IDACORP, Inc. Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2010. The combined filing covers IDACORP, Inc. and its principal subsidiary, Idaho Power Company. Financial statements are unaudited; the independent accountants performed a review, not an audit.
Business context and results
IDACORP is a holding company whose primary business is regulated electric utility Idaho Power, serving about 491,000 customers in southern Idaho and eastern Oregon. Results are affected by regulation, weather, hydroelectric output, customer demand, and purchased-power and fuel costs.
| IDACORP consolidated | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Operating revenue | $309.4 million | $324.5 million | $804.1 million | $796.7 million |
| Operating income | $89.0 million | $79.6 million | $159.6 million | $164.7 million |
| Net income attributable to IDACORP | $67.1 million | $54.5 million | $122.4 million | $100.8 million |
| Diluted EPS | $1.39 | $1.16 | $2.55 | $2.15 |
Q3 revenue fell about 5% year over year while operating income rose about 12%. For the first nine months, revenue rose about 1%, operating income declined about 3%, and net income increased about 21%. The year-to-date earnings increase substantially reflects lower income-tax expense, including tax accounting method changes, rather than stronger operating income.
Cash flow, balance sheet, debt, and liquidity
- Cash flow, nine months: Operating cash flow was $222.5 million, essentially unchanged from 2009; capital investment used $230.6 million, versus $147.5 million in 2009. Financing provided $140.4 million, and cash ended at $185.3 million.
- Liquidity: IDACORP reported $185.3 million cash and $4.0 million commercial paper outstanding. At September 30, unused credit facility availability was $96.0 million for IDACORP and $275.8 million for Idaho Power; no facility loans were outstanding.
- Debt: IDACORP reported $1.488 billion long-term debt and $126.6 million current maturities. Idaho Power issued $200 million of first mortgage bonds in August: $100 million at 3.40% due 2020 and $100 million at 4.85% due 2040. Idaho Power had $120 million of bonds due in March 2011 and expected to use part of the issuance proceeds to repay them.
- Leverage and dividends: Credit-agreement leverage ratios were 52% for IDACORP and 54% for Idaho Power, below the 65% covenant limit. IDACORP declared $0.30 per share for Q3; dividends declared were $0.90 per share for the nine months.
- Investment and pension funding: Utility plant additions were $249.4 million for the nine months. Idaho Power contributed $60 million to its pension plan in September, including $54 million above the stated minimum contribution.
Material changes and management commentary
- Q3 Idaho Power operating income increased about $9 million, principally from regulatory changes, partly offset by lower sales volumes. Year-to-date operating income declined about $5 million as regulatory changes were offset by weaker sales and the absence of a $6.4 million Oregon power-cost recovery recorded in 2009.
- Q3 general-business revenue declined $11 million; year-to-date it increased $10 million. Mild weather and weak economic conditions reduced usage. Non-irrigation sales volumes declined 5% in both comparison periods; irrigation sales rose 9% for Q3 and 1% year to date.
- Hydroelectric generation was down 16% for Q3 and 10% year to date. Lower surplus energy contributed to off-system sales revenue declines of 49% for Q3 and 19% year to date. Purchased-power expense fell 18% for Q3 and 17% year to date, while fuel expense increased 4% and 3%, respectively.
- Idaho’s June 2010 rate changes lowered customer rates overall by $58.2 million, or 6.49%, despite an $88.7 million base-rate increase, because the power cost adjustment decreased $146.9 million. A general rate moratorium remains in effect through January 1, 2012, subject to specified exceptions.
Outlook, risks, contingencies, and unusual items
- 2010 estimates: Idaho Power maintained its operation and maintenance expense estimate of $295–$305 million and capital expenditure estimate of $355–$365 million. Estimated hydroelectric generation was revised to 7.0–7.5 million MWh from 7.0–8.0 million MWh. Non-regulated subsidiary earnings and holding-company expenses were estimated at $0–$3 million, unchanged.
- Tax matters: A repair-cost accounting method change contributed to lower tax expense. For the nine months, IDACORP reported an income-tax benefit of $5.2 million versus $25.7 million expense in 2009. Idaho Power also recorded a $65.3 million uniform-capitalization tax benefit in Q3, offset by an equal uncertain-tax-position liability pending further approval; the filing says this change therefore had no Q3 operating-income impact. The companies expected a $24 million federal tax refund in Q4 2010. Tax-method approval, audits, and potential payments remain uncertain.
- Capital program: Management expected total capital expenditures of at least $1 billion for 2010–2012, with internally generated cash after dividends insufficient to cover all requirements. Major projects include the $427 million Langley Gulch gas plant, estimated for commercial operation by November 2012, and proposed transmission projects with substantial permitting, cost, and timing uncertainty.
- Long-term commitments: New power-purchase and service agreements include expected payments of about $569 million for geothermal power through 2037, $493 million for wind and other alternative energy through 2031, $32 million for gas transportation through 2042, and $47 million for coal transportation through 2014.
- Regulatory and environmental exposure: Pending issues include Idaho energy-efficiency cost recovery, pension-cost recovery, and changes to the power-cost adjustment mechanism. Idaho Power owns 10% of the Boardman coal plant, which faces proposed emissions controls or early-retirement options and an EPA notice of violation to plant operator PGE; Idaho Power could not predict the financial impact. Hydroelectric relicensing, Snake River water rights, and potential environmental regulation also present cost and generation risks.
- Other contingencies: Pacific Northwest energy-market refund proceedings remain unresolved; management could not estimate their impact. The filing states that other discussed legal matters were not expected to have a material adverse effect, except where outcomes and impacts could not be predicted. A $63 million reclamation guarantee relates to Bridger Coal Company; management considered its fair value minimal given the reclamation trust and surcharge mechanism.
- Operating and market risks: Weak regional economic conditions, weather and water variability, fuel prices, regulatory cost recovery, environmental requirements, and access to financing could affect results and liquidity. A downgrade below investment grade could prompt additional collateral demands; the filing estimated up to approximately $18 million of additional collateral under stated market conditions.
Most important facts for investors to verify
- Whether tax-method changes receive the remaining approvals, how uncertain tax positions are resolved, and whether the expected tax refund is received.
- How much reported earnings growth is attributable to tax items versus recurring utility operations, and whether Idaho’s return-on-equity sharing provisions are triggered.
- Actual capital spending, project costs and schedules, and the extent of future debt or equity financing required.
- Whether pension contributions and deferred pension costs are recovered through rates as expected.
- Developments in Boardman environmental proceedings, hydroelectric relicensing, water-rights matters, and wholesale-market litigation.
- Whether customer demand, hydroelectric generation, and the 2010 operating and generation estimates track management’s outlook.