Idacorp Inc (IDA) 2005 Q1 法說會逐字稿

Good day and welcome everyone to the IDACORP first-quarter 2005 conference call. Today's call is being recorded and is 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.idacorpink.com. If you need assistance at any time during the presentation, (OPERATOR INSTRUCTIONS) At this time, I would like to turn the call over to the Director of Investor Relations, Mr. Larry Spencer. Please go ahead, sir.

Good afternoon everyone and welcome to our first-quarter earnings release conference call. We issued our earnings release before the markets opened today and filed our 10-Q with the SEC shortly thereafter. Both these documents are now posted to our IDACORP web site.

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

Our presentation today may contain forward-looking statements and it is important to note that the future -- the Corporation's future results could differ materially from those discussed. A full discussion of the factors that could cost future results to differ materially can be found in our filings with the Securities and Exchange Commission. The first presenter on our call today is Jan Packwood.

Thanks Larry. Good afternoon ladies and gentlemen and thank you for joining our call today. Our first-quarter earnings of $0.55 per share marks an improvement over the $0.51 per share we earned a year ago. Idaho Power earned $0.51 per share in both this year's and 2004's first quarter. Our overall earnings increase is attributable to a lower effective tax rate partially offset by a larger number of IDACORP common shares outstanding.

Idaho Power and the region are facing another dry year. 2005 will be our sixth straight year below average water conditions here in Idaho and again among one of the worst on record. Northwest River Forecast Center is predicting that the April through July inflows into Brownlee reservoir will be approximately 2.2 million acre feet or about 34% of average.

Lower river flows are expected to reduce our low-cost hydro production to 5.6 million MW hours down from the long-term average of 8.7 million MW hours. That difference will be made up primarily with purchase power. Idaho Power did benefit from customer growth which is continuing at a record pace and the effects of higher prices resulting from last June's general rate increase. Those factors helped to offset the impacts of continuing low stream flows and warm winter temperatures experienced in 2005's first quarter.

Our nonregulated operations broke even during the recent period with an overall $0.04 gain in consolidated earnings registered at the holding company level. Consistent with our electricity plus strategy, we will remain focused on Idaho Power operations and issues during the balance of the year. We plan to use 2005 as a test year for the purpose of filing general rate cases in both Oregon and Idaho early this fall. Our regulatory strategy continues to be to obtain timely recovery of our utility investment during this period of customer growth and the accompanying infrastructure expansion. LaMont will talk a little more about the Idaho Power overview.

Thank you, Jan. Good afternoon everyone. In addition to the power purchases we have made to supplement our system resources as a result of the drought conditions, we also now have our new 164 MW Bennett Mountain gas-fired power plant on line and available to help meet summer loads.

On March 3, we filed an application with the Idaho Public Utilities Commission seeking authorization to increase Idaho electricity rates by approximately 9.4 million annually to cover the cost of the plant. If approved, that would be a 1.8% increase that would go into effect on June 1.

In our recent power cost adjustment filing again with the Idaho Public Utilities Commission, we proposed keeping the PCA component of our Idaho customers' rates at current levels to reduce the combined impacts of drought and other rate actions scheduled for June 1. The other proposals before the PUC pending right now include the proposed Bennett Mountain increase and implementation of the tax expense recovery approved by the IPUC last year. If fully implemented, they will increase our customers' rates an average of 6.3%.

The $29 million of drought-related cost and other PCA-related adjustments would have required us to request an additional 4.8% increase over the current PCA level. We are sensitive to the overall impact and believe the IPUC will be as well. That is obviously the impact on our customers. If approved, this amount will be deferred with interest to next year's PCA adjustment.

Our application to increase our Oregon rates an average of 17.5% or $4.4 million is proceeding at the Oregon Public Utility Commission. The Oregon staff and the company have verbally agreed to a partial settlement of all issues except for net power supply costs. Hearings to resolve the power supply cost issues are now scheduled for May 23rd and 24th with the final decision from the OPUC expected later this year.

We also recently signed an agreement with White Pine Energy Associates LLC giving that company a three-year exclusive option to purchase our land and permit rights associated with the Southwest Intertie Project. That's a transmission line corridor in Nevada and Idaho. The option may be exercised in part or as a whole and if fully exercised, will result in a net pre-tax gain to Idaho Power of approximately $6 million.

Changing tracks a little bit on the relicensing front, the Federal Energy Regulatory Commission in March issued a license that allows us to operate our Malad Power Plant for another 30 years. The Malad Project consists of two dams located on a tributary of the Snake River near Hagerman, Idaho and two plants have a combined nameplate capacity of approximately 22 MW. This is the sixth license that FERC has awarded to us in the past year. As you recall last year we received licenses for our Bliss, Lower Salmon, Upper Salmon, Shoshone Falls and C. J. Strike power plants.

We also had a notable legislative achievement during the quarter as well as the state of Idaho passed the Stray Voltage and Remediation Act. This new law which is a result of cooperation between the Company and dairy industries provides both the Company and our customers clearly defined standards and practices for addressing stray voltage concerns on dairy farms.

And finally as Jan indicated earlier, customer growth on our system is continuing at record-breaking levels. We gained 3050 customers in the first quarter which indicates we are continuing to grow quickly perhaps even faster than last year. In 2004 we saw our highest one-year customer gain ever, 13,809 customers. In the first quarter last year we added 2234 customers, so this year's first quarter eclipsed that by roughly 800 customers. At the end of March we had more than 443,000 general business customers.

And while we welcome this growth it does have its challenges because we have to build the infrastructure to meet the ever-increasing growth and demand. This year we anticipate investing approximately $202 million in our regulated system.

And with that, I will now turn it over to Darryl to discuss our corporate financial activities.

Thanks LaMont and good afternoon everyone. Today I will review a few items from the first quarter and then spend the remainder of the time along with the other officers responding to your specific questions.

The earnings per share breakdown per each subsidiary can be found on our earnings release issued today so I will not repeat those numbers here. Asked Jan and LaMont have previously noted, weather and water conditions continued to impact overall earnings performance at Idaho Power Company. I will speak briefly about the impact of these factors on general business revenues and power supply costs.

Despite the benefits of continued strong customer growth and the impact of last year's general rate increase, above normal temperatures during the quarter diminished the expected growth in general business revenues. We estimate that the weather-related factors reduced general business revenues by approximately $8 million which largely offset the positive impact of greater customer numbers and increased rates estimated about $9 million.

Increased power supply costs had a negative impact on Idaho Power's earnings since a portion of these expenses are absorbed by the Company and not recovered under the Idaho PCA and the Oregon excess power cost mechanisms.

In the first quarter 2005, the amounts absorbed by the Company approximated $4.4 million or about $0.06 a share, an increase of 2.3 million or $0.03 a share over first quarter of 2004.

Moving to financing related activities, I'd like to start with our success in closing our new five-year credit facilities at both IDACORP and Idaho Power Company earlier this week. The principal amount remains at 200 million at Idaho Power and 150 million at IDACORP. We took advantage of attractive market conditions to replace our current three-year agreements with new five-year agreements signing the final documents on May 3.

With respect to current liquidity, the IDACORP short-term debt at March 31 was $54 million, up $18 million from the $36 million balance at December of 2004. Increases in short-term debt were used to fund changes in working capital requirements and ongoing investments at IdaTech. Idaho Power had no short-term debt at the quarter end or the end of 2004.

At this time, the only planned long-term debt financing in 2005 is the refinancing of the $60 million 5.83% series first mortgage bond which mature in September. In a move to take advantage of the current interest rate environment and protect against a possible rise in interest rates, Idaho Power entered into an interest rate hedge arrangement in April to hedge the $60 million refinancing in September.

With the goal of adding additional common equity to its capital structure IDACORP recently changed its dividend reinvestment program from open market purchases to original issue IDACORP common stock. We continue to work to balance our capital structure using a combination of debt, equity and internal cash generation to fund our needs. Our goal is to continue to maintain a solid investment-grade rating.

Now I will discuss our 2005 projected key operating and financial metrics. For 2005 Idaho Power operation and maintenance expenses are currently expected to be in the range of 244 to $248 million. As LaMont mentioned earlier, below average water conditions have continued for the sixth consecutive year and as a result, generation from Idaho Power's hydroelectric facilities is expected to be 5.6 million MW hours in 2005. This is compared to 6 million MW hours in 2004 and normal generation estimate of 8.7 million MW hours.

Capital expenditures for Idaho Power are expected to continue to be 202 million in 2005. On the tax front, we estimate that the 2005 annual consolidated effective rate will be approximately 5% at IDACORP and between 35 to 40% at Idaho Power Company. In accordance with interim reporting requirements, IDACORP estimates its consolidated group effective income tax rate for the annual period. The estimated annual rate is used in determining the effective rate for the quarter and may result in inter-period allocation of income tax expense.

Such an allocation was made for the first quarter and is recorded at the Holding Company as an income tax benefit. The Holding Company benefit is expected to reverse over the course of 2005. The decline in the estimated 2005 annual effective rate -- effective tax rate from 10 to 15% to approximately 5% is based on estimated reductions in pretax income due to the continued impact of below normal water conditions and weather-related declines in operating revenues at Idaho Power.

These reductions when combined with the ongoing recognition of affordable housing tax credits at IDACORP Financial reduced the estimated annual consolidated effective tax rate.

Finally we are reaffirming our 2005 earnings per share guidance for the nonregulated business units including Holding Company expenses to be in the range of $0.05 to $0.10 positive per share.

That now concludes our formal comments. We would like to respond to your questions.

(OPERATOR INSTRUCTIONS) Paul Ridzon at KeyBank McDonald.

Good afternoon. Do you have an expected timeline on a Bennett Mountain decision?

We're going to let Rick Gale who heads of the regulatory affairs go ahead and address the Bennett Mountain question.

We're expecting the Bennett Mountain decision later this month in time to implement rates first of June.

Thank you very much.

James Bellessa of D.A. Davidson & Co.

The last time you asked for a deferral of your normal PCA, the IPUC denied your request. Why do you think that they will accept your request this time around?

We did not prepare that application without consulting first with the IPUC staff fully on where we were this year, where we might be next year and whether the staff was seeing that as appealing. We've got a sign from the staff that they valued that so we have an expectation that the Commission will as well.

It seems like the logic last time is they didn't know what the whether and the situation a year later would be so they decided that it would be better to pay for the power cost and the current dollars in the current rather than defer them. It seems like it would be the same logic this year.

We come in at this PCA in a very, very low end of the spectrum as far as stream flow, so there is a whole lot of upside to next year's PCA. As far as that expectation. We also know that some of the items that will be in or we expect to be in this next year will drop off so they'll be identifiable items that will reduce next year's PCA ultimate number. So we're expecting things to drop next year and we see upside on the river forecast.

Depreciation expense was flat in first quarter '05 versus 04. And down relative to the recent quarters. What explained the decline versus the recent quarters?

We are fairly flat as it relates to depreciation period-over-period. I think it's a matter of a couple of things. You know we did put in new depreciation rates, I want to say it was two years ago that attempted to true things up and get things more in line. I think it's a combination of adding new investment with also items getting more fully depreciated all-in. You will expect to see that number go up a little bit obviously with the Bennett Mountain application.

You had an option on this Intertie Project -- Southwest I guess it is --excuse me, Intertie -- not Internet -- Southwestern Intertie project option. Did you have some income or revenues post in the most recent quarter because of that?

We basically are taking -- we have cash actually came in on that particular transaction in April. We've basically taken that cash that's been received and recorded it basically as a deposit that we would continue to hold that until the point in time that the full option is exercised. We would expect to the extent that the option is exercised beyond what we have into it, we would have gained to the extent that we only receive the option payments, we would look to serve those to reduce the amount of investment we have in the project.

When you are saying that you -- if it was exercised in full in the three-year period that you might have a $6 million pretax gain. It looks like you have a little over 6 million into it. Is that meaning that the option would be exercised at around $12 million?

The math on that is probably pretty close, Jim.

Your tax rate for this year is kind of set as you guided us today. What might we try out for next year?

Jim, I think that as we look forward and obviously this year, I'll speak a little bit about this year's rates because it is important and it's all predicated on a lot of it is directed by the credit that resides at IDACORP Financial. So we need to make sure those are -- that is what help drives that effective rate down. And until we get up to a more reasonable earnings level at the utility, we will continue to be in the lower end of -- lower than the normal statutory rate.

As it relates to 2006, I think somewhere in that 20 to 25% rate would be a reasonable expectation to note given what we know today but there again, we don't know what water conditions are for 2006 and all of those things. But that is where it could end up in that range barring -- we are just not sure what 2006 holds for us.

There's a lot of factors, Jim -- like LaMont mentioned, we have a general rate case and we would be filing and expected to have some results on in 2006. So there's a number of things. But on average, we would expect that number to move up towards 20 to 25.

And with low pretax income expected this year, you've lowered your tax rate expected for the Holding Company to 5%? The pretax income being down this year is the major reason for being the reduction to a 5% rate?

Yes.

And therefore, is it fair to say right now the affordable housing credits aren't efficient?

I think we would say they are still efficient. I think we need to continue to monitor the extent to which we interest in future credits going forward to match those up with the earnings potential of the utility.

Thank you very much.

David Thickens, Deephaven Capital Management.

Good afternoon. Can you talk a little bit about longer-term views for water in the West? And also if there is any kind of push to change the regulatory regime from looking at basing the PCA on the midpoint of the thirty-year range as it is done now? I've seen some articles that have talked about cycles in the past over the past several hundred years and I think they are getting the data from like tree rings that are showing that there have been droughts in the West that have lasted 35 years or so. And they've seen several of those as they look back over the past couple millennia. Any sense of is that we're seeing sing now? Is this just kind of a short period; is this part of a longer period?

That is a good question. The study you are referring to I think came out of the University of Utah and tried to look at 500 years of history which is a pretty big look. A couple of things are happening. One, as we have successive dry years and you average those in with the historical numbers, average is coming back -- is coming down. It's not the direction we'd like to see it go but it is lower you might notice at 8.7 million acre feet this year.

Second thing is that I continue to be convinced that the impact on our water is more a function of open ocean conditions -- that's this El Nino/La Nina phenomenon. Of all the theories that have been brought forth by weather forecasters, that one seems to track closest to the reality of what happens here water-wise. If you take this year for example, the jet stream set up just south of us consequently the Lake Tahoe got buried, Utah got buried. But 100 miles north of that it experienced very low conditions.

That phenomenon seems to be a result of open ocean conditions and that seems to have more effect than any long-term cycles that we have been able to analyze. I am aware of the study that you are referring to. It does cast it in a broader light. Our reality has been in the time we've kept records, the longest consecutive string of dry years was seven and that was back in the '30s.

Thank you.

(OPERATOR INSTRUCTIONS) Paul Ridzon, KeyBank McDonald.

As I understand, whether or not you get the deferral on the PCA, is earnings neutral, is that correct?

We expect to be pretty much earnings neutral. We do have a carrying charge that we will be -- would be allowed to recover on the carryforward balance so the earnings impact would be the difference between our short-term rate that we would be financing that at and the amount of carrying charge.

Thank you.

James Bellessa, D.A. Davidson & Co.

Regarding the tax benefit that you had at the Holding Company for the first quarter, if it's going to work itself or reverse itself out during the course of the year, when does most of that tax reversal occur? What quarter?

Hang on Jim. I think we can give you an estimate of what that will be. We've got our tax director, Gene Marchioro here and -- it will probably be right around the fourth quarter, Jim. The majority of it.

Previously you had been saying 9.2 million acre feet into Brownlee and then all of a sudden it drops to 8.7 or is that all of a sudden you're taking a different series of five years or something?

That is based on updated data, Jim, the 9.2 or 3 number was based on 1992 River depletion studies and historical averages. That has now been updated and added a new decade worth of data plus the current years are averaging in and as I mentioned earlier, that is bringing that number down.

You entered into an interest rate hedge. What was the rate that you received on the hedge?

We entered into a forward interest rate swap that basically gets us a rate -- today we think that rate is -- can move a little but it should be somewhere in the 5.4 to 5.5% range.

I missed the comment that you indicated about your common stock issuances. You're issuing new stock the drip? Is that what I heard or did I miss that?

That is correct. We've opened up the drip program now for original issue shares.

What would be the likely number of shares a quarter that would increase as a result of drip?

On average for the year, the number we would look to possibly issue up toward between 4 to $5 million worth of stock over the year. Obviously, depending on market prices and other things I don't have a share number for you.

And the amount for the Bennett Mountain decision, what was the rate request or how much capital did you put into that? I'm guessing I should ask?

It's about 58 million -- (multiple speakers) including the plant and transmission.

Including the transmission and auxiliary equipment and things like that?

Yes.

Thank you very much.

David Thickens, Deephaven Capital Management.

Can you talk about the need to issue equity above and beyond the drip in your view over the next couple of years?

David, we continue to look at that and part of that is driven by obviously what we do ultimately spend in the form of construction because a lot of that is going to be predicated on balancing the cap structure with regard to our capital program. And so we continue to look at that. I think that over the next three years or so that we would need to look at potentially doing that depending on what we do with the drip program as well as looking at other options to get equity out.

So we don't have a number. We just continue to monitor that depending on where we go with capital but we will look at that over the next three years. That is something that is in our plan. I don't have a number for you today.

Going back to Jim's question on the change in the average number for the Brownlee in flows. Now if I understand this correctly, are the regulators using that new lower average so that if and when stream flows come back to the -- if we get stream flows back to or above the old 9.2 million acre feet number you would kick into share -- the sharing the other direction number or the other direction at the lower number of 8.7 million acre feet instead of the 9.2?

David, they don't use that particular information. They use River Forecast Center data and so that's not -- this is information that has come out of a study, our updated study that we attempt to use where we work with the Idaho Department of Water Resources to kind of -- they did a lot of analysis to come up with this number. It's not a number that gets used for PCA purposes.

That is actually 8.7 million MW hours of hydroelectric generation.

I just wanted to make sure that you weren't going to get effectively hurt in both directions because the thirty-year average comes down because of the five bad years or whatever.

Since you used the thirty-year average a couple times -- for rate-making purposes, we use 70 plus years.

70 years. Okay, then it is a slower impact. Thank you.

Paul Ridzon, KeyBank McDonald.

Keep going around and around I guess. Just wondering, your current portfolio whether what the longer-term view of that is? What is considered strategic and any update on maybe partnering out energy?

We don't have anything that we are choosing to announce right now. Obviously we continue to focus on the internal milestones for both IdaCom and IdaTech which are really the two that have a strategic dimension to them. The others are more like annuities at Ida-West and of course IDACORP Financial and the tax relationship. But they are meeting their milestones. We're still a little ways away from commercial products that we can offer on the IdaTech side. We're at breakeven now and improving on the InaCom side but nothing more really to say about those at this point in time.

Thank you.

That does conclude the question-and-answer session for today. We have no further questions in the queue. Mr. Spencer, I will turn the conference back over to you.

Thank you. I would like to thank everyone for their interest in IDACORP and our first-quarter earnings. So I will say goodbye.

Thanks everybody.

That concludes today's conference. Thank you for your participation.