Idacorp Inc (IDA) 2005 Q3 法說會逐字稿

Good day, everyone, and welcome to the IDACORP third 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 from the Company's website at www.IDACORP inc.com. If you need assistance at any time during the presentation, please dial star 0. At this time, I would like to turn the conference over to the Director of Investor Relations, Mr. Lawrence Spencer. Please go ahead, sir.

Thank you, Erica. Good afternoon, everyone, and welcome to our November 3, 2005 third quarter earnings release conference call. We issued our earnings release before the markets opened today, and filed our form 10Q with the SEC shortly afterward, both documents are now posted on our IDACORP website.

Included on the call today are Jan Packwood, IDACORP President and Chief Executive Officer, LaMont Keen, IDACORP Executive Vice President, and Idaho Power President and Chief Operating Officer, and Lori Smith, IDACORP Vice President and Chief Risk Officer and acting CFO. Other officers are also available to help answer your questions during the Q&A period.

Our presentation today may contain forward-looking statements, it is important to note that the corporations future results could differ materially from those discussed. The full discussion of factors that could cause future results to differ materially can be found in our filings with the Securities and Exchange Commission.

First on our call today is Jan Packwood.

Thanks, Larry. Good afternoon, everybody. As Larry said earlier today, we reported third quarter earnings of 23.6 million or $0.56 a share, $0.12 per share less than the third quarter of 2004. Year-to-date in 2005 we've earned 56.1 million, $1.33 a share. Our quarterly results included earnings of $0.50 per share at Idaho Power and $0.06 per share at the Holding Company and from our none regulated operations.

As I noted in our release this morning, Idaho Power continues to perform well at the operating level. General business revenues for the quarter are up 11% over 2004, 57% of that increase coming from customer growth, and higher consumption per customer. And the remainder coming from higher rates in effect for 2005.

Income before taxes at the Holding Company level improved significantly to $33 million, more than 6 times the 2004 results. However, the treasury department and I.R.S. released guidance in August, which necessitated the reversal of a previously accrued tax deduction. And, as a result, our after tax income was reduced by 9.4%, compared to a year ago.

There are two other noteworthy events that I'd like to mention. First, after receiving regulatory authorization, Idaho Power has generated in October approximately 57 million pretax through the sale of excess sulphur dioxide emission allowances. We are recording these proceeds in a reserve account and on November 7, which is next Monday, we will begin participating in workshops here in Idaho. The outcome of those workshops will help determine how these proceeds will be allocated between shareholders and our retail customers in Idaho. In Oregon, the portion of the proceeds attributable to that jurisdiction will be addressed during a future rate-making proceeding.

Second, we continue to experience record growth in our service territory. That, in turn, is leading to significant reinvestment as we upgrade existing infrastructure and make the necessary new investment in the power plants lines and stations as such robust growth require. Mindful that the lag between investment and recovery should be shortened to the extent possible, we filed on October 28, a general rate case in Idaho, requesting recovery of 44 million in annual revenue, an overall average increase of 7.8% to base rates.

I'll now let LaMont provide additional background on how Idaho Power faired in the quarter.

Thank you, Jan, and good afternoon, everyone. Customer growth in our service territory continues at a record pace. Year-to-date through September, we have gained 12,022 new customers, last year we gained 13,809 customers for the entire year, and that was an all-time record for us. If this year's pace continues, and we expect it to, we will easily surpass last year's record. For the 12 months ended September 30, we added over 16,000 new general business customers. Third quarter temperatures in our service area were well above normal and slightly above last year, resulting in greater general business customer sales. As we indicated in our earnings release this morning, our general business revenues were up 11%, or $20.5 million over last year's third quarter. A result of the customer growth, a 2.2% increase in usage per customer, and higher average rates paid by customers.

Drought continues to cut into our earnings and unfortunately at this time we can't predict when that might change. As reported in the earnings release in our 10-Q, hydro generation for the year is expected to be over 2 million megawatt hours below that generated in a median water year. We're just now beginning the 2006 water year and while we would welcome better conditions, we will be prepared for continued drought.

The Company has a well-developed process for managing power supply costs under less than normal water conditions. That has been developed in conjunction with a customer advisory group in Idaho. Under the process, any anticipated shortages under either expected or low water conditions, are identified in advance and prescribed steps are taken to acquire the necessary resources to meet customer loads and to limit power supply costs. We continue to manage our power supply system pursuant to these guidelines. And because of this program, and the efforts of our dedicated and skilled employees, we very effectively manage this system through our summer peak loads this summer, despite the limitations on our hydro system.

Changing tracks just a little bit, while the customer growth we've been experiencing provides the opportunity to grow the Company, it also has its challenges too. As our customer numbers increase, so must also our investment in the facilities necessary to provide reliable electric service. We also continue to invest in our aging core infrastructure to reinforce and renew it. For the past several years, the Company has averaged more than $200 million annually in investments in these facilities, and we foresee that continuing for at least the next 3 years and beyond. These investments include generation, transmission and distribution facilities.

As Jan mentioned, last Friday we filed an application with the Idaho Public Utilities Commission to increase our general rates in Idaho an average of 7.8%, or approximately $44 million annually. This filing is only our second general rate request for an increase in rates since 1993. Many of the issues within this case were closely reviewed by the Idaho Public Utilities Commission staff, as part of our 2003 general rate request. This filing represents adjustments to the Company's Operating requirements since that time.

And with that, I'll turn it over to Lori, who now has some information about our finances.

Thanks, LaMont. Good afternoon, everyone. Today in Darrel's absence, I'll take a few minutes to review our third quarter results and then spend the remainder of the time along with other officers here today responding to your questions. The earnings per share for each subsidiary have been included in our earnings release, so I will not repeat them.

As Jan indicated, the quarter reflects improved operating results at Idaho Power Company, partially offset by the disappointing news from the I.R.S. and the Treasury Department. On August 2, they released new temporary regulations for section 263-A of the internal revenue code. Which are effective for 2005 and future years. Specifically, the new regulations negatively impact the simplified service costs method of uniform capitalization. The method adopted by Idaho Power in 2001. As a result, we recorded additional income tax expense of 2 million, related to the reversal of the previously accrued 2005 tax deduction for capitalized overhead.

For the quarter, general business revenues have increased by 20 million or 11% over last year's third quarter. The increase is a combination of $18 million or 12% in base revenue increases. And that includes rate increases and volume differences between the quarters. An increase of 7 million in PCA revenues partially offset by a decline in PCA amortization of 5 million. The base revenue increases include the completion of the 2003 general rate case, full quarter of the increase from the Bennett Mountain Power Plant and the settlement amounts related to income taxes.

On a year-to-date basis, general business revenues have increased by 13 million, or 2.6% over last year's September year-to-date. The increase is a combination of $19 million or 5% in base revenue increases, an increase of 7 million in PCA revenues, offset by a decline in PCA amortization of 14 million.

Other operating revenues declined $17 million for the quarter, the decline is associated with two regulatory settlements in 2004. The first for the irrigation lost revenues of 12 million and the second for the income tax settlement of 12 million. Both of these items were settled in 2004 with rate increases beginning in June 2005. The irrigation lost revenue amount was accrued in December 2004, and the income tax settlement was accrued monthly from June 2004 to May 2005. For the year, other operating revenues declined $15 million. The required amortization out of other revenues into general business revenues began in June 2005. In the third quarter, the total amortization of both of these items is 8 million and year-to-date amortization is 10 million.

Turning to liquidity, our current liquidity includes an increase in IDACORP's short term debt at September 30 of $7 million, or a balance at IDACORP was 55.6 million. Idaho Power had no short-term debt borrowing at the end of September 2005. Internally generated cash after dividends is expected to provide approximately 62% of 2005 capital requirements. A decrease from the 70% reported last your. This decrease is largely due to changes in working capital accounts, and income taxes.

I will briefly review the changes to our key operating metrics. The capital expenditure range at Idaho Power was reduced by 5 million, due to the timing of construction expenditures. Our hydro electric generation remains mostly unchanged from the second quarter. The decrease in expected contributions for the nonregulated businesses is largely due to increase losses at IdaTech and Ida Com. IdaTech continues to focus on early market opportunities, including back-up power and portable power applications, and the necessary certifications related to these markets. The reduced focus on longer term markets in combined heat and power that are originally included project specific funding has increased the expected loss for the year.

Turning to income taxes, we have increased the estimated 2005 annual consolidated effective rate to between 11 and 16%. And between 38 and 43% at Idaho Power Company. The increase at IDACORP and Idaho Power Company is due to the additional tax expense recorded in the third quarter related to the reversal of the previously accrued 2005 tax deduction for capitalized overheads. Along with changes in other flow-through tax adjustments at Idaho Power.

That includes our prepared remarks. And we would now like to respond to your questions.

Erica?

Are you ready for questions, I do apologize. You are ready for questions?

Yes, ma'am.

Yes.

[ OPERATOR INSTRUCTIONS ] Our first question will come from Paul Ridzon with Key McDonald.

Question at corporate. There was a $0.09 swing. I was just wondering what was driving that?

In the third quarter we have inter period tax allocations at the Holding Company.

How would you expect -- what do you expect for that for the fourth quarter?

Well, by the fourth quarter it will be actual. So there's -- the inter period tax allocations would flow through and our tax expense will be our actual tax expense by then.

And then can you give some more flavor on the components of the $44 million in the rate case?

Anything further?

Yes, he's got a follow-up question.

I can give you the key components of our rate base in 2005. It includes about 1.6 billion of rate base, our capitalization or percent equity is 49.46%. Our ROE requested in this case is 11.25. And our overall return on rate base requested is 8.42%. Resulting in a revenue requirement of approximately $44 million.

Thank you very much.

And our next question will come from Neil Kalton with A.G. Edwards.

A question on the rate filing as well. Is there any suggestion in the filing to a change in the PCA adjustment mechanism?

No. We did not file for any changes in our PCA mechanism.

One quick follow-up, and I'm sorry I missed this. The equity ratio in the rate case?

49.46%.

Thanks.

As a reminder again, it you do have a question, please press star 1 now. We'll hear next from Patrick Forkin with [inaudible] Securities.

Good afternoon. I was wondering, if you could provide a status update on your advanced meter reading project that I think you have running in EHMET and McCall?

This is LaMont. I think I'll turn it over to Dan Minor, who is our Senior Vice President of our Delivery Business Unit.

The -- the advanced meter reading project. We have two areas that are under pilot. We are currently in the report writing phase of that project. And we will be giving -- we report to the commission on, I think, December 31 of this year. And that's actually kind of phase one of the [A Mark] project.

Okay. So any indication as to whether you'll be moving forward with that to the rest of your -- expanded portion of your service territory?

No, actually at this point in time, they are just in the process of kind of accumulating the statistics and the numbers from that report. Probably too soon to tell.

Okay. Thank you.

Our next question comes from Reza Hatefi with Zimmer Lucas partners.

Hello. I was wondering with the higher tax rate at Idaho Power. Is this sort of going to be mitigated through this rate proceeding and future rate proceedings?

Reza, I think I'll have our Director of Tax, [Gene Marcarrol] answer that.

Taxes are a component of cost of service in a regulatory proceeding. And basically encompasses all adjustments allowed in that context. The particular adjustment outlined in our filings today has been -- has been addressed in the regulatory filings. While we're not recording it for financial statement purposes, we're not recording it in customer -- in our filing as well.

Thank you.

Our next question comes from James Bellessa with BA Davidson & Co.

Good afternoon. Yes, 60,000 emission allowance sale, for $57 million. What is the amount of profit on the table there? And how are you going to argue how it should be allocated?

Jim, if you had -- you probably haven't had a chance to look at the Q. The $57 million is our gross proceeds on those 60,000 units. And as you know, on Monday, November 7 we'll be having a workshop related to the disposition or the sharing on that money. So right now it is recorded in a regulatory liability and we have not recognized any earnings off of it.

I understand that. But how much is up for grabs here? And what's the argument from the Company standpoint?

Jim, this is LaMont. We're obviously not going to be too forthcoming going into workshops with staff with the commission and customer groups. There certainly is a solid argument that all or at least a portion of those proceeds should go to the owners of the Company. There're also equally strong arguments that substantial portion of those should go to the customer. That's the purpose of the workshops is for us to get together with the staff of the commission and the customer groups and determine how that will work going forward, at least in Idaho. There's no process currently established in Oregon. And that's about as much as we can say today as we are prepared to go into that process. I think we look for a sharing of that. Too soon to determine what that sharing may be.

In your guidance or your financial metrics that you put out for 2005, include a reduction in the nonregulated subsidiary earnings and now you're guiding to minus $0.05 to mine us $0.10. With $0.02 year-to-date in that camp. What happens in the fourth quarter that makes it go negative?

Well, the -- Jim, in the third quarter the Holding Company shows a positive income, which the Holding Company is not a profit center. It is a cost center. And so mainly I think you're seeing positive impacts from the Holding Company or the parent in that estimate. So, in the fourth quarter, we'll have expected basically the same operations from Ida Tech and Ida Com for 2005 that really reflect the change in that estimate.

The -- are you saying that the Holding Company all of a sudden has a reversal of this inner period tax allocation that amounts to somewhere in the neighborhood of a minus $0.07 to minus $0.12 in the fourth quarter?

Yes. That's what I'm saying, Jim.

That was two questions. But I have many more. That was my share. [ Laughter ] I'll come back, I guess when I have my second chance.

Okay, thank you, Jim.

Our next question will come from Mitchell Moss with Morgan Stanley.

Hey, guys. A couple questions. Just want to make sure that you still have -- do you still have full use of your tax credits for the year, given your lowered estimates at the Holding Company, or the unregulated level? And the, with the increased losses -- I mean, do you still get full value out of the tax credits for '05? Plan on it?

Mitchell, in our earnings, we do get full credit for our tax credits.

Okay. Even with -- even with sort of, this issue of higher tax expense due to capitalized overhead, all of that stuff, should be able to get the full use of the credit?

Right. You can see that in the difference between our Idaho Power effective tax rate and the consolidated effective tax rate.

Okay. And then when -- looking through the Q, you discussed the purchase power costs and there was a hedge on those. Do you have a hedge in place for some of your purchase power based on, I guess -- you've put in place in the spring time with low hydro conditions? Was that hedge just for the third quarter or are you sort of still substantially hedged for -- I don't know if substantially, but hedged similarly in the fourth quarter?

Well, we don't break out our hedges by quarter, like LaMont mentioned in his words that he had. We follow a process that where we follow tiers related to our risk management policy.

I -- I guess what I'm trying to figure out is all else being the same, your exposure to market where power prices are significantly higher than they were last year. I'm just trying -- to understand if sort of the fourth quarter, if any potential -- your potential purchase power costs are likely to be sort of, not based on the market pricing or are they based on market pricing?

I guess the way I would answer that is in the second quarter our natural gas hedge that we ended up remarketing was mainly a function of the rains that we had in May. And so we ended up with more purchase gas than we needed. I would say -- I wouldn't expect that to repeat in the fourth quarter.

Okay. Thank you very much.

Yes.

Next move to Lilly Wu with TGRA Capital.

Yes, firstly, I was wondering if we could get a brief update on business at Ida Tech and Ida Com -- in the quarter. Whether either of the companies had significant contracts signed either for sale of jewel cell units in Ida Tech case or consultancy agreements on Ida Com side with any one of the power companies that they were bidding at?

This is Jan. I'll take that two parts. Start with IdaTech. They don't have any additional sales that they have announced publicly to date in the quarter. We're working with a financial advisor to introduce us to potential private equity investors in that company. That's been primarily their focus. We're completing the deliveries of some combined heat power units to RWE in Germany. Nothing above and beyond that that we've made any announcements on.

On the Ida Com side, there are no consultancy agreements in place beyond what has been publicly discussed on the BPL side. On their private fiber networks side, they have had sales primarily in the Las Vegas market, That's a part of their normal course of business that I don't believe we've broken out individually. But they're both operating pretty close to planned. The fall-off in the contribution from IdaTech is a result of them narrowing their focus to some nearer market products and it has increased their losses because we've backed off from combined heat power unit marketing for the time being.

All right. In regards to the private equity financing that was mentioned for both companies in the Q will both the companies be issuing new shares for the private investors? Or will any portion of existing shares help buy IDACORP be sold as part of the financings?

This is Lori. We really -- we don't know yet because we don't have a term sheet in front of us. It would -- it would be expected that we would issue new shares.

All right. Thanks.

Next we have a follow-up from Paul Ridzon with Key McDonald.

The $0.05 tax hit that you took in the quarter, that was just totally related to the tax year 2005, is that correct?

That's correct.

And then I was a little surprised to see that fuel prices really weren't up. I was just wondering what was driving that?

Fuel prices or fuel --

Fuel costs.

Fairly flat.

Right. We have basically lower volume, higher prices, kind of netting out to be the same number or close to in the quarter.

And what was hydrogeneration versus last year?

Just one second and I'll -- in the quarter we had 1.5 million megawatt hours and last year we had 1.4. About 100,000 different. And for the year, have 4.8 million, 18 versus 4 million 777.

And then just back to Tech. This a run rate or is this just kind of acceleration of some spending that's going to moderate over time? How should we think about this? These higher losses?

I think he's asking about IdaTech's?

In IdaTech?

Yes, sorry.

No, we're not expecting a higher run rate. This is about where we expect it to be.

But going forward is it going to be at this run rate or are we seeing an exacerbation of issues just being you're doing some acceleration?

Well, they've refocused what they're working on. So at this point in time, our expectation it would be similar run rate.

Until you can get a partner to kind of absorb some of that? Those costs?

Right. Correct.

Thank you.

Next we have a follow-up from Reza Hatefi with Zimmer Lucas Partners.

Yes. I was wondering in your Idaho rate filing, what ROE were you earning? In your request of us to give request at 11.25. What area were you earning in your test year?

In the 2003 filing --

Sorry.

Excuse me?

In the current filing that is --

In our current filing we file for 11.25.

And what ROE were you at in the -- in this test year that you need the 40 million to get up to the 11.25?

The previous authorized return is 10.25.

No, what I mean is in calculating your $40 million need, what ROE are you currently earning?

Well, it's -- the cost of service is a function of the cost. And then the overall cost of capital, which includes in this filing 11.25.

I mean, what is -- are you earning like a 9% and thereby you need 40 million to get up to 11.25 or what is your current ROE at Idaho Power?

It's not on a normalized basis. We don't have that separated out.

Oh, okay.

If we looked at -- so it's not based on what we're actually earning. It's based on the revenue requirement related to normalized sales, power supply, et cetera.

Okay. And earlier there was a brief mention of over $200 million a year ongoing CapEx. Do you have more precise figures for '06 and '07 for CapEx?

We will be providing those on our fourth quarter conference call and in the Q.

Okay. Thank you.

Next we have another follow up from James Bellessa with D.A. Davidson & Co.

This will tax reversal that you just posted for this quarter, what was the previous quarter that it was posted in.

The first two quarters we had an accrual for that deduction.

You don't know how that's broken out between the first and second quarters on a per share basis? It was $0.05, hit reversal. Is there something that we could hang our hats on for what this first and second quarters were at?

Jim, it would be evenly distributed.

Okay. And the 2005 consolidated tax rate projection is now 11 to 16%. You aren't giving guidance for 2006 or future years, but what is a reasonable guess for 2006?

A reasonable assumption, Jim, would probably be in the 15 to 20% at IDACORP.

Okay. Now -- in your Q you say that the O&M assumption -- while you tell us that what the O&M is for -- projected for the full year, and that assumes that the fourth quarter comes in somewhere between 59 and $63 million. Which is down from 65.6 million in the fourth quarter a year ago. What causes the O&M to come down that much?

Last year, in 2004, with the general -- the settlement on lost revenues, we've had a large accrual for incentives that were paid in 2005, is probably going to be the main explanation there. That's why we'll be down in the fourth quarter of 2005.

Have you not achieved the incentive rate this is year and therefore your bonuses are lower, is that what you're saying?

At this point in time, Jim, we are accruing on some of our metrics. But not all of them.

Okay. Now -- I'm looking at last year's utility fourth quarter. You had posted $0.37. What are the things that would help it this year, and what are the drags that would reduce it this year? In the fourth quarter? You have a higher rates.

Right, we have higher rates.

You have more customers.

Yes.

Are there other things that would change earnings upward and then the negative drags?

Jim, nothing is popping out to me. So -- heating degree days will be a function of how we do in the fourth quarter. Loads will have a function of how we do in the fourth quarter.

You recall whether or not last year was cold fourth quarter?

I don't. I think it was fairly mild.

I'm just trying to figure out what's in store for the fourth quarter. You don't give guidance on your overall company. But you do indicate that there's this swing in nonregulated subsidiaries. Which is going to amount to a minus $0.07 to minus $0.12. And if I just put the same utility EPS in as last year, I get the fourth quarter coming in at $0.25 to $0.30 down from $0.37 last year. Does that seem reasonable?

Well, Jim, I think you indicated minus $0.05 to $0.07. And we actually have $0.05 to $0.10, or $0.05 to $0.12 I guess is what you said.

Guidance is for a minus 5 to minus 10. You already have right now year-to-date $0.02. You're going to have to -- you have to subtract out the $0.02 and then you go into the hole by another $0.05 to $0.10. That's why I said $0.07 to $0.12 minus in the fourth quarter for nonsubsidiaries.

Right.

Nonregulated subsidiaries.

I guess, at this point in time, Jim, we don't have any further guidance on the fourth quarter.

Thank you very much.

Welcome.

And that concludes 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.

Okay. I'd like to thank everyone for your interest in IDACORP and our third quarter earnings. We hope to see many you of you down at the EEI Financial Conference next week. So, with that, I say good bye.