Idaho Power's Strategic Moves Promise Robust Revenue Growth Amidst Sustainable Energy Transition

Key Takeaways

• Strategic focus on economic expansion and infrastructure investments in growing Idaho service area imply forward-looking revenue growth from robust energy demand.
  
• Proactive regulatory approaches and investments in renewable energy and storage capabilities align with sustainability trends, potentially enhancing customer base and net margins.
  
• Regulatory and execution risks, alongside wildfire mitigation costs and reliance on tax credit amortization, could challenge IDACORP's profitability and necessitate unforeseen financial strategies.

Catalysts

Engages in the generation, transmission, distribution, purchase, and sale of electric energy in the United States.

• IDACORP's strategic focus on customer growth and economic expansion in the Idaho Power service area, which is experiencing robust GDP growth, contributes to future revenue increases. This is expected due to the forecasted GDP growth of 4.3% in 2024 and 3.8% in 2025, indicating a stronger economy and potentially higher energy demand.
  
• The investments in infrastructure to support two of IDACORP's largest customer projects, the Meta data center in Kuna, and the Micron's expansion in Boise, which are ahead of the construction schedule, imply capital expenditure aimed at increasing capacity and reliability, potentially leading to long-term revenue growth as these projects come online.
  
• Regulatory filings in Idaho and Oregon, including the settlement that would result in an overall rate increase of $6.7 million in Oregon, and a requested increase of $99 million in Idaho, highlight a proactive approach to recover infrastructure investment and labor expenses, impacting revenue positively if these increases are approved.
  
• The selection of a 200-megawatt battery storage system owned by Idaho Power and the negotiation for additional resources planned to come online in summer 2026 indicate strategic investments in renewable and storage capabilities, enhancing the company's energy portfolio and its appeal to environmentally conscious consumers, potentially boosting revenue through new energy contracts.
  
• The conversion of remaining coal-fired units to natural gas, reducing carbon emissions by about half while maintaining generating capacity, aligns with the global trend towards cleaner energy sources. This initiative could lead to cost savings on emissions and fuel over time, directly impacting net margins positively by reducing operational costs and attracting customers prioritizing sustainability.

Assumptions

• Analysts are assuming IDACORP's revenue will grow by 4.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.0% today to 16.5% in 3 years time.
• Analysts expect earnings to reach $344.7 million (and earnings per share of $6.22) by about October 2027, up from $274.2 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $246 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.6x on those 2027 earnings, up from 20.1x today. This future PE is greater than the current PE for the US Electric Utilities industry at 20.0x.
• Analysts expect the number of shares outstanding to grow by 1.35% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 5.8%, as per the Simply Wall St company report.

Risks

• Regulatory risks could impact the company's ability to secure timely and adequate rate increases, impacting revenue growth and profitability.
  
• Execution risks related to major transmission and infrastructure projects could lead to delays or cost overruns, affecting capital expenditure plans and possibly increasing debt levels.
  
• Wildfire risks and the associated costs for mitigation and system hardening efforts could increase operational and maintenance expenses, reducing net margins.
  
• The reliance on tax credit amortization for earnings support could introduce volatility in earnings, dependent on regulatory approval and tax credit availability, impacting net income.
  
• Higher-than-anticipated growth in customer demand and load could necessitate large-scale infrastructure investments sooner than planned, potentially stressing cash flow and requiring additional financing.

Valuation

• The analysts have a consensus price target of $108.75 for IDACORP based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $120.0, and the most bearish reporting a price target of just $98.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.1 billion, earnings will come to $344.7 million, and it would be trading on a PE ratio of 20.6x, assuming you use a discount rate of 5.8%.
• Given the current share price of $103.67, the analyst's price target of $108.75 is 4.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.