IDACORP INC quarterly report, Q2 FY2013

IDACORP, Inc. — Q2 2013 Form 10-Q

Business context and period. Combined unaudited quarterly filing for IDACORP and its principal operating subsidiary, Idaho Power, an Idaho- and Oregon-regulated electric utility. The quarter and six-month periods ended June 30, 2013; interim results are seasonal and not necessarily indicative of full-year results. Deloitte performed interim reviews, not audits.

Financial performance and position

Metric	Q2 2013	Q2 2012	Six months 2013	Six months 2012
Operating revenue	$303.9 million	$254.7 million	$568.9 million	$495.8 million
Operating income	$79.4 million	$56.5 million	$138.8 million	$96.3 million
Net income attributable to IDACORP	$45.5 million	$35.3 million	$79.0 million	$60.2 million
Diluted EPS	$0.91	$0.71	$1.58	$1.21

Revenue rose about 19% in Q2 and 15% year to date; diluted EPS increased about 28% and 31%, respectively.
Six-month operating cash flow was $114.2 million, versus $83.0 million in 2012. Capital additions were $109.1 million, compared with $123.1 million.
At June 30, cash was $136.2 million, long-term debt was $1.615 billion, and current maturities of long-term debt were $71.1 million. IDACORP had $61.9 million of commercial paper outstanding; Idaho Power had none. No borrowings were outstanding under either revolving credit facility.
Available short-term borrowing capacity was $63.1 million for IDACORP and $275.8 million for Idaho Power. Leverage ratios were 49% and 50%, respectively, against a 65% covenant maximum.
IDACORP declared dividends of $0.38 per share for Q2, versus $0.33 a year earlier. Six-month declared dividends were $0.76 per share.

Material changes and drivers

Management attributed higher earnings principally to 2012 rate increases, especially recovery of Langley Gulch plant investment, and increased customer usage and customer growth. The filing’s reconciliation estimates rate changes contributed $16.0 million to Q2 operating income and $29.8 million year to date; increased usage contributed $6.5 million and $12.7 million, respectively, after power-supply and PCA effects.
Retail sales volumes increased 5.5% in Q2 and 5.4% year to date, while off-system sales volumes fell 65% and 55%. Lower hydro generation and higher customer load reduced surplus sales.
Below-normal hydroelectric generation (3.0 million MWh year to date, versus 5.0 million) increased reliance on coal and natural gas generation. Fuel expense rose $20.6 million in Q2 and $37.0 million year to date; purchased-power expense rose $4.0 million and $12.6 million.
Higher revenue was partly offset by a $2.8 million Q2 provision for customer earnings sharing, based on management’s estimate that 2013 Idaho-jurisdiction ROE would exceed 10.0%.
Energy-efficiency revenue and expense each included $14.3 million recognized in Q2 following regulatory authorization to recover prior custom-program incentives. The filing says the matching revenue and expense had no net earnings impact.

Outlook, regulatory matters and risks

For full-year 2013, management estimated Idaho Power O&M expense of $335–$345 million, capital expenditures excluding AFUDC of $230–$240 million, and hydroelectric generation of 5.5–6.0 million MWh. It expected no additional ADITC amortization. Estimated capital expenditures for 2013–2015 were $805–$845 million.
Management expected to recommend to the board in September 2013 a quarterly dividend increase of at least 10%; this was an expectation, not a declared dividend. It did not plan to seek a general rate case in 2013.
Idaho regulators approved a $140.4 million annual PCA rate increase effective June 1, 2013 through May 31, 2014. The PCA passes most power-supply cost changes to customers and principally affects the timing of cash recovery rather than earnings.
Idaho Power requested a certificate and binding rate-base treatment for its share of Jim Bridger SCR upgrades, estimated at approximately $130 million including AFUDC; the application was pending. Environmental requirements, permitting and project timing could increase costs.
Management estimated 2013 hydro generation below the 8.4 million MWh median, citing reservoir conditions and forecasts. Hydrology, weather, fuel and wholesale power prices, load growth, regulatory cost recovery, environmental compliance, and project approvals are principal uncertainties.
Boardman, in which Idaho Power owns 10%, was unexpectedly offline July 1–31, 2013 after structural damage. Replacement-power costs were incurred; management expected PCA recovery for most increased costs and insurance to largely mitigate repair exposure.
Four terminated power-purchase agreements reduced contractual payment obligations by about $322 million over their remaining 15–20-year terms. Idaho Power also guaranteed $74 million of its share of Bridger Coal reclamation obligations; the reclamation trust held $66 million.
Management reported no material change in risk factors or off-balance-sheet arrangements. Certain Western energy proceedings remain unresolved, including possible “ripple claims” whose exposure could not be estimated; no amount was accrued. Future environmental compliance investment could be significant, but its amount was not estimable.

Investor verification priorities

Verify the sustainability of earnings growth after separating rate changes, weather-driven usage, hydro conditions, and customer sharing from recurring operating trends.
Track hydro generation, power-supply costs, PCA deferrals and collections, and the customer-rate effects of the $140.4 million PCA adjustment.
Confirm actual 2013 capital spending, O&M, and dividend decisions against management’s estimates and stated dividend intention.
Monitor regulatory approval and cost recovery for Jim Bridger SCR upgrades, environmental rulemaking, and transmission project permitting and schedules.
Review refinancing of the $70 million bond maturity due October 2013, future debt or equity issuance, liquidity, and covenant headroom.
Follow the Boardman outage’s final cost and insurance recovery, and developments in water-rights, Western energy, and other contingencies.