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HomeMy WebLinkAboutCOC IDAReport020509.pdfDisclosures and Analyst Certifications can be found in Appendix A. NEW YORK, NY, HOUSTON, TX MELVILLE, NY PRINCETON, NJ LOS ANGELES, CA LUTZ, FL 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 New York Stock Exchange, American Stock Exchange, FINRA, and SIPC IIDDAACCOORRPP ((IIDDAA)) Idaho-Based Regulated Electric Utility - Initiating Coverage of IDA with a NEUTRAL Rating Highlights • We initiate coverage of IDA with a NEUTRAL rating. Our price target of $28 per share is based on a 2009/2010 target P/E ratio of 12.2x/13.0x our 2009/2010 EPS of $2.30/$2.15. This compares to a regional small-cap peer group average of 11.8x/10.7x. IDA also trades at a 4.2% dividend yield. • It is unclear, at this time, whether IDA will file for another rate increase in 2009 for rates effective early 2010. Absent a rate increase in 2010, we expect regulatory lag to negatively impact 2010 earnings power which is currently reflected in our forecasts. In addition, inability to control costs, as well as, potentially below-normal hydro conditions could further pressure the company’s 2009 earnings profile, in our opinion. • We view IDA as a fundamentally sound small-cap, vertically- integrated utility, however, at current levels we view IDA as fairly- valued and thus we rate IDA NEUTRAL. With that said, we acknowledge the company’s rate base opportunities both in the form of new generation build and transmission opportunities needed to support regional growth which could yield considerable longer-term earnings power. • IDA owns approximately 3,266 MW of generating capacity, of which over 1,700 MW is hydroelectric located along the Snake River in Idaho. This heavy reliance on hydro capacity can lead to significant earnings variability depending on hydro conditions in a given year. As of January 23, 2009 the NOAA forecasts April-September water supply at the Brownlee to be 64% of its 30-year average. • 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. Idaho Power Company (IPC) serves over 466,000 retail customers across its 24,000 square mile service territory in both Idaho and Oregon, and owns approximately 3,266 MW of generating capacity. Other unregulated subsidiaries include IDACORP Financial (IFS) which invests in affordable housing and real estate and Ida-West Energy Company (Ida-West) which operates small hydroelectric generation projects. COMPANY & MARKET DATA Price $28.51 Price Target, Excl Dividends (YE09) $28.00 52 - Week Range $21.88-$34.81 Mkt. Capitalization (mill) $1,299 Enterprise Value (mill) $2,501 FD Shares Outstanding (mill) 46 Avg. Daily Trading Vol. (000) 549 Book Value per Share (3Q08A) $27.89 Dividend (FY09E) / Yield $1.20 4.2% FY2007A FY2008E FY2009E Revenue (mill) $879 $992 $1,068 1Q EPS $0.56 $0.48 2Q EPS $0.42 $0.39 3Q EPS $0.62 $1.14 4Q EPS $0.23 EPS $1.86 $2.25 $2.30 Prior EPS Consensus EPS $2.22 $2.27 P/E 15.3x 12.7x 12.4x EV/EBITDA 9.8x 8.2x 7.7x P/FCF -58.7x -58.7x -53.8x 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 Brian J. Russo, CFA 646-432-6312 brusso@ladenburg.com James Berry 212-409-2685 jberry@ladenburg.com Power & Utilities Sector Initiating Coverage February 5, 2009 NEUTRAL IDACORP (IDA) Ladenburg Thalmann & Co. Inc. PAGE - 2 - Investment Conclusion Initiating Coverage of IDA with a NEUTRAL We initiate coverage of IDA with a NEUTRAL rating. Our price target of $28 per share is based on a 2009/2010 target P/E ratio of 12.2x/13.0x our 2009/2010 EPS of $2.30/$2.15. This compares to a regional small-cap peer group average of 11.8x/10.7x (See Valuation Section and Appendix A for more detail). IDA also trades at a 4.2% dividend yield. Fairly Valued in Near-term but Potential Long-term Growth Drivers Exist We view IDA as a fundamentally sound small cap vertically integrated utility, however, at current levels we believe IDA is fairly-valued based on near-term fundamentals and thus we rate IDA NEUTRAL. With that said, we acknowledge the company’s rate base opportunities both in the form of new generation build and transmission opportunities needed to support regional growth and we apply a modest premium to peer averages for growth opportunities. IDA’s net long capacity position is declining and the company is developing plans for additional baseload capacity by 2012 (300 MW). New transmission lines and upgrades to existing infrastructure are also needed in the future to eliminate bottlenecks, congestion on the system and support renewables. We highlight the following investment characteristics: constructive regulatory framework (despite recent IPUC rate order), state legislative proposals (and federal stimulus) to promote infrastructure investment and timely recovery of costs to reduce regulatory risk and improve access to capital, attractive transmission ($1.4-$1.8b) and generation ($300m) investment opportunities, low- cost “green” footprint, regional economic growth. Upcoming Events and Initiatives Upcoming events/initiatives to monitor include: Idaho legislative session (January –March 2009), 2008 financial results and 2009 financial guidance (February 19, 2009), deadline to petition IPUC rate order (February 20, 2009), NOAA northwest water supply update (February 6, 2009), self-build decision (1Q09). Cash and Earnings Expectations We forecast 2008 EBITDA and earnings per share of $304.7m and $2.25 per share, respectively. Drivers include: hydro generation of approximately 7m MWh, consolidated tax rate of 22% and non-regulated earnings of $3.5m. Our estimates exclude a one-time charge of $7.9m related to a refund to customers ($13.3m total and $5.4m already reserved)) per the January 2009 FERC order for IDA to reduce transmissions service rates to FERC jurisdictional customers. We forecast 2009 EBITDA and earnings per share of $322.7m and $2.30 per share, respectively. Drivers include: new IPC rates effective February 1, 2009, load growth of 1.5% (and slowing industrial sales), normal hydro generation of approximately 8.5m MWh (although early indications are for less than average hydro conditions), consolidated tax rate of 26%, and lower transmission service rates ($3m gross). As a result of the recent IPUC final rate order, we expect IPC to under-earn its allowed ROE of 10.5%. IDACORP (IDA) Ladenburg Thalmann & Co. Inc. PAGE - 3 - We forecast 2010 EBITDA and earnings per share of $323.7m and $2.15 per share, respectively. Drivers include: continued regulatory lag on absence of rate relief assumption (at this time), normal hydro generation of approximately 8.2m MWh, and consolidated tax rate of 26%. It is important to note that IDA’s consolidated earnings profile includes several unique earnings drivers including tax credits related to its affordable housing investments supporting a consolidated tax rate of 22-26%, its 33% interest in Bridger Coal and Ida-West equity investments. Over time, we expect IDA Financial contributions to decline, IDA-West and Bridger Coal contributions to remain steady. Longer-term earnings power is likely to be derived from traditional returns on incremental utility rate base. Financial Guidance While the company does not convey specific earnings guidance it does provide various 2008 operating/financial assumptions including: maintenance expense of $285-$295m, Idaho Power capex of $235-$250m, hydro generation of 6.7-7.2m MWh, non-regulated subsidiary earnings of $2.3-$4.6m, Idaho Power effective tax rate of 32-36%, and consolidated tax rate of 22-26%. We expect IDA to convey 2009 operating/financial assumptions during its year-end 2008 financial results to be released February 19, 2009. Credit Profile and Liquidity We forecast 2008 debt/capital of 50.9%, 2008 debt/EBITDA of 4.2x and 2008 interest coverage of 4.2x. IDA liquidity is solid with $363m of availability under existing credit facilities as of September 2008. Refinancing is manageable with $75m of debt maturing in November 2009. Under the company’s continuous equity program we expect IDA to issue approximately 3m shares over the next 2 years. Also supporting near-term operating cash flow is the recovery of previously deferred power supply costs. IDA remains confident that it will not need to issue any equity outside of its continuous equity program to finance its base capital expenditures but would need external equity financing for large scale rate base projects like proposed transmission and generation projects. The company maintains a target equity ratio of 50%. Hydro Profile and Current Conditions IDA owns approximately 3,266 MW of generating capacity, of which over 1,700 MW is hydroelectric located along the Snake River in Idaho. This heavy reliance on hydro capacity can lead to significant earnings variability depending hydro conditions in a given year. As of January 23, 2009, Brownlee is forecasted to have water supply 64% of its 30-year average and Hells Canyon, IDA’s largest hydroelectric generation facility, is forecasted to be 63% of its average. We note that November was a dry month offset by favorable December precipitation and snowpack. Assuming “normal” hydro conditions, IDA produces approximately 8.5m MWh of hydroelectric generation per year. However, considering the below average water supply levels currently, we believe that the company’s initial hydro forecast may fall short of the targeted 8.5m MWh. IDACORP (IDA) Ladenburg Thalmann & Co. Inc. PAGE - 4 - Regional Economy Idaho’s economy is primarily driven by the technology sector, agriculture and businesses seeking relocation into low energy cost environments. There are also many growth opportunities in the state for new silicon plants that the company projects will eventually require from 40-80 MW of additional capacity from the system. Historically, Idaho has experienced load growth of approximately 2%. IDA has recently seen this growth decrease slightly (~1.5%) primarily due to fewer new customer connects. A large C&I customer, Micron Technology (MU-$3.90-NR), recently laid-off approximately 15% of its workforce which should pressure industrial sales growth in 2009. Regulatory Update and Statistics On January 30, 2009, the Idaho Public Utilities Commission (IPUC) granted IDA a $20.9m (+3.1%) increase based on a 2008 test year including rate base of $2.094b, equity ratio of 49.27% and ROE OF 10.5%. This compares to IDA’s requested $66.6m (9.9%) rate increase based on a 2008 forward test year including rate base of $2.093b, equity ratio of 49.27% and ROE of 11.25%. In addition, the IPUC permitted approximately $6.8m of 2009 Hells Canyon relicensing costs. The Load Growth Adjustment Rate (LGAR) was set at $26.52 per MWh. While the recovery of hydro relicensing costs is viewed favorably, we generally view the final order as unfavorable mainly to the disallowance of various O&M- related costs. As a result, we expect the company to under-earn its allowed ROE. The company is in the process of reviewing the IPUC order. IDA and other interested parties have until February 20, 2009 to petition the IPUC for reconsideration. The IPUC also recently approved a stipulation to change the Power Cost Adjustment (PCA) mechanism to 95/5 from 90/10 sharing thereby mitigating some of the earnings variability relative to hydro conditions. It is unclear, at this time, whether IDA will file for another rate increase in 2009 for rates effective early 2010. Absent a rate increase in 2010, we expect regulatory lag to negatively impact 2010 earnings power which is currently reflected in our forecasts. Capital Expenditures Profile and Integrated Resource Plan (IRP) IPC filed an updated IRP with both the IPUC and OPUC in June 2008, which notified bidders that the RFP quantity had been adjusted to approximately 300 MW. All proposals were submitted on October 17, 2008, and will be evaluated and compared to a self-build option. The Company expects negotiations to begin in late January/early February 2009. IPC plans to file a new IRP in June 2009. IDA has a total of approximately $1.4-1.8b in transmission projects investments including the joint venture with PacifiCorp (private) Gateway West Project ($800- $1.2b IDA interest) and Boardman-to-Hemmingway ($600m) project. Importantly, the Idaho legislature appears to be supportive of new transmission lines in the state, and the $825b American Recovery and Reinvestment Act of 2009 (introduced by House Democrats on January 15, 2009) includes $11b for modernization of the nation’s electric grid and an additional $8b in loans for transmission projects to wheel renewable energy to load centers. IDACORP (IDA) Ladenburg Thalmann & Co. Inc. PAGE - 5 - We forecast total 2008-2010 capital expenditures of $727.5m. Our forecasts are likely to change following release of the company’s 10-K in February 2009 which will include updated capital expenditures forecasts. Ladenburg Thalmann’s Northwest Regional Coverage Our new IDA coverage is complimentary to our northwest regional utility coverage that have varying degrees of hydroelectric exposure and/or shared ownership of generation assets and transmission project partnerships including: Avista Corp (AVA-$19.05-BUY), Northwestern Corp (NWE-$24.94-BUY), Portland General (POR-$19.11-NEUTRAL) and NV Energy (NVE-$11.01-BUY). 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 - 6 - Table 1: IDA – Financial Summar $000, exce t /s amount Year Ending 31 December 2005 2006 2007 2008E 2009E 2010E FINANCIAL SUMMARY EPS 1.50 2.51 1.86 2.25 2.30 2.15 P/E ratio 18.97 11.38 15.34 12.66 12.38 13.24 EBITDAPS 6.05 6.29 5.76 6.75 7.01 6.95 P/EBITDAPS 4.72 4.54 4.95 4.22 4.07 4.10 Free CFPS -0.75 -1.29 -4.68 -3.70 -0.49 -0.53 P/Free CFPS -37.96 -22.12 -6.10 -7.71 -58.74 -53.80 DPS 1.20 1.20 1.20 1.20 1.20 1.20 Dividend yield 4.2% 4.2% 4.2% 4.2% 4.2% 4.2% BV PS 24.20 26.22 27.26 27.14 28.91 30.73 P/BV PS 1.18 1.09 1.05 1.05 0.99 0.93 Dilluted Shares Out 42,362 42,874 44,291 45,135 46,039 46,564 Enterprise value 2,178,930 2,141,094 2,411,650 2,501,059 2,576,447 2,643,965 EV/Sales 2.59 2.31 2.74 2.52 2.41 2.45 EV/EBITDA 8.51 7.94 9.45 8.21 7.98 8.17 EV/EBIT 13.36 12.14 15.13 12.08 11.72 12.55 INCOME STATEMENT (USDm) Revenues 842,864 926,291 879,394 992,121 1,068,344 1,079,749 Gross margin 154,653 169,704 152,078 200,103 208,611 206,214 Operating EBITDA 256,138 269,528 255,150 304,675 322,754 323,781 Depreciation & Amortization 101,485 99,824 103,072 104,573 114,143 117,567 EBIT 163,055 176,427 159,344 206,997 219,818 210,631 Interest expense 59,729 60,975 63,341 71,987 76,561 75,145 Income tax expense 17,610 15,377 13,731 33,336 37,247 35,226 Net income 63,661 107,403 82,339 101,674 106,011 100,260 Net income per share 1.50 2.51 1.86 2.25 2.30 2.15 CASH FLOW (USDm) Cash flow from operations 161,496 169,778 80,601 75,503 220,153 217,826 Cash flow from investing (88,950) (253,040) (267,110) (221,988) (242,500) (242,500) Capital expenditures 193,314 225,048 287,751 242,500 242,500 242,500 Cash flow from financing (43,593) 40,798 184,583 193,199 (27,247) 22,123 Free cash flow (31,818) (55,270) (207,150) (166,997) (22,347) (24,674) BALANCE SHEET (USDm) Cash and marketable sec 52,356 9,892 7,966 54,680 5,086 2,535 Total assets 3,364,126 3,445,130 3,653,308 3,867,632 3,943,520 4,063,902 Total debt/lease 1,023,545 928,648 1,156,880 1,268,954 1,268,954 1,318,954 Total liabilities 2,338,875 2,320,947 2,445,993 2,642,814 2,612,637 2,632,759 Shareholders' equity 1,025,251 1,124,183 1,207,315 1,224,819 1,330,883 1,431,143 RATIO ANALYSIS Sales growth (%) na 9.9% -5.1% 12.8% 7.7% 1.1% Gross margin/sales (%) 18.3% 18.3% 17.3% 20.2% 19.5% 19.1% EBIT/Assets 4.8% 5.1% 4.4% 5.4% 5.6% 5.2% CFO/Assets 4.8% 4.9% 2.2% 2.0% 5.6% 5.4% ROA 1.9% 3.1% 2.3% 2.6% 2.7% 2.5% ROE 6.2% 9.6% 6.8% 8.3% 8.0% 7.0% Total debt/total capital 50.0% 45.2% 48.9% 50.9% 48.8% 48.0% Net debt/total capital 47.4% 44.8% 48.6% 48.7% 48.6% 47.9% Total debt/EBITDA 4.0 3.4 4.5 4.2 3.9 4.1 Net debt/EBITDA 3.8 3.4 4.5 4.0 3.9 4.1 EBITDA/interest expense 4.3 4.4 4.0 4.2 4.2 4.3 Source: Ladenburg Thalmann & Co, Inc., Company Reports IDACORP (IDA) Ladenburg Thalmann & Co. Inc. PAGE - 7 - Company Description Vertically Integrated Regulated Idaho-Based Electric Utility 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 electricity. IDA serves over 466,000 retail customers across its 24,000sq mile service territory in both Idaho and Oregon, and owns approximately 3,266 MW 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. Table 2: IDA – Service Territor Source: IDACORP, Inc., Third Quarter 2008 Investor Fact Sheet Corporate Strategy IDA is focusing on a strategy that emphasizes IPC as its core business. IPC continues to see strong customer growth in its service area, and IDA recognizes that substantial investments in infrastructure must be made in order to ensure sufficient electricity supply and reliable service while timely and adequate rate relief is necessary to consider various investments. IPC continues to work regulators to ease regulatory lag and simplify its cost recovery mechanisms and has sponsored various workshops. Ida-West remains a component of the corporate strategy as well as consistently registering strong financial results for shareowners. IDA is limiting its investments in IFC which will be a declining contributor to consolidated earnings going forward. IDACORP (IDA) Ladenburg Thalmann & Co. Inc. PAGE - 8 - Regional Economy Idaho’s economy is primarily driven by the technology sector, agriculture and businesses seeking relocation into low energy cost environments. There are also many growth opportunities in the state for new silicon plants that the company projects will eventually require from 40-80 MW of additional capacity from the system per year. Historically, Idaho has experienced load growth of approximately 2%. IDA has recently seen this growth decrease slightly (~1.5%) primarily due to fewer new customer connects and regional economic weakness. Management remains optimistic about Idaho’s economy and growth rates, and views the slowdown as a short-term opportunity to catch up on construction projects needed to meet their future load. The economic slowdown should have less of an effect on sales though due to a 3-year revenue decoupling pilot program that was initiated in 2006. A large C&I customer, Micron Technology (MU-$3.90-NR), recently laid- off approximately 15% of its workforce. Business Segments Idaho Power Corp (IPC) IDA’s only reportable business segment is Idaho Power Corp (IPC), which supplies electric energy to approximately 488,000 general business customers throughout southern Idaho and eastern Oregon. IPC owns and operates 17 hydroelectric generating plants, two natural gas-fired plants, one diesel-powered generator and share ownership in three coal-fired plants. IPC’s generation operations can be significantly affected by weather conditions as they have a predominately hydroelectric generating base. IPC’s electricity sales are primarily influenced by weather, customer growth and economic conditions. In 2007, IPC contributed approximately $77m to income from continuing operations and sold over 17.28m MWh. Generation Supply IDA owns approximately 3,266 MW of generating capacity, of which over 1,700 MW is hydroelectric and 1,557 MW is steam or other. Under normal stream flow conditions, IPC’s system generation mix is approximately 51% hydroelectric, 45% thermal and 4% DSM/purchased power. IDA is net long generating capacity and will not need additional baseload capacity until 2012; however, significant new transmission lines and upgrades will be needed in the near future to eliminate bottlenecks and congestion on the system. IDA typically experiences peak demand during late June to early July. IPC expects total system average load to grow 1.5% annually over the next three years. IDACORP (IDA) Ladenburg Thalmann & Co. Inc. PAGE - 9 - Table 3: IDA – Generation Portfolio 45% 51% 1%3% Thermal Hydro Purchased Power DSM Source: Ladenburg Thalmann & Co, Inc., Company Reports IPC’s generating facilities are interconnected through its integrated transmission system and are operated on a coordinated basis. IPC’s transmission system is directly interconnected with the transmission systems operated by Bonneville Power Administration, Avista Corp (AVA-$19.05-BUY), PacifiCorp (private), NorthWestern Corp (NWE-$24.94-BUY) and NV Energy (NVE-$11.01-BUY). These interconnections are in place to achieve maximum load-carrying capability and reliability. Table 4: IDA – Generation Resources Project Estimated Non-Coincident Maximum Operating Capacity (kW) Nameplate Capacity (kW) License Expiration Hydroelectric Developments: Properties subject to federal licenses: Lower Salmon 70,000 60,000 2034 Bliss 80,000 75,000 2034 Upper Salmon 39,000 34,500 2034 Shoshone Falls 12,500 12,500 2034 CJ Strike 89,000 82,800 2034 Upper Malad - Lower Malad 24,000 21,770 2035 Brownlee-Oxbow-Hells Canyon 1,398,000 1,166,900 2005 Swan Falls 25,547 27,170 2010 American Falls 112,420 92,340 2025 Cascade 14,000 12,420 2031 Milner 59,448 59,448 2038 Twin Falls 54,300 52,897 2040 Other Hydroelectric: Clear Lakes - Thousand Springs 10,400 11,300 Total Hydroelectric 1,709,045 Steam and Other Generating Plants: Jim Bridger (coal-fired) 706,667 770,501 Valmy (coal-fired) 260,650 283,500 Boardman (coal-fired) 58,500 64,200 Danskin (gas-fired) 76,000 261,800 Salmon (diesel-internal combustion) 5,500 5,000 Bennett Mountain (gas-fired) 163,980 172,800 Total Steam and Other 1,557,801 Total Generation 3,266,846 Source: Ladenburg Thalmann & Co, Inc., Company Reports IDACORP (IDA) Ladenburg Thalmann & Co. Inc. PAGE - 10 - Fuel Supply Idaho Energy Resources Co. (IERCO), a subsidiary of IPC, owns a one-third interest in Bridger Coal. Bridger Coal owns and operates Jim Bridger mine that is responsible for supplying coal to IPC’s Jim Bridger generating plant (33% interest) under a long-term sales agreement that provides coal to the plant through 2024. The Jim Bridger plant also has shorter-termed supply contracts that provide annual deliveries through 2009 from Black Butte Coal Company as a supplement to the Bridger Coal deliveries. The Bridger Coal mine has experienced problems in meeting production volume and operating cost goals during early 2008 due to soft floor and roof stability issues that began in December 2007. IPC owns a 50% interest in the North Valmy generating plant operated and jointly-owned by NVE. IPC is obligated to purchase one-half of the coal that is supplied to the facility annually (approximately 965,000 to 1,362,500 tons) through agreements between NV Energy and Arch Coal Sales Company, Inc. (contract through 2011) and Black Butte Coal Company (contract through 2009). IPC owns a 10% interest in another coal-fired generating facility called Boardman that is operated by POR. PGE has an agreement with Buckskin Mining Company to supply coal from the Powder River Basin (PRB) through 2008. IPC is obligated to pay for 10% of the coal that is supplied to Boardman (approximately 230,000 to 270,000 tons annually). IPC currently has a RFP in progress to secure coal through 2013. We note POR is evaluating the installation of pollution control equipment at the Boardman plant. IPC purchases gas for its Danskin and Bennett Mountain combustion turbines through long-term contracts that run through February 28, 2022, with Northwest Pipeline GP’s pipeline (approximately 24,500 MMBtu per day). IPC also has long-term contracts with Northwest Pipeline GP for 131,453 MMBtu of total storage capacity for the Jackson Prairie Storage Project (as the project is developed, storage capacity will be phased into service and allocated to IPC monthly). Currently, IPC’s storage allotment is approximately 18% of its total with full allotment expected by January 2011. Integrated Resource Plan (IRP) IPC filed an updated IRP with both the IPUC and OPUC in June 2008, which notified bidders that the RFP quantity had been adjusted to approximately 300 MW (previously 250-600 MW). All proposals were submitted on October 17, 2008, and will be evaluated and compared to a self-build option. The Company expected a list to be finalized by the end of December 2008, and negotiations to begin in late January/early February 2009. IPC plans to file a new IRP in June 2009. IPC has shifted its focus from the development of coal-fired resources to combined cycle natural gas-fired resources to meet baseload deficiencies identified in 2013. The revised supply needs follows various new projects becoming commercially available including the 76 MW Danskin plant (1Q08), 101 MW of wind generation (December 2007). IDACORP (IDA) Ladenburg Thalmann & Co. Inc. PAGE - 11 - Table 5: IDA – Pro ected 2026 Generation Portfolio 51% 33% 8% 4% 4% Thermal Hydro Purchased Power DSM Non-Hydro Renewables Source: Ladenburg Thalmann & Co, Inc., Company Reports IDACORP Financial IDA created IDACORP Financial (IFS) primarily to invest in affordable housing, which in return provide federal and state tax benefits largely from investments in 20-30 partnerships that invest directly in affording housing properties. Over time, competition for these credits has become stronger and the returns continue to diminish. As a result, IFS has seen earnings decline year over year and IDA has begun to discontinue investment into the business. Management has given its projects a conservative residual value despite the fact that they have seen increased demand recently. IFS generated tax credits of $15m in 2007, $19m in 2006 and $20m in 2005. IFS’s portfolio includes over 700 properties in 49 states including Puerto Rico and the US Virgin Islands of which approximately 90% are managed through syndicate funds. In 2007, IDACORP Financial contributed approximately $7.1m of earnings. Ida-West Energy Ida-West operates and owns a 50% interest in 42-44 MW of hydroelectric generation in northern California and Idaho. We view this business segment as a predictable earnings contributor with low maintenance and operating expenses. Earnings variability is minimal primarily from operating as all nine of the projects are 100% contracted. In 2007, Ida-West Energy contributed approximately $2.2m of earnings. Gateway West and Northwest Transmission Projects IDA plans to invest a total of approximately $1.4-1.8b in transmission projects. The Idaho legislature appears to be very supportive of new transmission lines in the state. The Gateway West project, (a joint venture with PacifiCorp) consists of two 500-kV lines between the Jim Bridger plant in Wyoming and Boise, ID and is designed to increase transmission capacity across southern Idaho. It is currently estimated that the majority of the project would be completed between 2012- 2014. IDA estimates its share of the project would be between $800m-$1.2b. The Boardman-Hemingway Line is a 500-kV line between southwestern Idaho and the Northwest and is designed to alleviate existing congestion, capacity and reliability constraints and to allow delivery of up to 1,500 MW of additional capacity to service areas primarily in Idaho and Oregon. The project could be in service by June 2013. IDA estimates that total project costs are approximately IDACORP (IDA) Ladenburg Thalmann & Co. Inc. PAGE - 12 - $600m and we would expect IDA to bring in partners to share the costs. In October 2008, POR signed an MOU for cooperation on the project. Both projects are in the early stages of development and various siting, permitting and other regulatory approvals are needed to successfully move the projects from development to construction. This process is likely to take several years. Table 6: IDA – Transmission Pro ects Source: Ladenburg Thalmann & Co, Inc., Company Reports IDACORP (IDA) Ladenburg Thalmann & Co. Inc. PAGE - 13 - Hydro Profile and Current Conditions Weather Impact on Utility Operations IPC’s generation operations can be significantly affected by weather due to its considerable reliance on hydroelectric generation. When stream flows into IPC’s hydroelectric projects are reduced, IPC’s hydroelectric generation is reduced as well. The amount of snow pack in the mountains upstream of IPC’s hydroelectric facilities, reservoir storage, springtime snow pack run-off, river base flows, rainfall, spring flows and stream flow management largely determine the availability of hydroelectric power. If poor hydro conditions exist, the amount of surplus generation available for off-system sales decreases, and the likelihood of needing to purchase power in the open market to meet system load requirements increases, which ultimately would result in increased power supply costs. Table 7: IDA – H dro S stem Ma Source: Ladenburg Thalmann & Co, Inc., Company Reports Historical Hydro Conditions and Earnings During a normal year, hydroelectric generation is approximately 8.5m MWh and the company is forecasting between 6.7-7.2m MWh in 2008. As mentioned previously, the company’s unique exposure to precipitation (hydro conditions) and weather patterns can adversely impact supply costs relative to recovery in rates and corresponding regulatory lag. IDA has several supply cost recovery mechanisms designed to mitigate regulatory lag and facilitate the more timely recovery of supply costs above the level embedded in rates. Recent IPUC changes to the PCA from 90/10 to 95/5 (customer/shareholders) sharing further mitigates earnings volatility to changes in power costs going forward. IDACORP (IDA) Ladenburg Thalmann & Co. Inc. PAGE - 14 - Table 8: IDA – Historical H dro Conditions and Earnin s 0 1 2 3 4 5 6 7 8 9 10 2003 2004 2005 2006 2007 2008 $0.00 $0.50 $1.00 $1.50 $2.00 $2.50 Hydro (MWh)EPS Source: Ladenburg Thalmann & Co, Inc., Company Reports IPC has acquired water rights for all water used at its hydroelectric facilities and also holds water rights for domestic, commercial, irrigation and other necessary purposes related to other property and facility holdings within the state. IPC’s water rights specifically for power generation are, however, subordinate to future upstream diversions for irrigation and other recognized consumptive requirements. In the past, increased irrigation development and other recognized consumptive diversions have resulted in a decrease in the stream flows available to fulfill the needs of IPC’s hydroelectric generating facilities. As a result of such reductions, IPC has worked with state and local agencies to secure water rights into the future; on October 25, 1984, IPC signed the Swan Falls agreement with the state of Idaho, which protects IPC’s hydropower water rights by setting certain minimum stream flows and establishing an administrative process that governs future development of water rights. Preliminary Hydro Outlook and NOAA Forecast IDA’s hydroelectric generating facilities are located along the Snake River in Idaho. IDA begins monitoring hydro conditions in the northwest in November particularly snowpack and forecasted stream flows. Although there is very limited volatility with regards to hydro during the fourth quarter, it is important to track precipitation and snowpack as they are the primary indicators of the runoff and water supply that will become available in the following spring. The majority of IDA’s water supply is held at the Brownlee Reservoir. The NOAA updates its April-September forecasted water supply for the northwest three times a month. As of January 23, 2009, Brownlee is forecasted to have water supply 64% of its 30-year average and Hells Canyon, IDA’s largest hydroelectric generation facility, is forecasted to be 63% of its average. Water supply forecasts are for the April-September 2009 period. Importantly, it is difficult to assume that current conditions will remain as it is still very early in the hydro season. Near-term dates for NOAA Northwest Water Supply forecast updates: February 6, 2009 (official forecast - final), February 9, 2009 (peak flow forecast), February 20, 2009 (mid-month update), and February 26, 2009 (early bird update). IDACORP (IDA) Ladenburg Thalmann & Co. Inc. PAGE - 15 - Table 9: IDA – NOAA Preci itation and Tem erature Forecasts Source: Ladenburg Thalmann & Co, Inc., NOAA Hydro Relicensing Efforts IDA is currently in the process of relicensing its Hells Canyon Complex. Due to the nature of this facility being located on the border between Oregon and Idaho, the relicensing process is slightly more complex due to the multiple regulatory agencies governing the rights to its water supply but ultimately we believe IDA will be succesful. The initial license expired in July 2005 and is currently re- licensed by the Federal Energy Regulatory Commission (FERC) on a year-to- year basis while FERC considers the company’s application for a new multi-year license. IDA is also working on water leases that may add approximately 100,000 MWh of additional energy from the hydro system. IDACORP (IDA) Ladenburg Thalmann & Co. Inc. PAGE - 16 - Table 10: IDA – H dro Relicensin Schedule Project FERC License Number Nameplate Capacity (MW) License Expiration File FERC License Application Hells Canyon Complex 1971 1,167 Jul 2005 Jul 2003 Swan Falls 503 27 Jun 2010 Jun 2008 Bliss 1975 75 Aug 2034 Jul 2032 Lower Salmon 2061 60 Aug 2034 Jul 2032 Upper Salmon A 2777 18 Aug 2034 Jul 2032 Upper Salmon B 2777 17 Aug 2034 Jul 2032 Shoshone Falls 2778 13 Aug 2034 Jul 2032 CJ Strike 2055 83 Aug 2034 Jul 2032 Upper Malad - Lower Malad 2726 22 Mar 2035 Feb 2033 Source: Ladenburg Thalmann & Co, Inc., Company Reports Regulatory Issues IPC’s operations are subject to the jurisdiction of the Idaho Public Utilities Commission (IPUC) and the Oregon Public Utilities Commission (OPUC) with respect to retail rates. IPC’s wholesale and transmission rates are regulated by the FERC. Idaho Public Utilities Commission Approximately 95 percent of IPC’s revenue (and rate base) is derived from customers located in Idaho. IPC’s rates charged to its Idaho customers are determined by the IPUC. IPC also has a Power Cost Adjustment (PCA) mechanism that allows for annual adjustments to its Idaho rates based on forecasted net power supply costs (fuel and purchased power less off-system sales) and the prior year’s true-up. The Idaho Public Utilities Commission (IPUC) is comprised of 3 full-time commissioners (2 Republicans and 1 Democrat) appointed by the governor (and confirmed by senate) with 6 year-staggered terms. The regulatory climate in Idaho has been relatively stable over the past several years. Idaho General Rate Final Order On January 30, 2009, the Idaho Public Utilities Commission (IPUC) granted IDA a $20.9m (+3.1%) increase based on a 2008 test year including rate base of $2.094b, equity ratio of 49.27% and ROE OF 10.5%. This compares to IDA’s requested $66.6m (9.9%) rate increase based on a 2008 forward test year including rate base of $2.093b, equity ratio of 49.27% and ROE of 11.25%. In addition, the IPUC permitted approximately $6.8m of 2009 Hells Canyon relicensing costs. The Load Growth Adjustment Rate (LGAR) was set at $26.52 per MWh. We note the recently approved rate increase includes an ROE of 10.5% compared to the previously allowed ROE of 10.25% which takes into account the company’s significant capital expenditures program and the current economic and financial climate. The recovery of hydro relicensing costs is also positive. IDACORP (IDA) Ladenburg Thalmann & Co. Inc. PAGE - 17 - Danskin CT1 Power Plant Cost Recovery On March 7, 2008, IPC filed an application with the IPUC asking to recover $9m or a 1.4% increase in annual revenue related to the construction costs of its new 170 MW gas-fired peaking plant. IPC requested that the $65m rate base increase be effective by June 1, 2008, as the plant began commercial operations on March 11. On May 30, 2008, the IPUC approved IPC’s request to rate base $64.2m or a 1.37% ($8.9m) annual revenue increase related to the Danskin gas-fired combustion turbine plant. Energy Efficiency Rider On March 14, 2008, IPC filed an application with the IPUC requesting approval to increase the monthly energy efficiency rider for all customer classes from 1.5% to 2.5% or $17m annually. IPC intends to use the additional funds to improve and expand its energy efficiency programs by providing cash incentives, information and services for its customers. The application was approved as filed and rates were effective June 1, 2008. Power Cost Adjustment The IPUC recently approved a stipulation to change the Power Cost Adjustment (PCA) mechanism to 95/5 from 90/10 sharing thereby mitigating some of the earnings variability relative to hydro conditions. When water is plentiful, power supply costs typically remain lower and rate reductions are passed along to the customers. When water supply is short, the higher costs of supplying power by other means are shared with the customers. On May 30, 2008, the IPUC approved a $73.3m or 10.7% increase in the annual PCA with new rates effective June 1, 2008. Advanced Metering Infrastructure (AMI) On August 4, 2008, IPC filed a request with the IPUC to install advanced meters throughout its service territory over the course of the next three years at an estimated cost of $71m and a $12.2m revenue requirement impact in 2009. Installation of these “smart meters” would begin in January 2009, and provide fully automated metering reading as well as improved outage management. If approved by the commission, rate impact and cost recovery would be addressed in future proceedings. Currently about 2/3 of the project’s costs are included in IDA’s 2008-2010 capex guidance. FCA Rate Adjustment On March 14, 2008, IPC filed an application with the IPUC to implement a rate reduction related to the Fixed Cost Adjustment pilot program (revenue decoupling mechanism) for expenses incurred in 2007. The FCA was approved by the IPUC and resulted in a $2.4m reduction to residential and small commercial customers with rates effective June 1, 2008. Oregon Public Utility Commission On April 30, 2007, IPC filed with the OPUC to defer net power supply costs for the period of May 1, 2007, through April 30, 2008, in anticipation of higher than “normal” power supply expenses. Currently in the Oregon GRC, “normal” power expenses are set to a negative number meaning that under normal weather conditions IPC should be able sell enough energy to cover all fuel and purchased IDACORP (IDA) Ladenburg Thalmann & Co. Inc. PAGE - 18 - power expenses with revenue still remaining. IPC has requested to defer $5.7m, and is currently waiting for an order from the OPUC. Oregon Power Cost Adjustment Mechanism The Oregon power cost recovery mechanism is composed of an annual power cost update (APCU) and a power cost adjustment mechanism (PCAM). The APCU includes an “October Update” when IPC will calculate its normalized net power supply costs from April to March, and a “March Forecast” which will forecast its power supply costs including variables such as stream flow data and wholesale electric prices. Collectively, APCU costs will be annually adjusted in rates on June 1. Under the PCAM, IPC shares 90% of the costs and benefits with its customers when the deviations in actual power supply costs are outside of the deadband; IPC absorbs 100% costs and benefits within the deadband. PCAM collections or refunds will occur only to the extent that IPC’s actual ROE is 100 basis points greater than (collection) or less than (refund) their previously authorized ROE. IPC is required to file its PCAM with the OPUC in February each year beginning in 2009. Idaho Legislative Proposal to Reduce Regulatory Uncertainty of Large Infrastructure Projects The head of Idaho Governor C.L. Otter’s Office of Energy Resources is preparing a legislative proposal designed to reduce regulatory uncertainty and risk associated with utilities in financing infrastructure projects. Paul Kjellander, administrator of the Office of Energy Resources, is working on a proposal to present to the Legislature that would require the IPUC to set clear parameters for recovery of transmission and generation project costs. 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. Early indications are that legislative support exists. American Recovery and Reinvestment Act of 2009 The $825b American Recovery and Reinvestment Act of 2009 (introduced by House Democrats on January 15, 2009) includes $11b for modernization of the nation’s electric grid and an additional $8b in loans for transmission projects to wheel renewable energy to load centers. IDACORP (IDA) Ladenburg Thalmann & Co. Inc. PAGE - 19 - Financial Statement Analysis Liquidity and Credit Profile We forecast 2008 debt/capital of 50.9%, 2008 debt/EBITDA of 4.2x and 2008 interest coverage of 4.2x. As of September 30, 2008, IDACORP had total available liquidity of approximately $363m including $32m of cash on hand and a $100m 5-yr credit facility. Idaho Power had total liquidity of approximately $435m including $36m of cash on hand and a $300m credit facility. Refinancing is manageable and upcoming debt maturities include: $75m in November 2009, $125m in 2011 and $100m in 2012. Under the company’s continuous equity program we expect IDA to issue approximately 3m shares over the next 2 years. IDA remains confident that it will not need to issue any equity outside of this program to finance its base capital expenditures but would need external equity financing for large scale rate base projects like proposed transmission and generation projects. The company maintains a target equity ratio of 50%. Also supporting near-term operating cash flow is the recovery of previously deferred power supply costs. IDA senior unsecured debt is currently rated Baa2 by Moody’s with a Negative outlook. Standard and Poor’s rates IDA BBB with a Stable outlook. Table 11: IDA – Cash Flow and O eratin Data ($000's unless otherwise noted)Summary Balance Sheet 2005 2006 2007 2008E 2009E 2010E 2011E 2012E 2013E PP&E 2,294,441 2,419,080 2,616,552 2,741,934 2,870,292 2,995,225 3,116,631 3,234,404 3,348,436Total Assets 3,364,126 3,445,130 3,653,308 3,867,632 3,943,520 4,063,902 4,132,631 4,173,190 4,213,235 Total Debt 1,023,545 928,648 1,156,880 1,268,954 1,268,954 1,318,954 1,318,954 1,318,954 1,318,954Equity 1,025,251 1,124,183 1,207,315 1,224,819 1,330,883 1,431,143 1,530,378 1,629,505 1,728,177 Debt/Total Capital (%) 0.50 0.45 0.49 0.51 0.49 0.48 0.46 0.45 0.43 Debt/EBITDA (x) 4.00 3.45 4.53 4.16 3.93 4.07 4.01 3.97 3.94 Cash Flow Analysis 2005 2006 2007 2008E 2009E 2010E 2011E 2012E 2013E Operating Revenue 842,864 926,291 879,394 992,121 1,068,344 1,079,749 1,099,261 1,118,170 1,137,453 Adj EBITDA 256,138 269,528 255,150 304,675 322,754 323,781 328,553 332,029 335,147 EBIT 163,055 176,427 159,344 206,997 219,818 210,631 211,885 211,737 211,123 Income 63,661 107,403 82,339 101,674 106,011 100,260 99,236 99,126 98,672 Cash from operations 161,496 169,778 80,601 75,503 220,153 217,826 220,330 223,853 227,140 Less: Capital Expenditures 193,314 225,048 287,751 242,500 242,500 242,500 242,500 242,500 242,500 Free Cash Flow (31,818) (55,270) (207,150) (166,997) (22,347) (24,674) (22,170) (18,647) (15,360) Source: Ladenburg Thalmann & Co, Inc., Company Reports Capital Expenditures Program Due to slowing customer growth and usage, IDA decreased its 2008 capital expenditures forecast to $255-$270, from $270-$390m. We forecast total 2008- 2010 capital expenditures of $727.5m. Our forecasts are likely to change following release of the company’s 10-K in February 2009 which will include updated capital expenditures forecasts. Dividend Policy With a current annual dividend of $1.20 per share, IDA’s payout ratio is approximately 50%, below industry averages. We expect steady dividend increases over time. IDACORP (IDA) Ladenburg Thalmann & Co. Inc. PAGE - 20 - Pension Obligations According to IDA, its pension obligations are manageable and state regulation allows for deferral of pension expense to be recovered in future rates. The company estimates it will reach 100% funding over seven years and would entail funding of $40m in 2010, $20m in 2011, $20m in 2012, and $20m in 2013. Table 12: IDA – Estimated Total LT Debt $000’s Maturity Year Description Interest Rate September 30, 2008 December 31, 2007 2009 First Mortgage Bonds 7.20% 80,000 80,000 2011 First Mortgage Bonds 6.60% 120,000 120,000 2012 First Mortgage Bonds 4.75% 100,000 100,000 2013 First Mortgage Bonds 4.25% 70,000 70,000 2018 First Mortgage Bonds 6.03% 120,000 2032 First Mortgage Bonds 6.00% 100,000 100,000 2033 First Mortgage Bonds 5.50% 70,000 70,000 2034 First Mortgage Bonds 5.50% 50,000 50,000 2034 First Mortgage Bonds 5.875% 55,000 55,000 2035 First Mortgage Bonds 5.30% 60,000 60,000 2037 First Mortgage Bonds 6.30% 140,000 140,000 2037 First Mortgage Bonds 6.25% 100,000 100,000 Total First Mortgage Bonds 1,065,000 945,000 2024 Variable Auction Rate Series 2003 49,800 49,800 2026 Variable Auction Rate Series 2006 116,300 116,300 2027 Variable Rate Series 2000 4,360 4,360 Total Pollution Control Revenue Bonds 170,460 170,460 19,885 19,885 9,573 10,636 Note guarantee due within one year (1,064) (1,064) (3,225) (3,409) 166,100 (166,100) Total long-term debt 1,260,629$ 1,141,508$ Unamortized premium (discount) - net Term Loan Credit Facility Purchase of pollution contol revenue bonds Pollution Control Bonds: First Mortgage Bonds: American Falls bond guarantee Milner Dam note guarantee Source: Ladenburg Thalmann & Co, Inc., Company Reports Note: Please refer to page 6 for Financial Summary IDACORP (IDA) Ladenburg Thalmann & Co. Inc. PAGE - 21 - Valuation Fairly Valued in Near-Term… Our price target of $28 per share is based on a 2009/2010 target P/E ratio of 12.2x/13.0x our 2009/2010 EPS of $2.30/$2.15. This compares to a regional small/mid-cap regulated utility peer group average of 11.8x/10.7x. We view IDA as a fundamentally sound small-cap, vertically-integrated utility, however, at current levels we view IDA as fairly-valued and thus we rate IDA NEUTRAL. Table 13: IDA – Peer Grou Com arison 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 AVA POR NWE NVE AVG IDA 2008 PE 2009 PE 2010 PE Source: Ladenburg Thalmann & Co, Inc., Company Reports …but Long-term Growth Drivers Exist Despite our view that IDA is fairly valued in the near-term we acknowledge the company’s rate base opportunities both in the form of new generation build and transmission opportunities needed to support regional growth. Potential project investments total $1.4-$1.8b with commercial operation dates in the 2012-2014 could be source for significant incremental earnings growth. However, these projects are in the early stages of development and are subject to change. Ladenburg Thalmann’s Northwest Regional Coverage Our new IDA coverage is complimentary to our northwest regional utility coverage that has varying degrees of hydroelectric exposure and/or shared ownership of generation assets and transmission project partnerships including: Avista Corp (AVA-$19.05-BUY), Northwestern Corp (NWE-$24.94-BUY), Portland General (POR-$19.11-NEUTRAL) and NV Energy (NVE-$11.01-BUY). IDACORP (IDA) Ladenburg Thalmann & Co. Inc. PAGE - 22 - Cash and Earnings Analysis IDA’s consolidated earnings profile includes several unique earnings drivers including tax credits related to its affordable housing investments, its 30% interest in Bridger Coal and IDA-West. Over time, we expect IDA Financial contributions to decline, IDA-West and Bridger Coal contributions to remain steady. Longer-term earnings power is likely to be derived from traditional returns on utility rate base 2007 Financial Results In 2007, IDA reported a net income of $92.3m or $1.86 per share compared to a net income of $107.4m or $2.51 per share in 2006. The primary reason for the reduction in earnings was poor hydroelectric generating conditions in 2007 (6.2m MWh) versus 2006 conditions (9.2m MWh). Other factors affecting IDA net income include: discontinued operations contributed $0.1m in 2007 compared to $7m in 2006 (-$0.17 p/s), 2007 net loss at the holding company of $3.5m compared to a net loss of $6m in 2006 (+$0.05 p/s), and IDACORP Financial Services (IFS) contributed $2.4m less in 2007 than in 2006 (-$0.06 p/s). Idaho Power Company reported 2007 net income of $76.6m or $1.73 per share compared to $93.9m or $2.19 per share in 2006. Key factors affecting results include: electric utility margin increased $2.9m, however, electric utility margin as a percentage of total revenue, PCA amortization and other revenue amortization declined to 82% (-5.0%), increased Other O&M expense in 2007 compared to 2006 (-$12.7m), and a $1.7m gain on the sale of emission allowances in 2007 compared to a gain of $5.0m in 2006. 2008 Expectations We forecast 2008 EBITDA and earnings per share of $304.7m and $2.25 per share, respectively. Drivers include: hydro generation of approximately 7m MWh, consolidated tax rate of 22% and non-regulated earnings of $3.5m. Our estimates exclude a one-time charge of $7.9m related to a refund to customers ($13.3m total and $5.4m already reserved) per the January 2009 FERC order for IDA to reduce transmissions service rates to FERC jurisdictional customers. 2009 Expectations We forecast 2009 EBITDA and earnings per share of $322.7m and $2.30 per share, respectively. Drivers include: new IPC rates effective February 1, 2009, load growth of 1.5% (and slowing industrial sales), normal hydro generation of approximately 8.5m MWh (although early indications are for less than average hydro conditions), consolidated tax rate of 26%, and lower transmission service rates ($3m gross). As a result of the recent IPUC final rate order, we expect IPC to under-earn its allowed ROE of 10.5%. 2010 Expectations We forecast 2010 EBITDA and earnings per share of $323.7m and $2.15 per share, respectively. Drivers include: continued regulatory lag on absence of rate relief assumption (at this time), normal hydro generation of approximately 8.5m MWh, and consolidated tax rate of 26%. IDACORP (IDA) Ladenburg Thalmann & Co. Inc. PAGE - 23 - Table 14: IDA – Income Statement $000 Year Ended December 31 2005 2006 2007 2008E 2009E 2010E INCOME STATEMENT(thousands of dollars except per share amounts)Operating Revenues:Electric utility: General business 667,270 636,375 668,303 800,503 889,134 906,916 Off-system sales 142,794 260,717 154,948 133,583 124,176 121,163 Other revenues 27,619 23,381 52,150 58,035 55,035 51,670 Total electric revenues 837,683 920,473 875,401 992,121 1,068,344 1,079,749 Other 5,181 5,818 3,993 Total operating revenues 842,864 926,291 879,394 992,121 1,068,344 1,079,749 Operating Expenses:Electric utility: Purchased power 222,310 283,440 289,484 245,146 250,044 249,864 Fuel expense 103,164 115,018 134,322 150,248 153,999 163,569 Power cost adjustment (2,995) (29,526) (121,131) (38,678) 0 0 Other operations and maintenance 241,209 256,553 286,510 291,274 301,327 305,721 Demand-side management 13,487 17,765 17,765 14,000 Gain on sale of emission allowances (2,754) (504) 0 0 Depreciation 101,485 99,824 103,072 104,573 114,143 117,567 Taxes other than income taxes 20,856 18,661 17,634 17,719 17,896 18,254 Total electric utility expenses 686,029 743,970 720,624 787,542 855,173 868,975Other expense 2,182 12,617 6,692 4,476 4,560 4,560 Total operating expenses 688,211 756,587 727,316 792,018 859,733 873,535 Operating Income (Loss): Electric utility 151,654 176,503 154,777 204,579 213,171 210,774 Other 2,999 (6,799) (2,699) 667 564 564 Total operating income 154,653 169,704 152,078 200,103 208,611 206,214 Other Income 17,121 18,195 20,524 19,758 23,558 16,758 Earnings (Losses) of Unconsolidated Equity-Method Investments (713) (2,913) (4,824) (6,239) (5,306) (5,296) Other Expense 8,006 8,559 8,434 6,625 7,045 7,045Interest Expense and Preferred Dividends:Interest on long-term debt 56,930 56,402 59,961 67,458 71,321 69,792Other interest 2,799 4,573 3,380 4,529 5,240 5,240 Preferred dividends of Idaho Power Company Total interest expense and preferred dividends 59,729 60,975 63,341 71,987 76,561 75,032 Income Before Income Taxes 103,326 115,452 96,003 135,010 143,257 135,598 Income Tax Expense (Benefit)17,610 15,377 13,731 33,336 37,247 35,255 Income from Continuing Operations 85,716 100,075 82,272 101,674 106,011 100,343 Income (Losses) from Discontinued Operations, net of tax (22,055) 7,328 67Net Income 63,661 107,403 82,339 101,674 106,011 100,343 Weighted Average Common Shares Outstanding, Diluted (000's)42,362 42,874 44,291 45,135 46,039 46,564Earnings Per Share:Earnings per share from Continuing Operations - Diluted 2.02 2.33 1.86 2.25 2.30 2.15Earnings (loss) per share from Discontinued Operations - Diluted (0.52) 0.17 0.00 0.00 0.00 0.00 EPS of Common Stock - Diluted 1.50 2.51 1.86 2.25 2.30 2.15 Dividends Paid Per Share of Common Stock 1.20 1.20 1.20 1.20 1.20 1.20 Source: Ladenburg Thalmann & Co, Inc., Company Reports IDACORP (IDA) Ladenburg Thalmann & Co. Inc. PAGE - 24 - Table 15: IDA – Cash Flow Statement $000 Year Ended December 31 2005 2006 2007 2008E 2009E 2010E CASH FLOWS STATEMENT(thousands of dollars)Operating Activities:Net income 63,661 107,403 82,339 101,674 106,011 100,260 Adjustments to reconcile net income to net cash provided by operating activies: Depreciation and amortization 124,124 122,641 120,368 104,573 114,143 117,567 Deferred income taxes and investment tax credits (31,769) (17,332) 11,026 32852 Changes in regulatory assets and liabilities 7,275 (17,133) (128,089) -74905 Non-cash pension expense 6,868 4283 Undistributed (earnings) losses of subsidiaries (16,762) (9,553) (6,273) -2662 Provision for uncollectible accounts (10,729) 106 0 Gain on sale of assets (2,128) (25,658) (4,758) -6751 Gain on extinguishment of debt 0 Impairment of goodwill 10,270 0 Impairment of long-lived asset 2,047 0 Other non-cash adjustments to net income (4,344) (3,501) (2,915) 2518 Excess tax benefit from share-based payment arrangments (1,411) (68) 0 Change in:0 Accounts receivable and prepayments (6,436) 24,304 (10,284) -9852 Accounts payable and other accrued liabilities 1,821 6,725 2,206 -30244 Taxes accrued 26,412 (24,099) (9,466) 989 Other current assets (14,360) (4,829) (11,159) -43861 Other current liabilities 794 (3,465) 15,551 12626 Other assets (514) 3,334 2,157 -11415 Other liabilities 14,181 10,199 13,098 -4321 Net cash provided by operating activities 161,496 169,778 80,601 75,503 220,153 217,826 Investing Activities: Additions to property, plant and equipment (193,314) (225,048) (287,751) (242,500) (242,500) (242,500) Sale of non-utility assets 1,019 146 7,283 11443 Sale of ITI 21,469 0 Investments in affordable housing (4,992) (5,059) 348 -16972 Sale of emission allowances 70,757 11,323 19,846 3792 Investments in unconsolidated affiliates (16,030) (8,535) -11790 Purchase of available -for-sale securities (85,334) (17,979) (24,349) 0 Sale of available-for-sale securities 120,026 20,778 26,110 0 Purchase of held-to-maturity securities (2,181) (2,730) (3,116) -3850 Maturity of hel-to-maturity sercurities 2,840 4,647 3,317 7345 Refundable income tax deposit (44,903) 40000 Other assets 2,229 346 (263) -9456 Other liabilities 0 Net cash used in investing activities (88,950) (253,040) (267,110) (221,988) (242,500) (242,500) Financing Activities: Increase in term loans 170000 Issuance of long-term debt 64,992 116,300 240,000 290000 50,000 Retirement of long-term debt (83,067) (132,642) (95,033) -15726 Purchase of pollution control revenue bonds -332200 Retirement of preferred stock IPC (53,012) 0 Dividends on common stock (50,690) (51,272) 57,445 -94549.2 (55,247) (55,877) Change in short-term borrowings 23,830 68,900 37,181 159709 Issuance of common stock 6,296 41,465 (346) 19058 28,000 28,000 Acquisition of treasury stock (213) 68 -854 Excess tax benefit from share-based payment arrangments 1,411 (337) 0 Other assets (4,486) (3,058) (1,383) -2239 Other liabilities (468) (93) 0 Net cash provided by (used in) financing activities (43,593) 40,798 184,583 193,199 (27,247) 22,123 Net increase (decrease) in cash and cash equivalents 28,953 (42,464) (1,926) 46,714 (49,594) (2,551) Cash and cash equivalents at beginning of year 23,403 52,356 9,892 7,966 54,680 5,086Cash and cash equivalents at end of yea 52,356 9,892 7,966 54,680 5,086 2,535 Source: Ladenburg Thalmann & Co, Inc., Company Reports IDACORP (IDA) Ladenburg Thalmann & Co. Inc. PAGE - 25 - Table 16: IDA – Balance Sheet $000 Year Ended December 31 2005 2006 2007 2008E 2009 2010 BALANCE SHEET(thousands of dollars)ASSETSCurrent Assets: Cash and cash equivalents 52,356 9,892 7,966 54,680 5,086 2,535 Receivables:0 0 Customer 94,469 62,131 69,160 78000 67,234 67,234 Allowances for uncollectible accounts (33,078) (7,168) (7,505) (1,359) (7,500) (7,500) Employee notes 2,951 2,569 2,128 203 2,100 2,100 Other 21,377 11,855 10,957 6,617 11,000 11,000 Energy marketing assets 23,859 12,069 0 0Accrued unbilled revenues 38,905 31,365 36,314 39,065 33,617 33,617Materials and supplies (at average cost) 30,451 39,079 43,270 51,324 43,961 43,961Fuel stock (at average cost) 11,739 15,174 17,268 24,402 20,687 20,687 Prepayments 17,876 9,308 9,371 10,299 7,758 7,758 Deferred income taxes 23,922 28,035 25,672 14,375 25,000 25,000 Regulatory assets 3,064 1,480 0 0 Refundable income tax deposit 44,903 46,083 24,903 46,000 46,000 Other 2,956 2,513 6,023 8,904 6,000 6,000 Assets held for sale 6,673 3,326 0 Total current assets 297,520 266,531 266,707 311,413 260,943 258,392Investments191,593 202,825 201,085 201,085 201,085 201,085 Property, plant and equipment - net 2,294,441 2,419,080 2,616,552 2,741,934 2,870,292 2,995,225 Total other assets 580,572 556,694 568,964 613,200 611,200 609,200 Total 3,364,126 3,445,130 3,653,308 3,867,632 3,943,520 4,063,902 Year Ended December 31 2005 2006 2007 2008 2009 2010 BALANCE SHEET(thousands of dollars) LIABILITIES and SHAREHOLDERS' EQUITY Current Liabilities: Current maturities of long-term debt 16,307 95,125 11,456 27,788 Notes payable 60,100 129,000 186,445 203,915 203,915 203,915 Accounts payable 80,324 86,440 85,116 66,195 66,195 66,195 Energy marketing liabilities 24,093 13,532 0Taxes accrued 72,652 47,402 8,492 14,736 14,736 14,736Interest accrued 14,616 12,657 18,913 29,624 29,624 29,624Uncertain tax positions 26,764 27,297 27,297 27,297 Other 19,577 23,572 38,129 36,883 36,883 36,883 Liabilities held for sale 5,916 2,606 Total current liabilities 293,585 410,334 375,315 406,438 378,650 378,650 Total other liabilities 1,021,745 981,965 913,798 967,422 965,033 935,155 Long-Term Debt 1,023,545 928,648 1,156,880 1,268,954 1,268,954 1,318,954 Total shareholders' equity 1,025,251 1,124,183 1,207,315 1,224,819 1,330,883 1,431,143 Total 3,364,126 3,445,130 3,653,308 3,867,632 3,943,520 4,063,902 Source: Ladenburg Thalmann & Co, Inc., Company Reports IDACORP (IDA) Ladenburg Thalmann & Co. Inc. PAGE - 26 - 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, and 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 - 27 - 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 02/01/09) Buy 73% (5% are banking clients) Neutral 26% (0% are banking clients) Sell 1% (0% are banking clients) OTHER COMPANIES MENTIONED/COMPANY SPECIFIC DISCLOSURES: IDA utility peer group consists of the following utilities; Avista Corp (AVA-$19.05-BUY), Northwestern Corp (NWE-$29.94-BUY)1, Portland General (POR-$19.11-NEUTRAL) and NV Energy (NVE-$11.01-BUY). Ladenburg Thalmann & Co. Inc. does not make a market in any of the companies mentioned. Ladenburg Thalmann & Co. Inc. has not had an investment banking relationship with any of the companies mentioned nor received compensation for investment banking services in the past 12 months. Neither the Analyst, nor members of the Analyst’s household own any securities issued by the subject Company, or other companies mentioned in this report. 1 Ladenburg Thalmann & Co Inc. had a non-investment banking securities-related services client relationship with the subject company in the form of a company buyback program in the last six months. IDACORP (IDA) Ladenburg Thalmann & Co. Inc. PAGE - 28 - 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, or other companies mentioned in this report. 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 (2) 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, AMEX, FINRA, all other principal exchanges and SIPC Additional Information Available Upon Request © 2009 - Ladenburg Thalmann & Co. Inc. All Rights Reserved.