Idacorp Inc (IDA) 2006 Q3 法說會逐字稿

Good day, Ladies and Gentlemen. Thank you for standing by. Welcome to the IDACORP Third Quarter 2006 Conference Call. Today's call is being recorded and is being web cast 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. [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.

Thank you, Erica and good afternoon everyone. Welcome to our November 2nd, Third Quarter Earnings Release Conference Call. We issued our earnings release before the markets opened today and that document is now posted to our corporate website. We also filed our Form 10Q with the SEC and that document has been posted to our IDACORP website.

Included on the call today are LaMont Keen, IDACORP and Idaho Power President and CEO and Darrel Anderson, IDACORP and Idaho Power Senior Vice President of Administrative Services and CFO. We also have other officers here today to help answers questions during the Q and A period.

Our presentation today may contain forward-looking statements and it is important to note that the corporation's future results could differ materially from those discussed. A 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.

Before turning the presentation over to LaMont, I'll briefly recap the financial results presented in today's earnings press release.

IDACORP's third quarter earnings report shows net income of $44 million, up significantly from $23.6 million in third quarter 2005. And year-to-date earnings of $89.3 million, compared with $56.1 million in 2005. Earnings increased by $0.47 per diluted share to $1.03 per diluted share, quarter-over-quarter. This includes a $0.27 per share after tax gain from the sale of IDACORP Technologies.

For the first nine months of 2006, earnings were $2.09 per diluted share, compared to $1.33 per share for the same period in 2005. Our chief subsidiary, Idaho Power, had earnings of $0.71 per share for the quarter, compared to $0.50 per share in third quarter 205.

Now, I'd like to turn the presentation over to LaMont.

Thank you, Larry and good afternoon everyone. Now, I want to say up front that I'm battling a bit of a bug today that makes my voice a little bit unreliable so I'm going to attempt this, but in the event it gives out on me midway, Darrel is prepared to step in for my part of the presentation, as well.

I wish I could say it's a result of cheering too much for the Boise State Broncos last night, but unfortunately that isn't the cause. To start my presentation, we are pleased by the performance at Idaho Power and the significance of its contributions to our overall results, as the utility's third quarter earnings increased to $30 million and that's a $9 million improvement over last year.

Contributing factors to the third quarter results were first, a slightly improved profit margins due to a 3.2% increase in our base rates in Idaho that went into effect June 1st. Secondly, to improved hydroelectric generating conditions. And third, as a result of increased retail electric sales due to weather-related influences and continued strong customer growth.

During the third quarter, our hydro production provided 46% of our total system generation, compared to 42% during the period in 2005. Overall, we recorded a 22% increase in volumes of electricity produced at our low cost hydro plants during the quarter. Inflows into Brownley Reservoir during this year's April through July runoff period were 8.9 million acre feet, compared to the 30 year Northwest River forecast Center average of 6.3 million acre feet. The increased hydro production certainly was valuable as hot weather and the addition of nearly 11,000 new customers since the beginning of this year spurred record-breaking demand for electricity. As I shared with you during our second quarter conference call, we set a new peak load three times during the summer. Our new peak record now stands at 3,084 megawatts and that was set on July 24th.

Overall, our service area experienced a 9.9% increase in cooling degree days during the quarter, with it having its greatest impact or being experienced by our residential customers as their average usage increased by 5.5%.

Despite the higher volumes of hydroelectric generation, we still needed to realize significantly on our thermal plants and make off system purchases during the quarter. Higher electricity purchased prices and increased fuel expense caused a significant increase in our net power supply costs. These were higher than the formulae forecast made in May, pursuant to the annual power cost adjustment or PCA. These costs are being deferred and will be addressed in next year's power cost adjustment.

For the third quarter, the PCA totaled credit of $55 million, compared a $9.7 million credit for the same period in 2005.

I would now like to turn to a key accomplishment of the quarter. Idaho Power filed its updated integrated resource plan with the Idaho and Oregon Public Utilities Commissions. The IRP, which we have begun communicating to our customers as the energy plan for the future, is produced every two years and is a collaboratively developed plan for addressing utilities load and resource balance over the next 20 years. The plan has two primary goals: the identification of the resources necessary to serve the growing demand for electricity and the proper balance of cost, risk and environmental concerns in developing those resources. We also have supporting goals of giving equal and balanced treatment to both supply side resources and demand side programs, meaningful public involvement in the process, the exploration of transmission alternatives and an evaluation of advanced coal technologies.

The energy plan for the future serves to highlight the major challenges and opportunities that lie before us, as we continue to focus on our core business. A strong customer growth in Idaho Power's electric service area is providing ample opportunity for reinvestment in the utility business we have been in for 90 years. Hand in hand with this focus is our effort to streamline the overall business, by monetizing endeavors that have been consuming capital, earnings and effort, without a commensurate financial return.

In this regard, the sale of IDACORP Technologies during the third quarter was a key development. And in a moment, Darrel will speak further about the sales impact on our earnings.

Further evidence of our progress was the October 12th agreement to sell telecommunication subsidiary, IDACOM to American Fiber System, a transaction that we expect to complete as early as the end of this year, subject to regulatory approvals.

These sales will enable us to focus on the higher priority capital requirements at Idaho Power and they support our commitment to this direction.

I'll now turn the discussion over to Darrel and I look forward to entertaining your questions later in the call.

Thanks, LaMont and good afternoon, everyone. Today I will spend some time going over the key earnings drivers fro the third quarter. I'll also cover cash flow, short-term debt positions at IDACORP and Idaho Power, the results of our IRS tax audit and finish my discussion with a look at the 2006 key operating and financial metrics. We then look forward to responding to your questions.

The earnings per share for each business unit have been included in our earnings release issued earlier today. The gain on the sale of IDACORP Technologies is classified as discontinued operations and added $0.27 per diluted share after tax to the consolidated result. Idaho Power's earnings increased from $21 million to just over $30 million. These results were impacted by the following. Customer growth and increased usage due to warmer weather, increased revenues $7.9 million. Customer numbers grew by approximately 15,700, or 3.5%. And cooling degree days increased 9.9% quarter-over-quarter. General business revenues decreased $35.7 million due to changes in rates effective on June 1st. Earnings were positively impacted by a decrease in other operation and maintenance expenses of $3 million, related to the reversal of accrued Federal Energy Regulatory commission fees resulting from a court judgment finalized in September.

Turning to cash flow on short term borrowings, for the first nine months of 2006, cash from operations increased approximately $49 million compared to 2005. The increase is primarily attributable to changes in working capital accounts and increased net income. At the end of September, 2006, IDACORP's short-term debt balance was $6 million, down $39 million from the end of June. The decrease is largely due to the use of proceeds from the sale of IDACORP Technologies to pay down short-term debt. Idaho Power had $27 million of short-term debt at the end of September, up from zero at the end of June. This increase reflects the increased net power supply costs noted earlier, combined with the increases in capital spending.

I would now like to move onto updating you on the status of our 2001/2003 Internal Revenue Service examination and the capitalized overhead issue.

In October, the IRS issued its examination report and assessment for those years. We settled all issues with the exception of Idaho Power's capitalized overhead cost tax method. As we have previous discussed, the IRS has disallowed the capitalized overhead cost method for uniform capitalization. We do not agree with the IRS conclusion and will be appealing the issue. We will file our formal protest later this month and make a deposit of the disputed tax with the IRS to stop the accrual of interest and enter the appeals process. While we cannot predict the timing or outcome of this process, we believe that an adequate provision for income taxes and related interest charges has been made for this issue.

I'll now update you on the key operating and financial metrics for 2006. These are also shown on the earnings release issued earlier today.

Our current estimates for operation and maintenance expenses are still expected to be in the range of $250 to $260 million. Should it be determined that we are required to write off the approximately $2 million of deferred internal expenses related to the proposed Grid West Regional Transmission Organization in the fourth quarter, we could slightly exceed the upper end of our range.

Our range of capital expenditures is expected to increase to $210 to $215 million. The increase and projected capital expenditures is due to increases for our gas [speaking] facilities, land purchases associated with our re-licensing efforts that have been accelerated into 2006 and increased customer connection expenditures.

As we look forward to 2007 and our new three-year capital spending forecast, we do expect to see an increase in the level of capital in response to the requirements of our 2006 integrated resource plan that LaMont has previously discussed. We will update you on this level of spending in our end-of-the-year earnings release call.

We have tightened the range of expected hydroelectric generation that we anticipate to produce for 2006 to between 9.0 and 9.2 million megawatt hours. Through the first nine months of the year, we have generated approximately 7.7 million megawatt hours, which is a 60% increase over last year. This represents approximately 85% of our total estimated hydroelectric production for the year. The estimated total of hydroelectric generation for the year is based on the assumption of normal precipitation and normal operating conditions through the balance of this year.

We have also revised the combined contribution from IDACORP Financial and Ida-West Energy, net of Holding Company expenses, to be between $0.15 and $0.17 per share. The slight increase is a result of better-than-expected performance from Ida-West Energy due to better than expected hydro conditions at its operating facilities.

Our effective tax rate at IDACORP and Idaho Power Company has not changed from our previous estimate. We will provide 2007 operating metrics at our year-end earnings call.

That concludes our prepared remarks and now we would like to respond to your questions.

Thank you. Ladies and Gentlemen, we will now begin the question and answer session. [OPERATOR INSTRUCTIONS] And our first question will come from Paul Ridzon of Keybanc.

Good afternoon, guys. How are you?

Hi, Paul.

Hey, Paul.

The $3 million FERC reversal, is that a pretax or after tax number?

That's a pretax number.

And what period was that related to, those accruals?

2003 through this year.

And --

Did you get that, Paul?

Yes.

Okay.

When should we see executive comp hit? Has that been flowing through the year or is that a fourth quarter item?

You want to clarify your question, Paul? You mean executive comp in what regard?

Incentive comp. I assume --

Okay. We accrue incentive comp throughout the year and as metrics change, related to the incentive compensation and then we change the accrual accordingly. So, we have been accruing pieces of that and there will be accruals throughout the balance of the fourth quarter.

And then on the new transmission that you're booking. What was the impact of that on the quarter?

Well, you're referring to the [oat] filing; is that correct, Paul?

Yes.

I don't know if we -- I'm not sure we have that right now. We don't have that information readily available to us right now. We can get that information for you though.

But you have started booking that, correct?

We are booking a component of that and reserving a component of that. That's correct.

And the higher capital as a result of the new IRP, how will we fund that?

Very good question. As you know from a standpoint of where our current historical cash flow from operations has been, we expect to finance the increased capital from a combination of both internal generated cash, as well as externally generated resources. And we are going to be looking at a number of different financing opportunities there to fund that increased capital spending. And we will be in a position to talk about that more when we have our end-of-the-year call, when we have an opportunity to talk about what that increase in forecasted capital spending will be.

And then lastly, taxes other than income seem to have improved. I was just wondering what was driving that?

They were down a little bit. And that's based on changes in the property tax assessments in the state of Idaho that the Legislators passed back in August. And so, we got some small amount of property tax relief that is reflected in that accrual through September.

And that should be ongoing then?

Yes.

Okay. Thank you very much.

Paul, let me just qualify that. I mean, what the Legislators did was they reduced the property taxes and increased the sales tax. And the way our sales tax flows through, it's a combination of both O&M and capital. So, property taxes generally run through the expense line. So, you'll see the increase in sales tax come in other areas.

There's no free lunch.

That's right.

Okay. Thanks.

[OPERATOR INSTRUCTIONS] Our next question comes from Steven Gambuzza of Longbow Capital.

Good afternoon.

Hi, Steve.

In the earnings release, it mentioned that there was an increase in other revenues of $7 million and I think it said related to the end of a regulatory amortization?

Right.

Could you explain what that is?

We'll have Lori Smith kind of respond to that for you.

Hi, Steve.

Hi.

What we have there is the discontinuation of two settlements that were previously collected and [raced] and amortized at the same time. So, those completed in the first quarter of 2005, I believe, 2006. And so, you're just seeing that amortization going away. The offset to that is actually in general business revenues so the net impact to the income statement is zero.

Okay. So, that was not a driver of increased earnings in the quarter?

No, it wasn't. We just wanted to identify it so people could see that increase in miscellaneous revenue.

So, really the rise in other revenues was offset in the decline in general revenues?

Part of it, yes.

Okay. And then I was wondering if you might just be able to clarify some of your comments in the opening remarks about the mixed service cost issue? It sounded like that you're going to be making some deposit with the IRS. That you're taking an accrual, but you're continuing to litigate the matter. I was wondering if you could just kind of clarify exactly what's at stake here, in terms of cash flow implications?

Sure. I'll start and I'll see if we answer your question and then go from there. And this not only an Idaho Power issue, as it relates to a utility industry issue. And we've talked about this before on this call. So, it's not just an Idaho Power issue. The Service has disallowed the method that we were using, which we believe was a straight forward method. But they have come out and disallowed it from an industry perspective and not only just for us. So, as part of that, we are going to post a deposit. The main reason we're posting the deposit is because we don't want to be subject to any, what we believe are the higher rates that the Service provides for us. So, we're going to post that and go through the appeals process. Concurrently with that though, we have filed our 2005 return with a different method. It doesn't create the same deduction as the old method did, but it does provide a deduction of a lesser amount. So, we have filed that and so as we work through that appeals process, that would have potentially an offsetting impact to the method that we are currently filed under.

And so, when you post this deposit, it will show up on your balance sheet as an asset? As like a receivable from the IRS?

It should show as a reduction, basically to our accrued taxes.

And roughly how much is the deposit?

It will be $45 million.

Okay. Thank you very much.

You bet.

[OPERATOR INSTRUCTIONS] And now we'll hear from David Thickens of Deephaven Capital.

Good afternoon.

Hi, David.

How are you?

Good.

Can you talk a little bit about your ability to continue to find investments in the affordable housing space? Where you are in that versus plan? And also, kind of what is the level that you need to make on an ongoing basis to hold the earnings level flat over time? I mean, I realize that usually these investments generate tax credits over 10 years and you're continually rolling investments off and have to layer new ones in to keep the level flat.

Right. David, we've got Steven Keen here with us who is our recently appointed Treasurer and past President of IDACORP Financial. So, we're going to ask Steve; he'll address that comment for you.

Thank you.

You bet.

Thanks, David. I'm not sure we have a number that tells you the exact amount we would need to invest to [levelize] our return. And really our focus is to make those investments match up with whatever the need might be of the whole corporate family, on a go-forward basis. So, that's something we monitor really quarter by quarter and year by year, as we look at what we're going to spend. But I would say there have been improvements in that market, from our perspective. That yields are heading back up and we haven't really seen a downturn in the availability of options. Certainly the rates have dropped a bit lower in the last few years and as a result, we had invested a little less than we had previously. We see that there's still plenty of opportunity there. There's also opportunities in the energy sector for new credits that have come up; wind credits and other types of things. And we look at all of those options and we weigh which ones fit our portfolio the best. And I would just say there are plenty of opportunities out there to meet the needs that we see going forward.

Okay. Thank you.

Thanks, David.

[OPERATOR INSTRUCTIONS] We'll hear from Dar Zango of Demmer Lucas.

Hi. I just had a follow-up question to the IRS tax issue. In the Q, it looks like the IRS had assessed a tax liability in the amount of $45 million. I'm just wondering; how do you plan on proceeding fighting this? And if you do end up having to make this payment, how do you plan on funding it?

That's a fair question. This is Darrel. We will fund that out of operating cash and if we have to, we'll use the commercial paper facility to help fund that in the short term. We hope to resolve this sometime in 2007 and so we will continue to work through, with our advisors and working through the IRS appeals process and reach resolution. We believe that the Service, when they changed the rules were wrong. We believe our method was in accordance with the results that they had provided and so we're going to work through the process.

And exactly how does the process sort of ensue from here? Meaning you'll appeal it and then what?

I'm going to have Gene Markerro respond to kind of walk you through where our next steps go.

Thank you.

He's our Tax Director.

Yes, if we were unsuccessful at the appeals level or not as successful as we'd like, our next step would be litigation. But until the appeals process starts, we can get our feet wet on that and see where it goes. But that's really an unknown at this point.

Okay. Thank you.

You bet. Thanks, Dar.

And we have no further questions let in our queue at this time. Mr. Spencer, I'll turn the conference back over to you.

Okay. Well, thank you. We would like to thank you all for your continued interest in IDACORP and our third quarter earnings. And we hope to see many of you at the financial conference next week. So, good-bye.

Thanks everybody.

This does conclude today's conference call. We appreciate your participation. You may disconnect at this time.