Idacorp ready to grow again

Idaho Power's parent company has thrived since it went back to the basics as a regulated utility. Will it stay independent?

rbarker@idahostatesman.comJuly 2, 2013 

  • STEADY GROWTH FOR SIX YEARS

    IdaCorp's operating revenues grew from $879.4 million in 2007 to $1,080.7 million in 2012. Its return on year-end common equity was 6.8 percent in 2007 and 9.6 percent in 2012, according to its annual report. (The report defines return on year-end common equity as net income attributable to IdaCorp Inc. divided by total equity, excluding non-controlling interests, at the end of the year.)

The past six years were hard on Idaho's economy, but not for its home-grown electric utility. IdaCorp, the holding company of Idaho Power Co., experienced six years of growth and drove up the annual dividend to $1.52. Investors responded by boosting the stock price from $39 to $49 in 2013 alone.

Now that Idaho's economy has finally turned around, the utility - which serves more than 500,000 customers across Southern Idaho and the eastern part of Oregon - is working with state officials to help lift their economic development hopes as well.

IdaCorp Chief Financial Officer Darrel Anderson sees the change out of his ninth-floor window in Boise.

"For the first time in my 17 years with the company, we see multiple construction cranes on the skyline of Boise, all positive indicators of an economy poised for expansion," Anderson, who is president of Idaho Power, told shareholders at IdaCorp's annual meeting in May.

ONCE AGAIN, A SEARCH FOR CUSTOMERS

Only a decade ago, Treasure Valley economic development officials complained because they had to turn down two possible new companies when Idaho Power suggested it couldn't supply the power they needed without sharp price increases for its existing customers.

But the 330-megawatt Langley Gulch natural gas generation plant came on line a year ago. Four hundred megawatts of wind power have been added to Idaho Power's grid. A solar polysilicon manufacturer in Pocatello, which would have been a big power user, has failed.

Now Idaho Power has electricity to sell.

The utility is working with chambers of commerce and the Idaho Department of Commerce to ensure electric power is not a "bottleneck" that stifles the state's growth, Anderson says.

"That's a fine line," he says. "You can't overbuild."

RULING TOOK THE WIND OUT OF WIND POWER

Since 2010, Idaho Power has been locked in a battle with wind power and other renewal energy developers, who used changes in tax incentives to build a new generation across the landscape. Under federal law, Idaho Power was required to buy the electricity they generated.

That fight was resolved in 2012, when the Idaho Public Utilities Commission reduced the price Idaho Power would pay new renewable plant developers for their power. This made wind and other renewable investors and developers look elsewhere to make their investments.

It was a harbinger of the challenges Idaho Power and other traditional utilities face as distributed generation sources, such as rooftop solar panels, challenge the centralized utility business model that has been in place since the 1920s.

Unlike most businesses, a regulated utility provides electricity to customers in its area without competition. A state public utility commission oversees the quantity and quality of services it provides and sets a rate of return for the money the utility invests to provide the service.

This makes the three members of the Idaho Public Utilities Commission the most important customers of Idaho Power. Since they are appointed by the governor and confirmed by the state Senate, they, too, must answer to the utility's customers.

C02 AND COAL POWER

Idaho Power's management also answers to its 39,000 stockholders, who sometimes display a collective mind of their own. In 2009, a majority of stockholders voted for a resolution urging the company to reduce its carbon-dioxide emissions.

As a result, the company set a goal for cutting emissions. This year Idaho Power made the target more ambitious, in part because of all of the wind power now on its grid. Target Rock Advisors, an investment-advisory firm that emphasizes environmental sustainability and socially responsible investing, named Idaho Power a 2013 Sustainable Utility Leader.

The utility stuck to its plans to spend up to $210 million on pollution-control upgrades for aging coal-fired plants in Wyoming and Nevada. Critics say that decision could cost ratepayers and stockholders when stricter limits on greenhouse gases, proposed last month by President Obama, take effect.

Several industry analysts say Idaho Power's risks are far lower than utilities that depend more on coal.

Over the long term, Idaho Power's business model is threatened by new technologies that manage electric power demand, so-called smart-grid technologies and rising power prices that will encourage energy efficiency. These "disruptive challenges," energy analyst Peter Kind writes for the Edison Electrical Institute, "create adverse impacts on revenues, as well as on investor returns."

CHEAPEST POWER IN U.S.

The tensions over wind and solar, along with a step back in energy-efficiency programs, grow out of Idaho Power's efforts to manage these changes while preserving its low-cost power as long as it can.

"We've never been against renewable energy," Anderson says. "What we're saying is: If we're going to do it, let's make sure pricing is correct so it doesn't send the wrong signals."

Idaho Power's hydroelectric base expanded dramatically in the 1950s and 1960s and still offers a buffer other utilities don't have. Since the dams were built long ago and their fuel is free, Idaho Power's rates remain the lowest in the nation.

But since the late 1990s, Idaho Power has been locked in a struggle to secure new 50-year licenses for the 750-megawatt Hells Canyon Dam complex on the Snake River south of Lewiston. Once completed, Idaho Power officials expect the bill, which would be recovered from ratepayers, will be more than $500 million.

"We still believe at the end of the day when that gets done - and it will get done - it will still be a competitively priced resource for our customers," Anderson says.

THINGS FELL APART

IdaCorp's success has been due to its return to the basics. In 1998, the holding company was formed to take advantage of electricity deregulation. Idaho Power became one of several subsidiaries, including IdaCorp Energy, which bought and sold power on the wholesale energy market.

By 2001, IdaCorp was making far more money from its unregulated power deals than Idaho Power. The company's revenues rose above $5 billion, and it entered the Fortune 500 for the first time.

But after Enron admitted to manipulating the energy market to drive up prices in 2001, IdaCorp's new business model fell apart, as it did for the rest of the industry. IdaCorp was forced to retool. The company's stock lost 50 percent of its value, falling to $20, and its credit rating dropped.

IdaCorp dumped businesses, such as an alternative-energy fuel-cell startup, and focused on its core competencies.

"We understand generation, we understand distribution, we understand customer services," Anderson says.

Wall Street agrees. Analyst Michael Bates, of D.A. Davidson and Co. in Portland, sees IdaCorp continuing to grow. He cites its plan to build a new transmission line between Idaho and Oregon.

"I think they've got a good management team," Bates says. "It's a good stock for an investor that's looking for a relatively low risk in their portfolio."

MORE POWER FOR WARREN BUFFETT?

The acquisition last month of Nevada's NV Energy for $56 billion by MidAmerican Energy Holdings Co. once again raises questions asked in the past about whether IdaCorp's success makes it a takeover target. MidAmerican is the energy unit of Berkshire Hathaway, led by Warren Buffett.

MidAmerican also owns PacifiCorp, which operates in Oregon and owns Rocky Mountain Power in eastern Idaho.

For the same reason IdaCorp is a good value for investors, it would appear on the surface to be ripe for such a merger. Its book or enterprise value of $4.03 billion is substantially higher than the value of its outstanding shares of more than $2.4 billion.

But Bates says a merger is not that simple: "Any potential buyer is going to ask, 'Is this going to add value to my existing businesses?'"

If the buyer says yes, it must be prepared for state regulators, who will ask whether an acquisition would harm Idaho Power's customers. Unlike in Nevada, Idaho Power answers not to one state regulator, but to two. Oregon's Public Utility Commission just chastised Idaho Power for "management failures" for not analyzing its coal plant upgrade more closely. Oregon's PUC would be an obstacle and potentially a poison pill in a takeover attempt.

"Someone would have to come in and have a very compelling argument why they could do better," Bates says.

ANDERSON: LET'S STAY INDEPENDENT

Idaho Power officials declined comment on the potential for a takeover or merger. But Anderson made the case for IdaCorp's track record over time.

CEO LaMont Keen, who led IdaCorp back to its regulated utility business roots, has not yet announced his retirement plans. But Anderson has stepped up into a more public role as the board seeks to preserve continuity and trust in its management team.

A quarter of its 2,000 workers are pension-eligible, so the company expects to see a lot of new blood in the next few years. Anderson says the management team is ready to manage change.

"We believe there's value in being independent," Anderson says. "We believe it provides us more flexibility so we can be more focused in on our customers and our customers' needs."

•••

Rocky Barker: 377-6484

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