ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) in this report, the general financial condition and results of operations for IDACORP, Inc. and its subsidiaries (collectively, IDACORP) and Idaho Power Company and its subsidiary (collectively, Idaho Power) are discussed. While reading the MD&A, please refer to the accompanying condensed consolidated financial statements of IDACORP and Idaho Power. Also refer to "Cautionary Note Regarding Forward-Looking Statements" in this report for important information regarding forward-looking statements made in this MD&A and elsewhere in this report. This discussion updates the MD&A included in the Annual Report on Form 10-K for the year ended
December 31, 2016
, and should also be read in conjunction with the information in that report. The results of operations for an interim period generally will not be indicative of results for the full year, particularly in light of the seasonality of Idaho Power's sales volumes, as discussed below.
INTRODUCTION
IDACORP is a holding company formed in 1998 whose principal operating subsidiary is Idaho Power. IDACORP’s common stock is listed and trades on the New York Stock Exchange under the trading symbol "IDA". Idaho Power is an electric utility whose rates and other matters are regulated by the Idaho Public Utility Commission (IPUC), Public Utility Commission of Oregon (OPUC), and Federal Energy Regulatory Commission (FERC). Idaho Power generates revenues and cash flows primarily from the sale and distribution of electricity to customers in its Idaho and Oregon service territories, as well as from the wholesale sale and transmission of electricity. Idaho Power experiences its highest retail energy sales during the summer irrigation and cooling season, with a lower peak in the winter that generally results from heating demand. Idaho Power’s rates are established through regulatory proceedings that affect its ability to recover its costs and the potential to earn a return on its investment.
Idaho Power is the parent of Idaho Energy Resources Co. (IERCo), a joint venturer in Bridger Coal Company (BCC), which mines and supplies coal to the Jim Bridger generating plant owned in part by Idaho Power. IDACORP’s other significant subsidiaries include IDACORP Financial Services, Inc. (IFS), an investor in affordable housing and other real estate investments, and Ida-West Energy Company, an operator of small hydroelectric generation projects that satisfy the requirements of the Public Utility Regulatory Policies Act of 1978 (PURPA).
EXECUTIVE OVERVIEW
Management's Outlook and Company Initiatives
In the Annual Report on Form 10-K for the year ended
December 31, 2016
, IDACORP's and Idaho Power's management included a brief overview of their outlook and initiatives for the companies for
2017
and beyond, under the headings "Executive Overview - Management's Outlook" and "2016 Accomplishments and 2017 Initiatives" in the MD&A. As of the date of this report, management's outlook remains consistent with that discussion. Most notably:
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•
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Idaho Power continues to expect positive customer growth in its service area, and continues to participate in and support state and local economic development initiatives aimed at responsible and sustainable growth. During the
first nine months
of
2017
, Idaho Power's customer count grew by approximately 7,400 customers, and for the twelve months ended
September 30, 2017
, the customer growth rate was
1.8 percent
. On July 7, 2017, Idaho Power recorded a new record system peak as total demand of 3,422 MW exceeded the previous record peak demand of 3,407 MW set on July 2, 2013.
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•
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Idaho Power expects substantial capital investments, with expected total capital expenditures of approximately $1.5 billion over the five-year period from
2017
(including the expenditures incurred so far in
2017
) through 2021.
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•
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Idaho Power continues to execute on three core focuses for 2017 - improving Idaho Power's core business, growing revenues, and positioning the company for the future through enhancing its brand.
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•
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Idaho Power continues to focus on timely recovery of costs and earning a reasonable return on investment, including working to evaluate and ensure that its rate design and regulatory mechanisms properly reflect the cost to provide electric service.
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Overview of General Factors and Trends Affecting Results of Operations and Financial Condition
IDACORP's and Idaho Power's results of operations and financial condition are affected by a number of factors, and the impact of those factors is discussed in more detail later in this MD&A. To provide context for the discussion elsewhere in this report, some of the more notable factors include the following:
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•
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Regulation of Rates and Cost Recovery:
The price that Idaho Power is authorized to charge for its electric and transmission service is a critical factor in determining IDACORP's and Idaho Power's results of operations and financial condition. Those rates are established by state regulatory commissions and the FERC, and are intended to allow Idaho Power an opportunity to recover its expenses and earn a reasonable return on investment. Because of the significant impact of ratemaking decisions, and in pursuit of its goal of advancing a purposeful regulatory strategy, Idaho Power focuses on timely recovery of its costs through filings with the company's regulators, working to put in place innovative regulatory mechanisms, and on the prudent management of expenses and investments. Idaho Power has a regulatory settlement stipulation in Idaho that includes provisions for the additional amortization of accumulated deferred investment tax credits (ADITC) to help achieve a minimum 9.5 percent return on year-end equity in the Idaho jurisdiction (Idaho ROE). Idaho Power continues to assess the need to file and the timing of a general rate case in Idaho and Oregon to change base rates.
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•
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Economic Conditions and Loads:
Economic conditions impact consumer demand for electricity and revenues, collectability of accounts, the volume of off-system sales, and the need to construct and improve infrastructure, purchase power, and implement programs to meet customer load demands. In recent years, Idaho Power has seen growth in the number of customers in its service area. Over the 12 months ended
September 30, 2017
, customer count grew by
1.8 percent
. Idaho Power expects its number of customers to continue to increase in the foreseeable future. Employment in Idaho Power's service area grew by approximately 2.6 percent over the twelve months ended September 30, 2017, based on Idaho Department of Labor preliminary September 2017 data. Idaho Power has in recent years supported State of Idaho-coordinated efforts to promote economic development with an emphasis on attracting industrial and commercial customers to its service area.
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In June 2017, Idaho Power filed its 2017 Integrated Resource Plan (IRP), Idaho Power's long-term forecast of loads and resources, as described in "Regulatory Matters" in this MD&A. The load forecast assumptions Idaho Power used in the 2017 IRP are included in the table below. For comparison purposes, the analogous average annual growth rates used in the prior two IRPs are included.
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5-Year Forecast
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20-Year Forecast
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Annual Growth Rate: Retail Sales
(Billed MWh)
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Annual Growth Rate: Annual Peak
(Peak Demand)
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Annual Growth Rate: Retail Sales
(Billed MWh)
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Annual Growth Rate: Annual Peak
(Peak Demand)
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2017 IRP
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1.1%
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1.6%
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0.9%
|
1.4%
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2015 IRP
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1.1%
|
1.5%
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1.1%
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1.4%
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2013 IRP
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1.2%
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1.5%
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1%
|
1.3%
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Idaho Power’s 2017 IRP identifies its preferred resource portfolio and action plan. The IRP provides for the completion of the Boardman-to-Hemingway transmission line by 2026, the end of Idaho Power's participation in coal-fired operations at the North Valmy coal-fired power plant (Valmy Plant) units 1 and 2 in 2019 and 2025, respectively, and the early retirement of Jim Bridger units 1 and 2 in 2032 and 2028, respectively, with no other new resource needs prior to 2026.
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•
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Rate Base Growth and Infrastructure Investment:
As noted above, the rates established by the IPUC and OPUC are determined so as to provide an opportunity for Idaho Power to recover authorized operating expenses and earn a reasonable return on "rate base." Rate base is generally determined by reference to the original cost (net of accumulated depreciation) of utility plant in service, subject to various adjustments for deferred taxes and other items. Over time, rate base is increased by additions to utility plant in service and reduced by depreciation and retirement of utility plant and write-offs as authorized by the IPUC and OPUC. In recent years, Idaho Power has been pursuing significant enhancements to its utility infrastructure, including the ongoing permitting of the Boardman-to-Hemingway and Gateway West transmission projects, in an effort to ensure an adequate supply of electricity, to provide service to new customers, and to maintain system reliability. Idaho Power's existing hydroelectric and thermal generation facilities also require continuing upgrades and component replacement, and the company is undertaking a significant
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relicensing effort for the Hells Canyon Complex (HCC), its largest hydroelectric generation resource. Idaho Power expects to include completed capital projects in its next general rate case or, in circumstances where appropriate, a single-issue rate case for individual projects with a significant capital cost. Depending on the outcome of the regulatory process and factors such as the rate of return authorized by the IPUC and OPUC, this growth in rate base has the potential to increase Idaho Power's revenues and earnings.
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•
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Weather Conditions:
Weather and agricultural growing conditions have a significant impact on Idaho Power's energy sales and the seasonality of those sales. Relatively low and high temperatures result in greater energy use for heating and cooling, respectively. During the agricultural growing season, which in large part occurs during the second and third quarters, irrigation customers use electricity to operate irrigation pumps, and weather conditions can impact the timing and extent of use of those pumps. Idaho Power also has tiered rates and seasonal rates, which contribute to increased revenues during higher-load periods, most notably during the third quarter of each year when overall customer demand is highest. Much of the adverse or favorable impact of weather on sales of energy to residential and small commercial customers is mitigated through the Idaho fixed cost adjustment (FCA) mechanism, which is described in Note 3 - "Regulatory Matters" to the condensed consolidated financial statements in this report. Temperatures in Idaho Power's service area during the third quarter of 2017 were warmer than normal and warmer than temperatures in the third quarter of 2016. The warmer temperatures resulted in increased sales volumes on a per-customer basis, primarily for residential customers using energy for cooling, in the third quarter of 2017 compared with the third quarter of 2016.
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Further, as Idaho Power's hydroelectric facilities comprise nearly one-half of Idaho Power's nameplate generation capacity, precipitation levels impact the mix of Idaho Power's generation resources. When hydroelectric generation is reduced, Idaho Power must rely on more expensive generation sources and purchased power. When favorable hydroelectric generating conditions exist for Idaho Power, they also may exist for other Pacific Northwest hydroelectric facility operators, lowering regional wholesale market prices and impacting the revenue Idaho Power receives from off-system sales of its excess power. Much of the adverse or favorable impact of this volatility is addressed through the Idaho and Oregon power cost adjustment mechanisms. For 2017, Idaho Power expects generation from its hydroelectric resources to be in the range of 8.5 to 9.0 million MWh, compared with 20-year average annual hydroelectric generation of 7.6 million MWh. Under median water conditions, Idaho Power's hydroelectric facilities would currently provide annual generation of approximately 8.4 million MWh.
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Mitigation of Impact of Fuel and Purchased Power Expense:
In addition to hydroelectric generation, Idaho Power relies significantly on coal and natural gas to fuel its generation facilities and power purchases in the wholesale markets. Fuel costs are impacted by electricity sales volumes, the terms of contracts for fuel, Idaho Power's generation capacity, the availability of hydroelectric generation resources, transmission capacity, energy market prices, and Idaho Power's hedging program for managing fuel costs. Over the past few years, low natural gas prices have made operation of Idaho Power's natural gas power plants more economical, resulting in increased operation of those plants and decreased operation of coal-fired plants. Idaho Power plans to end its participation in the operation of the Valmy Plant, of which Idaho Power owns a 50-percent interest, by the end of 2025, and in the second quarter of 2017 the IPUC and OPUC approved settlement stipulations providing for accelerated depreciation and cost recovery of the facility. Idaho Power also intends to cease coal-fired operations at the Boardman coal-fired plant, of which Idaho Power owns a 10-percent interest, by December 2020. Purchased power costs are impacted by the terms of contracts for purchased power, the rate of expansion of alternative energy generation sources such as wind or solar energy, and wholesale energy market prices. The Idaho and Oregon power cost adjustment mechanisms mitigate in large part the potential adverse impacts of fluctuations in power supply costs to Idaho Power.
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•
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Changes in legislation, regulation, and government policy as a result of the new federal administration:
The federal administration's proposed changes with respect to legislation, regulation, and government policy could significantly impact IDACORP’s and Idaho Power’s businesses and the electric utility industry. Specific legislative and regulatory proposals discussed before and after the 2016 presidential and congressional elections that could have a material impact on IDACORP and Idaho Power include, but are not limited to, reform of the federal tax code, infrastructure renewal programs, modifications to public company reporting requirements, and environmental regulation. During the first nine months of 2017, the new federal administration issued executive orders directed at changing or eliminating federal regulations that may affect Idaho Power's operations and environmental-related expenses, as described in "Environmental Matters" in this MD&A.
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•
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Regulatory and Environmental Compliance Costs and Plant Economics:
Idaho Power is subject to extensive federal and state laws, policies, and regulations, as well as regulatory actions and audits by agencies and quasi-governmental agencies, including the FERC and the North American Electric Reliability Corporation. Compliance with these
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requirements directly influences Idaho Power's operating environment and affects Idaho Power's operating costs. Environmental laws and regulations, in particular, may increase the cost of operating generation plants and constructing new facilities, may require that Idaho Power install additional pollution control devices at existing generating plants, or may require that Idaho Power cease operating certain generation plants. For instance, the Boardman coal-fired power plant, in which Idaho Power owns a 10-percent interest, is scheduled to cease coal-fired operations by the end of 2020, a decision driven in large part by the substantial cost of environmental controls required by existing regulations. Similarly, for economic reasons as described above in this MD&A, Idaho Power plans to end its participation in coal-fired operations at the Valmy Plant by the end of 2025.
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•
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Water Management and Relicensing of the Hells Canyon Hydroelectric Project:
Because of Idaho Power's reliance on stream flow in the Snake River and its tributaries, Idaho Power participates in numerous proceedings and venues that may affect its water rights, seeking to preserve the long-term availability of its rights for its hydroelectric projects. Also, Idaho Power is involved in renewing its long-term federal license for the HCC, its largest hydroelectric generation source. Given the number of parties and issues involved, Idaho Power's relicensing costs have been and will continue to be substantial. As of the date of this report, Idaho Power cannot determine the ultimate terms of, and costs associated with, any resulting long-term license.
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Summary of Financial Results
The following is a summary of Idaho Power's net income, net income attributable to IDACORP, and IDACORP's earnings per diluted share for the three and nine months ended
September 30, 2017
and 2016 (in thousands, except earnings per share amounts):
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Three months ended
September 30,
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Nine months ended
September 30,
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2017
|
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2016
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2017
|
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2016
|
Idaho Power net income
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$
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88,329
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|
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$
|
80,029
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$
|
169,192
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$
|
160,370
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Net income attributable to IDACORP, Inc.
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$
|
90,634
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$
|
83,100
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$
|
173,567
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$
|
165,075
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Average outstanding shares – diluted
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50,421
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50,393
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50,408
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50,361
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IDACORP, Inc. earnings per diluted share
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$
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1.80
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$
|
1.65
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$
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3.44
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$
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3.28
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The table below provides a reconciliation of net income attributable to IDACORP for the three and nine months ended
September 30, 2017
, from the same periods in
2016
(items are in millions and are before related income tax impact unless otherwise noted).
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Three months ended
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Nine months ended
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Net income attributable to IDACORP, Inc. - September 30, 2016
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$
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83.1
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$
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165.1
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Increase (decrease) in Idaho Power net income:
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Customer growth, net of associated power supply costs and power cost adjustment mechanism impacts
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2.3
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7.0
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Usage per customer, net of associated power supply costs and power cost adjustment mechanism impacts
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12.0
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12.2
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FCA revenues
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(7.4
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)
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(13.7
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)
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Increase in revenues per MWh, net of associated power supply costs and power cost adjustment mechanism impacts
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14.3
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30.3
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Third-party use of electric property, wheeling, and other revenue
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2.1
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9.1
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Other operating and maintenance (O&M) expenses
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2.9
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0.4
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Depreciation expense
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(4.2
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)
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(14.8
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)
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Other changes in operating revenues and expenses, net
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(0.4
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)
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(0.8
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)
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Increase in Idaho Power operating income
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21.6
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29.7
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Earnings of unconsolidated equity-method investments
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(7.0
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)
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(6.5
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)
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Non-operating income and expenses
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(0.7
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)
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0.9
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Additional ADITC amortization
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(1.0
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)
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(1.5
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)
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Income tax expense (excluding additional ADITC amortization)
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(4.6
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)
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(13.8
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)
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Total increase in Idaho Power net income
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8.3
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8.8
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Other changes (net of tax)
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(0.8
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)
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(0.3
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)
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Net income attributable to IDACORP, Inc. - September 30, 2017
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$
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90.6
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$
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173.6
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Net Income - Third Quarter 2017
IDACORP's net income increased
$7.5 million
for the third quarter of 2017 compared with the third quarter of 2016, primarily due to higher net income at Idaho Power. Continued customer growth in Idaho Power's service area, higher sales volumes resulting from warmer summer temperatures in Idaho Power's service area, lower other O&M expenses, and the net effects of the Valmy Plant settlement stipulations in the third quarter of 2017 contributed to the increase in net income.
Customer growth increased operating income by
$2.3 million
in the third quarter of 2017, as the number of Idaho Power customers grew by
1.8 percent
over the twelve months ended September 30, 2017. Warmer summer temperatures in Idaho Power's service area in the third quarter of 2017 led to an increase in sales volumes on a per-customer basis, primarily for residential customers using energy for cooling, compared with the third quarter of 2016, while higher levels of commercial and industrial activity also led to an increase in sales volumes on a per customer basis for commercial and industrial customers. The increases in sales volumes on a per-customer basis increased operating income by
$12.0 million
in the third quarter of 2017 compared with the third quarter of 2016. The increase in revenues from increased sales volumes was partially offset by the FCA mechanism, which reduced revenues by
$7.4 million
during the third quarter of 2017 compared with the third quarter of 2016. The warmer summer temperatures also caused an increase in the proportion of residential sales in higher rate categories under Idaho Power's tiered rate structure, partially contributing to a
$14.3 million
increase in operating income.
In the second quarter of 2017, the IPUC and OPUC each approved settlement stipulations related to Idaho Power’s plan to end its participation in coal-fired operations at the Valmy Plant by the end of 2025. The settlement stipulations resulted in increased general business revenue collections and general business revenue accruals in the third quarter of 2017 (included in the
$14.3 million
"Increase in revenues per MWh, net of associated power supply costs and power cost adjustment mechanism impacts" in the table above), increased net depreciation expense (included in the
$4.2 million
increase in "Depreciation expense" in the table above), and increased associated income tax expenses for the quarter, including plant-related flow-through tax adjustments.
For both the third quarter and nine months ended September 30, 2017, the settlement stipulations increased general business revenue collections, general business revenue accruals, net depreciation expense, and income tax expense. The ongoing annual
benefit to net income from the Valmy Plant settlement stipulations is expected to decline slightly each year through 2028, primarily due to the annual decline in Valmy Plant-related rate base, which is expected to be fully depreciated by December 31, 2028. Compared with Idaho Power’s estimate of what ongoing net income would have been without the settlement stipulations, the settlement stipulations increased after-tax net income for the first nine months of 2017 by $3.8 million, of which
$1.3 million
was recorded during the third quarter of 2017. Idaho Power estimates the Valmy Plant settlement stipulations will increase after-tax net income by approximately $1.4 million during the last three months of 2017 for a full-year 2017 increase to after-tax net income of approximately $5.2 million.
During the third quarter of 2017, Idaho Power benefited from a
$2.1 million
increase in third-party use of electric property, wheeling, and other revenue. This change was largely due to an increase in wheeling volumes and an increase in Idaho Power's Open Access Transmission Tariff (OATT) rates that became effective in October 2016.
Other O&M expenses were
$2.9 million
lower in the third quarter of 2017 compared with the third quarter in 2016, as lower generation at Idaho Power's thermal plants and the timing of an annual maintenance outage at the Jim Bridger coal-fired plant resulted in lower O&M costs.
Income from Idaho Power's unconsolidated investment in BCC decreased non-operating income by
$7.0 million
in the third quarter of 2017 compared with the same quarter in 2016, primarily due to a decrease in coal sales prices and volumes at BCC.
Idaho Power income tax expense increased $5.6 million in the third quarter of 2017 compared with the third quarter of 2016, due mostly to higher pre-tax income and tax benefits from distributions from fully-amortized affordable housing investments that were recorded during the third quarter of 2016. There were no significant distributions from fully-amortized affordable housing investments in the third quarter of 2017. Also, based on Idaho Power's current expectations of full-year 2017 results, Idaho Power did not record any additional ADITC amortization under its Idaho regulatory settlement stipulation during the third quarter of 2017 and does not expect additional ADITC amortization for the full-year 2017. During the third quarter of 2016, Idaho Power recorded $1.0 million of additional ADITC amortization.
Net Income - Year-to-Date 2017
IDACORP's net income increased
$8.5 million
, primarily from higher net income at Idaho Power, for the first nine months of 2017 compared with the same period in 2016. Customer growth added
$7.0 million
to Idaho Power operating income compared with the first nine months of 2016. Higher usage per customer in the first nine months of 2017 compared with the same period in 2016 contributed
$12.2 million
to operating income, due mostly to higher usage per customer in the third quarter of 2017 described above. Warmer summer temperatures and colder winter temperatures during the first nine months of 2017 compared with the same period in 2016 led to a greater proportion of residential sales in higher rate categories under Idaho Power's tiered rate structure. These residential sales contributed to the
$30.3 million
increase in operating income from the increase in revenues per MWh. The FCA mechanism reduced operating income by
$13.7 million
during the first nine months of 2017 compared with the first nine months of 2016. As noted above, the settlement stipulations related to the Valmy Plant approved in the second quarter of 2017 added $3.8 million to after-tax net income for the first nine months of 2017. During the first nine months of 2017, Idaho Power benefited from a
$9.1 million
increase in third-party use of electric property, wheeling, and other revenue. This change was largely due to an increase in wheeling volumes, an increase in Idaho Power's OATT rates that became effective in October 2016, and a new long-term wheeling agreement that became effective in July 2016.
A decrease in income from Idaho Power's unconsolidated investment in BCC decreased non-operating income by
$6.5 million
in the first nine months of 2017 compared with the first nine months in 2016, primarily due to a decrease in coal sales prices and higher expenses at BCC. Idaho Power anticipates that higher coal sales prices will increase income from BCC in the fourth quarter of 2017 compared with the fourth quarter of 2016. Despite the expected fourth quarter increase in income from BCC this year, Idaho Power expects income from BCC for the full year of 2017 to be slightly below the income from BCC in 2016.
Idaho Power's income tax expense was $15.3 million higher primarily due to higher pre-tax income, the $5.6 million flow-through benefit of tax deductible make-whole premiums that Idaho Power paid in connection with the early redemption of long-term debt in the first nine months of 2016, and tax benefits from distributions from fully-amortized affordable housing investments that were also recorded in 2016. There were no early redemptions of long-term debt or significant distributions from fully-amortized affordable housing investments in the first nine months of 2017. Also, based on Idaho Power's current expectations of full-year 2017 results, Idaho Power did not record any additional ADITC amortization under its Idaho regulatory settlement stipulation during the first nine months of 2017. During the first nine months of 2016, Idaho Power recorded $1.5 million of additional ADITC amortization.
RESULTS OF OPERATIONS
This section of MD&A takes a closer look at the significant factors that affected IDACORP’s and Idaho Power’s earnings during the
three and nine months ended
September 30, 2017
. In this analysis, the results for the
three and nine months ended
September 30, 2017
, are compared with the same periods in
2016
.
Utility Operations
The table below presents Idaho Power’s energy sales and supply (in thousands of MWh) for the
three and nine months ended
September 30, 2017
and
2016
.
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|
|
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|
|
|
|
|
|
Three months ended
September 30,
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Nine months ended
September 30,
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|
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2017
|
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2016
|
|
2017
|
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2016
|
General business sales
|
|
4,438
|
|
|
4,156
|
|
|
11,309
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|
|
10,933
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|
Off-system sales
|
|
216
|
|
|
224
|
|
|
1,806
|
|
|
837
|
|
Total energy sales
|
|
4,654
|
|
|
4,380
|
|
|
13,115
|
|
|
11,770
|
|
Hydroelectric generation
|
|
1,991
|
|
|
1,331
|
|
|
7,169
|
|
|
5,191
|
|
Coal generation
|
|
1,236
|
|
|
1,487
|
|
|
2,578
|
|
|
2,961
|
|
Natural gas and other generation
|
|
665
|
|
|
712
|
|
|
1,067
|
|
|
1,557
|
|
Total system generation
|
|
3,892
|
|
|
3,530
|
|
|
10,814
|
|
|
9,709
|
|
Purchased power
|
|
1,115
|
|
|
1,164
|
|
|
3,269
|
|
|
2,951
|
|
Line losses
|
|
(353
|
)
|
|
(314
|
)
|
|
(968
|
)
|
|
(890
|
)
|
Total energy supply
|
|
4,654
|
|
|
4,380
|
|
|
13,115
|
|
|
11,770
|
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Sales Volume and Generation:
In the third quarter of 2017, general business sales volumes increased
282
thousand MWh, or
7 percent
, compared with the third quarter of 2016. During the first nine months of 2017, general business sales volumes increased
376
thousand MWh, or
3 percent
, compared with the first nine months of the prior year. Cooling degree days for the three and nine months ended September 30, 2017, were 53 percent and 34 percent higher, respectively, which increased the use of electricity for cooling purposes. Heating degree days for the first nine months of 2017 were 27 percent higher than the same period in 2016, which increased the use of electricity for heating purposes. In addition, customer growth contributed to increased sales volumes in 2017 compared with 2016, with the number of Idaho Power's customers growing by
1.8 percent
over the prior twelve months. Usage per irrigation customer was approximately 11 percent lower in the first nine months of 2017 compared with the same period in 2016, as precipitation in the Idaho Power service area during the nine months ended September 30, 2017, was significantly higher than in the same periods of 2016, which reduced usage by irrigation customers, particularly in the first six months of 2017.
Off-system sales volumes in the third quarter of 2017 were relatively flat compared with the third quarter of 2016, as an increase in hydroelectric generation supported the increased general business sales, resulting in a consistent amount of energy available for off-system sales. Off-system sales volumes increased
969 thousand
MWh, or
116 percent
, in the first nine months of 2017 compared with the first nine months of 2016 due primarily to increased hydroelectric generation exceeding the increased general business sales, resulting in more energy available for off-system sales. For the third quarter and first nine months of 2017, hydroelectric generation comprised 51 percent and 66 percent of Idaho Power's total system generation, respectively, compared with 38 percent and 53 percent, respectively, for the third quarter and first nine months of 2016. Generation from Idaho Power's hydroelectric plants increased due to significantly greater precipitation in the first nine months of 2017. Precipitation in Boise, Idaho (measured in inches) was
131 percent
higher in the first nine months of 2017 compared with the same period in 2016, and
58 percent
above normal. For 2017, Idaho Power estimates annual generation from its hydroelectric facilities will be between 8.5 million MWh and 9.0 million MWh. An increase in hydroelectric generation throughout the northwest United States increased surplus power available for sale by utilities and decreased Idaho Power's wholesale power sales prices approximately 28 percent for the first nine months of 2017 compared with the first nine months of 2016.
The financial impacts of fluctuations in off-system sales, purchased power, fuel expense, and other power supply-related expenses are addressed in Idaho Power's Idaho and Oregon power cost adjustment mechanisms, which are described later in this MD&A.
General Business Revenues:
The table below presents Idaho Power’s general business revenues (in thousands) and MWh sales volumes (in thousands) for the
three and nine months ended
September 30, 2017
and
2016
, and the number of customers as of
September 30, 2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
145,555
|
|
|
$
|
130,952
|
|
|
$
|
410,245
|
|
|
$
|
376,492
|
|
Commercial
|
|
89,305
|
|
|
81,062
|
|
|
242,565
|
|
|
227,442
|
|
Industrial
|
|
52,771
|
|
|
48,979
|
|
|
147,995
|
|
|
136,617
|
|
Irrigation
|
|
89,370
|
|
|
84,264
|
|
|
146,363
|
|
|
153,301
|
|
Total
|
|
377,001
|
|
|
345,257
|
|
|
947,168
|
|
|
893,852
|
|
Deferred revenue related to HCC relicensing AFUDC
(1)
|
|
(3,432
|
)
|
|
(3,432
|
)
|
|
(8,366
|
)
|
|
(8,366
|
)
|
Total general business revenues
|
|
$
|
373,569
|
|
|
$
|
341,825
|
|
|
$
|
938,802
|
|
|
$
|
885,486
|
|
Volume of Sales (MWh)
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
1,395
|
|
|
1,222
|
|
|
3,993
|
|
|
3,640
|
|
Commercial
|
|
1,112
|
|
|
1,034
|
|
|
3,090
|
|
|
2,984
|
|
Industrial
|
|
855
|
|
|
820
|
|
|
2,496
|
|
|
2,402
|
|
Irrigation
|
|
1,076
|
|
|
1,080
|
|
|
1,730
|
|
|
1,907
|
|
Total MWh sales
|
|
4,438
|
|
|
4,156
|
|
|
11,309
|
|
|
10,933
|
|
Number of customers at period end
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
450,857
|
|
|
442,284
|
|
|
|
|
|
Commercial
|
|
70,066
|
|
|
69,145
|
|
|
|
|
|
Industrial
|
|
120
|
|
|
123
|
|
|
|
|
|
Irrigation
|
|
20,914
|
|
|
20,641
|
|
|
|
|
|
Total customers
|
|
541,957
|
|
|
532,193
|
|
|
|
|
|
(1)
As part of its January 30, 2009 general rate case order, the IPUC is allowing Idaho Power to recover the allowance for funds used during construction (AFUDC) on construction work in progress related to the HCC relicensing process, even though the relicensing process is not yet complete and the costs have not been moved to electric plant in service. Idaho Power is collecting approximately $10.7 million annually in the Idaho jurisdiction but is deferring revenue recognition of the amounts collected until the license is issued and the accumulated license costs approved for recovery are placed in service.
Changes in rates, changes in customer demand, and changes in FCA revenues are the primary reasons for fluctuations in general business revenue from period to period. The primary influences on customer demand for electricity are weather and economic conditions. Extreme temperatures increase sales to customers who use electricity for cooling and heating, while moderate temperatures decrease sales. Precipitation levels and the timing of precipitation during the agricultural growing season also affect sales to customers who use electricity to operate irrigation pumps. Rates are also seasonally adjusted, providing for higher rates during peak load periods, and residential customer rates are tiered, providing for higher rates based on higher levels of usage. The seasonal and tiered rate structures contribute to seasonal fluctuations in revenues and earnings. For purposes of illustration, Boise, Idaho weather-related information for the
three and nine months ended
September 30, 2017
and
2016
, is presented in the table that follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
2017
|
|
2016
|
|
Normal
|
|
2017
|
|
2016
|
|
Normal
(2)
|
Heating degree-days
(1)
|
|
131
|
|
|
97
|
|
|
121
|
|
|
3,442
|
|
|
2,715
|
|
|
3,320
|
|
Cooling degree-days
(1)
|
|
1,108
|
|
|
722
|
|
|
751
|
|
|
1,341
|
|
|
1,000
|
|
|
934
|
|
(1)
Heating and cooling degree-days are common measures used in the utility industry to analyze the demand for electricity and indicate when a customer would use electricity for heating and air conditioning. A degree-day measures how much the average daily temperature varies from 65 degrees. Each degree of temperature above 65 degrees is counted as one cooling degree-day, and each degree of temperature below 65 degrees is counted as one heating degree-day. While Boise, Idaho weather conditions are not necessarily representative of weather conditions throughout Idaho Power's service area, the greater Boise area has the majority of Idaho Power's customers.
(2)
Normal heating degree-days and cooling degree-days elements are, by convention, the arithmetic mean of the elements computed over 30 consecutive years. The normal amounts are the sum of the monthly normal amounts. These normal amounts are computed by the National Oceanic and Atmospheric Administration.
General business revenues increased
$31.7 million
and
$53.3 million
for the
three and nine months ended
September 30, 2017
, respectively, compared with the same periods in
2016
. Factors affecting general business revenues during the period are discussed below.
|
|
•
|
Rates
: Rate changes increased general business revenue by $13.3 million and $34.1 million for the three and nine months ended September 30, 2017, respectively, compared with the same periods in 2016. In the second quarter of 2017, the IPUC and OPUC each approved settlement stipulations related to Idaho Power’s plan to end its participation in coal-fired operations at the Valmy Plant by the end of 2025, which increased general business revenue collections and general business revenue accruals for the three and nine months ended September 30, 2017 compared with the same periods in 2016. Also, colder winter temperatures in early 2017 and warmer summer temperatures during the third quarter of 2017 led to a greater proportion of residential sales in higher rate categories in Idaho Power's tiered rate structure in the third quarter and first nine months of 2017 compared with the same periods in the prior year.
|
|
|
•
|
Customers
: Customer growth increased general business revenue by $2.8 million and $9.5 million, respectively, compared with the
third
quarter and first nine months of 2016. Total customers increased
1.8 percent
during the twelve months ended
September 30, 2017
.
|
|
|
•
|
Usage
: Higher usage (on a per customer basis) by residential, industrial, and commercial customers increased general business revenue by $23.1 million for the third quarter of 2017 and $23.5 million for the first nine months of 2017 when compared with the same periods of 2016. Increased usage in both periods was primarily the result of warmer summer temperatures and colder winter temperatures in Idaho Power's service area, which increased usage by residential customers for cooling and heating. Cooling degree days were significantly higher in the third quarter and first nine months of 2017 compared with the same periods in 2016, and heating degree days were also significantly higher in the first nine months of 2017. These increases in usage were partially offset by an 11 percent decrease in usage per irrigation customer due to increased precipitation in Idaho Power's service area during the nine months ended September 30, 2017 compared with the same period in 2016, particularly in the first six months of 2017.
|
|
|
•
|
FCA Revenue
: The FCA mechanism adjusts revenue each year to collect, or refund, the difference between the authorized fixed-cost recovery amount and the actual fixed costs recovered by Idaho Power during the year. Higher usage (on a per customer basis) by residential and small general service customers during the three and nine months ended September 30, 2017, compared with the same periods in 2016, decreased the amount of FCA revenue accrued by $7.4 million and $13.7 million for the third quarter and first nine months of 2017, respectively, compared with the same periods in 2016. Idaho Power did not accrue or defer FCA revenue in the third quarter of 2017, but Idaho Power accrued $7.4 million of FCA revenue in the third quarter of 2016. Idaho Power accrued $8.7 million of FCA revenue in the first nine months of 2017 compared with an accrual of $22.4 million in the same period in 2016.
|
Off-System Sales:
Off-system sales consist primarily of long-term sales contracts and opportunity sales of surplus system energy. The table below presents Idaho Power’s off-system sales for the
three and nine months ended
September 30, 2017
and
2016
(in thousands, except for per MWh amounts).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Revenue
|
|
$
|
6,710
|
|
|
$
|
6,143
|
|
|
$
|
25,609
|
|
|
$
|
16,532
|
|
MWh sold
|
|
216
|
|
|
224
|
|
|
1,806
|
|
|
837
|
|
Revenue per MWh
|
|
$
|
31.06
|
|
|
$
|
27.42
|
|
|
$
|
14.18
|
|
|
$
|
19.75
|
|
In the third quarter of 2017, off-system sales revenue increased by
$0.6 million
compared with the same period in 2016. For the first nine months of 2017, off-system sales revenue increased by
$9.1 million
, or
55 percent
compared with the same period in 2016. Off-system sales volumes increased
116 percent
in the first nine months of 2017 compared with the same period in 2016 as generation from Idaho Power's hydroelectric plants increased due to significantly greater precipitation in the first nine months of 2017 compared with the same period in the previous year. The average price of off-system sales was
28 percent
lower for the nine months ended September 30, 2017 compared with the same period in 2016, as an increase in output from hydroelectric resources in the region due to increased precipitation during the period, as well as additional output from new wind and solar projects throughout the region, increased surplus power available for sale and decreased wholesale power market prices.
Other Revenues:
The table below presents the components of other revenues for the
three and nine months ended
September 30, 2017
and
2016
(in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Transmission services and other
|
|
$
|
16,493
|
|
|
$
|
14,404
|
|
|
$
|
49,250
|
|
|
$
|
40,177
|
|
Energy efficiency
|
|
9,883
|
|
|
9,102
|
|
|
26,726
|
|
|
24,256
|
|
Total other revenues
|
|
$
|
26,376
|
|
|
$
|
23,506
|
|
|
$
|
75,976
|
|
|
$
|
64,433
|
|
Other revenues increased
$2.9 million
, or
12 percent
, and
$11.5 million
, or
18 percent
, in the third quarter and first
nine
months of 2017, respectively, compared with the same periods in 2016. The increase was largely due to an increase in wheeling volumes, an increase in Idaho Power's OATT rates that became effective in October 2016, and a new long-term wheeling agreement that became effective in July 2016, all of which increased revenues during the first
nine
months of 2017 compared with 2016.
Most energy efficiency activities are funded through a rider mechanism on customer bills. Energy efficiency program expenditures funded through the rider are reported as an operating expense with an equal amount of revenues recorded in other revenues, resulting in no net impact on earnings. The cumulative variance between expenditures and amounts collected through the rider is recorded as a regulatory asset or liability pending future collection from, or obligation to, customers. A liability balance indicates that Idaho Power has collected more than it has spent and an asset balance indicates that Idaho Power has spent more than it has collected. At
September 30, 2017
, Idaho Power's energy efficiency rider balances were a $4.6 million regulatory liability in the Idaho jurisdiction and a $6.0 million regulatory asset in the Oregon jurisdiction. As described in Note 3 - "Regulatory Matters" to the condensed consolidated financial statements in this report, the approved net increase in Idaho power cost adjustment (PCA) rates, effective for the 2017-2018 PCA collection period from June 1, 2017 to May 31, 2018, included a
$13.0 million
refund of previously collected Idaho energy efficiency rider funds.
Purchased Power:
The table below presents Idaho Power’s purchased power expenses and volumes for the
three and nine months ended
September 30, 2017
and
2016
(in thousands, except for per MWh amounts).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Expense
|
|
|
|
|
|
|
|
|
PURPA contracts
|
|
$
|
50,660
|
|
|
$
|
42,477
|
|
|
$
|
127,896
|
|
|
$
|
111,422
|
|
Other purchased power (including wheeling)
|
|
18,218
|
|
|
25,093
|
|
|
51,398
|
|
|
52,194
|
|
Demand response incentive payments
|
|
6,775
|
|
|
$
|
6,878
|
|
|
6,981
|
|
|
7,059
|
|
Total purchased power expense
|
|
$
|
75,653
|
|
|
$
|
74,448
|
|
|
$
|
186,275
|
|
|
$
|
170,675
|
|
MWh purchased
|
|
|
|
|
|
|
|
|
PURPA contracts
|
|
763
|
|
|
574
|
|
|
2,199
|
|
|
1,740
|
|
Other purchased power
|
|
352
|
|
|
590
|
|
|
1,070
|
|
|
1,221
|
|
Total MWh purchased
|
|
1,115
|
|
|
1,164
|
|
|
3,269
|
|
|
2,961
|
|
Cost per MWh from PURPA contracts
|
|
$
|
66.40
|
|
|
$
|
74.00
|
|
|
$
|
58.16
|
|
|
$
|
64.04
|
|
Cost per MWh from other sources
|
|
$
|
51.76
|
|
|
$
|
42.53
|
|
|
$
|
48.04
|
|
|
$
|
42.75
|
|
Weighted average - all sources
|
|
$
|
61.77
|
|
|
$
|
58.05
|
|
|
$
|
54.85
|
|
|
$
|
55.26
|
|
Purchased power expense increased
$1.2 million
, or
2 percent
, and
$15.6 million
, or
9 percent
, in the
third
quarter and first nine months of
2017
, respectively, compared with the same periods in
2016
. The increase for the
third
quarter and first nine months of
2017
was primarily due to increases of
33 percent
and
26 percent
, respectively, in MWh purchased from generation projects under PURPA contracts, offset partially by decreases in costs per MWh.
Idaho Power is required by federal law to purchase power from some PURPA generation projects at a specified price regardless of the then-current load demand or wholesale energy market prices. The intermittent, non-dispatchable nature of most PURPA generation increases the likelihood that Idaho Power will at times be required to reduce output from its lower-cost hydroelectric and fossil fuel-fired generation resources and may be required to sell its excess power in the wholesale power market at a
significant loss. The other purchased power cost per MWh often exceeds the off-system sales revenue per MWh because Idaho Power generally needs to purchase more power during heavy load periods than during light load periods, and conversely has less energy available for off-system sales during heavy load periods than light load periods. Market energy prices are typically higher during heavy load periods than during light load periods. Also, in accordance with Idaho Power's risk management policy, Idaho Power may purchase or sell energy several months in advance of anticipated delivery. The regional energy market price is dynamic and additional energy purchase or sale transactions that Idaho Power makes at current market prices may be noticeably different than the advance purchase or sale transaction prices. Most of the non-PURPA purchased power and substantially all of the PURPA power purchase costs are recovered through base rates and Idaho Power's power cost adjustment mechanisms.
Fuel Expense:
The table below presents Idaho Power’s fuel expenses and generation at its thermal generating plants for the
three and nine months ended
September 30, 2017
and
2016
(in thousands, except for per MWh amounts).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Expense
|
|
|
|
|
|
|
|
|
|
|
Coal
|
|
$
|
40,361
|
|
|
$
|
56,651
|
|
|
$
|
84,855
|
|
|
$
|
103,599
|
|
Natural gas
(1)
|
|
14,168
|
|
|
17,274
|
|
|
26,342
|
|
|
36,058
|
|
Total fuel expense
|
|
$
|
54,529
|
|
|
$
|
73,925
|
|
|
$
|
111,197
|
|
|
$
|
139,657
|
|
MWh generated
|
|
|
|
|
|
|
|
|
|
|
Coal
|
|
1,236
|
|
|
1,487
|
|
|
2,578
|
|
|
2,961
|
|
Natural gas
(1)
|
|
665
|
|
|
712
|
|
|
1,067
|
|
|
1,557
|
|
Total MWh generated
|
|
1,901
|
|
|
2,199
|
|
|
3,645
|
|
|
4,518
|
|
Cost per MWh - Coal
|
|
$
|
32.65
|
|
|
$
|
38.10
|
|
|
$
|
32.92
|
|
|
$
|
34.99
|
|
Cost per MWh - Natural gas
|
|
$
|
21.31
|
|
|
$
|
24.26
|
|
|
$
|
24.69
|
|
|
$
|
23.16
|
|
Weighted average, all sources
|
|
$
|
28.68
|
|
|
$
|
33.62
|
|
|
$
|
30.51
|
|
|
$
|
30.91
|
|
(1)
Includes a negligible amount of expense and generation related to the Salmon diesel-fired generation plant.
The majority of the fuel for Idaho Power’s jointly-owned coal-fired plants is purchased through long-term contracts, including purchases from BCC, a one-third owned joint venture of IERCo. The price of coal from BCC is subject to fluctuations in mine operating expenses, geologic conditions, and production levels. BCC supplies up to two-thirds of the coal used by the Jim Bridger plant. Natural gas is mainly purchased on the regional wholesale spot market at published index prices. In addition to commodity (variable) costs, both natural gas and coal expense include costs that are more fixed in nature for items such as capacity charges, transportation, and fuel handling. Period to period variances in fuel expense per MWh are noticeably impacted by these fixed charges when generation output is substantially different between the periods.
Fuel expense decreased
$19.4 million
, or
26 percent
, and
$28.5 million
, or
20 percent
, in the
third
quarter and first nine months of
2017
, respectively, compared with the same periods in
2016
. The decreases in the third quarter and first nine months of 2017 were primarily due to increased output from Idaho Power's hydroelectric plants, which reduced utilization of gas and coal generation. Generation from the hydroelectric plants increased 50 percent during the third quarter of 2017 and 38 percent during the first nine months of 2017, compared with the same periods in 2016.
Power Cost Adjustment Mechanisms:
Idaho Power's power supply costs (primarily purchased power and fuel expense, less off-system sales) can vary significantly from year to year. Volatility of power supply costs arises from factors such as weather conditions, wholesale market prices, and volumes of power purchased and sold in the wholesale markets, Idaho Power's hydroelectric and thermal generation volumes and fuel costs, generation plant availability, and retail loads. To address the volatility of power supply costs, Idaho Power's power cost adjustment mechanisms in the Idaho and Oregon jurisdictions allow Idaho Power to recover from or refund to customers most of the fluctuations in power supply costs. The Idaho PCA includes a cost or benefit sharing ratio that allocates the deviations in net power supply expenses between customers (95 percent) and Idaho Power (5 percent), with the exception of PURPA power purchases and demand response program incentives, which are allocated 100 percent to customers. The Idaho deferral period, or PCA year, runs from April 1 through March 31. Amounts deferred during the PCA year are primarily recovered or refunded during the subsequent June 1 through May 31 period. Because of the power cost adjustment mechanisms, the primary financial impacts of power supply cost variations is that cash is paid out but recovery from customers does not occur until a future period, or cash that is collected is refunded to customers in a future period, resulting in fluctuations in operating cash flows from year to year.
The table that follows presents the components of the Idaho and Oregon power cost adjustment mechanisms for the
three and nine months ended
September 30, 2017
and
2016
(in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Idaho power supply cost accrual (deferral)
|
|
$
|
8
|
|
|
$
|
(30,006
|
)
|
|
$
|
21,851
|
|
|
$
|
(17,408
|
)
|
Amortization of prior year authorized balances
|
|
10,971
|
|
|
11,664
|
|
|
29,357
|
|
|
29,322
|
|
Total power cost adjustment expense
|
|
$
|
10,979
|
|
|
$
|
(18,342
|
)
|
|
$
|
51,208
|
|
|
$
|
11,914
|
|
The power supply accruals (deferral) represent the portion of the power supply cost fluctuations accrued (deferred) under the power cost adjustment mechanisms. When actual power supply costs are lower than the amount forecasted in power cost adjustment rates, which was the case both periods in 2017, most of the difference is accrued.When actual power supply costs are higher than the amount forecasted in power cost adjustment rates, which was the case for both periods in 2016, most of the difference is deferred. The amortization of the prior year’s balances represents the offset to the amounts being collected or refunded in the current power cost adjustment year that were deferred or accrued in the prior power cost adjustment year (the true-up component of the power cost adjustment).
Other O&M Expenses:
Other O&M expenses decreased $2.9 million, or 3 percent, in the
third
quarter of
2017
compared with the
third
quarter of
2016
. Lower generation at Idaho Power's thermal plants and the timing of an annual maintenance outage at the Jim Bridger coal-fired plant resulted in lower thermal operating and maintenance costs in the third quarter of 2017 compared with the third quarter in 2016. Other O&M expenses decreased $0.4 million, or less than 1 percent, for the first nine months of 2017, compared with the same period in 2016. Compared with the first nine months of 2016, lower O&M expenses due to lower thermal generation during the first nine months of 2017, were mostly offset by weather-related increases in certain O&M expenses in early 2017.
Income Taxes
IDACORP's and Idaho Power's income tax expense for the nine months ended
September 30, 2017
, when compared with the same period in
2016
, increased
$16.8 million
and
$15.3 million
, respectively, primarily as a result of greater pre-tax income, the $5.6 million flow-through income tax benefit related to the tax deduction for bond redemption costs incurred in the first nine months of 2016, and tax benefits from distributions from fully-amortized affordable housing investments that were also recorded in 2016. For information relating to IDACORP's and Idaho Power's computation of income tax expense and estimated annual effective tax rate, see Note 2 - "Income Taxes" to the condensed consolidated financial statements included in this report.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Idaho Power has been pursuing significant enhancements to its utility infrastructure in an effort to ensure an adequate supply of electricity, to provide service to new customers, and to maintain system reliability. Idaho Power's existing hydroelectric and thermal generation facilities also require continuing upgrades and component replacement. Idaho Power expects these substantial capital expenditures to continue, with expected total capital expenditures of approximately $1.5 billion over the five-year period from
2017
(including expenditures incurred to-date in
2017
) through 2021.
Idaho Power funds its liquidity needs for capital expenditures through cash flows from operations, debt offerings, commercial paper markets, credit facilities, and capital contributions from IDACORP. Idaho Power periodically files for rate adjustments for recovery of operating costs and capital investments to provide the opportunity to align Idaho Power's earned returns with those allowed by regulators. Idaho Power uses operating and capital budgets to control operating costs and capital expenditures. During the first nine months of 2017, Idaho Power continued its efforts to optimize operations, control costs, and generate operating cash inflows to meet operating expenditures, contribute to capital expenditure requirements, and pay dividends to shareholders.
As of
October 27, 2017
, IDACORP's and Idaho Power's access to debt, equity, and credit arrangements included:
|
|
•
|
their respective $100 million and $300 million revolving credit facilities;
|
|
|
•
|
IDACORP's shelf registration statement filed with the U.S. Securities and Exchange Commission (SEC) on May 20, 2016, which may be used for the issuance of debt securities and common stock;
|
|
|
•
|
Idaho Power's shelf registration statement filed with the SEC on May 20, 2016, which may be used for the issuance of first mortgage bonds and debt securities; $500 million is available for issuance pursuant to state regulatory authority; and
|
|
|
•
|
IDACORP's and Idaho Power's issuance of commercial paper, which may be issued up to an amount equal to the available credit capacity under their respective credit facilities.
|
IDACORP and Idaho Power monitor capital markets with a view toward opportunistic debt and equity transactions, taking into account current and potential future long-term needs. As a result, IDACORP may issue debt securities or common stock, and Idaho Power may issue debt securities or first mortgage bonds, if the companies believe terms available in the capital markets are favorable and that issuances would be financially prudent.
Based on planned capital expenditures and operating and maintenance expenses, the companies believe they will be able to meet capital and debt service requirements and fund corporate expenses during at least the next twelve months with a combination of existing cash, operating cash flows generated by Idaho Power's utility business, availability under existing credit facilities, and access to commercial paper and long-term debt markets.
IDACORP and Idaho Power seek to maintain capital structures of approximately 50 percent debt and 50 percent equity, and maintaining this ratio influences IDACORP's and Idaho Power's debt and equity issuance decisions. As of
September 30, 2017
, IDACORP's and Idaho Power's capital structures, as calculated for purposes of applicable debt covenants, were as follows:
|
|
|
|
|
|
|
|
IDACORP
|
|
Idaho Power
|
Debt
|
|
44%
|
|
46%
|
Equity
|
|
56%
|
|
54%
|
IDACORP and Idaho Power generally maintain their cash and cash equivalents in highly liquid investments, such as U.S. Treasury Bills, money market funds, and bank deposits.
Operating Cash Flows
IDACORP’s and Idaho Power’s operating cash inflows for the
nine months ended
September 30, 2017
were
$349 million
and
$363 million
, respectively,
increase
s of
$73 million
and
$113 million
, respectively, compared with the same period in
2016
. Significant items that affected the comparability of the companies' operating cash flows in the
first nine months
of
2017
compared with the same period in
2016
were as follows:
|
|
•
|
Changes in regulatory assets and liabilities
increase
d operating cash flows by
$48 million
. The increase is mostly related to the relative amounts of power supply and fixed costs deferred and collected under the Idaho power cost adjustment and FCA mechanisms, partially offset by revenues accrued in excess of collections from the Valmy Plant settlement stipulation, which will be collected in future periods;
|
|
|
•
|
Operating cash flows increased by
$16 million
and
$17 million
for IDACORP and Idaho Power, respectively, due to a
$46 million
and a
$28 million
increase
from changes in taxes accrued, offset partially by a
$30 million
and an
$11 million
decrease
from changes in deferred taxes and investment tax credits, respectively; and
|
|
|
•
|
Changes in working capital balances due primarily to timing, including fluctuations in accounts receivable, other current assets, and other current liabilities, as follows:
|
|
|
◦
|
timing of collections of accounts receivable balances
decreased
operating cash flows by
$8 million
for IDACORP and
decreased
operating cash flows by
$15 million
for Idaho Power. IDACORP's decrease is less than Idaho Power's decrease because IDACORP collected a $7.6 million receivable in the first quarter of 2017 from a legal settlement;
|
|
|
◦
|
the changes in other current assets
increased
cash flows by
$11 million
, which was primarily due to fluctuations in the balance in accrued unbilled revenues as energy sales near the end of the respective periods were impacted by weather;
|
|
|
◦
|
timing of accounts payable payments
decreased
operating cash flows by
$22 million
for IDACORP and increased operating cash flows by
$24 million
for Idaho Power (the difference relates to a $46.5 million payable from Idaho Power to IDACORP relating to estimated income tax payments); and
|
|
|
◦
|
other current liabilities, which include non-incentive accrued compensation, customer deposits, accrued interest, and other miscellaneous liabilities, increased more during the
first nine months
of 2017 compared
|
with the first nine months of 2016, and
increased
cash flows by
$2 million
during the first nine months of 2017 compared with the first nine months of 2016.
Investing Cash Flows
Investing activities consist primarily of capital expenditures related to new construction and improvements to Idaho Power’s generation, transmission, and distribution facilities. IDACORP’s and Idaho Power’s net investing cash outflows for the
nine months ended
September 30, 2017
, were
$199 million
. Investing cash outflows for
2017
and
2016
were primarily for construction of utility infrastructure needed to address Idaho Power’s aging plant and equipment, customer growth, and environmental and regulatory compliance requirements. Idaho Power has a Rabbi trust designated to provide funding for obligations of its nonqualified defined benefit plans. In the first nine months of 2017, related to activity in the Rabbi trust, Idaho Power purchased
$3 million
of available-for-sale securities and received
$4 million
of proceeds from the sales of available-for-sale securities.
Financing Cash Flows
Financing activities provide supplemental cash for both day-to-day operations and capital requirements as needed. Idaho Power funds liquidity needs for capital investment, working capital, managing commodity price risk, and other financial commitments through cash flows from operations, debt offerings, commercial paper markets, credit facilities, and capital contributions from IDACORP. IDACORP funds its cash requirements, such as payment of taxes, capital contributions to Idaho Power, and non-utility expenses allocated to IDACORP, through cash flows from operations, commercial paper markets, sales of common stock, and credit facilities.
IDACORP's and Idaho Power's financing cash outflows for the
nine months ended
September 30, 2017
were
$107 million
and
$106 million
, respectively. In the first nine months of 2017, IDACORP and Idaho Power paid cash dividends of
$83 million
and had a net reduction in commercial paper of
$19 million
.
Financing Programs and Available Liquidity
IDACORP Equity Programs:
In recent years, IDACORP has entered into sales agency agreements under which IDACORP could offer and sell shares of its common stock from time to time through a third-party agent. The most recent sales agency agreement terminated in May 2016. In May 2016, IDACORP filed a shelf registration statement with the SEC, which became effective upon filing, for the potential offer and sale of an unspecified amount of shares of common stock. IDACORP has no current plans to issue equity securities other than under its equity compensation plans during 2017, and as of the date of this report, the company has not pursued the execution of a new sales agency agreement.
Idaho Power First Mortgage Bonds
: Idaho Power's issuance of long-term indebtedness is subject to the approval of the IPUC, OPUC, and Wyoming Public Service Commission (WPSC). In April and May 2016, Idaho Power received orders from the IPUC, OPUC, and WPSC authorizing the company to issue and sell from time to time up to $500 million in aggregate principal amount of debt securities and first mortgage bonds, subject to conditions specified in the orders. Authority from the IPUC is effective through May 31, 2019, subject to extension upon request to the IPUC. The OPUC’s and WPSC’s orders do not impose a time limitation for issuances, but the OPUC order does impose a number of other conditions, including a requirement that the interest rates for the debt securities or first mortgage bonds fall within either (a) designated spreads over comparable U.S. Treasury rates or (b) a maximum interest rate limit of seven percent.
In September 2016, Idaho Power entered into a selling agency agreement with seven banks named in the agreement in connection with the potential issuance and sale from time to time of up to $500 million in aggregate principal amount of first mortgage bonds, secured medium term notes, Series K (Series K Notes), under Idaho Power’s Indenture of Mortgage and Deed of Trust, dated as of October 1, 1937, as amended and supplemented (Indenture). At the same time, Idaho Power entered into the Forty-eighth Supplemental Indenture, dated as of September 1, 2016, to the Indenture (Forty-eighth Supplemental Indenture). The Forty-eighth Supplemental Indenture provides for, among other items, (a) the issuance of up to $500 million in aggregate principal amount of Series K Notes pursuant to the Indenture and (b) the increase of the maximum amount of obligations to be secured by the Indenture to $2.5 billion (which maximum amount may be further increased or decreased by Idaho Power without the consent of the holders of first mortgage bonds). As of the date of this report, Idaho Power had not sold any first mortgage bonds, including Series K Notes, or debt securities under the selling agency agreement.
The Indenture limits the amount of first mortgage bonds at any one time outstanding to $2.5 billion, and as a result, the maximum amount of additional first mortgage bonds Idaho Power could issue as of
September 30, 2017
was limited to approximately $759 million. Separately, the Indenture also limits the amount of additional first mortgage bonds that Idaho
Power may issue to the sum of (a) the principal amount of retired first mortgage bonds and (b) 60 percent of total unfunded property additions, as defined in the Indenture. As of
September 30, 2017
, Idaho Power could issue approximately $1.8 billion of additional first mortgage bonds based on retired first mortgage bonds and total unfunded property additions.
IDACORP and Idaho Power Credit Facilities
:
In November 2015, IDACORP and Idaho Power entered into Credit Agreements for $100 million and $300 million credit facilities, respectively, replacing prior credit agreements. Each of the credit facilities may be used for general corporate purposes and commercial paper back-up. IDACORP's facility permits borrowings under a revolving line of credit of up to $100 million at any one time outstanding, including swingline loans not to exceed $10 million at any time and letters of credit not to exceed $50 million at any time. IDACORP's facility may be increased, subject to specified conditions, to $150 million. Idaho Power's facility permits borrowings through the issuance of loans and standby letters of credit of up to $300 million at any one time outstanding, including swingline loans not to exceed $30 million at any one time and letters of credit not to exceed $100 million at any one time outstanding. Idaho Power's facility may be increased, subject to specified conditions, to $450 million. While the credit facilities currently provide for a maturity date of November 5, 2021, the credit agreements grant IDACORP and Idaho Power the right to request an additional one-year extension, subject to certain conditions. Other terms and conditions of the credit facilities are described in IDACORP's and Idaho Power's Annual Report on Form 10-K for the year ended December 31, 2016, in Part II, Item 7 - "MD&A - Liquidity and Capital Resources."
Each facility contains a covenant requiring each company to maintain a leverage ratio of consolidated indebtedness to consolidated total capitalization equal to or less than 65 percent as of the end of each fiscal quarter. In determining the leverage ratio, "consolidated indebtedness" broadly includes all indebtedness of the respective borrower and its subsidiaries, including, in some instances, indebtedness evidenced by certain hybrid securities (as defined in the credit agreement). "Consolidated total capitalization" is calculated as the sum of all consolidated indebtedness, consolidated stockholders' equity of the borrower and its subsidiaries, and the aggregate value of outstanding hybrid securities. At
September 30, 2017
, the leverage ratios for IDACORP and Idaho Power were
44 percent
and
46 percent
, respectively. IDACORP's and Idaho Power's ability to utilize the credit facilities is conditioned upon their continued compliance with the leverage ratio covenants included in the credit facilities. There are additional covenants, subject to exceptions, that prohibit certain mergers, acquisitions, and investments, restrict the creation of certain liens, and prohibit entering into any agreements restricting dividend payments from any material subsidiary. At
September 30, 2017
, IDACORP and Idaho Power believe they were in compliance with all facility covenants. Further, IDACORP and Idaho Power do not believe they will be in violation or breach of their respective debt covenants during
2017
.
Without additional approval from the IPUC, the OPUC, and the WPSC, the aggregate amount of short-term borrowings by Idaho Power at any one time outstanding may not exceed $450 million. Idaho Power has obtained approval of the state public utility commissions of Idaho, Oregon, and Wyoming for the issuance of short-term borrowings through November 2022.
IDACORP and Idaho Power Commercial Paper:
IDACORP and Idaho Power have commercial paper programs under which they issue unsecured commercial paper notes up to a maximum aggregate amount outstanding at any time not to exceed the available capacity under their respective credit facilities, described above. IDACORP's and Idaho Power's credit facilities are available to the companies to support borrowings under their commercial paper programs. The commercial paper issuances are used to provide an additional financing source for the companies' short-term liquidity needs. The maturities of the commercial paper issuances will vary but may not exceed 270 days from the date of issue. Individual instruments carry a fixed rate during their respective terms, although the interest rates are reflective of current market conditions, subjecting the companies to fluctuations in interest rates.
Available Short-Term Borrowing Liquidity
The table below outlines available short-term borrowing liquidity as of the dates specified (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
|
IDACORP
(2)
|
|
Idaho Power
|
|
IDACORP
(2)
|
|
Idaho Power
|
Revolving credit facility
|
|
$
|
100,000
|
|
|
$
|
300,000
|
|
|
$
|
100,000
|
|
|
$
|
300,000
|
|
Commercial paper outstanding
|
|
(2,425
|
)
|
|
—
|
|
|
—
|
|
|
(21,800
|
)
|
Identified for other use
(1)
|
|
—
|
|
|
(24,245
|
)
|
|
—
|
|
|
(24,245
|
)
|
Net balance available
|
|
$
|
97,575
|
|
|
$
|
275,755
|
|
|
$
|
100,000
|
|
|
$
|
253,955
|
|
(1)
Port of Morrow and American Falls bonds that Idaho Power could be required to purchase prior to maturity under the optional or mandatory purchase provisions of the bonds, if the remarketing agent for the bonds is unable to sell the bonds to third parties.
(2)
Holding company only.
At
October 27, 2017
, IDACORP had
no loans outstanding under its credit facilities and had $2.3 million of commercial paper outstanding. Idaho Power had
no loans outstanding under its credit facilities and no commercial paper outstanding. The table below presents additional information about short-term commercial paper borrowing during the
three and nine months ended
September 30, 2017
(in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
September 30, 2017
|
|
September 30, 2017
|
|
|
IDACORP
(1)
|
|
Idaho Power
|
|
IDACORP
(1)
|
|
Idaho Power
|
Commercial paper:
|
|
|
|
|
|
|
|
|
Period end:
|
|
|
|
|
|
|
|
|
Amount outstanding
|
|
$
|
2,425
|
|
|
$
|
—
|
|
|
$
|
2,425
|
|
|
$
|
—
|
|
Weighted average interest rate
|
|
1.54
|
%
|
|
—
|
%
|
|
1.54
|
%
|
|
—
|
%
|
Daily average amount outstanding during the period
|
|
$
|
115
|
|
|
$
|
—
|
|
|
$
|
241
|
|
|
$
|
1,122
|
|
Weighted average interest rate during the period
|
|
1.53
|
%
|
|
—
|
%
|
|
1.15
|
%
|
|
1.12
|
%
|
Maximum month-end balance
|
|
$
|
2,425
|
|
|
$
|
—
|
|
|
$
|
2,425
|
|
|
$
|
—
|
|
(1)
Holding company only.
Impact of Credit Ratings on Liquidity and Collateral Obligations
IDACORP’s and Idaho Power’s access to capital markets, including the commercial paper market, and their respective financing costs in those markets, depend in part on their respective credit ratings. There have been no changes to IDACORP's or Idaho Power's ratings or ratings outlook by Standard & Poor’s Ratings Services or Moody’s Investors Service from those included in the companies' Annual Report on Form 10-K for the year ended
December 31, 2016
. However, any rating can be revised upward or downward or withdrawn at any time by a rating agency if it decides that the circumstances warrant the change.
Idaho Power maintains margin agreements relating to its wholesale commodity contracts that allow performance assurance collateral to be requested of and/or posted with certain counterparties. As of
September 30, 2017
, Idaho Power had posted
$0.4 million
performance assurance collateral related to these contracts. Should Idaho Power experience a reduction in its credit rating on its unsecured debt to below investment grade, Idaho Power could be subject to requests by its wholesale counterparties to post additional performance assurance collateral, and counterparties to derivative instruments and other forward contracts could request immediate payment or demand immediate ongoing full daily collateralization on derivative instruments and contracts in net liability positions. Based upon Idaho Power’s current energy and fuel portfolio and market conditions as of
September 30, 2017
, the amount of additional collateral that could be requested upon a downgrade to below investment grade is approximately $5.1 million. To minimize capital requirements, Idaho Power actively monitors its portfolio exposure and the potential exposure to additional requests for performance assurance collateral through sensitivity analysis.
Capital Requirements
Idaho Power's construction expenditures, excluding allowance for funds used during construction (AFUDC),
were $200 million during the
nine months ended
September 30, 2017
. The table below presents Idaho Power's expected cash requirements for construction, excluding AFUDC, for
2017
(including amounts incurred to-date) through 2021 (in millions).
|
|
|
|
|
|
|
|
|
|
2017
|
|
2018
|
|
2019-2021
|
Expected capital expenditures (excluding AFUDC)
|
|
$290-300
|
|
$285-295
|
|
$900-950
|
Major Infrastructure Projects:
Idaho Power is engaged in the development of a number of significant projects and has entered into arrangements with third parties concerning joint infrastructure development. The discussion below provides a summary of developments in certain of those projects since the discussion of these matters included in Part II, Item 7 - "MD&A - Capital Requirements" in IDACORP's and Idaho Power's Annual Report on Form 10-K for the year ended
December 31, 2016
. The discussion below should be read in conjunction with that report.
Boardman-to-Hemingway Transmission Line
:
The Boardman-to-Hemingway line, a proposed 300-mile, 500-kV transmission project between a station near Boardman, Oregon and the Hemingway station near Boise, Idaho, would provide transmission service to meet future resource needs. In January 2012, Idaho Power entered into a joint funding agreement with PacifiCorp and the Bonneville Power Administration to pursue permitting of the project. The joint funding agreement provides that Idaho Power's interest in the permitting phase of the project would be approximately 21 percent, and that during future negotiations
relating to construction of the transmission line Idaho Power would seek to retain that percentage interest in the completed project. Total cost estimates for the project are between $1.0 billion and $1.2 billion, including Idaho Power's AFUDC. This cost estimate is preliminary and excludes the impacts of inflation and price changes of materials and labor resources that may occur following the date of the estimate.
Approximately $92 million, including AFUDC, has been expended on the Boardman-to-Hemingway project through
September 30, 2017
. Pursuant to the terms of the joint funding arrangements, Idaho Power has received approximately $48 million of that amount as reimbursement from the project participants as of
September 30, 2017
. Idaho Power has accrued in receivables approximately $18 million more that will be billed by Idaho Power in the future to the project participants for expenses Idaho Power has incurred, for a total amount reimbursable by joint permitting participants of $66 million. Joint permitting participants are obligated to reimburse Idaho Power for their share of any future project permitting expenditures incurred by Idaho Power.
The permitting phase of the Boardman-to-Hemingway project is subject to federal review and approval by the U.S. Bureau of Land Management (BLM), the U.S. Forest Service, the Department of the Navy, the Army Corps of Engineers, and certain other federal agencies. The BLM, as the lead federal agency on the National Environmental Policy Act review, issued a final environmental impact statement (EIS) for the project in November 2016. As of the date of this report, the BLM's schedule provides for the issuance of a record of decision in 2017.
In the separate Oregon state permitting process, in June 2017, Idaho Power submitted its amended preliminary application for site certificate and expects the Oregon Department of Energy to issue a draft proposed order on the application in 2018. Idaho Power is unable to determine an in-service date for the line, but given the status of ongoing permitting activities, expects the in-service date would be in 2024 or beyond.
Gateway West Transmission Line
: Idaho Power and PacifiCorp are pursuing the joint development of the Gateway West project, a 500-kV transmission project between a station located near Douglas, Wyoming and the Hemingway station located near Boise, Idaho. In January 2012, Idaho Power and PacifiCorp entered a joint funding agreement for permitting of the project. Idaho Power has expended approximately $34 million, including AFUDC, on the permitting phase of the project through
September 30, 2017
. As of the date of this report, Idaho Power estimates the total cost for its share of the project (including both permitting and construction) to be between $200 million and $400 million, including AFUDC.
The permitting phase of the Gateway West project is subject to review and approval of the BLM. The BLM released its record of decision in November 2013 for eight of the ten transmission line segments. In May 2017, President Trump signed into law a bill that issued a right-of-way for certain portions of the remaining Gateway West segments. As of the date of this report, the other portions of the remaining segments continue to be subject to the BLM's review and approval. Idaho Power expects the BLM to issue a record of decision for the outstanding portions of the remaining segments in 2018.
Defined Benefit Pension Plan Contributions
Idaho Power has no minimum contribution requirement to its defined benefit pension plan in 2017; however, Idaho Power has contributed $40 million to the plan during 2017. Idaho Power's contributions are made in a continued effort to balance the regulatory collection of these expenditures with the amount and timing of contributions and to mitigate the cost of being in an underfunded position. The primary impact of pension contributions is on the timing of cash flows, as the timing of cost recovery lags behind contributions.
Contractual Obligations
During the
nine months ended
September 30, 2017
, IDACORP's and Idaho Power's contractual obligations, outside the ordinary course of business, did not change materially from the amounts disclosed in their Annual Report on Form 10-K for the year ended
December 31, 2016
, except that Idaho Power entered into agreements with solar, biomass, and hydro PURPA-qualifying facilities that increased Idaho Power's contractual payment obligations by approximately
$85 million
over the 20-year terms of the contracts.
Off-Balance Sheet Arrangements
IDACORP's and Idaho Power's off-balance sheet arrangements have not changed materially from those reported in MD&A in IDACORP's and Idaho Power's Annual Report on Form 10-K for the year ended
December 31, 2016
.
REGULATORY MATTERS
Introduction
Idaho Power's development of regulatory filings takes into consideration short-term and long-term needs for rate relief and involves several factors that can affect the timing of rate filings. These factors include, among others, in-service dates of major capital investments, the timing of changes in major revenue and expense items, and customer growth rates. Idaho Power's most recent general rate cases in Idaho and Oregon were filed during 2011, and Idaho Power filed a large single-issue rate case for the Langley Gulch power plant in Idaho and Oregon in 2012. These significant rate cases resulted in the resetting of base rates in both Idaho and Oregon during 2012. Idaho Power also reset its base-rate power supply expenses in the Idaho jurisdiction for purposes of updating the collection of costs through retail rates in 2014 but without a resulting net increase in rates. Between general rate cases, Idaho Power relies upon customer growth, power cost adjustment mechanisms, tariff riders, and other mechanisms to reduce the impact of regulatory lag, which refers to the period of time between making an investment or incurring an expense and recovering that investment or expense and earning a return. Management's regulatory focus in recent years has been largely on regulatory settlement stipulations and the design of rate mechanisms. Idaho Power continues to assess the need and timing of filing a general rate case in its two retail jurisdictions, based on its consideration of factors such as those described above.
The outcomes of significant proceedings are described in part in this report and further in IDACORP's and Idaho Power's Annual Report on Form 10-K for the year ended
December 31, 2016
. In addition to the discussion below, which includes notable regulatory developments since the discussion of these matters in IDACORP's and Idaho Power's Annual Report on Form 10-K for the year ended
December 31, 2016
, refer to Note 3 - "Regulatory Matters" to the condensed consolidated financial statements included in this report for additional information relating to Idaho Power's regulatory matters and recent regulatory filings and orders.
Notable Retail Rate Orders During 2017
During 2017, Idaho Power received orders authorizing the rate changes summarized in the table below.
|
|
|
|
|
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Description
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Status
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Estimated Rate Impact
(1)
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Notes
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Power Cost Adjustment Mechanism - Idaho
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New PCA rate became effective June 1, 2017
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$10.6 million PCA increase for the period from June 1, 2017 to May 31, 2018
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The potential revenue impact of rate increases and decreases associated with the Idaho PCA mechanism is largely offset by associated increases and decreases in actual power supply costs and amortization of deferred power supply costs.
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Fixed Cost Adjustment Mechanism - Idaho
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New FCA rate became effective June 1, 2017
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$6.9 million FCA increase for the period from June 1, 2017 to May 31, 2018
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The FCA is designed to remove Idaho Power’s financial disincentive to invest in energy efficiency programs by partially separating (or decoupling) the recovery of fixed costs from the volumetric kilowatt-hour charge and instead linking it to a set amount per customer.
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Valmy Plant Accelerated Depreciable Life - Idaho
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New retail rates became effective June 1, 2017
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$13.3 million increase in Idaho jurisdictional revenue requirement
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The increase allows Idaho Power to recover specified costs associated with its plan to end its participation in coal-fired operations at the Valmy Plant by the end of 2025.
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Depreciation Study - Idaho
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New depreciation rates became effective June 1, 2017
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No change in retail rates
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(1)
The annual amount collected in rates is typically not recovered on a straight-line basis (i.e., 1/12th per month), and is instead recovered in proportion to general business sales volumes.
Customer-Owned Generation Filing
On July 27, 2017, Idaho Power filed an application with the IPUC requesting the creation of two new classes for residential and small general service customers who choose to install on-site generation on or after January 1, 2018. If approved as proposed, Idaho Power does not, as of the date of this report, anticipate that the creation of these new rate classes would impact in the near term the current rates for the approximately 1,700 residential and small general service customers and applicants who currently take or are requesting net metering services from Idaho Power for their customer-owned generation.
Idaho Earnings Support from Idaho Settlement Stipulation
In October 2014, the IPUC issued an order approving an extension, with modifications, of the terms of a December 2011 Idaho settlement stipulation for the period from 2015 through 2019, or until the terms are otherwise modified or terminated by order of the IPUC or the full $45 million of additional ADITC amortization contemplated by the settlement stipulation has been amortized. The more specific terms and conditions of the October 2014 Idaho settlement stipulation are described in Note 3 - "Regulatory Matters" to the condensed consolidated financial statements included in this report. IDACORP and Idaho Power believe that the terms allowing additional amortization of ADITC in the October 2014 settlement stipulation provide the companies with a greater degree of earnings stability than would be possible without the terms of the stipulation in effect.
Under the October 2014 settlement stipulation, Idaho Power recorded
no
additional ADITC amortization during the first nine months of 2017, based on Idaho Power's estimate of Idaho ROE for the full-year 2017. During the first nine months of 2016, Idaho Power recorded
$1.5 million
of additional ADITC amortization, which was reversed later in 2016 as actual financial results exceeded Idaho Power's early estimates.
Change in Deferred Net Power Supply Costs and the Power Cost Adjustment Mechanisms
Deferred power supply costs represent certain differences between Idaho Power's actual net power supply costs and the costs included in its retail rates, the latter being based on annual forecasts of power supply costs. Deferred power supply costs are recorded on the balance sheets for future recovery or refund through customer rates.
The table that follows summarizes the change in deferred net power supply costs during the
nine months ended
September 30, 2017
(in thousands).
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Idaho
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Oregon
(1)
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Total
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Balance at December 31, 2016
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$
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53,442
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$
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428
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$
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53,870
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Current period net power supply costs accrued
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(21,851
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)
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—
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(21,851
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)
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Prior amounts recovered through rates
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(28,846
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)
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(511
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)
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(29,357
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)
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Revenue sharing
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1,186
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—
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1,186
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Prior energy efficiency funds refunded through rates
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6,665
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—
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6,665
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SO
2
allowance and renewable energy certificate sales
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(1,911
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)
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(56
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)
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(1,967
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)
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Energy efficiency rider funds transferred to Idaho PCA mechanism
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(13,000
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)
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—
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(13,000
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)
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Interest and other
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218
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42
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260
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Balance at September 30, 2017
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$
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(4,097
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)
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$
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(97
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)
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$
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(4,194
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)
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(1)
Oregon power supply cost deferrals are subject to a statute that specifically limits rate amortizations of deferred costs to six percent of gross Oregon revenue per year (approximately $3 million). Deferrals are amortized sequentially.
Idaho Power's power cost adjustment mechanisms in its Idaho and Oregon jurisdictions address the volatility of power supply costs and provide for annual adjustments to the rates charged to retail customers. The power cost adjustment mechanisms and associated financial impacts are described in "Results of Operations" in this MD&A and in Note 3 - "Regulatory Matters" to the condensed consolidated financial statements included in this report. With the exception of power supply expenses incurred under PURPA and certain demand response program costs that are passed through to customers substantially in full, the Idaho PCA mechanism allows Idaho Power to pass through to customers 95 percent of the differences in actual net power supply expenses as compared with forecasted base net power supply expenses, whether positive or negative. Thus, the primary financial statement impact of power supply cost deferrals is that cash is paid out but recovery of those costs from customers does not occur until a future period, impacting operating cash flows from year to year.
Valmy Rate Base Adjustment Settlement Stipulations and Depreciation Rate Settlement Stipulations
In May 2017, the IPUC approved a settlement stipulation allowing accelerated depreciation and cost recovery for the Valmy Plant. The settlement stipulation provides for an increase in Idaho jurisdictional revenues of
$13.3 million
per year, and (1) levelized collections and associated cost recovery through December 2028, (2) accelerated depreciation on unit 1 through 2019 and unit 2 through 2025, (3) Idaho Power to use prudent and commercially reasonable efforts to end its participation in the operation of unit 1 by the end of 2019 and unit 2 by the end of 2025, and (4) a filing no later than 2020 that would include actual and planned incremental investments in unit 2, including updated financial analysis regarding the lowest costs options for unit 2. The costs intended to be recovered by the increased revenue requirement include current investments as of May 31, 2017 in both units, forecasted unit 1 investments from 2017 through 2019, and forecasted decommissioning costs for unit 1 and unit
2, offset by forecasted operation and maintenance costs savings. The settlement stipulation also provides for the regulatory deferral of the difference between actual revenue requirements and levelized collections, and provides for the regulatory deferral of the difference between actual costs incurred (including accelerated depreciation expense on unit 1 through 2019 and unit 2 through 2025) compared with costs permitted to be recovered during the cost recovery period specified in the settlement stipulation (including depreciation expense through 2028). If actual costs incurred differ from forecasted amounts included in the settlement stipulation, collection or refund of any differences would be subject to regulatory approval.
In May 2017, the IPUC and OPUC approved settlement stipulations related to revised depreciation rates for Idaho Power's other electric plant in service, and adjusted base rates in Oregon to reflect the revised depreciation rates applied to electric plant-in-service based on balances from the most recent general rate case. These settlement stipulations provided for new depreciation rates to go into effect on June 1, 2017, with no significant resulting increase in revenue.
For more information on the settlement stipulations and their impacts on results, see Note 3 - "Regulatory Matters" to the condensed consolidated financial statements included in this report and "Executive Overview" in this MD&A.
Open Access Transmission Tariff Rate
Idaho Power uses a formula rate for transmission service provided under its OATT, which allows transmission rates to be updated annually based primarily on financial and operational data Idaho Power files with the FERC. On August 28, 2017, Idaho Power filed its 2017 final transmission rate with the FERC, reflecting a transmission rate of $34.90 per kW-year, to be effective for the period from October 1, 2017 to September 30, 2018. Idaho Power's final rate was based on a net annual transmission revenue requirement of $130.4 million. The OATT rate in effect from October 1, 2016 to September 30, 2017, was $25.52 per kW-year based on a net annual transmission revenue requirement of $127.4 million. The increase in the OATT rate was largely attributable to an asset exchange transaction with one transmission customer, and the termination of legacy long-term transmission service agreements and its impact on the transmission formula rate, which was fully incorporated in the new formula rate effective October 1, 2017.
2017 Integrated Resource Plan
The IPUC and OPUC require that Idaho Power prepare biennially an IRP. The IRP seeks to forecast Idaho Power's loads and resources for a 20-year period, analyzes potential supply-side, demand-side, and transmission options, and identifies potential near-term and long-term actions. Idaho Power filed its most recent IRP with the IPUC and OPUC in June 2017. The 2017 IRP assumes a forecasted annual growth in average energy demand of 0.9 percent and a forecasted annual growth in peak-hour demand of 1.4 percent over the 20-year period. The 2017 IRP identified a preferred resource portfolio and action plan, which includes the completion of the Boardman-to-Hemingway transmission line by 2026, the end to Idaho Power's participation in coal-fired operations at the Valmy Plant units 1 and 2 in 2019 and 2025, respectively, and the early retirement of Jim Bridger units 1 and 2 in 2032 and 2028, respectively, with no other new resource needs prior to 2026. However, as noted in the 2017 IRP, there is considerable uncertainty surrounding the resource sufficiency estimates and project completion dates, including uncertainty around the timing and extent of third party development of renewable resources, fuel commodity prices, environmental requirements, the actual completion date of the Boardman-to-Hemingway transmission project, and the economics and logistics of plant operation and retirements. These uncertainties, as well as others, could result in changes to the desirability of the preferred portfolio and adjustments to the timing and nature of anticipated and actual actions.
Idaho Energy Efficiency Rider
On an annual basis, Idaho Power applies to the IPUC for an order designating Idaho Power’s prior calendar year Idaho Energy Efficiency Rider (Idaho Rider) funded expenses as prudently incurred. In 2012 and 2013, the IPUC declined to decide the prudence of the increases in 2011 and 2012 Idaho Rider funded labor increases, while at the same time offering Idaho Power another opportunity to provide sufficient evidence at a future time.
In 2017, Idaho Power applied to the IPUC for an order determining that the 2011 - 2016 Idaho Rider funded labor increases of $1.9 million were prudently incurred and eligible for collection through the Idaho Rider. On October 16, 2017, the IPUC issued its order determining that the 2011 - 2016 incremental Idaho Rider funded labor expenses of $1.9 million were prudently incurred. In its order, the IPUC also authorized actual Idaho Rider funded wage increases after 2016, up to a 2 percent cap. The IPUC determined that this process does not require pre-determination as to prudence, no longer requires labor to be examined in Idaho Power’s annual prudence cases, and that the base wage level and annual cap will be reset in future general rate cases. Idaho Power expects that the prudency finding will result in an approximate $2.0 million increase in operating income in 2017.
Renewable and Other Energy Contracts
Idaho Power has contracts for the purchase of electricity produced by third-party owned generation facilities, most of which produce energy with the use of renewable generation sources such as wind, solar, biomass, small hydroelectric and geothermal. The majority of these contracts are entered into as mandatory purchases under PURPA. As of
September 30, 2017
, Idaho Power had contracts to purchase energy from 127 on-line PURPA projects. An additional three contracts are with non-PURPA projects, including the Elkhorn Valley wind project with a 101 MW nameplate capacity. The following table sets forth, as of
September 30, 2017
, the resource type and nameplate capacity of Idaho Power's signed agreements for power purchases from PURPA and non-PURPA generating facilities. These agreements have original contract terms ranging from one to 35 years.
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Resource Type
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Total On-line (MW)
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Under Contract but not yet On-line (MW)
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Total Projects under Contract (MW)
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Began Operating During 2017 (MW)
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PURPA:
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Wind
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627
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—
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627
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50
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Solar
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290
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24
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314
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120
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Hydroelectric
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147
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8
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155
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—
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Other
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50
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5
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55
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—
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Total
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1,114
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37
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1,151
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170
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Non-PURPA:
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Wind
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101
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—
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101
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—
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Geothermal
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35
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—
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35
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—
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Total
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136
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|
—
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136
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—
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Relicensing of Hydroelectric Projects
In connection with Idaho Power's efforts to relicense the HCC, as described in more detail in IDACORP's and Idaho Power's Annual Report on Form 10-K for the year ended December 31, 2016, in Part II, Item 7 - "Regulatory Matters," Idaho Power has filed water quality certification applications, required under Section 401 of the Clean Water Act (CWA), with the states of Idaho and Oregon requesting that each state certify that any discharges from the project comply with applicable state water quality standards. Section 401 of the CWA requires that a state either approve or deny a Section 401 water quality certification application within one year of the filing of the application or the state may be considered to have waived its certification authority under the CWA. As a consequence, Idaho Power has been filing and withdrawing its Section 401 certification applications with Oregon and Idaho on an annual basis while it has been working with the states to identify measures that will provide reasonable assurance that discharges from the HCC will adequately address applicable water quality standards. In the 2016 Section 401 certification application process, Oregon required Idaho Power to comply with fish passage and reintroduction conditions. Idaho's water quality certification, however, provides that Idaho Power shall take no action that may result in the reintroduction or establishment of spawning populations of any fish species into Idaho's waters without consultation with and express approval of the State of Idaho. In April 2017, the governors of Oregon and Idaho jointly requested that Idaho Power withdraw and resubmit its Section 401 certification applications in both states to allow the states additional time to negotiate a potential resolution of the disputed issues. Idaho Power subsequently withdrew its Section 401 certification applications in both states. Idaho Power resubmitted its application to both states in April 2017 and since that time the states have been negotiating towards a mutually agreeable solution.
Costs for the relicensing of Idaho Power's hydroelectric projects are recorded in construction work in progress until new multi-year licenses are issued by the FERC, at which time the charges are transferred to electric plant in service. Idaho Power expects to seek recovery of relicensing costs through the ratemaking process. Relicensing costs of $269 million for the HCC, Idaho Power's largest hydroelectric complex and a major relicensing effort, were included in construction work in progress at
September 30, 2017
. As of the date of this report, the IPUC authorizes Idaho Power to include in its Idaho jurisdiction rates approximately $10.7 million of AFUDC annually relating to the HCC relicensing project. Collecting these amounts currently will reduce future collections when HCC relicensing costs are approved for recovery in base rates. As of
September 30, 2017
, Idaho Power's regulatory liability for collection of AFUDC relating to the HCC was $116 million. Idaho Power is unable to predict the timing of issuance of a new license for the HCC, or the financial or operational requirements of a new license.
In December 2016, Idaho Power filed an application with the IPUC requesting a determination that Idaho Power's expenditures of $220.8 million through year-end 2015 on relicensing of the HCC were prudently incurred, and thus eligible for future
inclusion in retail rates. Idaho Power is currently participating in settlement proceedings related to the prudence determination. If settlement is not reached, IPUC staff and intervenor testimony is due December 15, 2017.
ENVIRONMENTAL MATTERS
Overview
Idaho Power is subject to a broad range of federal, state, regional, and local laws and regulations designed to protect, restore, and enhance the environment, including the Clean Air Act, the CWA, the Resource Conservation and Recovery Act, the Toxic Substances Control Act, the Comprehensive Environmental Response, Compensation and Liability Act, and the Endangered Species Act (ESA), among other laws. These laws are administered by a number of federal, state, and local agencies. In addition to imposing continuing compliance obligations and associated costs, these laws and regulations provide authority to regulators to levy substantial penalties for noncompliance, injunctive relief, and other sanctions. Idaho Power's three coal-fired power plants and three natural gas-fired combustion turbine power plants are subject to many of these regulations. Idaho Power's 17 hydroelectric projects are also subject to a number of water discharge standards and other environmental requirements.
Compliance with current and future environmental laws and regulations may:
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•
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increase the operating costs of generating plants;
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•
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increase the construction costs and lead time for new facilities;
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•
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require the modification of existing generation plants, which could result in additional costs;
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•
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require the curtailment or shut-down of existing generating plants; or
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•
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reduce the output from current generating facilities.
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Current and future environmental laws and regulations may increase the cost of operating fossil fuel-fired generation plants and constructing new generation and transmission facilities, in large part through the substantial cost of permitting activities and the required installation of additional pollution control devices. In many parts of the United States, some higher-cost, high-emission coal-fired plants have ceased operation or the plant owners have announced a near-term cessation of operation, as the cost of compliance makes the plants uneconomical to operate. The decision to agree to cease operation of the Boardman coal-fired plant, in which Idaho Power owns a 10 percent interest, by the end of 2020, was based in part on the significant future cost of compliance with environmental laws and regulations. The decision to pursue an end to participation in coal-fired operations at the Valmy Plant was also based primarily on the economics of operating the plant. Additionally, in light of the uncertainty resulting from pending environmental regulation and the substantial estimated cost of selective catalytic reduction equipment (SCR) installation, Idaho Power is assessing whether to move forward with the installation of SCR on units 1 and 2 at the Jim Bridger power plant. Beyond increasing costs generally, these environmental laws and regulations could affect IDACORP's and Idaho Power's results of operations and financial condition if the costs associated with these environmental requirements and early plant retirements cannot be fully recovered in rates on a timely basis. Part I - "Business - Environmental Regulation and Costs" in IDACORP's and Idaho Power's Annual Report on Form 10-K for the year ended
December 31, 2016
, includes a summary of Idaho Power's expected capital and operating expenditures for environmental matters during the period from 2017 to 2019. Given the uncertainty of future environmental regulations, Idaho Power is unable to predict its environmental-related expenditures beyond that time, though they could be substantial.
A summary of notable environmental matters impacting, or expected to potentially impact, IDACORP and Idaho Power, is included in Part II, Item 7 - "MD&A - Environmental Issues" and "MD&A - Liquidity and Capital Resources - Capital Requirements - Environmental Regulation Costs" in IDACORP's and Idaho Power's Annual Report on Form 10-K for the year ended
December 31, 2016
. Included below is a summary of notable developments in environmental and related issues impacting Idaho Power since the discussion in that report.
Executive Orders on Environmental Matters
In March 2017, President Trump issued an executive order directing the U.S. Environmental Protection Agency (EPA) to review the Clean Power Plan (CPP), the greenhouse gas new source performance standards (GHG NSPS), and the proposed Federal Implementation Plan (FIP) for CPP and, if appropriate, to propose rules suspending, revising, or rescinding the CPP, GHG NSPS, and proposed FIP within 45 to 120 days after the date of the order. The order also directs the Secretary of the Interior to lift the moratorium on federal land for coal leasing activities and revoke certain Obama Administration directives regarding the nature and extent of mitigation required for projects on federal lands. The order also addresses other climate-related issues, including rescinding the technical support documents that estimate the social cost of carbon, rescinding the National Environmental Policy Act guidance on greenhouse gases, and rescinding climate-related actions undertaken by the
previous presidential administration, among other issues. Shortly after the orders were issued, the EPA notified each state’s governor that if any deadlines under the CPP become relevant in the future, the EPA will toll its requirement for states to comply with the regulation. On October 10, 2017, the EPA announced a proposal to repeal the CPP but did not provide specific information about its replacement. As of the date of this report and in light of these executive actions, Idaho Power believes it is unlikely that it will be required to comply with the CPP in the near term.
In August 2017, President Trump also issued an executive order to accelerate federal agencies' environmental review and permitting for major infrastructure projects. The outcome of the EPA’s and other federal agencies' review of regulations covered by the executive orders is difficult to predict. Changes to or elimination of regulations may lower Idaho Power's costs of operating and maintaining fossil fuel-fired generation plants and transmission lines, due to the reduction of potential environmental infrastructure upgrades or reduction or elimination of permitting requirements. The executive orders and resulting federal regulations could, on the other hand, be affected by Congressional action and challenged in court. Further, state and local governmental authorities could choose to replace the federal regulations or bolster environmental compliance and enforcement efforts at the local level, and therefore, Idaho Power is uncertain whether and to what extent the orders could affect its operations and environmental-related expenditures. Idaho Power plans to continue to monitor actions associated with or resulting from the executive orders.
Developments in Regulation of Sage Grouse Habitat
In February 2016, a lawsuit was filed in the U.S. District Court of Idaho challenging the BLM's sage grouse resource management and land use plan revisions that became effective in 2015 under the Federal Land Policy and Management Act. The lawsuit challenges the plans and associated environmental impact statements across the sage grouse range and alleges that the plans fail to ensure that sage grouse populations and habitats will be protected and restored in accordance with the best available science and legal mandates. Further, the complaint challenges certain exemptions provided for the Boardman-to-Hemingway and Gateway West transmission line projects. Idaho Power has intervened in the proceedings in an effort to support the exemptions provided for in the BLM's plans. If the exemptions are overturned, Idaho Power may be required to reroute the projects, which could lead to substantially higher construction and permitting costs and could delay construction.
In May 2016, a separate lawsuit was filed in the U.S. District Court of North Dakota challenging the BLM's sage grouse resource management and land use plan revisions, including the exemptions provided for the Boardman-to-Hemingway and Gateway West transmission line projects. In October 2016, the plaintiffs amended their complaint to no longer challenge the exemptions; however, in December 2016, the North Dakota court transferred claims challenging certain Idaho land use plan amendments to the U.S. District Court for the District of Columbia. Idaho Power is participating in the proceedings in an effort to protect its interests.
In June 2017, the Secretary of the Interior issued an order directing the BLM to review the 2015 sage grouse resource management and land use plan revisions and to identify provisions that may require modification or rescission to address energy and other development of public lands. In October 2017, the Secretary of the Interior issued a notice of intent declaring the Department of the Interior’s intent to consider amending the 2015 sage grouse resource management and land use plan revisions. As of the date of this report, the above lawsuits are stayed as the parties and the courts consider the Department of the Interior’s review of the sage grouse resource management and land use plan revisions.
Clean Water Act Matters
In June 2017, the EPA and the Department of Army issued a notice of their intent to rescind and replace the definition of "waters of the United States" under the CWA as enacted in August 2015 (WOTUS), which had expanded the number of waterways subject to federal jurisdiction for environmental regulation beyond traditional navigable waters, interstate waters, territorial seas, tributaries, and adjacent wetlands, to a number of other waters, including waters with a "significant nexus" to those traditional waters. As described in Part II, Item 7 - "MD&A - Environmental Issues" in IDACORP's and Idaho Power's Annual Report on Form 10-K for the year ended
December 31, 2016
, Idaho Power did not expect the revised WOTUS to have a material adverse effect on Idaho Power's operations or financial condition. Similarly, because the CWA as previously interpreted applies to most of Idaho Power's facilities, including its hydroelectric plants, Idaho Power does not expect this proposal to have a material benefit to Idaho Power's operations or financial condition.
Review of Federal Coal Leases
In January 2016, the Secretary of the U.S. Department of the Interior issued an order directing the BLM to prepare a Programmatic Environmental Impact Statement (PEIS) to analyze potential reforms to the federal coal lease program and placed a moratorium on new federal coal leasing, with limited exceptions, pending completion of the PEIS. In January 2017, the Secretary of the Department of the Interior ordered a cessation of all work on the PEIS and in March 2017, lifted the moratorium on new federal coal leases. As of the date of this report, Idaho Power believes that BCC has adequate reserves under existing leases to satisfy its coal delivery obligations to the Jim Bridger plant during the term of the existing coal supply contract through 2024, and that the Jim Bridger plant will otherwise have access to sufficient coal supplies for its operation for the foreseeable future. However, the lifting of the moratorium could increase the availability of coal resources and lower the cost of leases for coal resources, which could reduce the fuel cost for each of Idaho Power's co-owned coal-fired plants.
OTHER MATTERS
Critical Accounting Policies and Estimates
IDACORP's and Idaho Power's discussion and analysis of their financial condition and results of operations are based upon their condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles. The preparation of these financial statements requires IDACORP and Idaho Power to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, IDACORP and Idaho Power evaluate these estimates, including those estimates related to rate regulation, retirement benefits, contingencies, litigation, asset impairment, income taxes, unbilled revenue, and bad debt. These estimates are based on historical experience and on other assumptions and factors that are believed to be reasonable under the circumstances, and are the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. IDACORP and Idaho Power, based on their ongoing reviews, make adjustments when facts and circumstances dictate.
IDACORP’s and Idaho Power’s critical accounting policies are reviewed by the audit committees of the boards of directors. These policies have not changed materially from the discussion of those policies included under "Critical Accounting Policies and Estimates" in IDACORP's and Idaho Power's Annual Report on Form 10-K for the year ended
December 31, 2016
.
Recently Issued Accounting Pronouncements
For a listing of new and recently adopted accounting standards, see Note 1 - "Summary of Significant Accounting Policies" to the notes to the condensed consolidated financial statements included in this report.