydroelectric generation, which can be adversely affected by weather, reduced hydroelectric generation can reduce revenues and increase costs. Continuing declines in stream flows and over-appropriation of water in Idaho may reduce hydroelectric generation and revenues and increase costs. Load growth in IPC’s service territory due to customer growth and demand for energy exposes it to greater market and operational risk as increased reliance on purchased power to meet load requirements could increase costs and reduce earnings and cash flows. IPC’s reliance on coal and natural gas to fuel its generating facilities exposes it to risk of increased market prices, which could increase costs and reduced earnings. Changes in temperature and precipitation can reduce power sales and revenues. Climate change could affect customer demand and hydroelectric generation and lead to restrictions on generation resources. If Idaho Public Utility Commission (IPUC), the Oregon Public Utility Commission (OPUC) or the Federal Energy Regulatory Commission (FERC) grant less rate recovery in rate case filings than IPC needs to cover the costs of providing services, financial results could be adversely impacted and economic expansion may be limited. Conditions that may be imposed in connection with hydroelectric license renewals may require large capital expenditures and reduce earnings and cash flows. The cost of complying with environmental regulations related to air quality, water quality, natural resources and health and safety can increase capital expenditures and operating costs and reduce earnings and cash flows. IDACORP and its subsidiaries are subject to costs and other effects of legal and regulatory proceedings, settlements, investigations and claims, including those that have arisen out of the western energy situation. IPC’s business is subject to substantial governmental regulation and may be adversely affected by increased costs resulting from, or liability under, existing or future regulations or requirements. Increased capital expenditures can significantly affect liquidity. As a holding company, IDACORP does not have its own operating income and must rely on the upstream cash flows from its subsidiaries to pay dividends and make debt payments. A downgrade in IDA’s credit ratings could negatively affect the company’s ability to access capital and increase their cost of borrowing. Adverse results of income tax audits could reduce earnings and cash flows. Employee workforce factors, including the loss or retirement of key personnel, availability of qualified personnel and an aging workforce, could increase costs and reduce earnings. Brian Russo 646.432.6312 IDACORP (IDA) STOCK RATING DEFINITIONS Buy: The stock’s return is expected to exceed 15% over the next twelve months. Neutral: The stock’s return is expected to be plus or minus 15% over the next twelve months. Sell: The stock’s return is expected to be negative 15% or more over the next twelve months. Investment Ratings are determined by the ranges described above at the time of initiation of coverage, a change in risk, or a change in target price. At other times, the expected returns may fall outside of these ranges because of price movement and/or volatility. Such interim deviations from specified ranges will be permitted but will become subject to review. RATINGS DISPERSION AND BANKING RELATIONSHIPS (as of 02/01/10) Buy 67% (18% are banking clients) Neutral 32% (5% are banking clients) Sell 1% (0% are banking clients) INVESTMENT RATING AND PRICE TARGET HISTORY Ladenburg Thalmann & Co. Inc. Page - 3 - Brian Russo 646.432.6312 IDACORP (IDA) Ladenburg Thalmann & Co. Inc. Page - 4 - COMPANY SPECIFIC DISCLOSURES: Ladenburg Thalmann & Co. Inc. does not make a market in subject company. Ladenburg Thalmann & Co. Inc. has neither had an investment banking relationship with, nor received investment banking fees from the subject company in the past 12 months. 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