Idacorp Inc (IDA) 2010 Q2 法說會逐字稿

Good day and welcome everyone to the IDACORP second-quarter 2010 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.IDACORPInc.com. (Operator Instructions).

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

Good afternoon everyone. Welcome to our August 5 second-quarter 2010 earnings release conference call.

We issued our earnings release before the markets opened today, and that document, along with our SEC Form 10-Q, is now posted to our IDACORP website at www.IDACORPInc.com.

We will be using a few slides to supplement today's call, and these are also located on our IDACORP website. We will refer to specific slide numbers as we work our way through today's presentation.

Now, moving to Slide 2. On the call today, we have LaMont Keen, IDACORP and Idaho Power President and CEO, and Darrel Anderson, IDACORP and Idaho Power Executive Vice President of Administrative Services and CFO. We also have other individuals available to help answer your questions during the Q&A period.

Before turning the presentation over to LaMont, I'll cover a few details with you. First, our complete Safe Harbor statement is on Slide 3. Our presentation today contains forward-looking statements and it is important to note that the Company's future results could differ materially from those discussed. While these forward-looking statements represent our current judgment of what the future holds, these statements are also subject to risks and uncertainties that may cause actual results to differ materially from the statements being made today. As a result, we caution you against placing undue reliance on these forward-looking statements which reflect our opinion only as of today. A more complete discussion of factors that could cause future results to differ materially can be found in our filings with the Securities and Exchange Commission, which we encourage you to review.

Referring to Slide 4, I'll briefly discuss the financial results from today's earnings press release. Second-quarter 2010 net income attributable to IDACORP was $39.2 million, $11.7 million more than last year's second quarter. Year-to-date net income attributable to IDACORP was $55.3 million, $8.9 million more than the first six months of 2009. Idaho Power's second-quarter 2010 net income was $38.8 million compared to $26.3 million in the second quarter of 2009, while Idaho Power's year-to-date 2010 net income was $57 million, which was $11.4 million greater than the same period in 2009. IDACORP earnings increased by $0.24 per diluted share quarter-over-quarter to $0.82 per diluted share and by $0.16 per diluted share on a year-to-date basis to $1.15 per diluted share. As indicated in today's earnings press release, our current full-year 2010 earnings guidance remains in the range from $2.65 to $2.80 per diluted share.

Now, I'll turn the presentation over to LaMont.

Thanks, Larry. Welcome to our call participants. We thank you for your interest in IDACORP.

I am pleased with the earnings results for the second quarter that reflect the positive impacts of our tax accounting method change relating to repair deductions. Darrel will speak to this in greater depth later on in the call. However, I wanted to note that this method change is beneficial for our customers and our owners, as it allows us to preserve the deferred investment tax credits for future use.

Operationally, mild temperatures and late spring rains contributed to lower energy sales, most notably among our irrigation customers, which adversely impacted our second-quarter financial performance. Only 107 cooling degree days were recorded in the second quarter this year. This is nearly a 50% drop from the 208 cooling degree days we experienced during the same period last year. July, however, saw a return to more normal summer temperatures.

Our hydroelectric generation estimate for 2010 has been revised since our last update in May. At that point in time, we expected between 6.5 million and 8.5 million megawatt hours of hydro generation for the year. Based on actual generation through June and estimated generation for the remainder of the year, we now predict the annual range to be from 7.0 million to 8.0 million megawatt hours, compared to 8.1 million megawatt hours for 2009.

Several rate actions in Idaho and Oregon occurred during the second quarter which we have previously disclosed that will provide ongoing benefits to the company. I am also pleased to report that the Idaho rate settlement resulted in a benefit for Idaho retail customers in the form of a PCA rate reduction.

Economic conditions in Idaho Power's service area remained weak during the quarter. While there are some indicators of improvement, overall economic conditions in the service area have not recovered from the recession. In June, State of Idaho economic officials reported that they were seeing signs that the state had navigated through the worst of the recession with modest recovery beginning to emerge in some areas. While still high, state unemployment numbers have declined and were 8.8% in June, down from 9.5% in February.

Additionally, we experienced some modest growth in customer numbers with over 500 new customers requesting service year-to-date through June. Obviously, uncertainty still exists about when and how fast the regional economy will recover. But Idaho Power, IDACORP's core business, continues to do its part to help our region be prepared for recovery and to support economic development.

Referring now to Slide 5, accordingly, Idaho Power continues to expand its generation and transmission portfolio. In June, we received a permit to construct from the Idaho Department of Environmental Quality and began construction on our 300 megawatt Langley Gulch gas-fired power plant. We are still on schedule for it to become operational in 2012.

Additionally, in June 2010, we filed with the Idaho Public Utilities Commission for approval of a 20-year agreement to add up to 20 megawatts of additional solar energy to our mix. These milestones, in addition to continued progress on our Boardman to Hemingway and Gateway West 500 kilovolt transmission project help ensure we fulfill our mission of providing reliable, responsible, fair priced energy today and tomorrow.

Our automated metering infrastructure rollout also continues. At the end of June, we were approaching the 60% milestone for having meters installed at customer locations throughout our service area, a total of approximately 278,000 meters. By the end of the three-year project, in December 2011, we expect that nearly 500,000 smart meters will have been installed. This technology will become the foundation for the smart grid, which we continue to develop with support from the $47 million Department of Energy grant.

With that, I'll now hand it off to Darrel Anderson, who will update you on our financial results for the quarter.

Thanks LaMont. Good afternoon everyone. Today, I will discuss the reconciliation of earnings from second quarter 2009 to the second quarter 2010, our current liquidity positions at IDACORP and Idaho Power, the 2010 key operating and financial metrics and finish with a discussion of our current income tax projects. After that, we look forward to taking your questions.

Larry already gave you the quarter-to-quarter and year-to-date result comparison, so let me spend a little time talking about the major second-quarter drivers.

On Slide 6, we present a reconciliation of net income attributable to IDACORP from the second quarter 2009 to the second quarter 2010. This shows an increase in net income from $27.5 million to $39.2 million. Idaho Power's operating income declined largely due to reduced sales volume and the non-recurrence of an Oregon power cost deferral. Rate and regulatory changes, combined with reduced sales volumes, accounted for a $5.8 million reduction in operating income.

Sales volumes were less, largely due to the mild temperatures, increased precipitation, economic factors and conservation. The reduction in the Oregon excess power cost deferral recorded in 2009, which did not recur in 2010, accounted for $6.4 million of the operating income decrease.

Based on Idaho Power's current estimate of 2010 return on equity in the Idaho retail jurisdiction, we do not expect the need to amortize the additional accumulated deferred investment tax credits for 2010, as allowed under the Idaho settlement agreement. Thus, the $4.5 million of amortization recorded in the first quarter of 2010 was reversed in the second quarter of 2010. Based upon the Idaho settlement agreement, if Idaho Power does not utilize additional amortization for 2010, it will have $25 million available for use in 2011.

Bridger Coal Company earnings were $2.6 million more than second quarter 2009, primarily due to the change in coal pricing and an increase in coal deliveries. The $27 million net decrease in income tax expense was primarily due to the $25.2 million Idaho Power repairs method change that I will discuss later.

I'll now discuss IDACORP's liquidity for the first six months of 2010. Cash flow from operations improved $77 million to $187 million from year-to-date June 2009 to 2010. The increase is primarily the result of collections related to the PCA and PCAM that increased cash flow by $34 million. Increased collections of 2009 year-end accounts receivable, including unbilled revenues, added an additional $22 million to cash flow, an increase of $16 million related to payments in 2009 for power purchases in 2008 and a 2009 refund of $13 million to Idaho Power's customers made pursuant to an open access transmission tariff, FERC order, did not recur in 2010, also increasing operating cash flow.

Cash used for investing activities was $149 million, an increase of approximately $52 million over the first six months of 2009. Idaho Power's net expenditures for utility plant, the additions to utility plant less the proceeds from the sale of utility assets, accounted for the majority of the increase.

Construction expenditures were partially offset by proceeds from the sale of $19 million of transmission related assets to PacifiCorp.

Key financing activities during the first six months of 2010 included the net repayment by IDACORP of $36 million of commercial paper. Commercial paper outstanding at June 30, 2010 was $17.5 million at IDACORP and none at Idaho Power.

Current revolving credit facilities at IDACORP and Idaho Power are $100 million and $300 million respectively, with $82.5 million available at IDACORP and $276 million available at Idaho Power at June 30, 2010. Both of these facilities expire in April 2012.

Looking forward, Idaho Power has $120 million of first mortgage bonds that mature in the first quarter of 2011. We are evaluating various financing alternatives for the repayment of this debt.

I'll now update you on the key operating and financial metrics for 2010 shown on Slide 7. These are also included in both the earnings release and our second-quarter 2010 Form 10-Q, which were both issued earlier today. Only the expected hydroelectric generation range has changed since our first-quarter disclosure in May. As LaMont pointed out earlier, the new range reflects actual data through June and our estimated range of generation for the remainder of 2010.

The last items we want to discuss with you are the impact of two tax accounting method changes at Idaho Power. In our second-quarter 2010 Form 10-Q, we discuss a tax accounting method change for repair related expenditures on utility assets.

In the second quarter, Idaho Power recorded an estimated $25.2 million net tax benefit related to the cumulative method change adjustment for the tax years 1999 to 2009. We have also included an annual deduction estimate in Idaho Power's 2010 income tax provision which resulted in a $3.6 million net tax benefit for the first six months of 2010. These amounts are net of an increase in our liability for uncertain tax positions of $10.9 million. The tax benefits were recorded following our prescribed regulatory accounting for tax differences of this type. We intend to make the repairs change in the third quarter when we file IDACORP's 2009 federal income tax return. The cash benefits associated with the method change are recognized through offsets to current tax payments.

Additionally, as part of IDACORP's 2009 Internal Revenue Service examination, Idaho Power and the service continue to work jointly on the impact of IRS guidance related to electric utility uniform capitalization methods. Initial estimates indicate that the potential income and cash benefit associated with the settlement of this matter could be in excess of the amounts recorded in the second quarter under the repairs method change I discussed earlier. We expect that the examination of this method will be completed during the third quarter. However, the ultimate timing of final settlement with the Internal Revenue Service and thus recognition of the income and cash impact has yet to be determined and are not reflected in the 2010 annual earnings guidance range.

This concludes my financial update. Now we would like to respond to your questions.

(Operator Instructions). Paul Ridzon, KeyBanc.

Good afternoon. How are you? I'm just looking for some clarification on these tax items. I don't -- in your reconciliation, I don't see where the $10.9 million liability book flows through.

What we did, Paul, as it relates to the $10.9 million, the amount that we recorded was net of the uncertain tax provision amount of $10.9 million. So the gross amount of the benefit, less the $10.9 million, is what we reported as part of the $25.2 million and the $3.6 million that we recorded for the first six months of the year.

So if you were to think about it in the terms of we had -- what would arguably be a gross benefit, if you take both the current six-month amount plus the cumulative effect amount, you come up with a number that's pretty close to $40 million, less the $10.9 million gets you to the net benefit that we reported to both the $3.6 million as well as the $25.2 million.

Does that mean the repairs deduction is now closer to $35 million?

That would say that the cumulative effect gross component would be in the range of $35 million for the cumulative effect piece.

For the repairs?

For the repairs, that's right.

Is that $35 million -- have you reserved anything for a refund to customers? Have you talked to the Commission about this?

Ok, on this particular one, we -- our uncertain tax position component reflects our best estimate of a number of different factors. As it relates to this item, we believe it's included as part of our settlement that we reached with the Commission kind of an all-in approach. This is one of the things that we had been considering as we look forward to the settlement as one of the items we were assessing at the time.

Then on the uniform capitalization, you're saying that could be bigger than $35 million or $25 million?

We believe it could be bigger than even the gross amount that we have reported; it could be bigger than the $35 million.

I think those are my questions. Thank you.

Brian Russo, Ladenburg Thalmann.

Good afternoon guys. Just to clarify again on the tax repair study so when or if -- when does this -- the gross benefit or the net $25.2 million and the $3.6 million, when does that flow through cash flow so that you get the cash benefit for that?

What we have done since -- we've been working on this for some time. As we looked at our estimated tax payments that we normally have to make every quarter, we made certain assumptions around this project based on the cash that we would otherwise be required to pay. We, over time, have basically used those to offset our estimated tax payment. So for the most part, not entirely 100%, most of that cash has allowed us to offset those payments.

One of the things you -- one of the areas you see that in are a couple of things. I just want to discuss that a little bit. As I reported earlier, we are sitting on no commercial paper outstanding at Idaho Power today. We've seen a reduction in our commercial paper at IDACORP. While all at the same time to date we've spent just a little over $100 million on Langley Gulch, which in all of those cases we haven't had to go out and fund, so these projected benefits have helped us -- helped fund some of those things kind of in real-time. So in relationship to the repairs piece, that cash, for the most part, it's been reflected through cash.

Now, I will say, as it relates to the uniform capitalization project, we haven't made those same assumptions because we are still working through with the service on that issue. So we didn't have the same level of comfort on doing that, and so we haven't made any of those assumptions with respect to that project for both cash and earnings.

So I guess, in the third quarter, you might record the repair change, both the tax benefit and the cash benefit?

You are talking about the repairs?

Yes, the ongoing tax study that you're doing.

Right. There is potentially some additional cash benefit that will come, but the majority of the cash benefit has been recognized really through reduced tax payment as part of our ongoing estimated tax payment.

Okay, so is that -- does this carry over into 2011 as well?

We have estimated that, as part of our discussion, we made an estimate for the first half of the year, a net estimate, of about $3.7 million net benefit for the first half of the year as our estimate for the impact, the current impact for 2010. So, again, a lot of that is dependent upon facts and circumstances that we have to assess on an ongoing basis. But obviously, for 2010, that represents the first half of the year based on an annual estimate. So that's probably -- it's fair to say that's about 50% of what we would expect to see for 2010. 2011 will be a different set of circumstances that we would expect to continue to have some ongoing benefit.

Okay. You mentioned one indirect benefit, and that is the reversal of the ADITCs, which then you could possibly use next year or even incorporate maybe into your next rate case filing for new rates in '12. Are there any other indirect benefits that you can discuss? Will this impact shareholder equity, which in return when calculating 9.5% floor off that, will that -- could that bump up your 2010 guidance and then carry over into a higher equity balance in 2011 as well?

Well, the good news about the repairs piece, as well as under the assumption we get a positive outcome on the uniform capitalization methodology, in our particular case, it creates both earnings and cash. So those are good things. So a couple of things it does, it does allow us to evaluate our need for equity, because it does help us to strengthen the balance sheet that way. It also provides cash to help fund ongoing capital requirements.

As you know, under the ADITC, that we get earnings, we get equity, but we don't get cash that comes along with it. So in this particular case, what you saw in the second quarter is we traded off the ITC in essence for a tax benefit, there are still tax-related benefits, but we ended up getting -- we were able to keep the cash benefits associated with the repairs deduction.

Just lastly, if I could? Remind me how much have you spent on Langley Gulch thus far? If I heard you correctly, some of these tax benefits used to pay off some of your short-term debt or letters of credit, so in theory you've already paid for about one-third or something of Langley Gulch?

We've spent, through June 30, about $102 million on Langley Gulch. So this last quarter through March, we've spent $77 million, so we spent just about $30 million this quarter. We have been able to pay down short-term borrowings while at the same time continuing to manage our capital program. So we are about -- our current project estimate there is $427 million, which was our not to exceed number that we've provided to the Commission. And so we are on track, on schedule, with respect to that project.

Okay. So when we look to 2011 and your external capital needs, if we were to just assume some sort of 50-50 cap structure on the $400-plus million, it looks like you'd only have about $100 million left of equity needs that could potentially be offset by this upcoming tax repair study to be concluded in 3Q?

I think, depending on the magnitude of it, it will be helpful in supporting our cash needs as well as any equity needs that we would do. Now, whether it happens to meet all of our needs, we haven't determined that at this time.

Thanks a lot.

Emily Christy, RBC Capital Markets.

Good afternoon. A couple more questions on the taxes if I can. You said that you had a view of this issue when you settled with the Commission for these last couple of years. Is this something that the Commission also then had a view on? I want to make sure I have that right.

I think it was brought up in a general sense as part of the discussion and the fact we were looking at lots of different ways that we could -- allow us to keep moving the business forward while at the same time providing some certainty as it relates to rates for the customer. So it was one of a couple of different things in general terms that we'd shared with them.

So the magnitude isn't going to be a surprise to them in any way really?

I don't believe so.

Backing out this -- the tax matter from this quarter, and then the next one, the next big lump sum coming up, what do you expect your ongoing effective tax rate to be?

That's a great question. I think, last quarter, we talked -- or we talked about eliminating the range of our effective tax rate for a lot of these reasons because we knew we had a fair number of these projects that were ongoing that would potentially have an impact. We just had a real difficult time estimating what it was because of the flow-through nature of our tax position here in Idaho. So over time, I think we would expect to get back to what I would call some more normal tax rates depending -- and we'll have to define that down the road. But we have to get through these tax projects and understand the ongoing benefits.

One of the things I think is important to note, when we do have our next rate filing, a lot of these items will get trued up as part of that filing process. So we do have the ability to maintain those benefits until they go into the next time, at which point in time this stuff will get trued up and take some pressure possibly off of other -- where we might have other price pressures, and so that will all have to be taken into account as we assess when that next filing would be.

So back to your original question as to at what point in time will we get back to a -- what will be our ongoing effective rate, I guess I would probably be inclined to be able to give you more certainty on that probably when we get on the other side of this uniform capitalization method.

Ok, then switching gears for a minute, the weak demand for the quarter -- can you just remind me how that flows through? You are in a decoupling pilot but the impact was great pretty pronounced. Can you just remind me how that's going to flow through the fixed cost adjustment mechanism?

What I'll do is I'll probably have Greg Said, who heads up our Regulatory side, talk a little bit about this. But you are right. We actually have a couple of mechanisms in place that help us manage changes in loads. That's -- obviously the fixed cost mechanism is part of that, and also the low growth mechanism is another component of that. So I'll ask Greg to speak to maybe what we see kind of going forward and how we see that playing out.

Yes, the fixed cost adjustment mechanism looks at what's considered typical use per customer, and then looks at the actual use per customer as it goes forward in time and makes a comparison of the actual use per customer to that normalized use per customer. So as the customer demands go down -- and obviously we don't have the opportunity to recover all of our fixed costs, and so the fixed cost adjustment allows for recovery of those fixed costs that aren't recovered as a result of customer lower use.

Then similarly, as was mentioned by Darrel, the low growth adjustment mechanism in power cost adjustment also looks at deviations in total consumption by customers to adjust our power supply expenses to reflect when loads decline, the revenues that aren't received as a result of that load decline. There is an adjustment within the power cost mechanism to allow for recovery of those costs that aren't -- that wouldn't -- or haven't been recovered as a result of a load decline.

Okay, thank you very much.

Darrel, if I could -- this is LaMont. Before we get another question, a couple of you have touched on the issue of the tax method change of the shareholder benefits versus customer benefits. I just want to clarify and make sure you understand that, in my opinion, most of the benefit of the tax method change will go to our customers because what has happened is it has supported our earnings in 2010 in lieu of us using additional investment tax credits to do that. Having that be the case, then those additional investment tax credits that we would've utilized in 2010 are preserved for their benefit and will flow through to them as customer benefits in subsequent years. So yes, it's going into earnings today, but it is preserving for them those accelerated ITCs for their future benefit, really not to shareholders to a great degree.

[John Ali], Decade Capital.

I apologize for rehashing the tax issue, but there were some phone issues when Brian was getting his question answered. But I just wanted to make sure I understood it. That $35 million for the repairs deduction, or around $30 million, that comes in this year. Is there more in subsequent years?

Right, the part you might have missed is we booked two pieces of this in the second quarter. One piece was the cumulative effect component for 1999 to 2009, and then we also recorded an estimate for the first half of 2010, which the net number in 2010 was approximately $3.6 million. Again, that's our estimate for the first half of the year. As we go into 2011, again, we will just have to kind of reassess our spending and what we are spending the dollars on, determine how much that is going forward. But we do anticipate ongoing benefit, again, up until the point in time that we have our next rate proceeding, which in time these numbers, along with everything else, gets reset, and we go from there. But at least for the time being, we do anticipate some ongoing benefit from this method change.

Great and as far as the uniform capitalization method goes, do you think that will be at least as big as the repairs deduction? When will that flow into your cash flow?

That is an item that is really kind of up to timing of our deliberations with the Internal Revenue Service. That is an ongoing effort underway today, and so we aren't able to predict when that will get recorded. And that's why we indicated that any impact of that item is not included in our current earnings estimate.

Understood and just so I am clear on it, the fact that you don't have to use the accelerated -- the ADITCs, that means you're basically going to hit the ROEs, the 9.5% ROE at a very minimum?

That is -- based on where we know today, we would expect that we would be within that debt band as it is today between the 9.5% and the 10.5% in light of where we stand with our earnings range today.

So being that it's still pretty early in the year, you could even exceed that?

We could.

We have a follow-up question from the line of Paul Ridzon, KeyBanc.

Is the repair study done? I thought you had concluded that and had moved on to uniform capitalization. But then, in response to another question, it sounded like there could be additional -- as you look closer at repairs, it could be more?

We have completed our analysis of the repairs, which is why we ended up recording it in the second quarter versus where we anticipate it possibly would be done in the third. We had completed it and it became probable an estimatable, which then required us to record it. There could be some minor modifications between now and the time we file that with any tax item you may have true ups between what you're estimating and what you actually file. So there could be some minor adjustments. In general, that's a pretty good -- we feel our best estimate that we had, and it was solid enough that we felt we needed to record it in the second quarter.

How often do you do your kind of true ups for the decoupling mechanism? Could some of the pain you felt in the second quarter for reduced load flow back later in the year, or whenever you do a -- I guess it's your fixed cost adjustment?

I will have Greg Said take that one.

We have monthly reporting of where we are at any given time, but the adjustments for rates occur once a year. So, it's really an end-of-year evaluation as to the full reduction in use per customer, or increase in use per customer, that is measured at the end of the year. In the meantime, estimates are made monthly as to where we are at any given time. But the final determination is made once a year at the end of the year.

Do you defer or accrue through the year, or are we going to see probably a positive true up in the fourth quarter?

We defer throughout the year.

Thank you.

(Operator Instructions). This concludes the question-and-answer session for today. Mr. Keen, I will turn the conference back to you.

Thank you all for participating on our call this afternoon, and for your interest in IDACORP. Have a good day.

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