IDACORP, Inc. Form 10-Q — Quarter ended September 30, 2018
IDACORP is a holding company whose principal operating subsidiary, Idaho Power, is a regulated electric utility serving southern Idaho and eastern Oregon. The filing reports unaudited results for the three and nine months ended September 30, 2018, compared with the same periods in 2017. Interim results are seasonal and are not necessarily indicative of full-year performance.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Operating revenue | $408.8 million | $408.3 million | $1,058.9 million | $1,043.9 million |
| Operating income | $115.2 million | $123.7 million | $248.7 million | $259.2 million |
| Net income attributable to IDACORP | $102.2 million | $90.6 million | $200.7 million | $173.6 million |
| Diluted earnings per share | $2.02 | $1.80 | $3.97 | $3.44 |
| Operating margin | 28.2% | 30.3% | 23.5% | 24.8% |
Operating margins are calculated as operating income divided by operating revenue. IDACORP declared dividends of $0.59 per share for the quarter and $1.77 per share year to date, versus $0.55 and $1.65, respectively, in 2017.
For the nine months, operating cash flow was $365.9 million, up from $346.0 million; capital additions were $198.0 million, and net investing cash outflow was $170.5 million. Cash and equivalents were $261.3 million at September 30, 2018, versus $76.6 million at year-end 2017. Long-term debt was $1.834 billion, compared with $1.746 billion at year-end. Covenant leverage ratios were 44% for IDACORP and 46% for Idaho Power, within the 65% limit. Unused revolving credit capacity was $100 million at IDACORP and $275.8 million at Idaho Power; neither had commercial paper outstanding.
Changes and drivers versus 2017
- Revenue rose modestly, but operating income and operating margins declined. Higher purchased-power expense, other operations and maintenance, and depreciation contributed to the decline.
- Net income and EPS increased despite lower operating income, principally reflecting lower income tax expense after federal and Idaho corporate tax-rate reductions, deferred-tax remeasurement, and the tax benefit of bond redemption costs. Nine-month effective tax rates were 6.5% for IDACORP and 6.9% for Idaho Power, versus 20.7% and 21.5% in 2017.
- Customer growth supported results: Idaho Power’s customer count increased 2.2% over the prior twelve months, or about 9,000 customers. Milder weather reduced residential use per customer by 7%; lower precipitation increased irrigation use per customer by 6% in Q3 and 9% year to date. The fixed cost adjustment mechanism partly offset weaker usage.
- Purchased power expense increased 22% in Q3 and 17% year to date. Higher wholesale prices and volumes lifted wholesale energy revenue to $12.4 million in Q3 from $5.1 million, and to $35.1 million year to date from $18.1 million.
- Cash generation diverged at the subsidiary level: Idaho Power’s operating cash flow was $319.6 million, down from $360.1 million, largely reflecting working-capital and payment timing.
Outlook, regulation, risks, and unusual items
- Management maintained its strategic outlook, expects continued customer growth, and forecasts approximately $1.5 billion of capital expenditures over 2018–2022. The filing estimates construction spending, excluding AFUDC, at $280–290 million for 2018, $285–300 million for 2019, and $850–900 million for 2020–2022.
- Management did not anticipate filing a general rate case in the next twelve months. Approved tax-reform settlements reduce Idaho customer base rates by $18.7 million annually and Oregon rates by $1.5 million annually; Idaho customers also receive specified PCA reductions. These rate benefits can affect revenue timing relative to tax-expense reductions.
- Idaho Power recorded a $1.5 million Q3 provision for earnings sharing with Idaho customers based on its estimated full-year Idaho return on equity. The earnings-support and sharing arrangement was extended indefinitely, with modified terms beginning in 2020.
- Idaho Power expects 2018 hydroelectric generation of 8.5–9.0 million MWh, above the 7.5 million MWh 20-year average. The Western Energy Imbalance Market began operating for Idaho Power in April 2018; related ongoing costs are recoverable through the Idaho PCA mechanism.
- Idaho Power issued $220 million of 4.20% first mortgage bonds due 2048 and redeemed $130 million of 4.50% notes due 2020, paying a $4.6 million make-whole premium. It entered new PURPA power-purchase agreements that add approximately $57 million of contractual payments over 20 years.
- Key exposures include regulatory cost recovery and rate decisions, weather and hydrology, purchased-power prices and mandatory PURPA contracts, environmental requirements, and Hells Canyon Complex relicensing. The HCC license timing and ultimate requirements remain uncertain; $289 million of relicensing costs were in construction work in progress. Pending legal and regulatory matters were not expected to have a material adverse financial effect; environmental impacts remain difficult to estimate.
- Idaho Power’s BCC reclamation guarantee was $58.4 million, supported by a reclamation trust fund valued at $111.0 million. A credit downgrade below investment grade could prompt additional collateral demands; the filing estimates approximately $6.2 million of potential collateral under current market conditions.
Important facts for investors to verify
- Whether operating-cost growth and declining operating margins persist, and how much earnings improvement depends on lower tax expense rather than utility operations.
- How customer growth, weather, hydroelectric output, and wholesale-market prices affect future sales, power costs, and PCA balances.
- Whether capital spending is completed on schedule and recovered through rates, particularly for HCC relicensing and major transmission projects.
- Implementation and earnings effects of tax-reform rate settlements and the extended Idaho earnings-sharing mechanism.
- Developments in environmental regulation, water and relicensing proceedings, and potential collateral requirements if credit ratings change.
The independent accountant’s interim review found no material modifications needed for GAAP conformity; it was a review, not an audit.