Keybanc-Oct-2-2011.pdf

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October 2, 2011
ENERGY: Electric Utilities
Company Update / Estimates Change / Rating Change
KeyBanc
Capital￿Markets

IDACORP, Inc.:
IDA: Positive Events Set Table for Next Round of Regulation; Upgrade to BUY
KeyBanc Capital Markets Inc.
Member NYSE/FINRA/SIPC
Paul T. Ridzon: [phone] Ð [e-mail]
Timothy Yee: [phone] Ð [e-mail]

Rating BUY
Price $37.78
12-Mo. Price Target $41.50
Dividend $1.20
Yield 3.2%
52-Wk. Range $34 - $41
Trading Volume (000)347
Market Cap. (mm)$1,870.9
Shares Out. (mm)49.52
Book Value/Share $31.45
EPS (Net) Summary
FY Dec 2010A 2011E 2012E
1Q $0.34 $0.60A --
2Q $0.82 $0.42A --
3Q $1.39 $1.75 --
4Q $0.41 ----
YEAR $2.95 $3.20 $3.10
Prior $2.95 $3.05 $3.00
First Call --$3.04E $3.01E
P/E 12.8x 11.8x 12.2x
Note 1: 2010 Q2: $0.82 reported includes $0.53 benefit from
tax accounting method change for repair-related expenses and
$0.09 loss on reversal of 1Q10 ADITC amortization.
Note 2: 2010 Q3: $1.39 reported includes $0.14 benefit from
tax accounting method change for repair-related expenses.
ACTION STATEMENT
IDACORP, Inc. (IDA-NYSE) has had two incremental positive announcements that we
believe put the Company in a decent position from a regulatory standpoint. IDA’s tax
accounting change around Uniform Capitalization (UniCap) was accepted yielding a
$57 million benefit, eliminating the need to amortize Accumulated Deferred InvestmentTax Credits (ADITCs) to achieve a 9.5% ROE in 2011 (and preserving full balance ofthese tax credits). Additionally, IDA announced a settlement in its pending Idaho rate
case granting $45 million out of a request for $71 million. While the settlement was
silent on ROE, we believe it is in the 10% ballpark, relative to an ask of 10.5%. We
believe these events position IDA well for its next regulatory task, getting the 300 MWLangley Gulch natural gas plant in rates in a timely manner. With some benefits ofUniCap flowing to ratepayers, and full value of ADITCs to bring to the table, we believe
IDA is well positioned for a constructive dialog with regulators.
· Rating: BUY from HOLD
· 2011E: $3.20 from $3.05
· 2012E: $3.10 from $3.00
KEY INVESTMENT POINTS
We believe the combination of several recent events has improved IDA's investment
outlook and prospects for favorable regulation in Idaho.
IDA received approval for its change in tax accounting for its UniCap tax treatment,
which will: provide a one-time tax refund of $57 million (before any sharing with
customers); provide ongoing $3 million annual benefit and allow IDA to reverse $6.8
million of ADITC's amortized to date, leaving intact the approximately $45 million bank
of these credits.
IDA reached a settlement that we view as constructive with key parties in its Idaho
general rate case. IDA appears to have gotten an authorized ROE of approximately
10%, although the floor ROE of 9.5% included in its last settlement was not extended.
We believe these events leave IDA in a favorable position for the next regulatory activity
we expect, getting the $427 million Langley Gulch Plants (in service June 2012) in rates.
We expect that bringing untapped ADITC's to the table, benefits from the UniCap
approval and the parameters of the proposed settlement should allow for a constructive
outcome, including the potential to put a floor on earned ROE, as IDA currently has.
Given the constructive proposed settlement and improved prospects for timely Langley
Gulch rate treatment, we have raised our 2012 estimate to $3.10 from $3.00. We are
raising our rating to BUY from Hold and establishing a $41.50 price target.
FOR IMPORTANT DISCLOSURES AND CERTIFICATIONS, PLEASE REFER TO PAGES 4 - 5 OF THIS NOTE.
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We have raised our 2011 estimate to $3.20 from $3.05, acknowledging much of the benefit is one time.
VALUATION
Based upon our revised 2012 estimate, shares of IDA sell at a P/E multiple of 12.2x, representing an 11% discount to the group average
multiple of 13.6x. We believe shares warrant an average to modest discount valuation given attractive investment opportunities balanced
against a below average (4.4%) yield of 3.2%. Our $41.50 price target represents a P/E ratio of 13.4x based on our 2012 estimate.
RISKS
We believe the primary risk to achieving our price target is a rejection of the recently proposed settlement by the Idaho commission.
Other risks include prolonged weak hydro conditions and worsening demand trends.
DISCUSSION
Given the recent confluence of events at IDA, we feel incrementally positive about the name and are upgrading shares from Hold to
BUY with a $41.50 price target, representing a twelve month total return potential of 13%. We believe these events have set the stage
for IDA to achieve a constructive outcome in its next regulatory task of getting the $427 million Langley Gulch plant in rates. We discuss
these events and how we believe they may tie in to one another in a positive way below.
UniCap Resolution
On September 13, 2011, the Congressional Joint Committee on Taxation (JCT) approved the change in IDA's tax treatment for
shared costs around large construction projects. This resulted in IDA being able to claim a $57 million tax deduction, related to tax
periods from 2009 to 3Q11. IDA will be able to keep 100% of the benefit until it earns a 10.5% ROE in 2011, with 50/50 sharing with
customers thereafter. IDA has indicated that it might use the shareholder portion of earnings in excess of 10.5% as a negotiating
chip with regulators and intervenors in rate discussions. In our view, trading a one-time earnings pop in 2011 for a more sustainable
benefit makes very good sense. Aside from the one-time benefit, IDA has indicated that it expects an ongoing $3 million annual
benefit (approximately $0.06 per share) from the new accounting treatment. As a consequence of receiving JCT approval for this tax
methodology, IDA will reverse $6.8 million of ADITCs booked through June 30, 2011 and will no longer need to amortize an expected
total of $13.5 million of ADITCs in 2011 to hit the floor ROE of 9.5% specified in the 2010 settlement. This leaves intact IDA's $45
million bank of these credits (more on this below).
Idaho Rate Case Settlement
IDA announced a settlement in its pending Idaho rate case that was filed on June 1, 2011. The original filing sought a total rate increase
of $82.6 million based on a 10.5% ROE and 51% equity layer. Included in the $82.6 million was $11.3 million of power supply costs
IDA was asking to have included in base rates. The settlement allows a base rate increase of $45.5 million and calls for reclassifying
$22.8 million of base rates as power supply costs, eligible for full recovery as a pass through cost. We are agnostic to how power
supply costs are classified and view the settlement as a $45.5 million recovery vs. an apples to apples request of $71.3 million.
While the settlement was silent with regards to ROE, we believe the imbedded ROE is approximately 10%, which we view positively
in this environment. The blended overall rate of return in the settlement is 7.86% vs. the requested 8.17%. The settlement will still
require approval from the Idaho commission, but believe risk is mitigated by the fact that the major intervenors are signatories to the
stipulation. An extension of the floor ROE of 9.5% (with any shortfall covered by amortizing ADITCs) was not included in the current
settlement, as it was in IDA©s January 2010 rate agreement.
Potential Implications and Opportunities Stemming from These Events
Market reaction to these events has been muted (IDA has outperformed the UTY index by 1.8% since the UniCap announcement).
The UniCap resolution, which we had felt was quite likely, got a stronger reaction than the settlement. In our view, the fact that the
settlement did not include extending the safeguard of the 9.5% ROE floor dampened enthusiasm.
We believe investors have not looked at the opportunity that these events, on a combined basis, present to the Company. We believe the
forum to capture the interaction will come in IDA's request to have its Langley Gulch gas plant investment included in rates concurrent
with bringing the plant online (expected in June 2012). We believe IDA is likely to start discussions with parties on this matter late
in 2011 or in early 2012. As discussed, we believe the manner in which recent events have unfolded puts IDA in a good position in
this dialog, through the ability to be very flexible with the array of options open to discussion. These options include converting the
one-time benefit of 2011 earnings in excess of a 10.5% ROE into a more lasting benefit by putting these shareholder earnings on
the negotiating table and allowing ratepayers to receive some of the benefit. Additionally, the $45 million bank of ADITCs could, as
it was in the 2010 settlement, be used to fund another floor ROE to buffer downside. The fact any earnings from amortizing ADITCs
would be non cash is a much lesser concern to us than it was previously due to the favorable UniCap outcome, repairs deduction
benefits and bonus depreciation, which have provided cash we see as ample to fund Langley Gulch and beyond without outside equity.
We understand that the settlement was largely crafted before the JCT ruled on the UniCap deduction, and as such the ongoing $3
million annual benefit will be incremental to the $45 million rate increase. We believe this presents another opportunity to negotiate a
way to mitigate customer rate impacts. In our view these items set against the financial parameters within the proposed settlement,
particularly the blended rate of return of 7.86%, which we estimate to imply a ROE approximating 10%.
Company NoteOctober 2, 2011
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Earnings Revisions
We have revised our 2011 estimate to $3.20 from $3.05 per share. This estimate assumes that IDA earns an ROE in Idaho of roughly
10.5%. However, we expect that the benefit of the UniCap deduction will push the ROE above this, well into the 50/50 sharing band.
Our estimate assumes that IDA reserves this incremental benefit for negotiating. We expect results could be somewhat higher if no
reserve is taken around this issue. Given the large size of items that are one time in nature in 2011, we do not view the 2011 EPS
as meaningful for valuation purposes.
We have raised our 2012 estimate to $3.10 from $3.00 per share. This reflects the constructive settlement as well as our view that
Langley Gulch can enter rates nearly coincident with the timing of commercial operation.
Company NoteOctober 2, 2011
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KeyBanc Capital Markets Inc. Disclosures and Certifications
IDACORP, Inc. - IDA
IDACORP, Inc. is an investment banking client of ours.
We have received compensation for investment banking services from IDACORP, Inc. during the past 12 months
We expect to receive or intend to seek compensation for investment banking services from IDACORP, Inc. within the next
three months.
During the past 12 months, IDACORP, Inc. has been a client of the firm or its affiliates for non-securities related services.
Reg A/C Certification
The research analyst(s) responsible for the preparation of this research report certifies that:(1) all the views expressed in
this research report accurately reflect the research analyst©s personal views about any and all of the subject securities or
issuers; and (2) no part of the research analyst©s compensation was, is, or will be directly or indirectly related to the specific
recommendations or views expressed by the research analyst(s) in this research report.
Three-Year Rating and Price Target History
Rating Disclosures
Distribution of Ratings/IB Services Firmwide and by Sector
KeyBanc Capital Markets
IB Serv/Past 12 Mos.
Rating Count Percent Count Percent
BUY [BUY]228 48.90 53 23.25
HOLD [HOLD]235 50.40 49 20.85
SELL [UND]3 0.60 0 0.00

ENERGY
IB Serv/Past 12 Mos.
Rating Count Percent Count Percent
BUY [BUY]30 41.70 14 46.67
HOLD [HOLD]42 58.30 20 47.62
SELL [UND]0 0.00 0 0.00

Company NoteOctober 2, 2011
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Rating System
BUY - The security is expected to outperform the market over the next six to 12 months; investors should consider adding the
security to their holdings opportunistically, subject to their overall diversification requirements.
HOLD - The security is expected to perform in line with general market indices over the next six to 12 months; no buy or sell
action is recommended at this time.
UNDERWEIGHT - The security is expected to underperform the market over the next six to 12 months; investors should
reduce their holdings opportunistically.
The information contained in this report is based on sources considered to be reliable but is not represented to be
complete and its accuracy is not guaranteed. The opinions expressed reflect the judgment of the author as of the
date of publication and are subject to change without notice. This report does not constitute an offer to sell or a
solicitation of an offer to buy any securities. Our company policy prohibits research analysts and members of their
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Investors should assume that we are seeking or will seek investment banking or other business relationships with the
company described in this report.
Company NoteOctober 2, 2011