IDACORP INC quarterly report, Q2 FY2014

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Business context and reporting period

IDACORP, Inc. is a holding company whose principal subsidiary, Idaho Power, is a regulated electric utility serving southern Idaho and eastern Oregon. This combined, unaudited Form 10-Q covers the quarter and six months ended June 30, 2014; interim results are seasonal and are not necessarily indicative of full-year results. The financial statements received an independent accountant’s review, not an audit.

Financial performance and position

Unless otherwise noted, amounts are in millions of dollars. IDACORP’s second-quarter revenue was $317.8, up 4.6% year over year, while net income attributable to IDACORP fell to $44.5 from $46.5 and diluted EPS declined to $0.89 from $0.93. For the first half, revenue was $610.5 versus $568.9; attributable net income was $71.9 versus $81.7, and diluted EPS was $1.43 versus $1.63.

  • Operating income was $71.8 in Q2 versus $79.4, and $120.4 for the first half versus $138.8. Approximate operating margin declined to 22.6% from 26.1% in Q2 and to 19.7% from 24.4% for the first half.
  • Idaho Power net income was $42.7 in Q2 versus $45.0 and $70.6 for the first half versus $79.0.
  • IDACORP operating cash flow was $163.3 for the first half, up from $114.2. Capital additions were $128.3 versus $109.1; cash at June 30 was $50.6, down from $78.2 at year-end.
  • At June 30, IDACORP reported $1.614 billion of long-term debt, $1.1 million of current debt maturities, and $37.2 million of commercial paper. No loans were outstanding under either revolving credit facility. Available short-term borrowing capacity was $87.8 million for IDACORP and $275.8 million for Idaho Power.
  • Credit-facility leverage ratios were 47% for IDACORP and 48% for Idaho Power, below the 65% covenant limit. Declared dividends were $0.43 per share in Q2 and $0.86 for the first half, compared with $0.38 and $0.76 in 2013.

Material changes versus prior comparable periods

  • Management attributed lower earnings mainly to milder weather: lower customer usage reduced Idaho Power operating income by $8.6 million in Q2 and $21.4 million for the first half. Customer growth partially offset the impact, adding $2.5 million and $4.3 million, respectively.
  • General business sales volume fell 2% in Q2 and 3% for the first half, while off-system sales volume rose 81% and 68%. Better hydrologic conditions lifted hydro generation 19% in Q2 and 11% year to date.
  • Higher purchased-power costs and operating expenses weighed on results; lower fuel costs partly offset those increases. Rate changes and customer growth lifted general business revenue, but lower usage reduced it. 2013 comparisons reflect retrospective adoption of a new affordable-housing investment accounting method, which increased reported 2013 IDACORP net income by $1.0 million for Q2 and $2.7 million for the first half.
  • Operating cash flow improved substantially, with management citing regulatory-account changes, including power-cost adjustment deferrals and collections, and working-capital timing.

Outlook, regulation, risks and unusual items

  • Management’s outlook was unchanged from the prior quarter. It expected 2014 Idaho Power O&M of $335–$345 million and capital expenditures, excluding AFUDC, of $280–$295 million. Estimated 2014 hydro generation was revised to 5.5–6.5 million MWh from 5.5–7.5 million. The company estimated $1.47–$1.56 billion of capital investment over 2014–2018.
  • Idaho Power did not expect additional ADITC amortization for 2014 and reversed the $0.95 million recorded in Q1, based on its updated full-year Idaho return-on-equity estimate. An application to extend the related regulatory settlement remained pending.
  • Idaho regulators approved an $11.1 million net PCA rate increase and a $6.0 million increase in fixed-cost-adjustment recovery, effective June 1, 2014. Two subsequent review dockets address the PCA true-up and FCA methodology; staff identified a potential $14.2 million PCA true-up issue, which remained under review.
  • Significant risks include regulatory cost recovery, weather and water availability, wholesale power and fuel prices, environmental compliance, and large capital needs. Proposed federal CO₂ rules and potential expansion of Clean Water Act requirements had uncertain impacts; the company could not estimate the cost of the proposed CO₂ rules. Idaho Power expected compliance with new cooling-water intake rules to apply to Jim Bridger, but did not then expect a material cost increase.
  • Ten renewable-energy purchase agreements added during the first half covered about 64 MW and expected payments of $252 million through 2038; four remained subject to approval. In July, Idaho Power signed additional solar purchase agreements for about 120 MW, subject to regulatory approval, with expected payments of $480 million over 2016–2036.
  • Idaho Power planned approximately $30 million of pension contributions in 2014 and expected significant contributions in 2015 and beyond. Legal and regulatory contingency accruals were not material at filing, though future accruals could be material. A $70 million mine-reclamation guarantee was matched by a $70 million trust fund.

Important facts for investors to verify

  1. Whether customer usage and weather normalize, and whether customer growth continues to offset volume weakness.
  2. Outcomes of the pending Idaho PCA/FCA reviews and the application to extend the settlement stipulation, including any effect on rates, earnings, or cash flows.
  3. Whether forecast capital expenditures, hydro generation, and pension contributions remain within management’s estimates and how these needs are funded.
  4. Regulatory approval and eventual costs of renewable power agreements, and the financial implications of environmental rules and generation-control investments.
  5. Whether operating cash flow and liquidity remain adequate amid investment needs, and whether debt ratings, collateral requirements, or dividend restrictions change.