IDACORP, Inc. (IDA) — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Financial statements are unaudited; the independent accountants performed interim reviews, not audits. IDACORP is a holding company whose principal operating subsidiary, Idaho Power, is a regulated electric utility serving southern Idaho and eastern Oregon.
Financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Operating revenue | $333.0 million | $315.4 million | $635.6 million | $596.4 million |
| Operating income | $79.1 million | $77.0 million | $129.9 million | $120.8 million |
| Net income attributable to IDACORP | $49.8 million | $56.2 million | $82.9 million | $82.0 million |
| Diluted earnings per share | $0.99 | $1.12 | $1.65 | $1.63 |
| Declared dividend per share | $0.55 | $0.51 | $1.10 | $1.02 |
Margins: Calculated operating margin was approximately 23.8% in Q2 2017 versus 24.4% a year earlier, and 20.4% for the first half versus 20.3%. IDACORP’s net income attributable to the company declined about 11% in Q2 but increased about 1% year to date.
Cash flow and liquidity: First-half operating cash flow was $191.6 million, up from $137.9 million; capital additions were $146.3 million. Cash was $32.6 million at June 30, down from $61.5 million at year-end 2016. Long-term debt was $1.745 billion; quarter-end notes payable were $0.6 million at IDACORP and none at Idaho Power. Covenant leverage ratios were 44% for IDACORP and 46% for Idaho Power, below the 65% limit. Net available revolving-credit capacity was approximately $99.5 million at IDACORP and $275.8 million at Idaho Power.
Changes and drivers versus prior periods
- Q2 revenue grew, but IDACORP-attributable earnings fell. Cooler temperatures and substantially higher precipitation reduced irrigation use; lower per-customer usage reduced Q2 operating income by about $9.9 million. Customer growth contributed about $2.0 million to Q2 operating income.
- First-half revenue growth reflected rate changes, customer growth, and higher transmission-related revenue. Customer count grew 1.8% over the prior 12 months, reaching 538,984 at June 30.
- Hydroelectric generation rose with wetter conditions, lowering thermal fuel expense but increasing surplus energy available for sale. Off-system sales volume increased, while average wholesale selling prices declined 16% in Q2 and 30% for the first half.
- Purchased power expense rose 28% in Q2 and 15% year to date, principally due to more PURPA-contract purchases. Fuel expense declined 32% in Q2 and 14% year to date, primarily from increased hydro generation.
- Depreciation expense increased, including from the Valmy settlement and revised depreciation rates. Income tax expense was higher than in 2016, partly because 2016 included a $5.6 million tax benefit from deductible bond-redemption costs; no comparable early redemption occurred in 2017.
Outlook, regulatory matters, and risks
- Management said its outlook remained consistent with the 2016 Form 10-K. It expects positive customer growth and approximately $1.5 billion of capital expenditures over 2017–2021. The filing gives no new full-year earnings-per-share guidance.
- Idaho Power estimated 2017 hydroelectric generation of 8.5–9.5 million MWh, versus a 20-year average of 7.6 million MWh. The 2017 integrated resource plan forecasts 20-year annual growth of 0.9% in retail energy demand and 1.4% in peak demand.
- 2017 regulatory changes include an Idaho PCA rate increase of $10.6 million for the June 2017–May 2018 period, a $6.9 million increase in the Idaho fixed-cost adjustment, and a $13.3 million annual Idaho Valmy revenue requirement effective June 1. Oregon approved a $1.1 million Valmy revenue-requirement increase effective July 1. Valmy-related settlements added $2.5 million to first-half after-tax income; management estimated a $5.2 million full-year 2017 benefit.
- Idaho Power plans to end participation in Valmy coal operations by the end of 2025, with unit 1 targeted by 2019; it plans to cease coal operations at its Boardman interest by the end of 2020. The company is assessing whether to install pollution controls at Jim Bridger. Environmental rules, plant economics, and timely recovery of costs in rates remain uncertainties.
- Hells Canyon Complex relicensing remains uncertain. Relicensing costs of $263 million were in construction work in progress; Idaho Power could not predict the timing or financial and operational requirements of a new license. The company is also pursuing major transmission projects, subject to permitting, cost, and timing risks.
- New biomass and solar PURPA agreements increased contractual payment obligations by approximately $70 million over 20 years. Idaho Power’s BCC reclamation guarantee was $57 million, supported by a $90 million reclamation trust fund. Management said recorded legal-contingency accruals were not material and believed pending matters would not materially adversely affect the companies, while noting outcomes remain uncertain.
- Key broader risks include regulatory cost recovery and allowed returns, weather and water availability, power and fuel prices, PURPA purchase obligations, large capital needs, environmental and permitting requirements, credit ratings and collateral calls, and HCC relicensing. A credit downgrade below investment grade could trigger additional collateral demands; estimated potential collateral related to wholesale exposure was approximately $3.1 million.
Important facts for investors to verify
- Whether customer growth, rate actions, and the Valmy settlements offset weather-driven usage variability and higher depreciation and taxes in subsequent periods.
- Whether the expected $1.5 billion five-year capital program and major transmission and relicensing projects remain on schedule and can be recovered through rates.
- Actual hydroelectric output, wholesale prices, PURPA purchase volumes and costs, and resulting PCA/FCA deferrals and cash-flow timing.
- Progress on HCC relicensing, environmental requirements, coal-plant transition plans, and regulatory approvals or rate proceedings.
- Debt, covenant headroom, access to capital, and any changes in credit ratings or collateral requirements.