Loading...
HomeMy WebLinkAboutCOC IDANote061710.pdfPower and Utilities Sector Company Update June 17, 2010 NEUTRAL IIDDAACCOORRPP ((IIDDAA)) Management and IPUC Meeting Highlights – Maintaining NEUTRAL Highlights • We are maintaining our NEUTRAL rating on IDA shares. Our revised price target of $36 (previously $35 p/s) is based on a 2010/2011/2012 P/E of 12.9x/12.0x/11.7x our EPS estimates of $2.79/$3.00/$3.08. • We recently met with IDA management. Topics of discussion included: recent rate orders and 2009 settlement agreement, pending tax study, regional economy (in-migration activity picking-up, technology sector expanding, 9.1% Idaho unemployment, +1.5% service area population growth, low electricity rates due to low-cost hydro supply attracts business, potential new photovoltaic facility customer load), Langley Gulch power plant ($427m, 300 MW gas plant, COD mid-2012), upcoming mid-2011 general rate filing (new rates effective early 2012), B-H transmission project ($600m, IDA share 30-50%, COD 2015, Pacificorp MOU, high probability of success due to reliability needs identified in the 2009 IRP, in our opinion), Gateway West transmission project (IDA share $300-$500m, COD uncertain and dependant on demand), Hells Canyon relicensing costs ($120m to-date capitalized, CWIP), 2010 external capital needs minimal and post 2010 needs currently being reviewed (will depend on tax study outcome), dividend payout likely to remain below industry average for sometime while managing large capital budget, hydro supplies improved recently due to heavy precipitation June-to-date but still below normal (Hells Canyon water supplies at 63% in early-June vs 53% a month ago, run-off June-to-date of 135% of average). • Recent IPUC orders and rate settlement highlight constructive regulated environment and adds earnings visibility through 2011 by allowing IDA to earn at least a 9.5% ROE (up to 10.5% with sharing above 10.5%) based on year-end shareholder with the ability to utilize up to $25m of ADITC per year to support the ROE floor ($4.5m utilized in 1Q10). Importantly, the settlement added $63.7m to base net power supply costs, thereby, lessening the impact of PCA changes going forward and added $25m to base revenues, while also refunding to customers $58.2m. We expect IDA to begin evaluating its upcoming mid-2011 general rate case filing soon. We expect IDA to explore ways to minimize regulatory lag associated with mid-2012 Langley Gulch start date (forward test year filing, used and useful status) and also review ways to provide IDA with an adequate level of return while managing customer rate increases. • IDA is currently conducting a tax study and evaluating a tax accounting method (see 1Q10 conference call discussion, 10Q/10K summaries) that would allow a current income deduction for repair-related expenditures on its utility assets that are currently capitalized for book and tax purposes (deduction for tax years 1999 and forward). IDA regulatory accounting treatment requires immediate income recognition for tax differences. While we (and management) cannot predict the outcome of the study, we suspect that IDA is likely to record cash/earnings gains later this year and adoption may reduce IDA’s need to amortize additional ADITC in 2010 (possibly reversing previous quarters including $4.5m in 1Q10), as well as, boost shareholder equity balance. With both earnings and cash benefits we expect IDA to maintain financial flexibility (rely more on lower- cost debt comparable to growth in shareholder equity), and potentially minimize external equity needs to fund its capital budget and specifically the $427m Langley Gulch plant ($72m spent to- date). We expect more discussion on the 2Q10 conference call in early August and actual financial impact in 3Q10 is likely. • We recently met with the IPUC. Our constructive view of the IPUC was reaffirmed following our meeting. While there is a general rate moratorium in effect until January 1, 2012, the IPUC stressed that the moratorium does not apply to other adjustment mechanisms (PCA, FCA, pension funding, AMI, efficiency riders). The IPUC appeared pleased with recent PCA adjustments. The Staff and utility are encouraged to be “creative” in balancing utility returns and customer rates. While IDA’s request to make the decoupling pilot permanent was denied, the IPUC views decoupling favorably and extended the pilot for 2 more years. IPUC acknowledges that customers are likely to witness a rate increase in 2012 and noted pre-approved Langley Gulch plant and Hells Canyon relicensing costs as drivers for higher rates over the long-term. Pre-approved rate-making legislation utilized for Langley Gulch would also be considered in any upcoming transmission project filings (per IRP) with each project reviewed based on its economics. • Our 2010/2011 EPS estimate of $2.79/$3.00 (previously $2.72/$3.00) assumes Idaho Power can earn at least 9.5% ROE on estimated year-end equity balance of $1.4b/$1.5b plus non-utility earnings contributions. 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. We see potential upside to our cash/earnings forecasts following a tax study to be completed later this year (discussed below). We also see post 2012 growth as the company moves the high-probability Boardman-Hemmingway (B-H) transmission line through development and Hells Canyon relicensing costs are added to base rates. COMPANY & MARKET DATA Price $34.49 Price Target, Excl Dividends (YE10)$36.00 Prior Target $35.00 52 - Week Range $24.65-$36.93 Mkt. Capitalization (mill)$1,643 Enterprise Value (mill)$2,483 FD Shares Outstanding (mill)48 Avg. Daily Trading Vol. (000)218 Book Value per Share (1Q10A)$29.17 Dividend (FY10E) / Yield $1.20 3.5% FY2008A FY2009A FY2010E Revenue (mill)$992 $1,037 $1,086 1Q EPS $0.48 $0.40 $0.34A 2Q EPS $0.35 $0.58 3Q EPS $1.14 $1.16 4Q EPS $0.16 $0.49 EPS $2.17 $2.64 $2.79 Prior EPS $2.72 Consensus EPS $2.71 P/E 15.9x 13.1x 12.4x EV/EBITDA 8.0x 9.0x 8.3x P/FCF -25.6x -25.6x -97.4x 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 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 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) Ladenburg Thalmann & Co. Inc. Page - 3 - 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 05/31/10) Buy 71% (32% are banking clients) Neutral 28% (5% are banking clients) Sell 1% (0% are banking clients) INVESTMENT RATING AND PRICE TARGET HISTORY 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. Neither the Analyst, nor members of the Analyst’s household own any securities issued by the subject Company. GENERAL DISCLAIMERS Information and opinions presented in this report have been obtained or derived from sources believed by Ladenburg Thalmann & Co. Inc. to be reliable. The opinions, estimates and projections contained in this report are those of Ladenburg Thalmann as of the date of this report and are subject to change without notice. Ladenburg Thalmann & Co. Inc. accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to Ladenburg Thalmann & Co. Inc. This report is not to be relied upon in substitution for the exercise of independent judgment. Ladenburg Thalmann & Co. Inc. may have issued, and may in the future issue, other reports that are inconsistent with, and reach different conclusions from, the information presented in this report. Those reports reflect the different assumptions, views and analytical methods of the analysts who prepared them and Ladenburg Thalmann & Co. Inc. is under no obligation to ensure that such other reports are brought to the attention of any recipient of this report. Some companies that Ladenburg Thalmann & Co. Inc. follows are emerging growth companies whose securities typically involve a higher degree of risk and more volatility than the securities of more established companies. The securities discussed in Ladenburg Thalmann & Co. Inc. research reports may not be suitable for some investors. Investors must make their own determination as to the appropriateness of an investment in any securities referred to herein, based on their specific investment objectives, financial status and risk tolerance. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. The price, value of and income from any of the securities mentioned in this report can fall as well as rise. The value of securities is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities. Investors in securities such as ADRs, the values of which are influenced by currency volatility, effectively assume this risk. Securities recommended, offered or sold by Ladenburg Thalmann & Co. Inc. (1) are not insured by the Federal Deposit Insurance Company; (2) are not deposits or other obligations of any insured depository institution; and (3) are subject to investment risks, including the possible loss of some or all of principal invested. Indeed, in the case of some investments, the potential losses may exceed the amount of initial investment and, in such circumstances; you may be required to pay more money to support these losses. The information and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy any securities mentioned herein. This publication is confidential for the information of the addressee only and may not be reproduced in whole or in part, copies circulated, or disclosed to another party, without the prior written consent of Ladenburg Thalmann & Co. Inc. Member: NYSE, NYSE Amex, FINRA, all other principal exchanges and SIPC Additional Information Available Upon Request © 2010 - Ladenburg Thalmann & Co. Inc. All Rights Reserved.