IDACORP, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; financial statements are unaudited. IDACORP is a holding company whose principal operating subsidiary, Idaho Power, is a regulated electric utility serving southern Idaho and eastern Oregon. Results are seasonal, with peak sales generally in summer.
Financial performance
Amounts below are in millions of dollars except per-share data. IDACORP’s results primarily reflect Idaho Power’s utility operations.
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Operating revenue | $386.3 | $408.8 | $1,053.5 | $1,058.9 |
| Operating income | $114.2 | $115.2 | $244.1 | $248.7 |
| Operating margin | 29.5% | 28.2% | 23.2% | 23.5% |
| Net income attributable to IDACORP | $89.9 | $102.2 | $185.7 | $200.7 |
| Diluted earnings per share | $1.78 | $2.02 | $3.68 | $3.97 |
Operating margins are calculated as operating income divided by operating revenue. Nine-month operating cash flow was $287.0 million, down from $365.9 million; capital additions were $198.9 million and common dividends paid were $95.9 million. IDACORP ended September with $260.6 million cash and $1.836 billion long-term debt. Covenant leverage ratios were 43% for IDACORP and 45% for Idaho Power; both were reported in compliance. Idaho Power had $143.5 million cash and the same $1.836 billion long-term debt balance.
Changes and principal earnings drivers
- Q3 IDACORP net income fell $12.4 million year over year; nine-month net income fell $15.0 million. Higher income tax expense was a major factor: Q3 expense was $15.2 million versus $3.9 million, and nine-month expense was $26.5 million versus $13.9 million. The 2018 comparison included tax-reform deferred-tax remeasurement and other tax benefits.
- Customer growth supported operating results: customers increased 2.6% over the 12 months through September, adding an estimated $5.5 million to Q3 and $14.1 million to nine-month operating income. This was outweighed by lower usage per customer, especially irrigation demand amid greater precipitation, and milder summer temperatures. Retail sales volumes declined 1% in both comparison periods.
- Lower Q3 transmission wheeling revenue and lower wholesale energy sales weighed on results. Nine-month wholesale energy revenue rose to $68.7 million from $35.1 million, largely because of stronger market prices earlier in 2019; the Q3 trend reversed.
- Q3 fuel expense decreased 13% year over year, but nine-month fuel expense increased 16% as thermal generation rose. Natural-gas hedge gains of $11.6 million in the first nine months partly offset fuel costs; most realized gains benefit customers through power-cost adjustment mechanisms.
Liquidity, investment and outlook
- Management expects approximately $1.5 billion of capital expenditures over 2019–2023. The detailed estimates are $280–$290 million for 2019, $285–$300 million for 2020 and $875–$925 million for 2021–2023. Management expects available cash, operating cash flows, credit facilities, commercial paper and debt-market access to meet requirements for at least the next 12 months.
- Revolving credit facilities total $100 million at IDACORP and $300 million at Idaho Power; no borrowings or commercial paper were outstanding at September 30. Idaho Power’s facility had $275.8 million net available after amounts identified for other use.
- In August, Idaho Power remarketed $49.8 million and $116.3 million of pollution-control bonds at lower rates. Management estimated annual interest savings of approximately $5.6 million for five years and $3.9 million thereafter for the remaining life of the longer-lived bonds.
- Management expects continued customer growth and forecast 2019 hydropower generation of 8.0–8.5 million MWh, compared with a 7.5 million MWh 20-year average. The 2019 Integrated Resource Plan assumes long-term annual growth of 1.0% in retail energy demand and 1.2% in peak demand. Idaho Power does not anticipate filing a general rate case in the next 12 months.
- Idaho Power’s stated goal is to provide customers with 100% clean energy by 2045. Its resource plan includes planned Valmy unit exits in 2019 and 2025, planned exits of two Jim Bridger units in 2022 and 2026, and prospective solar resources; timing and resource choices remain subject to uncertainty.
Regulatory matters, risks and unusual items
- Idaho’s 2019–2020 power cost adjustment reduced customer rates by $50.1 million, while the fixed-cost adjustment increased recovery by $19.2 million. Power-cost mechanisms pass most supply-cost differences to customers, but the timing of recovery or refunds affects cash flow.
- The full $45 million of additional accumulated deferred investment tax credits remained available at September 30; the company recorded no 2019 additional amortization or earnings-sharing provision under the Idaho settlement mechanism.
- The Boardman-to-Hemingway transmission project remains in permitting, with service expected in 2026 or later. Idaho Power reported $318 million of Hells Canyon Complex relicensing costs in construction work in progress and could face higher future operating and capital costs under a new license; timing and final requirements are uncertain. Third parties challenged Oregon’s water-quality certification in court.
- A proposed 20-year power purchase agreement for output from a planned 120-MW solar facility would add $136 million of obligations if approved. Idaho Power was also negotiating the possibility of acquiring the facility. New PURPA contracts added approximately $24 million of obligations over their 20-year terms.
- Risks include regulatory cost-recovery decisions, weather and water conditions, wildfire-related claims, environmental compliance and permitting, construction costs and execution, and commodity, financing and counterparty risks. Idaho Power estimated that a downgrade below investment grade could trigger up to approximately $10.8 million in additional collateral requests under then-current conditions.
- Management said existing loss-contingency accruals were not material and believed existing claims would not materially adversely affect the companies’ financial statements; future accruals could be material in a period. The independent accountants conducted interim reviews, not audits, and reported no material modifications were known to be needed.
Investor verification priorities
- Track whether customer growth continues to offset lower per-customer usage, and whether weather and irrigation conditions normalize.
- Assess the persistence of tax expense and compare future earnings with 2018, which included significant tax benefits.
- Verify cash conversion, capital spending and timely regulatory recovery, including the effect of power-cost adjustments and regulatory deferrals.
- Monitor approval, ownership structure and economics of the planned 120-MW solar resource, as well as the evolving IRP analysis and transmission-project schedules.
- Follow Hells Canyon relicensing, associated litigation and future investment requirements, and exposure to wildfire claims, environmental rules and potential collateral calls.