IDACORP INC quarterly report, Q2 FY2016

IDACORP, Inc. 2016 Q2 Form 10-Q Summary

Business context and reporting period

Quarterly period ended June 30, 2016. IDACORP is a holding company whose principal operating subsidiary, Idaho Power, is a regulated electric utility serving southern Idaho and eastern Oregon. This combined filing presents separate results for both registrants. Financial statements are unaudited; the independent accountants performed interim reviews, not audits.

Financial performance and position

IDACORP consolidated	Q2 2016	Q2 2015	Six months 2016	Six months 2015
Operating revenue	$315.4 million	$336.3 million	$596.4 million	$615.7 million
Operating income	$77.0 million	$86.0 million	$120.8 million	$128.9 million
Net income attributable to IDACORP	$56.2 million	$66.1 million	$82.0 million	$89.5 million
Diluted EPS	$1.12	$1.31	$1.63	$1.78

Operating margin was approximately 24.4% in Q2 and 20.2% for the first half, versus 25.6% and 20.9% in the comparable 2015 periods. IDACORP declared dividends of $0.51 per share for Q2 and $1.02 per share for the first half.

• First-half operating cash flow was $137.9 million, down from $171.0 million. Capital expenditures were $117.2 million; investing cash outflow was $114.5 million. Cash declined by $24.2 million to $90.6 million.
• At June 30, IDACORP reported total assets of $6.08 billion, long-term debt of $1.75 billion, and current maturities of $1.1 million. Notes payable were $23.9 million, all IDACORP commercial paper. Current assets were $496.6 million and current liabilities $224.5 million.
• IDACORP’s debt-to-capitalization covenant ratio was 46% (Idaho Power: 47%), below the 65% limit. IDACORP had $76.1 million and Idaho Power $275.8 million of net available short-term borrowing capacity at quarter-end. Management said existing cash, operating cash flows, and available credit should cover needs for at least the next 12 months.

Material changes and drivers

• IDACORP-attributable net income fell $9.8 million in Q2 and $7.5 million for the first half. Management attributed the decline mainly to lower Idaho Power operating income.
• Q2 general business sales volume fell 3%; first-half volume fell 1%. Lower usage per customer, particularly by irrigation and residential customers, outweighed customer growth. Customer count rose 1.8% year over year to 529,529.
• Q2 2015 included record sales following a June heat wave and earlier irrigation season; 2016 weather was milder by comparison. Customer growth contributed to earnings, but reduced usage more than offset it.
• Stronger hydroelectric generation reduced fuel expense: Q2 fuel expense fell 35% to $30.0 million and first-half expense fell 16% to $65.7 million. Lower wholesale prices and reduced off-system sales also affected results; first-half off-system sales revenue fell 38% to $10.4 million.
• First-half operating cash flow declined amid lower earnings, regulatory-account timing, reduced distributions from equity-method investments, and working-capital movements.

Outlook, regulatory matters, risks and unusual items

• Management said its previously stated outlook remained consistent: expected positive customer growth, continued cost management, and approximately $1.5 billion of capital expenditures over 2016–2020. Idaho Power was assessing whether to file general rate cases in Idaho and Oregon in 2017 or 2018. No new earnings guidance was provided in the supplied filing text.
• 2016 capital spending estimates were $300–$310 million; estimates for 2017 were $275–$285 million and for 2018–2020 $860–$920 million. Major projects include transmission development and generation upgrades. Hells Canyon relicensing costs in construction work in progress were $232 million.
• Idaho’s 2016–2017 PCA rates increased by a net $17.3 million, and the fixed-cost adjustment increased by $11.2 million. These mechanisms affect customer rates and defer or recover certain power-cost differences, but do not eliminate all earnings or cash-flow exposure.
• Idaho Power issued $120 million of 4.05% bonds due 2046 and redeemed $100 million of 6.15% bonds due 2019, paying a $14 million make-whole premium. The redemption generated an approximately $5.6 million tax benefit in Q2; management expects an additional net income benefit from the lower coupon on replacement debt.
• Ten solar power purchase agreements were terminated after counterparty breaches, reducing contractual payment obligations by approximately $267 million over their 20-year terms.
• Key risks include regulatory cost recovery and authorized returns, weather and hydrology, low wholesale electricity prices, fuel and purchased-power costs, environmental compliance and plant-retirement costs, Hells Canyon relicensing, large capital requirements, and access to financing. Management noted low regional wholesale prices had reduced off-system sales revenue.
• The Hoku bankruptcy trustee seeks recovery of payments of up to approximately $36 million; Idaho Power said the case was at an early stage and a potential loss could not be estimated. Other loss-contingency accruals were not material. Environmental compliance costs could be significant, but their future impact was not estimable.
• Management reported effective disclosure controls and no material change in internal control over financial reporting. The companies adopted share-based compensation accounting changes early in 2016; the impact included a tax benefit. The potential financial effects of new revenue and lease accounting standards were still being assessed.

Important facts for investors to verify

• Whether subsequent customer usage, weather, and hydroelectric conditions sustain or reverse the first-half earnings decline.
• How future regulatory decisions, rate cases, PCA/FCA mechanisms, and cost recovery affect earnings and cash flow.
• Whether planned capital spending, transmission projects, and environmental or relicensing obligations remain on budget and receive timely regulatory approvals.
• Developments in the Hoku litigation and other legal or environmental contingencies, including any change in estimated exposure.
• Liquidity and financing needs relative to capital expenditures, dividends, debt maturities, and any credit-rating or collateral requirements.