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Summary IDACORP has outperformed utility benchmarks on one year, five year, and ten year timeframes. Idaho’s recovery from the recession has been incredibly resilient, helping the utility perform above peer averages. The dividend yield isn’t amazing, but shareholders should expect 5% annual increases over the next five years. IDACORP (NYSE: IDA ) provides electric utility services to over five hundred thousand customers in southern Idaho and eastern Oregon. Idaho has been a relatively strong state coming out of the recession, maintaining below average unemployment while adding healthy, higher-paying jobs and maintaining a pro-business environment. These factors have combined with prudent management style from IDACORP has resulted in a company with a rapidly rising dividend in a normally benign sector. This performance has elevated shares, bringing them onto the radar for many investors. Those who got in early on this tiny utility with just 3,600MW of capacity have been awarded with solid gains as the shares have continued to repeatedly trounce utility benchmarks year in and year out. Is the long-term outlook for IDACORP as favorable as its past? Non-ownership Operational Risk Idaho Power generates nearly half of its power from coal-fired generation. Beyond the general risks of coal (shift to renewables, coal ash, regulatory risk, high capital expenditures to bring plants into emissions compliance), Idaho Power also bears the risk of not having a controlling interest. The three coal plants in which it has an interest are operated by Portland General (PGE), PacifiCorp, and NV Energy. This non-controlling interest gives Idaho Power limited control in operations, but it also gives the company an easier out if does choose to exit coal operations by being able to sell its partial stakes. As for continuing coal operations, the Boardman plant, as outlined in my article on Portland General , is already slated to be closed by 2020. Based on Idaho Power’s 2013 review, they will continue to undertake operations at the other two plants for the foreseeable future. Operating Results Roughly half of IDACORP’s power generation is generated from hydroelectricity generated along the Snake River and its tributaries. When water conditions are poor (due to poor snowpack melt in the spring, low rainfall, or a combination of both), hydroelectric generation falls. In order to fill these gaps, the company must usually purchase power on the open market to fill the gaps. Likewise when the rivers are strong, IDACORP has excess power to sell on the open market for additional revenue. Idaho has been experiencing historically warm and dry conditions for the past several years, which has led to a decrease in yearly power generation from its hydroelectric plants. Purchased power will touch $250M in 2015, up $80M from 2010 levels. As an offset to this, dry and hot weather means higher energy demand from IDACORP customers. Peak energy usage for the utility generally comes in the summer as customers run their air conditioners and irrigation pumps, dry weather exasperating the power draw needed to run these key items. In spite of this gross margin weakness, primarily due to increased purchased power, operating margins have been expanding. This has been primarily due to management chokehold on operations and maintenance costs. Cash from operations has been growing while capital expenditures have been falling. Cash burn has been marginal, with long-term debt barely moving over recent years. The current dividend yield of 2.84% is highly sustainable in my view and future growth is easily supported by operational cash flow. Conclusion IDACORP is a small utility that does trade at a fair premium to peers. The dividend yield is quite small but has been growing, especially in the last few years. The company can easily support future dividend increases so I expect that the company will bump the dividend meaningfully over the next five years, likely in the 5% range. While I might not advocate buying at current prices near 52-week highs, it definitely deserves to be on investor watch lists looking for steady, reliable future returns. Scalper1 News
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