Idaho Power

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

Idaho Power is a regulated electric utility company providing power to customers primarily in Idaho and Oregon.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Idaho Power’s operations are fairly simple to understand: they generate and distribute electricity. However, the regulatory environment and complex financial structures make a full understanding very complicated.

Business Overview

Idaho Power is a regulated electric utility company, which means it operates within a strict regulatory framework with oversight from public utility commissions. This regulatory structure shapes how they generate, distribute, and price electricity, thereby influencing their business model and profitability.

The company generates electricity from diverse sources including hydroelectric facilities, natural gas, coal and various renewable sources, which adds to the complexity of operations and the business model’s economics. They are primarily focused on providing electric power to residential, commercial, industrial, and other customers located in Idaho and Oregon.

Their revenue stream is largely determined by tariffs approved by regulatory bodies. They manage costs and optimize generation to achieve a reasonable return on their capital investments. Given the long term nature of electricity infrastructure, strategic decisions are made with a long term timeframe and stability in mind.

Revenues:

  • Retail Revenue:

Primarily generated from selling electricity to residential, commercial, and industrial customers, with rates set by regulatory bodies. This is the most important source of revenue for the company.

  • Wholesale Revenues:

Income derived from selling electricity to other utilities and power marketers, often driven by short-term contracts and market conditions.

  • Other Revenues:
  • Revenue from renewable energy credits
  • Revenue from ancillary services

Margins

  • Idaho Power has historically maintained consistent gross profit margins with fluctuations primarily attributed to changes in fuel costs, and regulatory actions, and the timing of rate adjustments.
  • EBITDA margins have fluctuated due to these external factors.

Competitive Landscape:

  • Natural Monopoly Characteristics: The power utility industry tends to have local natural monopoly characteristics, as it is expensive and inefficient to build redundant infrastructure such as transmission lines and distribution systems.
  • Regulation: Given its regulated status, IDACORP does not face direct competition in its service area, but must compete with other power generation and delivery methods.
  • Competitors: Competing energy sources such as wind, solar, and natural gas in wholesale markets. This is driven more by government incentives and changing energy preferences than pure economic competition.
  • Barriers to Entry: Stringent regulatory approvals, significant capital requirements, and the need for extensive infrastructure make entry into this market particularly difficult, if not impossible, by any new competitor.

What makes the company different:

  • Integrated Operations: From power generation to distribution and retail sales, it offers a vertically integrated model. This is not unique in the utility space, but it is still relevant.
  • Geographical Position: Being concentrated on providing power to Idaho and some Oregon means it is heavily influenced by the regulatory conditions in these two States.
  • Low-Cost Hydro: Hydroelectric power contributes to a significant portion of their supply and, generally speaking, costs less to produce. This is an advantage given its relative abundancy.

Financial Analysis

  • Cash Flow: *The cash flow from operation is generally sufficient to fund their large capital spending. *Free cash flow is usually very low or even negative because of its regulated nature and heavy need for constant capex investment.
  • Profitability: * Idaho Power’s reported Net Profit has shown modest growth over the past decade (from about 176 million USD in 2013 to 242 million USD in 2022. *Operating Margins are in the 20 to 30% Range for the last decade, with some fluctuations caused by regulatory shifts or cost shifts. *The trend for profit in the last 3 years has been positive year on year, growing at approximately 10%, mostly driven by increasing revenue as opposed to decreasing cost. *ROIC seems to average a healthy 7% or so. This means that it is generally able to generate a good amount of profit over its capital employed.
  • Balance Sheet: *Current ratio is usually more than 1. *Debt to equity was approximately 0.44 in 2021 and 0.58 in 2022. It shows that leverage has slightly increased for the company. The leverage levels are considered quite manageable. *Goodwill represents a small percentage of the total assets. *Total liabilities are higher than equity. *Current assets are higher than the long term assets.
  • Shareholders Equity:
    • Has almost continuously grown from 2019 (approx 2.3 billion) to 2022 (approx 2.8 billion) with minor fluctuations.

Moat Analysis

Idaho Power has a narrow moat rating because the industry structure provides it some protection from competition. Due to the massive capital spending involved in utility infrastructure, it’s unlikely new entrants would disrupt the market on a meaningful scale.

  • Regulatory Environment: It is very difficult for a new entrant to be approved as a new utility provider. The regulatory oversight greatly reduces competitive pressure.

  • Local Network: Existing infrastructure has some degree of network effects that give incumbents some advantage as it has already built up all the necessary infrastructures. It would be hard for competitors to get the same coverage.

  • Cost Advantage: Relatively cheap power production through hydroelectric resources also provides it a slight edge over peers, which rely on more costly sources.

  • Barriers to Entry: New competitors face huge barriers due to regulation, capital requirements, and the scale needed to successfully compete.

    Moat Rating: 3 / 5

    Justification: While these moats create some structural protection for a long time, they also can be diminished over time or made irrelevant by the actions of government, which greatly reduces the consistency of its ability to profit. Also, the lack of an innovative culture means that new technology might disrupt it. In a market with limited pricing power, it is also harder to earn outsized profit. Also, given the regulated environment, the returns for the company are unlikely to be astronomically high either.

Risks to the Moat and Business Resilience

  • Regulatory Changes: Changes in regulatory guidelines and environmental standards can impact operations and their profitability. In particular, the price cap on returns and any restrictions on generating power are a risk. The regulatory environment is extremely important in determining Idaho Power’s profitability.

  • Technological Disruption: New power generation technologies can reduce the economic advantage of the company. The speed of adoption, however, may mitigate this risk, as it may be gradual. Also the fact that they are vertically integrated mitigates disruption.

  • Economic Cycles: Major economic changes can impact the local economy in which the company operates. Any drop in economic activities reduces the demand for electricity.

  • Fuel Price Volatility: Hydroelectric power generation (which accounts for a huge part of energy) and natural gas are susceptible to the volatility of their respective prices, affecting profits of the company.

  • Demand Shifts: If the market moves to solar, wind, or other energy sources, the company may need to increase capital spending and reduce profits to conform to trends and government mandates.

    Business Resilience Rating: 3 / 5

    Justification: Idaho Power has demonstrated operational consistency over time. It is unlikely to go out of business, but its profitability could very well change drastically depending on external factors. Its reliance on government regulation and external fuel prices makes the business far more fragile than businesses with their own pricing power and control over costs. The company’s business is also vulnerable to economic contractions, which would directly impact its top line through reduced demand for electricity.

Understandability

The business of Idaho Power is relatively simple: they make and distribute energy. But the specifics of a regulated business with complex financials and capital structures make the business much harder to understand in detail. The regulations also add an additional layer of complexity.

***Understandability Rating: 2 / 5***

**Justification:** The underlying business model of selling electricity is simple. However, understanding the intricacies of the regulatory environment, the complex financial structures, and the impacts of weather and customer demand is a challenge. The company has a mix of straightforward operations coupled with many obscure and difficult to understand financial mechanics.

Balance Sheet Health

Idaho Power’s balance sheet appears healthy based on a look at the asset-liability proportions. However, because the company is very capital intensive, a slight increase in interest rates or decrease in assets can rapidly change its health. Balance Sheet Health Rating: 4 / 5

**Justification:** The company has a reasonable amount of assets, both current and long term. Leverage is within acceptable limits and while its growth in debt is a point of concern, it is not a major one. However, the huge reliance on capital expenditures may cause a risk, as it makes the company more susceptible to disruptions in capital markets.

Recent Concerns and Problems

  • Idaho Power has been dealing with various regulatory adjustments and is in the process of submitting new proposals.

  • They also had the 2023 Settlement Stipulation which was a key development and might indicate a reduction in future revenue growth, while also providing more certainty with its future. The company’s management seems optimistic, stating “This settlement represents an important milestone for the company and will allow it to focus on investments to serve customer needs while enhancing their financial stability”

  • In recent times, Idaho Power has been affected by increased energy prices. However, it passed these prices onto consumers through the PCA (Power cost adjustment) mechanism with very little delay.

  • The increase in energy costs for its consumers have been a recent issue of contention for the Oregon regulators, which might negatively affect the company’s future in that State if the regulations are more strictly enforced.

  • They have also had trouble with some regulatory and environmental agencies, that may require significant costs to be added to their balance sheet.

  • There are ongoing talks on the future of power generation and sources, this may cause significant shifts in how the company runs and is profitable in the future.

  • They mentioned a 7.1 million USD hit to the company from the first quarter because of bad debt.

  • The recent increase in interest rate by the Federal Reserve (the central bank) adds to concern about how profitable their businesses will be in the future given that a large part of their financing are based on loans with changing interest rates.