Idacorp Inc (IDA) 2004 Q2 法說會逐字稿

Good day, and welcome everyone to the IDACORP second-quarter 2004 conference call. Today's call is being recorded and being webcast live. A complete replay will also be available from the end of the day for a period of 12 months on the Company's website at www.IDACORPInc.com. If you need assistance at any time during the presentation, please dial start zero.

At this time, I'd like to turn the call over to the Director of Investor Relations, Mr. Lawrence Spencer. Please go ahead, sir.

Good afternoon, everyone, and welcome to our second-quarter earnings release conference call. We issued our earnings release before the markets opened today, and filed our Form 10-Q with the SEC shortly afterwards. Both of these documents have now been posted to our corporate website.

With me today are Jan Packwood, IDACORP President and Chief Executive Officer; LaMont Keen, Idaho Power President and Chief Operating Officer; and Darrel Anderson, IDACORP and Idaho Power Company Senior Vice President Administrative Services and Chief Financial Officer. Other officers are also available to help answer your questions during the Q&A period.

Now, our presentation today may contain forward-looking statements, and it is important to know that the Corporation's future results could differ materially from those discussed. Full discussion of the factors that could cause future results to differ materially can be found in our filings with the Securities and Exchange Commission. Now, I'd like to turn the presentation over to Jan Packwood.

Thanks, Larry, and hi everybody. Thanks for dialing in today. IDACORP's second-quarter earnings of $0.34 per share are certainly an improvement over last year's results. But they still lag behind historical averages. IDACORP's consolidated results reflect a $0.36 per share improvement from last year, a sizable swing because, as you might recall in 2003, we were still absorbing the costs of closing our energy trading business, and intra-period tax allocation pushed much of last year's earnings into the second half.

Idaho Power contributed nearly two-thirds of our earnings, or $0.21 per share. Those results included the write-off of about 10 million in capitalized expenses for which re-hearing was denied by the Idaho Public Utilities Commission in our recently-concluded rate case. The Commission issued its order in that case on May 25th, establishing a return on equity of 10.25 percent and authorizing an average increase of 5.2 percent. It was a disappointing order in most respects, and on June 15th we filed a petition for reconsideration. Subsequently, the commission granted additional relief because of computational errors, and agreed to rehear issues relating to the determination of Idaho Power's income tax expense. We're currently pursuing settlement discussions with parties to the case.

While the issues around the rate case are drawing to a close, drought-related pressure on the utility operations are continuing, as they have for the previous four years. We are becoming way too familiar with managing low streamflows and the reduced hydroelectric production that accompanies them. In a minute, LaMont will give you some additional background of those and other activities at Idaho Power.

Quarterly performance was aided by activities at three of our subsidiaries. IDACORP Financial generated tax credits and sold its interest in the El Cortez property in San Diego; Ida-West Energy retired some debt; and an outstanding legal issue at IDACORP Energy was favorably settled. Those events comprise the bulk of the 13 cents per share we earned from our nonregulated businesses.

There were some notable operating milestones at the other IDACORP subsidiaries as well. IDACOMM acquired the Metropolitan Area Fiberoptic Networks in Reno and Las Vegas from Sierra Pacific Communications, significantly expanding that company's market. And fuel cell Company, IdaTech, continued its efforts to build commercial capabilities and develop partnerships in Europe. The German heating equipment manufacturer, Bridger (ph), joined the cooperation agreement with RWE Fuel Cells and IdaTech. And we entered into an agency agreement with Italian Energy engineering firm, Ranco (ph).

Now, LaMont will give you a little more detail on Idaho Power.

Thank you, Jan, and good afternoon everyone. Idaho Power contributed 21 cents per share to IDACORP's second-quarter results and $0.72 per share year-to-date. Last year, we earned $0.31 per share in the second quarter and $0.67 for the first half of the year. Second-quarter results this year were negatively impacted by the 9.8 million, or approximately $0.15 per share, write-off from the denial of certain expenses that had been capitalize related to incentives and the pension plan. So far this year, we have added 5900 new general business customers for a total of 432,500. And this is the biggest increase in the first six months of the year in a decade.

As most of you know, the summer is our heaviest load period; however, with some of the irrigation load falling off now that agricultural crops are maturing, we believe that 2004's peak load time has most likely passed. Temperatures in July this year were approximately one degree above average across our service area, but not as hot as last summer when we had a two-week period of consecutive 100-degree temperatures. For the second quarter, cooling degree days were 20 percent less than last year, but they were still 27 percent above average.

This year, customer usage peaked on June 24 at 2843 megawatts. That follows more than 100 megawatts short of our all-time peak of 2963 megawatts, which was set on July 12, 2002. Now, as our customer numbers grow, these peak usage times of year become more critical for us. To ensure that we continue to have adequate electrical supplies, we recently broke ground on our new Bennett Mountain natural gas-fired plant. The need for this plant was identified in both our 2000 and 2002 integrated resource plans. This is the new 162 megawatt simple cycle natural gas turbine being installed in Mountain Home, Idaho. We expect to have this facility to be online by the summer of 2005, in time to help us meet our summer peak loads.

We also have just completed a series of public meetings in Oregon and Idaho to obtain public comment on our draft 2004 integrated resource plan. In the integrated resource plan is a comprehensive 10-year look ahead at that company's future demands for electricity as well as a plan for meeting those demands. We produce it every two years for the Idaho and Oregon Commissions. We expect to present our final plan to those Commissions by August 31st this year. The selected portfolio would increase Idaho Power Company's power supply by approximately 800 average megawatts, and increase the capacity of the system by almost 940 megawatts over the planning horizon. A copy of the draft plan is available on our Idaho Power website.

In other regulatory matters, Jan provided and update on developments associated with our general rate increase filing in Idaho. Unless settled, hearings will be conducted before the IPUC in September with an order due out by mid-October. Also in Idaho, the 2002 irrigation lost revenue case has been remanded back to the Idaho PUC from the Idaho Supreme Court. And we expect to book benefits from that decision of approximately 12 million in the second half of the year.

In Oregon, we are preparing to file a general rate case later this year. We have met with the Oregon PUC staff and previewed the rate case issues. Our overall request will be for approximately 4 million, and our proposed rate structures will be consistent with our Idaho rates and rate structures.

At the federal level, we were notified last week that FERC has granted licenses for our five Middle Snake hydroelectric projects. We view this is very good news that the licenses have now been granted, with the caveat that we have just received the actual licenses and are just beginning the process of looking at the details. The five Middle Snake projects include Shoshone Falls, Upper Salmon, Lower Salmon, Bliss, and C.J. Strike. Together the five projects can generate nearly 265 megawatts of electricity.

With regard to our Hells Canyon license application, we have filed a series of objections and requests for clarification with the Federal Energy Regulatory Commission in connection with the additional information requests that FERC has made to us. These objections basically relate to the impact of the federal government's effect of the four lower Snake River dams, and additional studies on flow restrictions that the company believes are in conflict with provisions of the Hells Canyon National Recreation Area legislation passed by Congress in 1975.

And with that, I will now turn the call over to Darrel Anderson.

Thanks, LaMont, and good afternoon everyone. I want to review three areas with you this afternoon. The Company's effective tax rate, cash flow, and earnings guidance. The first area I want to address relates to our effective tax rate. Our effective rate has increased slightly from the prior year from a estimated effective rate of 0 to approximately 4 percent. The decline in the estimated effective rate from our last call is due to reduced taxable income, combined with the effects of the IDACORP financial tax credits and flowthrough adjustments at the utilities. One reminder is that the tax benefits of approximately $10 million recognized by IDACORP Financial are recorded in the tax expense line, and the losses from its investments are recorded in other expenses. Our current tax expense is recorded as $1.3 million. And to better understand the impact of the IFS credits on the effective rate, if you add $10 million of those credits back to tax expense, divide by booked pretax income of $34 million, this results in an adjusted effective rate of approximately 33 percent, which is something that you would more typically expect to be seeing. So the impact of those tax credits has a big impact on that effective rate.

Moving onto cash flow. Operating cash flow for the first six months of 2004 was $90 million, compared to $138 million for the same period last year. The results reflect declining collections of the PCA amounts compared to last year, and increases in power supply costs, and partially offset by the timing of tax payments. At Idaho Power, operating cash flow was $89 million, compared to $116 million in 2003. Rate decreases from the 2003/2004 PCA rate order were principally responsible for the decline in operating cash flow, combined with increases in power supply costs. As you might imagine, the operating cash flow at IDACORP was significantly affected by the operating cash flow at Idaho Power.

Construction expenditures were $83 million for the six months period in 2004, compared to 57 million for the same period in 2003. Increases are due to construction of the Bennett Mountain power plant and increases in relicensing -- relicensing expenditures, all of which were included in our original 2004 capital budget. We continue to expect that capital spending will approximate $207 million we have budgeted for this year.

Despite the drop in operating cash flow, total debt to capital has remained relatively constant at approximately 54 percent on a consolidated basis at IDACORP, and 52 percent at Idaho Power. Consolidated short-term debt has decreased from $94 million at December 31st to $77 million at June 30th. We are continuing to work on maintaining the capital structure in support of our credit ratings.

Moving on to earnings guidance. We're reaffirming our earnings guidance of $1.70 to $2.00 per share that we issued in our July 15th release. Looking to the balance of the year, one key factor in landing in our range is the resolution of the lost revenue case that has been remanded back to the Idaho Public Utility Commission. We're expecting resolution of this issue during the last half of the year. The Company estimates that resolution of this issue will add $0.18 to $0.20 per share to earnings in 2004. Remember, we wrote that particular item off a couple of years ago, and this is just really an ability to go back and collect those dollars. Also included in the range is the impact of increased base revenues of $2.7 million related to computational errors from the Idaho general rate case. These revised rates went into effect August 1st. We have made no assumptions in our guidance for the currently outstanding matter at the IPUC relating to the computation of income taxes. If successful with the petition for reconsideration on the tax issue, the company would expect to have base rates increased by $11.5 million on an annualized basis.

As we look to 2005, the company is evaluating the appropriateness of providing meaningful operating metrics that will contribute in helping predict the Company's results, rather than giving specific earnings per share guidance. We expect to update you on our direction at our third-quarter conference call.

That includes our formal comments, and we would now like to respond to your questions.

(OPERATOR INSTRUCTIONS). Ashar Khan, SAC Capital?

Can I just ask you, is it right that -- I guess if the settlement has to come, it comes before the hearing starts? Is there any idea that whatever amount you get in the settlement you can book it before -- retroactively to a date? Or whatever amount you get will then have to start with the next billing cycle?

Let me address the second half of your question first. And then I think we will have Rick Gale, who is here with us today, address the first part of that. First of all, as we work through a settlement, we can't tell you until the settlement is decided as to what might be recorded and when it might be recorded. So it's really difficult to answer your question. It would be dependent upon the ultimate outcome of the settlement. So it's real difficult to give you any definitive answer to that. As it relates to the procedural issues, I will let Rick answer that.

Sure. The testimony in the petition for reconsideration is due on August 20th. So practically, if a settlement is to occur, it will happen quite quickly, otherwise we'll get about our business of going through the formal proceeding. And so, my best estimate is that if a settlement occurs, it will happen quite rapidly.

Rick, could you just remind us what is the main issue on this $11 million? I guess that is the amount in question right now.

The $11.5 million is the difference in the Company's position and the PUC staff position for tax expense, As it manifests itself in our revenue requirement in the rate case.

I was just trying to get -- Darrel, if you can -- why the staff came out with this lower number? If you can just remind me; I just forgot the issue as to why this difference arose.

In this particular instance, the staff used an average of five years as a way to normalize the tax expense. It was a new methodology that we had not seen before, and not typical of our past cases before the Idaho Commission.

So, Darrel, we can expect -- you're saying, if I'm right, you do your budgeting in the next couple of months, and you usually come up with your guidance in the fall, late fall -- that you will provide no longer earnings per share guidance? You'll just provide more directional guidance in certain assumptions to help you with '05 guidance? Is that what you were saying?

Ashar, we are reviewing a number of options as to what makes the most sense in having the ability to predict the earnings of the company. So we are looking at what some of the key operating metrics that make it easier for outsiders to understand our earnings process. So, that could include other items other than earnings per share.

So, you are still going to provide earnings per share?

We have not decided that, Ashar, at this point. It could be that we may not. It may just be operating metrics.

I appreciate it. Thank you, sir.

James Bellessa from D.A. Davidson & Company.

Going forward, what type of tax rate should we be using?

Jim, as we talked about on our last call, we had indicated -- a question came up on our last call about what number would you might be using for 2005. And the number we provided you at that time was in the 20 to 25 percent range. We would not change that assumption as it stands today. Because part of this change from where we are today versus what we talked about last time is predicated on the amount of taxable income. Under the assumptions that you have a return to better water, some of those types of conditions, you would expect earnings to improve, which would then drive that effective rate up. And so, I think we still stand by that 20 to 25 percent number today.

The effective rate for this year would be -- what? What would be a reasonable guess?

Well, as we have indicated just recently and in my just previous remarks, we are currently looking at a number around 4 percent. And as we have said in the past, that can be affected by many factors. But right now, our projections are 4 percent.

Now, that's 4 percent for the whole year, is what you are talking about?

That is correct. And based on -- one thing to make sure you understand, is that right now IDACORP Financial has earned approximately $10 million of tax credits through the first six months of the year. We would expect -- and that's a fairly radical earnout through the first six months. We would expect that to continue. In factoring in the level of credits that you would expect to use in coming up to that tax provision of a $20 million number, it would not be out of the realm of reasonableness.

The settlement talks -- is there some area of compromise here that you have been discussing that brought the two parties together?

Rick has been the main architect to this, so we will let Rick speak to that.

On August 2nd, we met with the staff and approached them on possibly settling the tax issue and some of the lingering PCA issues. Later that day, the staff noticed the parties that that activity had occurred. And now, we'll proceed to see if we can actually get a settlement completed.

So it may extend beyond just the tax rate that they allow in your recovery -- rate recovery- making method? But also possibly the PCA adjustments?

Yes.

And that will all have to come quickly together, is what you're saying.

Yes, it does.

So the chances of success are less than 100 percent?

I could say it's less than 100 percent, but I am optimistic.

Thank you.

John Hansen(ph) from Hyperion.

Just to refresh my memory as to where you are with the balance of deferred -- the power cost adjustment going now into the amortization period, is that right?

(indiscernible)

Is that their main item that is in the $400 million regulatory asset on the balance sheet?

No, the current PCA balance that we have, that we are currently looking to cover -- at June 30th, our total deferral is $61 million -- 60.8 million, to be specific. Of that $60.8 million, 13 million of that relates to Oregon, and about $13 million relates to our current deferrals. And almost 35 million relates to amounts that we are currently collecting. And so, the balance of those regulatory assets really are related to deferred taxes.

The 35, just to clarify, you said that's the amount you are currently collecting or currently --

Those are amounts that we are currently collecting under the current PCA rate adjustment that is in effect today. We would expect to collect that between now and June 1st of 2005.

That the ones you're working down to collect --

That's correct.

Got you. Okay, thanks.

Paul Ridzon from Key/McDonald.

What would you expect the PCA line to look like for the full year?

That's a tough one to estimate because, as you know, the PCA -- our continual deferrals represent changes from our forecast. And so, as we stand today, predicting what happens between now and the end of March is difficult to do. And so, I think at this point in time, we can tell you what is in there today; we are actively managing the portfolio and attempting to do what we can with respect to the deferral. And as a reminder, just to understand, the current increment that we have above base is about $71 million that we are collecting.

Last year in the fourth quarter, you had the heat exacerbated by some plant outages. What was the impact of that, and how are the plants running now?

Paul, can you repeat the first part of that question?

I think it was the third quarter of last year you had the combination of heat, which normally would have been a good thing had you not had some outages. What was the impact of that? And what is the current state of the plants?

Okay, yes. What we were referring to last year is where we had the two-week sequence of 100-degree days. Actually, we set a new record in 2002 for total 100-plus-degree days for the summer. This summer, as I mentioned in my remarks, has been warmer than normal in the summer, but nothing like last year. And I think the plant outage you were talking about is we had one of the Ballman (ph) units down for a couple of months last summer. As we sit today, we are not in a similar situation at all on the thermal fleet; not that there aren't problems once in a while with units that are 20 to 30 years old, but no problem like we had last year, and loads have not peaked at the level they did last year. So, while it hasn't been an easy summer for us due to the Hydro conditions, we've been in relatively better shape this year than last.

Okay, thank you.

Ashar Khan, SAC Capital?

Darrel, I might have missed this a little bit in the beginning, so I apologize. You had mentioned in your Q that, because of the rate case decision, you might lower your CapEx by just going forward? And I know you're going to file, I guess, an updated resource plan at the end of August, as mentioned in the Q. Could you just tell us as to what is the level of capital expense your debt could be lowered?

And secondly, if you could also shed some light as to the rating agencies. When they're procuring a downgrade, I guess, they had mentioned that they are going to look at the petition, which you had filed for rehearing, as to what the eventual conclusion of that would be? What kind of a result are they looking forward to being suitable to them, that this downgrade could be taken off?

Well, you have a lot there, Ashar, so let's break that down a little bit in probably reverse order, first of all. As it relates to the rating agencies, I think, as everybody is aware of where we stand with them on their current outlooks. But I'm not going to attempt to predict what they will to. But I will say that we are in ongoing communication with them, keeping them updated with respect to the status of our petition for reconsideration. And I think -- depending on the outcome, I can't tell you what it might take for them to take one action versus another action. All I can say is that we are keeping them apprised of our situation. And, obviously, any positive impacts that come out of the reconsideration will be helpful to us. But I can't tell you -- can't really evaluate to what degree that'll have a bearing on whatever ultimate outcome they may do for us.

I think on the first part of that question --

I will try to address that, and if I don't touch on your points exactly, please follow up. But first, the integrated resource plan we filed is a ten-year look, and it looks only really at the resource side of things. It wouldn't look at relicensing, it doesn't look at other system costs. So it's not really a complete look at our system needs, either over that ten-year timeframe or certainly not over the next couple of years. That is a process that we engage in every fall, and we are actively in the midst of that now. It probably won't culminate until it is approved by our Board at their November Board meeting. So for me to tell you what that number is going to be at this point is premature.

Obviously, we are mindful of the drought, the impact on us. We are mindful of the Company's credit ratings and situation. On the other hand, we will meet our customer needs. And while the rate order was disappointing in some respects, it was generally very supportive of new plant additions. In fact, they did some things out of the ordinary, stepping beyond an historical test year to pick up some known and measurable adjustments to plants. So I don't think we have an issue with our Idaho Commission in supporting our plant investments that are needed to meet our customer needs. We will certainly work cooperatively with them going forward, and we'll manage those as well as we can. But there will be expenditures we need to make.

But you mentioned in the Q that you might revise downward your CapEx requirements. I forget now -- was it 650 over the next --

We had indicated that our estimate over the three-year period was 643 million. And what we are looking at today, we will, in light of the order, continue to review what our capital needs are. But as LaMont indicated, we have to balance the needs of the customers. We will, as we move through the '05, '06 planning process, take a very hard look at that capital spending program. As it relates to the balance of '04, we believe that we are well underway on a number projects that makes it more difficult to scale back our current budgeted levels of 207 million. But we are looking at those numbers and reviewing those, and being very diligent in our capital spending.

Darrel, I guess you mentioned that you're going to be able to -- this is pretty much updated, right? That you said in your Q that 61 percent is what you expect internally generated cash flows to provide after dividends for the 2004 CapEx?

That is our current forecast, right.

Okay. Thank you.

James Bellessa from D.A. Davidson & Company.

You've given guidance of $1.70 to 2.00 -- what percentage might constitute non-regulated EPS this year?

Jim, as we talked about in our last call, if everyone remembers, we indicated right now that our non-reg business would contribute somewhere in the $0.05 to $0.15 range. And I guess I'd be able to say that, given where we are through the first six months, it's probably fair -- and given the things that have occurred, we think it's going to probably be in the $0.10 to $0.15 range. So, just moving kind up that bottom end because of where we have ended up with some of these other activities that we reported on this quarter.

If I've done my arithmetic correctly, you already have $0.13 of $0.14.

$0.13, that's right.

And so there's not much left for the second half --

Not as we figure today. As you recall, one of the things that we have talked about, as it relates to the balance between reg and non-reg -- but in the nonregulated side of the business, that we are continuing to invest in IdaTech and IdaTech will continue to sustain some level of losses through the balance of the year.

Now with the new summer rates that you have in place, what does this mean for EPS in the third quarter?

Jim, that is a number we are working hard to quantify ourselves. What we cannot predict today is the impact -- at least very well -- the impact that elasticity has on usage patterns. The idea there was to attempt to send price messages to those periods of higher-use periods. We're only really one month into reporting on it, and now we're into -- just completed the second month, and it's really hard to determine the trends on behavior that it has today.

Would you be surprised if the third quarter would not be the peak earnings period of the year?

I can't comment on that right now, Jim. I think we're going to wait and see how it plays out. Remember, the idea behind the seasonal rates was really to attempt to match the time when it is more expensive for us to acquire energy against the usage side of it.

So if that is the case, your costs don't materially change your overhead other than purchase power costs? It should mean that you should have a boost to EPS in the third quarter, relative to the other quarters?

I will be in a better position to tell you that on our November call.

Thank you.

John Hansen(ph), Aperion.

Just to follow up a little bit on Jim's question about the non-reg businesses. IdaTech -- can you comment about -- I didn't see much in terms of information in either place on what's currently going on in that business right now.

Jan will give you an update there.

I mentioned briefly two of the key milestones they hit during this last quarter, that they achieved during the last quarter. We continue to work on the relationship between RWE in Germany, and that cooperation was strengthened, I think, substantially by the decision of the Buderast (ph) Heating Group to join that -- I don't know how familiar you are with that name, but they are Europe's leading manufacturer of residential and small commercial boiler systems and home heating systems. What they bring to the table is extraordinary manufacturing capability, because we're still working on both the manufacturing, the delivery and service channels for introduction into the European market. So, it is a positive development on that side.

Same thing is true of the agency agreement with Ranco down in Italy that provides a service and delivery channel into Italy, as these units move through their prototyping stage and into the pre-commercial stage. So nothing we are prepared to make any large announcements about, but incremental progress.

So that business is, for the foreseeable future, still the same development level that it has been in the past in terms of activities, dollars and revenue and things like that?

Yes. It is tracking well on its internal plan, and that will be its outcome for this year, certainly.

Okay. Thank you.

There are no more question standing by. This does conclude our question-and-answer session. I would like to turn the call back over to Mr. Spencer for any additional comments.

Okay, I'd just like to thank you all for your interest in IDACORP and our second-quarter earnings. We will give you further updates as our situation progresses. So, thank you.

Ladies and gentlemen, this does conclude our conference today. We do thank you for your participation. You may now disconnect.