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IDACORP (IDA): A Utility Powerhouse Navigating Growth and Regulatory Challenges
Published on September 24, 2024 | Ticker: IDA

IDACORP, Inc. (NYSE: IDA) is a holding company whose principal operating subsidiary is Idaho Power Company, a regulated electric utility serving over 630,000 customers across a 24,000 square-mile service area in southern Idaho and eastern Oregon. With a diverse energy mix dominated by low-cost hydropower, IDACORP has established itself as a leader in the utility industry, delivering reliable service and affordable electricity to its growing customer base.

Business Overview

IDACORP's core business is the generation, transmission, distribution, sale, and purchase of electric energy and capacity through its Idaho Power subsidiary. Idaho Power operates 17 hydropower generating plants, three natural gas-fired plants, and interests in two coal-fired plants. The company's diverse energy portfolio, with hydropower accounting for over 50% of its nameplate generation capacity, has allowed it to maintain some of the lowest electricity rates in the nation.

IDACORP's other notable subsidiaries include IDACORP Financial Services (IFS), an investor in affordable housing and other real estate tax credit projects, and Ida-West Energy, an operator of small hydropower generation projects. While these non-utility operations contribute to IDACORP's overall financial performance, the majority of the company's earnings and cash flows are derived from the regulated utility operations of Idaho Power.

Financial Performance

For the full year 2023, IDACORP reported annual revenue of $1.77 billion and net income of $261.2 million. The company's operating cash flow for the year was $267.0 million, while free cash flow was negative $344.1 million, reflecting the significant capital investments required to maintain and expand Idaho Power's infrastructure.

In the first quarter of 2024, IDACORP's diluted earnings per share were $0.95, compared to $1.11 in the same period of 2023. The decrease was primarily driven by lower usage per retail customer, partially offset by customer growth and higher retail revenues per MWh. IDACORP's management has reaffirmed its full-year 2024 earnings guidance range of $5.25 to $5.45 per diluted share.

Regulatory Landscape and Initiatives

As a regulated utility, Idaho Power's operations and financial performance are heavily influenced by the decisions of state regulatory commissions, primarily the Idaho Public Utilities Commission (IPUC) and the Public Utility Commission of Oregon (OPUC). In 2023, Idaho Power reached a settlement agreement with the IPUC for a general rate case, which resulted in a rate increase effective January 1, 2024.

To address the regulatory lag associated with recovering its investments, Idaho Power has decided to file a limited-scope rate case in Idaho in 2024, focusing on capital additions and labor cost increases. The company is also engaged in constructive discussions with the OPUC regarding a general rate case filed in Oregon, which is expected to result in new rates effective in October 2024 or later.

In addition to rate case proceedings, Idaho Power utilizes various regulatory mechanisms to help mitigate the impact of fluctuations in power supply costs, including the Power Cost Adjustment (PCA) and the Fixed Cost Adjustment (FCA) mechanisms. These mechanisms allow the company to recover or refund the majority of changes in power supply expenses and fixed-cost recovery, respectively, through adjustments to customer rates.

Growth and Infrastructure Investments

IDACORP's service area has experienced robust customer growth, with the company's customer base expanding by 2.5% over the past 12 months. This growth, coupled with increasing energy demand from both existing and new large industrial customers, has necessitated significant investments in Idaho Power's generation, transmission, and distribution infrastructure.

To meet the projected energy and capacity needs of its growing customer base, Idaho Power is pursuing a multi-pronged approach. The company has entered into power purchase agreements for new solar facilities, acquired battery storage assets, and plans to convert its remaining coal-fired generation units to natural gas. Additionally, Idaho Power is actively engaged in the development of major transmission projects, such as the Boardman-to-Hemingway (B2H) and Gateway West (GWW) lines, which will enhance the reliability and flexibility of the regional transmission grid.

Despite regulatory permitting delays, Idaho Power remains committed to these critical infrastructure projects. The company has spent approximately $268 million, including AFUDC, on the B2H project through March 31, 2024, and expects to incur significant additional capital expenditures in the coming years to complete the project.

Liquidity and Capital Structure

IDACORP and Idaho Power maintain strong liquidity positions, with access to $100 million and $400 million revolving credit facilities, respectively, as well as commercial paper programs. As of March 31, 2024, IDACORP and Idaho Power had no outstanding borrowings under their credit facilities.

To fund its substantial capital investment program, IDACORP has utilized a balanced approach, relying on a combination of debt and equity financing. The company's capital structure, as of March 31, 2024, was approximately 49% debt and 51% equity, in line with its target of maintaining a 50/50 debt-to-equity ratio.

In November 2023, IDACORP completed a registered public offering of 3.2 million shares of common stock, generating net proceeds of $292.5 million. The company also plans to establish an at-the-market (ATM) equity program to support its ongoing capital needs.

Risks and Challenges

While IDACORP's business model and regulatory environment have historically provided a stable foundation for the company's operations, it faces several risks and challenges that warrant consideration:

1. Regulatory Uncertainty: IDACORP's financial performance is heavily dependent on the decisions of state regulatory commissions, which can impact the company's ability to recover costs and earn a reasonable return on its investments.

2. Environmental Regulations: Compliance with evolving environmental laws and regulations, such as those related to air emissions, water quality, and coal plant retirements, can result in significant capital expenditures and operating costs for Idaho Power.

3. Weather and Hydropower Dependence: As a utility with a significant reliance on hydropower generation, IDACORP's financial results are susceptible to fluctuations in precipitation levels and water availability, which can impact the company's power supply costs and wholesale energy sales.

4. Transmission and Infrastructure Constraints: Delays in the development and construction of critical transmission projects, such as B2H and GWW, could hinder Idaho Power's ability to reliably serve its growing customer base and integrate new generation resources.

5. Commodity Price Volatility: Fluctuations in the prices of natural gas, coal, and wholesale electricity can affect Idaho Power's power supply costs and the company's ability to manage its fuel and purchased power expenses.

Outlook and Conclusion

IDACORP's strong financial performance, customer growth, and strategic investments in its infrastructure position the company well to navigate the challenges and capitalize on the opportunities in the utility industry. The company's commitment to renewable energy integration, grid modernization, and regulatory engagement underscores its focus on delivering reliable, affordable, and sustainable electricity to its customers.

Despite the risks and uncertainties inherent in the regulated utility sector, IDACORP's diversified energy portfolio, prudent financial management, and proactive regulatory strategy suggest the company is well-equipped to continue generating value for its shareholders. As IDACORP continues to execute on its growth initiatives and adapt to the evolving industry landscape, it remains a compelling investment opportunity in the utility space.