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HomeMy WebLinkAboutCOC IDANote032409.pdfDisclosures 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)) Company Update – Reiterating BUY Rating Highlights • We are reiterating our BUY on IDA shares. Our price target of $28 per share is based on a 2009/2010 P/E of 10.9x/10.4x EPS of $2.56/$2.69. • On March 19, 2009, the IPUC granted IDA’s reconsideration petition of the previous rate case (final order on January 30, 2009) and determined that, following various corrections (primarily related to payroll expense calculations), the revenue deficiency for IDA is now $27.017m versus the previously calculated revenue deficiency of $20.878m. • On March 13, 2009 IDA filed a request for increases in residential rates for energy efficiency programs, installation of advanced metering infrastructure (AMI) and recovery of costs under its fixed cost adjustment mechanism (FCA). • On March 9, 2009, IDA announced the selection of a 330 MW $427m CCGT generation facility called the Langley Gulch Power Plant following its request for proposals issued April 2008 for a new baseload resource. The plant is expected to be in service by December 2012 pending PUC approval. We view the self-build proposal favorably as it is consistent with the company’s integrated resource plan and a meaningful source of future regulated earnings power. • As of the March 19, 2009 NOAA forecast, Brownlee is forecasted to have water supply 65% of its 30-year average and Hells Canyon, IDA’s largest hydroelectric generation facility, is forecasted to be 64% of its average. Water supply forecasts are for the April-September 2009 period. It is important to note that although these estimates are below average, IDA was authorized by the Idaho Public Utility Commission (IPUC) in January 2009 to change its sharing mechanism to 95/5 (previously 90/10 sharing with customers), as well as, the implementation of a forward-looking model forecasting fuel costs. Both measures should help mitigate earnings volatility to changes in hydro conditions and corresponding power costs going forward. • We have adjusted our earnings outlook to reflect the March order granting IDA incremental rate relief. We now estimate 2009/2010 EPS of $2.56/$2.69 (previously $2.50/$2.63). COMPANY & MARKET DATA Price $24.21 Price Target, Excl Dividends (YE09) $28.00 52 - Week Range $20.91-$33.89 Mkt. Capitalization (mill) $1,103 Enterprise Value (mill) $2,501 FD Shares Outstanding (mill) 46 Avg. Daily Trading Vol. (000) 549 Book Value per Share (4Q08A) $28.43 Dividend (FY09E) / Yield $1.20 5.0% FY2007A FY2008A FY2009E Revenue (mill) $879 $992 $1,059 1Q EPS $0.56 $0.48 2Q EPS $0.42 $0.35 3Q EPS $0.62 $1.14 4Q EPS $0.23 $0.26 EPS $1.86 $2.22 $2.56 Prior EPS $2.50 Consensus EPS $2.22 $2.27 P/E 13.0x 10.9x 9.5x EV/EBITDA 9.8x 8.2x 7.7x P/FCF -49.9x -49.9x -45.7x 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 50-day average 200-day average Chart data: Bloomberg Brian J. Russo, CFA 646-432-6312 brusso@ladenburg.com James Berry 212-409-2685 jberry@ladenburg.com Power and Utilities Sector Company Update March 24, 2009 BUY IDACORP (IDA) Ladenburg Thalmann & Co. Inc. Page - 2 - Investment Conclusion Reiterating BUY Rating We are reiterating our BUY rating on IDA shares. Our price target of $28 per share is based on a 2009/2010 P/E of 10.9x/10.4x EPS of $2.56/$2.69. We recognize the company’s rate base opportunities both in the form of new generation build and transmission opportunities needed to support regional growth. IDA’s net long capacity position is declining and the company is developing plans for additional 330 MW of baseload capacity by 2012 ($427m). New transmission lines ($1.4-$1.8b) and upgrades to existing infrastructure are also needed in the future to eliminate bottlenecks, congestion on the system and support renewables. We view these necessary infrastructure projects as meaningful rate base investment opportunities and a source of long-term incremental regulated earnings power. Petition for Reconsideration Granted and Upward Adjustment to Revenue Deficiency On March 19, 2009, the IPUC granted IDA’s reconsideration petition of the previous rate case (final order on January 30, 2009) and determined that, following various corrections (primarily related to payroll expense calculations), the revenue deficiency for IDA is now $27.017m versus the previously calculated revenue deficiency of $20.878m. Rate Request Recovery of Efficiency-Related investments On March 13, 2009 IDA filed a request for increases in residential rates for energy efficiency programs, installation of advanced metering infrastructure (AMI) and recovery of costs under its fixed cost adjustment mechanism (FCA). The company is requesting a $5.2m rate increase under its FCA pilot program for the net under-recovery of fixed costs during 2008 due to increased energy efficiency, effective June 1, 2009 to May 31, 2010. The FCA is a decoupling rate mechanism to allow for adequately recovery of costs while programs designed to promote less usage of electricity are in place. The company is requesting an increase to its Energy Efficiency Rider (the primary mechanism for conservation, efficiency and demand response programs) of approximately $15.6m effective June 1, 2009. The company is also requesting an $11.2m increase in rates to recover its AMI investments during a June 1, 2009 through May 31, 2010 test year. Baseload Resource Selection On March 9, 2009, IDA announced the selection of the CCGT generation facility, Langley Gulch Power Plant following its request for proposals issued April 2008 for a new baseload resource. The proposed new 330 MW nameplate capacity Langley Gulch Power Plant estimated cost is $427m (including expected transmission costs to connect to the grid) and is expected to be in service by December 2012. The company filed for a Certificate of Public Convenience and Necessity (CPCN) with the IPUC authorizing construction of the plant and inclusion of the project in the company’s rate base. Amounts incurred above the committed amount of $427m would be subject to a “soft cap” and included in rates only upon IPUC IDACORP (IDA) Ladenburg Thalmann & Co. Inc. Page - 3 - review/approval. IDA also requested that the IPUC authorize the use of one of two alternative ratemaking treatments to more efficiently finance the project: allow construction work in progress (CWIP) or specific ratemaking treatment for the project, allow for treatment that is envisioned in the construction cost recovery legislation currently being discussed in the Idaho Legislature in Senate Bill 1123 (SB1123). A pre-hearing conference is scheduled for April 14, 2009 and other development initiatives will commence over the next several months. We view the self-build proposal favorably and a source of regulated earnings growth. The proposal is also consistent with the company’s June 2008 integrated resource plan. IDA will likely finance the project with external debt and equity to maintain its 50/50 target capital structure and its request that the IPUC determine one of the two previously mentioned alternative ratemaking treatments would allow the company to best finance the project. Project expenditures is excluded from the company’s previously conveyed capital expenditures forecast. Pending Idaho Legislation to Reduce Regulatory Uncertainty of Large Infrastructure Projects Senate Bill 1123 (SB1123) is designed to allow a utility to file an application with the IPUC for an order specifying in advance the ratemaking treatments (ROE, depreciation life, etc) that would apply when the costs of the proposed project are included in a utility’s revenue requirement. The goal is to provide more certainty for adequate cost recovery and attractive financing for large-scale projects during a time in which new infrastructure investment is needed to alleviate constraints on the grid, meet supply needs, and accommodate new large load requests as various companies consider locating in Idaho. Revised Cash and Earnings Expectations We have adjusted our earnings outlook to reflect the March order granting IDA incremental rate relief following the company’s request for reconsideration. Our 2009 EPS is $2.56 per share (previously $2.50 p/s). Our assumptions include: lower projected O&M expense, lower depreciation expense, rate relief, and minimal earnings variability from hydro conditions, partially offset by lower non-regulated earnings, higher tax rate, and load growth of 1.2%. Our 2010 EPS is $2.69 per share (previously $2.63 p/s). Our assumptions include: continued cost controls, rate relief, and load growth of 2%. Current Hydro Conditions IDA’s hydroelectric facilities are primarily located on the Snake River along the Idaho/Oregon border. IDA begins monitoring hydro conditions in the northwest in November particularly snowpack and forecasted stream flows. The majority of IDA’s water supply is held at the Brownlee Reservoir. Assuming “normal” hydro conditions, IDA produces approximately 8.5m MWh of hydroelectric generation per year. However, the Company is currently forecasting 2009 hydro generation of 6.5–8.5m MWh. As of the March 19, 2009 NOAA forecast, Brownlee is forecasted to have water supply 65% of its 30-year average and Hells Canyon, IDA’s largest hydroelectric generation facility, is forecasted to be 64% of its average. Water supply forecasts are for the April-September 2009 period. It is important to note that although these estimates are below average conditions have improved over the past several weeks. Also, IDA was authorized by the Idaho Public Utility IDACORP (IDA) Ladenburg Thalmann & Co. Inc. Page - 4 - Commission (IPUC) in January 2009 to change its sharing mechanism to 95/5 (previously 90/10 sharing with customers). This will help mitigate earnings volatility to changes in power costs going forward. Primary Risks The primary risks of an investment in IDA shares include (but are not limited to); pending regulatory issues, under-recovery of volatile supply costs including power, fuel and natural gas, regulatory allowance of the recovery of power costs, operating costs and capital investments, uncertain stream flow and weather conditions, legislation/regulation changes, generation plant availability (unplanned outages), access to capital markets, litigation, pension requirements, changes in wholesale energy prices, execution risk, hydro relicensing, changes in regional economy, increased employee related costs. See Appendix A for additional risk factors. IDACORP (IDA) Ladenburg Thalmann & Co. Inc. Page - 5 - 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. IDACORP (IDA) Ladenburg Thalmann & Co. Inc. Page - 6 - 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 03/01/09) Buy 75% (8% are banking clients) Neutral 24% (0% are banking clients) Sell 1% (100% are banking clients) INVESTMENT RATING AND PRICE TARGET HISTORY IDACORP (IDA) Ladenburg Thalmann & Co. Inc. Page - 7 - COMPANY SPECIFIC DISCLOSURES: Ladenburg Thalmann & Co. Inc. does not make a market in subject company. Ladenburg Thalmann & Co. 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