HomeMy WebLinkAboutIDANOTE022213.pdf Disclosures and Analyst Certifications can be found in Appendix A. NEW YORK, NY MELVILLE, NY BOSTON, MA PRINCETON, NJ MIAMI, FL NAPLES, FL BOCA RATON, FL HOUSTON, TX 520 Madison Avenue y New York, New York 10022 y Telephone: 212-409-2000 800-LAD-THAL Member: NYSE, NYSE MKT, FINRA, all other principal exchanges and SIPC IIDDAACCOORRPP ((IIDDAA)) 4Q12 Results and 2013 Outlook – Lowering to NEUTRAL from BUY Highlights • We are lowering our rating to NEUTRAL from BUY on IDA shares. Our price target of $47 p/s implies a 2013/2014/2015 P/E of 14.3x/13.8x/14.3x our EPS estimates of $3.26$3.38/$3.27 (previously $3.26/$3.41/NA). • On February 21, 2013, IDA reported 4Q12 net income of $16.5m or $0.33 p/s compared to net income of $9.0m or $0.18 p/s in 4Q11 and our estimate of $0.30 p/s. 2012 net income of $168.8m or $3.37 p/s compares to 2011 net income of $166.7m or $3.36 p/s and our estimate of $3.34. The main drivers behind the y-o-y changes include: rate and regulatory changes (+$65.2m), increase in sales volumes (+$16.1m), additional pension expense funded through sharing and rate increases (+$0.6m), change in Depreciation, Property Tax and Other – Net (-$8.7m), greater revenue sharing in 2011 than in 2012 (+$19.9m), change in AFUDC (-$4.5m), other net changes (-$1.0m), change in other income tax expense (-$22.1m) and net decrease in tax method changes and other net changes (net of tax) (-$56.6m). • IDA initiated 2013 earnings guidance of $3.20-$3.35 p/s and assumes the following: Idaho Power O&M expense of $340m-$350m, Idaho Power additional amortization of ADITC of less than $5m, 2013 capital expenditures of $245m-$255m, 2014-2015 capital expenditures total $570m-$5580m and Idaho Power Hydroelectric Generation of 6.0-8.0m MWh (2012 actual at 8.0m MWh). • With less than 12.5% total return potential upside to our revised price target, we now rate IDA shares NEUTRAL. Our price target, rating and fundamental view reflect the following: minimal regulatory risk through 2014 due to previous rate settlement that offers cash/earnings visibility, at least 10% dividend growth expected in September 2013 (target payout of 50-60%), growing service territory, manageable sensitivity to changes in hydro conditions, Boardman-to-Hemingway transmission project (B-H) offers long-term growth (2018). Partially offsetting the previously mentioned positive fundamentals are: 2015 uncertain rate structure and corresponding GRC risks pending mid-2014 filing, B-H delay from 2016 to 2018, uncertain 2016 capacity needs pending June 2013 IRP filing (400 MW of estimated demand response likely to bridge the capacity deficit of 80 MW beginning in 2016 until B-H is built), limited near-term catalysts. • Our 2013-2014 EPS estimates reflect the current Idaho Power rate plan settlement. Idaho Power may use up to $45m in aggregate of deferred investment tax credits (ADITC) over a three year-period (2012-2014) to reach a minimum 9.5% return-on-year-end equity. No more than $25m can be used in any one year and we assume no ADITC usage in 2012. IDA is essentially earning at least 9.5% of year-end shareholder equity. If Idaho Power return on year-end equity for 2012-2014 exceeds 10.0% but less than 10.5% then equal sharing (50/50) between Idaho Power and customers would be triggered. If Idaho Power return on year-end equity for 2012-2014 exceeds 10.5% then 75% customer sharing and 25% Idaho Power sharing would be triggered. IDA is forecasting less than $5m of ADITC usage in 2013. • Our 2015 EPS estimate reflects a more traditional regulated-utility return-on rate base structure. Under this scenario, we see flat-to-slightly down year-over-year EPS due to our forecast that rate base equity is less than Idaho Power year-end shareholder equity. We estimate 2015 total rate base of $3.1b and assuming 51% equity ratio we calculate rate base equity of $1.6b. This compares to 2014 estimated year-end Idaho Power shareholder equity of $1.7b. If needed, we would expect IDA to file its next rate case by mid-2014 for rates effective 2015. A filing requesting an extension of the current rate plan is also possible prior to June 2014. In the event that a rate extension is granted, we see upside to our 2015 EPS estimates. The current rate structure was extended for 2012-2014 and a similar rate structure was in place during 2010- 2011. Post-2015 growth is supported by B-H development success and environmental compliance scenarios still to be determined and details will be provided in the upcoming June 2013 IRP filing. • See Table 1 for Financial Summary. COMPANY & MARKET DATA Price (February 21, 2013) $46.73 Price Target, Excl Dividends (YE13) $47.00 52 - Week Range $38.17-$47.82 Mkt. Capitalization (mill) $2,295 Enterprise Value (mill) $3,687 FD Shares Outstanding (mill) 49 Avg. Daily Trading Vol. (000) 207 Book Value per Share (4Q12A) $35.29 Dividend (FY13E) / Yield $1.67 3.57% FY2012A FY2013E FY2014E Revenue (mill) $1,151 $1,170 $1,179 1Q EPS $0.50 2Q EPS $0.71 3Q EPS $1.84 4Q EPS $0.33 EPS $3.37 $3.26 $3.38 Prior EPS $3.41 Consensus EPS $3.26 $3.37 P/E 13.9x 14.3x 13.8x EV/EBITDA 9.5x 9.4x 9.5x P/FCF nm nm nm ESTIMATES Volum e in Millions 0.0 1.02.0 3.0 4.0 $20 $25 $30 $35 $40 $45 $50 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Chart data: Bloomberg Brian J. Russo, CFA 646-432-6312 brusso@ladenburg.com Ira Reibeisen 212-409-2051 ireibeisen@ladenburg.com Power and Utilities Sector Company Update February 22, 2013 NEUTRAL Brian Russo 646.432.6312 IDACORP (IDA) Ladenburg Thalmann & Co. Inc. PAGE - 2 - Table 1: IDA – Financial Summar $000, exce t /s amount Year Ending 31 December 2010 2011 2012E 2013E 2014E 2015E 2 FINANCIAL SUMMARY1 EPS 2.95 3.36 3.31 3.26 3.38 3.27 P/E ratio 15.82 13.89 14.11 14.32 13.84 14.27 EBITDAPS 6.51 5.73 7.73 7.84 7.77 7.89 P/EBITDAPS 7.18 8.15 6.05 5.96 6.01 5.92 Free CFPS -0.68 -0.56 0.92 0.77 0.11 0.05 P/Free CFPS -68.76 -84.15 50.63 60.61 425.09 1030.32 DPS 1.20 1.20 1.52 1.67 1.84 2.02 Dividend yield 2.6% 2.6% 3.3% 3.6% 3.9% 4.3% Dividend payout ratio 40.6% 35.7% 45.9% 51.2% 54.5% 61.8%BV PS 31.76 33.53 35.00 36.59 38.13 39.38 P/BV PS 1.47 1.39 1.34 1.28 1.23 1.19 Dilluted Shares Out 48,340 49,558 50,010 50,010 50,010 50,010 Enterprise value 3,518,538 3,675,582 3,726,561 3,686,620 3,773,100 3,812,008EV/Sales 3.40 3.58 3.24 3.15 3.20 3.18 EV/EBITDA 11.18 12.94 9.65 9.40 9.71 9.66 EV/EBIT 16.23 19.73 13.73 13.78 14.23 14.13INCOME STATEMENT (USDm) Revenues 1,036,029 1,026,756 1,151,017 1,169,587 1,179,401 1,199,325Gross margin 198,670 164,248 262,973 263,074 258,290 262,999 Operating EBITDA 314,591 284,037 386,355 392,190 388,698 394,711Depreciation & Amortization 115,921 119,789 123,383 129,116 130,408 131,712 EBIT 216,843 186,255 271,362 267,463 265,091 269,800Interest expense 75,114 71,526 75,417 75,417 75,418 75,419 Net income 142,798 166,693 165,574 163,240 168,800 163,766 Net income per share 2.95 3.36 3.31 3.26 3.38 3.27CASH FLOW (USDm) Cash flow from operations 305,400 310,243 281,159 288,558 292,998 289,268 Cash flow from investing (328,334) (332,358) (235,000) (250,000) (287,500) (287,000) Capital expenditures 338,252 337,765 235,000 250,000 287,500 287,000Cash flow from financing 198,624 (178,749) 23,985 1,383 (91,978) (41,176) Common dividends (57,872) (59,668) (76,015) (83,617) (91,978) (101,176) Free cash flow (32,852) (27,522) 46,159 38,558 5,498 2,268 BALANCE SHEET (USDm) Cash and marketable sec 228,677 27,813 97,956 137,898 51,417 12,509 Total assets 4,676,055 4,960,609 4,808,775 4,982,600 5,090,711 5,206,591 Total debt/lease 1,488,287 1,387,550 1,487,550 1,487,550 1,487,550 1,487,550 Total liabilities 3,140,071 3,298,915 2,904,904 2,904,904 2,904,904 2,904,904 Shareholders' equity 1,535,284 1,661,694 1,750,364 1,829,987 1,906,809 1,969,400RATIO ANALYSIS Sales growth (%) -1.3% -0.9% 12.1% 1.6% 0.8% 1.7% Gross margin/sales (%) 19.2% 16.0% 22.8% 22.5% 21.9% 21.9% EBIT/Assets 4.6% 3.8% 5.6% 5.4% 5.2% 5.2%CFO/Assets 6.5% 6.3% 5.8% 5.8% 5.8% 5.6% ROA 3.1% 3.4% 3.4% 3.3% 3.3% 3.1% ROE 9.3% 10.0% 9.5% 8.9% 8.9% 8.3%Total debt/total capital 49.2% 45.5% 45.9% 44.8% 43.8% 43.0% Total debt/EBITDA 4.7 4.9 3.9 3.8 3.8 3.8 EBITDA/interest expense 4.2 4.0 5.1 5.2 5.2 5.2 FFO/Debt 20.5% 22.4% 18.9% 19.4% 19.7% 19.4% RATE BASE ANALYSISImplied Rate Base 2,487,521.76 2,701,021.76 2,796,442.88 2,917,326.38 3,074,826.38 ADITC EXTENSION ANALYSIS AND EARNINGS SUMMARY1 Idaho Power (IPC) year-end shareholder equity 1,592,831 1,679,013 1,754,264 Idaho Power Idaho-jurisdictional Earnings 158,646 154,721 161,655 Idaho Power Oregon-jurisdictional Earnings 5,610 5,722 5,837 Total Idaho Power Earnings Per Share $3.28 $3.21 $3.35 Financial, Ida-West, Holdco $0.03 $0.03 $0.03 Consolidated EPS $3.31 $3.23 $3.37 12012-2014 rate structure based on IPUC approved ADITC extension and 2011 GRC settlement. 2015 EPS to be dictated by an expected mid-2014 GRC filing. 2Our 2015E EPS assumes traditional cost of service and return on rate base structure Source: Ladenburg Thalmann & Co, Inc., Company Reports Brian Russo 646.432.6312 IDACORP (IDA) Ladenburg Thalmann & Co. Inc. PAGE - 3 - 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, provided, however, that: The research analyst primarily responsible for the preparation of this research report has or will receive compensation based upon various factors, including the volume of trading at the firm in the subject security, as well as 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 Brian Russo 646.432.6312 IDACORP (IDA) Ladenburg Thalmann & Co. Inc. PAGE - 4 - workforce, could increase costs and reduce earnings. STOCK RATING DEFINITIONS Buy: The stock’s return is expected to exceed 12.5% over the next twelve months. Neutral: The stock’s return is expected to be plus or minus 12.5% over the next twelve months. Sell: The stock’s return is expected to be negative 12.5% 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 1/31/13) Buy: 77% (34% are banking clients) Neutral: 22% (10% 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 - 5 - 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 MKT, FINRA, all other principal exchanges and SIPC Additional Information Available Upon Request © 2013 - Ladenburg Thalmann & Co. Inc. All Rights Reserved.