Idacorp Inc (IDA) 2010 Q4 法說會逐字稿

Good day, and welcome, everyone to the IDACORP's year end 2010 conference call. Today's conference call is being recorded and 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.

Thank you Kendall and good afternoon, everyone. Welcome to our February 23, year end 2010 earnings release conference call. We issued earnings release before the markets opened today, and that document along with our SEC Form 10-K 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'll 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 questions during the Q&A period.

Before I turn the presentation over to LaMont, I'll cover a few details with you. First, our 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 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 discussion of factors that could cause future results to differ materially can be found on slide 3 and 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. Fourth quarter 2010 net income attributable to IDACORP was $20.4 million, $3.1 million less than the previous year's fourth quarter. 2010 net income attributable to IDACORP was $142.8 million, $18.4 million more than 2009. Idaho Power's fourth quarter 2010 net income was $18.9 million, compared to $25.9 million in the fourth quarter of 2009, while Idaho Power's 2010 net income was $140.6 million, $18.1 million greater than 2009.

IDACORP earnings decreased by $0.08 per diluted share quarter over quarter to $0.41 per diluted share, but increased by $0.31 per diluted share on a year to date basis relative to 2009 to $2.95 per diluted share. As indicated in today's earnings press release, we are initiating 2011 earnings guidance with a range of $2.80 to $2.95 per diluted share. And as a reminder, our 2011 guidance does not include potential benefits that could result from the settlement of the uniform capitalization tax method change. I'll now turn the presentation over to LaMont.

Thanks, Larry, and welcome to our call participants. We thank you for your interest in IDACORP. In the midst of the economic uncertainty that still exists nationally and in our service area, IDACORP recorded another year of growth and sound financial performance in 2010, as indicated in our earnings release today and in Larry's comments. We achieved these favorable results by keeping your Company financially strong while limiting price impacts on our customers during these challenging times.

Our 2010 Idaho rate settlement provided the foundation for our financial success last year. Importantly, however, our system operations, combined with income tax benefits derived from a tax method change for repair related expenditures, helped produce these financial results without the need to utilize additional amortization of accumulated deferred investment tax credits, as provided for in the settlement. No additional amortization of these tax credits was needed in 2009 or 2010, preserving these credits for the future.

The Idaho regulatory settlement continues in 2011 and again provides earnings support to the Company on electricity price benefits to our customers. Regulatory strategy is obviously important in a rate regulated environment, and we assess our options on an ongoing basis. The settlement does not allow the Company to file a general rate case request that would result in a general rate adjustment becoming effective before January 1, 2012. The settlement does allow the Company to seek rate changes related to certain matters other than a general rate adjustment. We believe the settlement also provides the opportunity for Idaho Power to file as early as June 1, 2011 for a general rate increase to be effective on January 1, 2012. We have not made a final decision on whether we would file a general rate case in Idaho on that date.

Operationally, our 2010 net increase in customers was modest, reflecting the local economy. It was nevertheless positive as our general business accounts grew by 2,146 for the year. Our system reliability continued to improve in 2010, and our diverse fleet of generation resources, combined with power purchase agreements, adequately provided the capacity and energy to meet our customers' needs. Mild weather and economic conditions led to reduced energy sales to nearly all customer groups, with sales to irrigation customers being the exception.

As we meet our customers' energy needs today, we also look forward and prepare to meet their needs tomorrow. We have active projects underway to expand both our generating fleet and transmission interconnections. And are preparing a new integrated resource plan, or IRP, a 20-year forecast of our customers' energy needs and supply options. We continue to meet with representatives from our customer groups and the communities we serve to better understand their needs and concerns. The new IRP is scheduled to be filed with regulators in Idaho and Oregon this summer.

Referring now to slide 5, construction on our new Langley Gulch combined cycle natural gas plant continues within our budget and on schedule to be operational in 2012. We also continue to pursue our 500-kilovolt transmission projects, Boardman to Hemingway and Gateway West. These projects will help meet our customers' energy demands and support economic expansion when the recession abates in our service areas.

Idaho Power's advanced metering infrastructure project also continues on schedule. As of December 31, 2010, we had installed approximately 343,000 smart meters; and by the end of this year, we expect to wrap up installation of 487,000 smart meters across our service area. This project will be the foundation for empowering our customers' access to information and the wise use of energy. It will also further augment our ability to improve system reliability and efficiency.

As we look forward to the balance of 2011 and beyond, we are working diligently to sustain the momentum of the success as experienced in recent years. That doesn't mean just a repeat of specific benchmarks, but a continued focus on financial stability, fairness to customers and an engaged workforce. I'll now hand it off to Darrel Anderson, who will update you on our financial report.

Thanks, LaMont and good afternoon, everyone. Today I will discuss key items that impacted our earnings results as compared to 2009; our current liquidity position at IDACORP and Idaho Power; the 2011 key operating and financial metrics; our income tax project relating to uniform capitalization; and finish with a discussion of our 2011 earnings guidance. After that, we look forward to taking your questions.

On slide 6, we present a reconciliation of IDACORP's net income from 2009 to 2010. This shows an increase in net income from $124.4 million to $142.8 million. Rate and regulatory changes combined with reduced sales volumes decreased pre tax earnings by $900,000. Sales volumes declined by 4% in all customer classes, except irrigation largely due to mild weather, economic conditions and energy conservation. Irrigation sales volumes increased 3.5% year over year, as low precipitation in the third quarter led to greater irrigation pump usage in 2010.

The increase in depreciation expense, which is a result of the acceleration of depreciation for the non-AMI meters and the increase in Idaho property tax expense combined to reduce operating income by $8.3 million.

The increased depreciation expense associated with the non-AMI meters is currently being recovered from customers. The year benefited significantly from Idaho Power's capitalized repairs tax method change, which resulted in a $41.5 million net income tax benefit being recorded in 2010. This is comprised of $32.6 million related to the periods prior to 2010 and $8.9 million of benefit related to the 2010 annual capitalized repairs deduction. Had these benefits not been recognized in 2010, we would have had up to $25 million of accumulated deferred investment tax credits available as part of our 2010 Idaho rate settlement.

Now I would like to turn the discussion to IDACORP's liquidity for 2010. IDACORP's cash flow from operations for 2010 was $305 million, an increase of $21 million over 2009. Changes in accounts receivable, unbilled revenues, income taxes, accounts payable and other assets and liabilities increased operating cash flow by almost $70 million. These increases were offset by a $60 million cash contribution to the Company's defined benefit pension plan. Cash used for investing activities increased to $86 million in 2010 relative to 2009. Idaho Power's net expenditures for utility plant, which are the additions to utility plant less the proceeds from the sale of utility assets, accounted for the majority of the increase. Included in this increase were expenditures related to the Langley Gulch power plant.

Through December 31st, 2010, the Company had incurred $206 million on the plant against the original estimate of $427 million. Construction expenditures were partially offset by proceeds from the sale of $19 million of transmission related assets to PacifiCorp.

Key financing activities during 2010 included Idaho Power's issuance of $200 million of long-term debt in August at historical favorable rates and IDACORP's issuance of $48.6 million of common stock from our continuous equity program, dividend reinvestment and employee plans. As of December 31, 2010, there were 1.2 million IDACORP common shares remaining under the continuous equity program.

Cash and cash equivalence at the end of the year totaled $229 million, compared to $53 million at the end of 2009. $120 million of the total will be used to retire Idaho Power first mortgage bonds that mature in the first quarter of 2011. Commercial paper outstanding at December 31st, 2010, was $67 million at IDACORP and none at Idaho Power. The revolving credit facilities at IDACORP and Idaho Power are $100 million and $300 million respectively, with $33 million available at IDACORP and $276 million available at Idaho Power as of December 31, 2010. Both of these facilitates expire in April 2012.

The three-year Idaho Power estimated cash requirements for construction excluding AFUDC for 2011 through 2013 is in the range of $775 million to $805 million. This is down more than $200 million from the three-year range of 2010 to 2012 reported a year ago, principally due to the expected completion of the Langley Gulch power plant in mid 2012, as well as reductions to expected ongoing routine capital expenditures.

Our financing plans for 2011 include the repayment of $120 million of long-term debt mentioned earlier that we expect to pay with existing cash on the balance sheet. While our plans and needs could change based on a number of factors, our equity needs for 2011 are not expected to exceed what would be the anticipated proceeds from our currently available 1.2 million shares under the continuous equity program and from our dividend reinvestment and employee plan.

I will now spend a little time talking about the uniform capitalization tax method change. The Internal Revenue Service and Idaho Power reached agreement on the method change during the third quarter of 2010, and Idaho Power recorded a tax benefit of $65.3 million for the method change adjustment related to tax years 1986 through 2009. Idaho Power has a current uncertain tax position liability equal to $59.7 million related to this method of change. This is $5.6 million less than the benefit recorded in the third quarter due to the recognition of current-year income tax expense from the reversal of this temporary difference.

While we have an agreement with the Internal Revenue Service for examination and tax return filing purposes, we are still awaiting US Congress Joint Committee on Taxation approval of this method, or approval of methods filed by other similarly situated companies before concluding that the new method is effectively settled for financial reporting purposes. We cannot predict when approval may occur, but certainly believe it is possible during 2011.

I'll now update you on key operating and financial metrics for 2011 on slide 7. These are also shown in both the earnings release issued today and the 2010 Form 10-K filed with the SEC earlier today. The Idaho Power operations and maintenance expenses are projected to be between $300 million and $310 million in 2011, compared with $294 million in 2010. Expected increases in expenses are a result of government mandated changes, modest increase in parallel expenses and increase in operating expenses at our thermal facilities.

Idaho Power's cash requirements for capital expenditures are expected to be in the range of $320 million to $330 million. This includes expenditures for the Langley Gulch power plant and other major projects. The expected hydroelectric generation range for 2011 is 7.5 million to 9.5 million megawatt hours as compared to our actual generation in 2010, of 7.3 million megawatt hours. This range is based in part on a National Weather Service report stating that La Nina conditions, including an enhanced chance of above-average precipitation in Idaho and the Snake River Basin, are expected to continue into Spring 2011. Finally, our non-regulated subsidiary earnings are expected to be in the range of breakeven to $3 million in 2011, consistent with our past couple of years' results.

Now I would like to turn to 2011 earnings guidance. As a basis and setting our 2011 guidance, I wanted to briefly review our Idaho rate settlement. Under the 2010 Idaho rate settlement, we continue to have the ability to utilize up to $25 million of accumulated deferred investment tax credits in 2011 to achieve a 9.5% return on year end equity in the Idaho jurisdiction. If Idaho jurisdictional earnings exceed 10.5% return on year end equity, we share the excess earnings equally between Idaho customers and shareowners.

With the settlement as a backdrop, we are initiating our 2011 earnings guidance in the range of $2.80 to $2.95 per diluted share. The guidance incorporates all of the key operating metrics that are previously discussed. However, it does not include potential benefits that could result from a final determination on the uniform capitalization tax method change. Operating income is expected to benefit from the full year impact of the base increases and other regulatory mechanisms that went into effect during 2010 in all jurisdictions.

As a result of these changes and benefits from our 2010 financing activities, our 2011 guidance includes the expected utilization of approximately $15 million of tax benefit associated with accumulated deferred investment tax credits. This compares to our 2010 result, which included approximately $33 million of pre-2010 repairs related tax benefits and none of the accumulated deferred investment tax credits that were available. This concludes my financial results. Now we would like to respond to your questions.

(Operator Instructions)We have a question from the line of Paul Ridzon with KeyBanc.

Under your settlement, what was your earned ROE at IP -- in Idaho in 2010?

Paul, this is Darrel. That number -- I don't have a specific number, but it's pushing about 10.3% or thereabouts.

You weren't into the sharing end?

No, we did not reach the sharing end in 2010.

And can you kind of give us a good way of thinking about the potential benefit that UNICAP could provide to earnings?

Yes. I'll give you a high level. Obviously we have not included any of the UNICAP benefits in our earnings range that we have provided. Under an assumption that the UNICAP settles as we have filed it, that -- we would expect that would go into earnings in 2011 in the year that it is completed. And then it would work its way through the settlement option, and obviously, if we were to recognize the entire amount, we would expect that would put us into the sharing mode.

Above 10.5%?

We would expect that should push us above the 10.5%.

And as we look at the midpoint, the 287 midpoint of 2011 guidance, is that a 9.5% ROE, or how should we think about that?

I think, because of what we're saying, we're using $15 million of -- approximately $15 million of ITC, that's under the assumption that moves us to the 9.5% in the Idaho jurisdiction.

Okay. Just any sense of visibility on when Congress could act?

I wish we knew that. If we had any more certainty, we would surely be sharing it, but we can't really control how Congress works.

But there was nothing negative you saw that forced your hand to exclude that from guidance, correct?

That's correct.

Okay. Thank you very much.

Thanks, Paul.

Your next question comes from the line of Brian Russo with Ladenburg Thalmann.

Good afternoon.

Hi, Brian.

Just could you comment on bonus depreciation and your review of that, and how that might possibly impact your rate base and your upcoming general rate case?

Sure, Brian. This is Darrel. I'll start and if I can't get you all the way there, we've got Gene Marchioro, our Tax Director here. But I think that we are assessing the -- obviously the impact, the bonus depreciation and what it may have for us in both 2011 and 2012. We are assessing all of the aspects of not only from rate based implications, cash flow considerations, all of those things, and we're just basically right in the middle of doing that right now.

Obviously by adopting bonus, it does provide improved cash flow, because we are able to write off more of the assets that we would close. At the same time, it also does reduce rate base because of the deferred taxes that get set up so that's a consideration. We're continuing to evaluate that. And we will -- as we kind of go through the year, we'll keep you updated on where we're at with that.

Okay. And could you just comment on your dividend policy? I think you remained steady at $1.20 from the last dividend declaration. Just wondering what your views are on that considering you do have a below average payout.

Sure, Brian. LaMont will take that one.

Yes, hi. And as I've indicated previously, the Board of Directors reviews the Company's dividend policy on an ongoing basis and considers many factors. And although our earnings profile has improved, the Board has not elected to increase the dividend thus far in light of our capital needs, the current regulatory and economic environment and the desire to preserve our credit quality.

That said, the Board will continue to review our dividend level going forward and make adjustments where appropriate. The Board does recognize the need to balance a payout with retention, and we do understand that our payout has fallen below the industry standards.

Okay. And just -- I know you guys are deferring some revenue related to the hydro relicensing or deferring some of that capital investment. What -- can you quantify that? I guess that would be an additional future rate-based driver that you guys would file for recovery of once FERC permanently extends the licenses.

Well, Paul, Greg Said will answer this question. What we are doing is having the ability to collect on the CWIP component of some of the relicensing costs. I believe that's what you're referring to, I think. Is that right?

Yes.

Okay. We'll have Greg speak to that and clarify and make sure that's what your question was.

The construction work is in progress and accumulating (Inaudible) until the time the licenses are renewed and can be placed into the Company's revenue requirements. But we do have an agreement at this point in time to recover some of the AFUDC that's associated with CWIP prior to the point in time that those licenses are renewed. It's about $9.5 million, I believe.

Okay. And just on the general rate case, I think earlier you commented that you're still evaluating whether you'll file in mid '11. But how will Langley Gulch work? I know it's a pre approved project, but is the rate structure contingent on a general rate case filing, or how can all that play out over the next 12 to 18 months?

This is Greg again. We can either address that in a general rate case or what we have done with recent large plant additions, is we've had single issue rate cases associated with new generation compliance. So, there's actually a couple of ways that we can address it.

Okay. Thanks a lot.

Thanks, Brian.

Your next question comes from the line of Neil Kalton with Wells Fargo Securities.

Just a quick question on your rate strategy. So, sounds like you have the ability to file on June 1 for new rates beginning in early 2012, but you don't have to. So, at what point in time do you feel that you would need to have a filing in place? Would it be prior to year end? What are some of the factors that will determine when you file? What should we be looking out for I guess?

Neil, this is Darrel. First, one of the things if we're going to file a rate proceeding, we have to file a notice of intent, and that notice of intent is filed 60 days in advance of when we would -- anytime after that 60 days, then we could file. So, I think one of the things for you to be taking a look at is that notice of intent. As LaMont indicated in his comments, we can't file any sooner than June 1. You back that up, and that would suggest April 1 as a possibility of the notice of intent.

So, that's kind of the first potential milestone that's sitting out there for you to kind of keep an eye on. So, we're continuing to evaluate where we are right now in light of economic conditions in our service territory, our own needs and other things. So, we're kind of continuing to go through that evaluation process. But if I'm in your shoes, that's what I would be looking for.

Just as a follow-up with the rate plan expiring at year end, do you need to come back in for rates during this year, or could you kind of sit tight for awhile in theory?

Well, I guess I would -- I put it at the fact that as we're going into 2011, and we are looking to -- we are using an estimated amount $15 million of ITCs, which suggests that we're still not earning what we should be earning, and so that would just -- so there probably is the need there. The question is how much of a need and balancing with everything else that's out there.

Got it. Thanks.

Your next question comes from line of John Ali with Decade Capital.

I'm sorry. I was on mute. Good afternoon.

Good afternoon.

Just a couple quick questions. Did you guys bake in $15 million of ADITCs by backing into a 9.5% ROE or did you use a round number of $15 million?

It is our estimate based on what we think the estimated we would need in 2011 to get to the 9.5%, to get to the threshold of what the rate settlement provides for us.

Got you. Okay. But you still have an extra headroom of about $10 million worth of those in case anything moves south on you?

Yes. You're correct in that it does provide -- the additional $10 million provides us some down-side protection on things that maybe we're not anticipating today. Likewise on the upside, you also have that $15 million to work through before you can then go above the 9.5%. So, it does give you some level of a range that you can earn on, a pretty tight range.

So, you have some upside flexibility?

Yes, we do. We believe we both down-side protection and likewise, we also have up-side opportunity. Again, you have to work through the 15 -- approximately $15 million first.

And I apologize for this. My computer-based Web site is not working so well right now. What is the equity balance at year end at IPC?

It's about $1.4 billion, I believe. Let me just confirm that, but I think that's the number. Give us one second. I'll have an answer for you.

Certainly.

Total equity is sitting at $1.4 billion.

Great. And I guess the last question I have is, how much hydro help was baked into your estimate for this year versus normal.

Included in our estimate is the range that we have provided; the 7.5 to 9.5. So, there's a number within that range that we are using. And the thing we need to remind everybody is that because of the changes that took place in the PCA a year or so ago, a couple years ago where we shrank the volatility or the impact risk side of things, we're down to 95-5 sharing. So, the good news is we're projecting better hydro than we saw in 2010.

We don't quite get as much of that benefit that flows through that we might otherwise. At the same time, we also have the down-side protection in the event that the hydro didn't show up. So, the good news is we will have better water. If you take a look at the 10-K it does indicate that our deferrals aren't as high as they've been, which also can potentially provide some benefits back to our customers.

Okay. But is there a ballpark estimate of how much hydro help -- a penny, 2 pennies?

We haven't provided that.

Okay. Great. Thanks, guys.

Thanks a lot.

Your next question comes from the line of James Bellessa with DA Davidson and Company.

I'm assuming that if you receive the UNICAP benefit as you have filed, you wouldn't use any ADITC; is that correct?

That's correct, Jim. We would go through the threshold, and expect that everything else being equal, we would go through the ceiling also.

The Langley Gulch facility is expected to be completed mid 2012; is that correct?

That's correct. The contract provides for a November date. However, we have incentives in place to have the contractor complete it prior to our Summer season.

If you were to file on June 1 a rate case in Idaho, which would become effective on January 1 of 2012, how would you get recovery in Langley Gulch? You would have to wait until it's operating to start that portion of the return, or how conceptually would that work?

We've got a couple of different options. I'm going to have Greg Said, our VP of Regulatory Affairs address that, because we are still evaluating options on how we might pursue recovery of that. We'll have Greg speak to that.

If we had a forward test year. You could theoretically include Langley Gulch in that test year for 2012 and have recovery begin in January. However, that would kind of be atypical. Typically, you can't start recovering a return on a new generation facility until it's on line and used and useful. So, it would probably be more prudent to look at a rate change associated with Langley that was more aligned with when it came online.

The final question, in your press release, you put out this net income attributable to IDACORP table, reconciliation of net income for the year, and one line item is the change in earnings at Bridger Coal Company, $3 million. I tried to go back and see what nine months of the year was for that or anything like that. But I couldn't -- you don't break out what Bridger Coal Company earns, do you?

It generally shows up, Jim, as part of our equity and earnings line, it shows up on the Idaho Power. You can generally pick that up.

Should be a line item. Okay. I'll go back and check that out. Thank you very much.

You bet, Jim.

Your next question comes from the line of Jack D'Angelo with Catapult Capital Management.

Good afternoon.

Hi there.

Of that $1.4 billion of equity at Idaho Power at year end 2010, how much of that is in your Idaho jurisdiction; i.e., what's the denominator in the Idaho ROE calculation?

Right. That number moves around, and it's in a range -- it's on the high side. It would be probably north of the 95%. We generate -- let me step back. We normally talk about in the context business wise is about 95% or so of our business is in Idaho.

When we go to the actual allocation of equity and then we actually go into the allocation of rate base, there are different factors that are used. So, that number can range anywhere from 92% to the 96ish%. So, depending on the numbers, the factors that are included and there's a whole series of factors, it's not just one factor that's used in determining what the appropriate amount for that would be. So, I can't just say it's X percent, but it kind of moves around in that range.

Okay. So, that 10.3%, ROE you spoke about assumes somewhere from 92% to 96%?

It's our jurisdictional allocation for Idaho based on a series of factors.

Okay. Can you tell me what earnings were in your Oregon jurisdiction and what ROE you guys earned?

We don't have that number available right here handy with us. It's not a number -- the good news is it's improved because of the recent proceedings that we've had over there, but we don't have a specific number for Oregon.

Okay. Thank you.

Thank you. .

Your next question is a follow-up from the line of Paul Ridzon with KeyBanc Capital Markets.

Given the expected benefits from uniform capitalization, is there the potential for you to decline to take bonus depreciation and avoid the negative impact on rate base, or how are you thinking about that ?

It is a consideration because there is only so many assets that you can write off in the form of taking deductions. Bonus is another way of doing that, as is uniform capitalization, as is repairs.So, there are all ways that you can write off your bases and your assets. So, that is a consideration for us, but we also have to weigh the other factors of not only relating to the customer and [laying] the cash flow and those kinds of things. So, all of those are in consideration.

Is it possible, or is it just -- probably not likely?

I don't have an answer right now for you, Paul. We're still in the process of evaluating it.

Okay. Thanks again.

Thanks, Paul.

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

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

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