Idacorp Inc (IDA) 2011 Q3 法說會逐字稿

Good day and welcome everyone to the IDACORP's third quarter 2011 conference call. Today's 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, Stacey and good afternoon, everyone. Welcome to our November 3, 2011 earnings release conference call. We issued our earnings release before the markets opened 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 two, 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 will cover a few details with you. First, our safe harbor statement is on slide three. 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 three and in our filings with the Securities and Exchange Commission, which we encourage you to review.

Referring to slide four, I will briefly discuss the financial results from today's earnings press release. Third quarter 2011 net income attributable to IDACORP was $107.1 million, $39.9 million more than last year's third quarter. Year-to-date net income attributable to IDACORP was $157.7 million, $35.3 million more than the first nine months of 2010. Idaho Power's third quarter 2011 net income was $104.9 million, which was $40.2 million greater than the third quarter 2010, while Idaho Power's year-to-date 2011 net income was $155.4 million, which was $33.7 million more than the same period in 2010.

IDACORP earnings increased by $0.77 per diluted share quarter-over-quarter to $2.16 per diluted share and by $0.64 per diluted share on a year-to-date basis to $3.19 per diluted share. As indicated in today's earnings press release, our current full-year 2011 earnings guidance is now in the range from $3.35 to $3.45 per diluted share. Darrel will speak more about the guidance range later on the call.

I will now turn the presentation over to LaMont.

Thanks, Larry, and welcome to our call participants. We thank you for your interest in IDACORP. Third quarter 2011 results illustrate our continued focus on financial strength and operational excellence.

IDACORP's increase in earnings per share for the year-to-date 2011 relative to the same period last year is largely attributable to the impact of the US Congress Joint Committee on Taxation's approval of Idaho Power's Uniform Capitalization Method Change Agreement with the Internal Revenue Service, as well as warmer and drier weather conditions leading to increased sales volumes and strong hydroelectric generating conditions which decreased net power supply costs.

As we look ahead, the General Rate Case settlement currently progressing through the Idaho Public Utilities Commission, or IPUC, if approved should help us to continue to balance the needs of owners and customers just as the 2010 settlement agreement did. As always, Idaho Power continues to work with interested parties to ensure the financial stability of our Company while being sensitive to customers who may be struggling during the continued weak economy.

Energy usage by Idaho Power customers increased 4% in the third quarter of 2011 compared to the third quarter of 2010. Due to favorable water conditions 64% of Idaho Power's total system generation in the third quarter and 71% year-to-date was produced by Idaho Power's low cost hydroelectric facilities, emphasizing our hydroelectric base as a cost effective resource.

On the regulatory front, Idaho Power made progress on general rate cases filed in Idaho and Oregon. In September Idaho Power and other interested parties filed a settlement stipulation with the IPUC resolving most of the outstanding issues from the original Idaho general rate case filing. If approved, the settlement agreement would result in a $34 million or 4.1% overall average increase in our annual Idaho jurisdictional base rate revenues effective January 1, 2012.

In its July general rate case filing with the Oregon Public Utility Commission, Idaho Power filed a request for a $5.8 million increase in Oregon jurisdictional revenues. The case is proceeding and if approved would result in new rates effective June 1, 2012.

On November 2, 2011, yesterday, Idaho Power filed an application with the Idaho PUC requesting a continuation of the current ability to use investment tax credits to help achieve a minimum 9.5% return on year-end common equity and a sharing of benefits between Idaho Power and its Idaho customers above a set return on equity threshold. Darrel will address the specific terms of the filing in greater detail in a minute.

Moving on to operations, construction continues on Idaho Power's 300 megawatt Langley Gulch gas fired power plant. As of September 30, 2011, Idaho Power had invested $321 million in the project and expects to be within the budgeted amount of $427 million upon completion. Once online, currently estimated to be June 2012, this plant will help Idaho Power serve its current and expected customers and assist with the significant challenge of integrating intermittent non-dispatchable sources of renewable energy such as wind and solar. We are planning to seek recovery related to our investment in the plant so that the rate changes coincide approximately with the time the facility begins commercial operation.

Let me address one other topic before I hand it over to Darrel.

In recent quarters we have received a number of questions and comments from analysts and investors regarding IDACORP's dividend. We know that many of our investors own IDACORP stock due in part to income received from the dividends and that they derive value from those dividends.

We also recognize that IDACORP's dividend payout ratio has been below the industry norm for a period of time. As you all know, the dividends paid by IDACORP are at the discretion of the Board of Directors, who when evaluating the dividend amount must take into account factors such as current and projected capital requirements, the Company's liquidity position and earnings, the competitiveness of the dividend yield, business cycles, credit rating impacts, legal requirements, long-term sustainability and other factors.

The Board undertakes an analysis of the dividend rate periodically to determine its appropriateness in light of those factors and management provides its insight upon request from the Board of Directors. Historically the IDACORP Board has not established a formal target dividend payout ratio. However, at the next regular Board meeting in November, management intends to present to the Board and seek approval of a proposed dividend payout policy.

The policy management intends to present for consideration provides for a target long-term dividend payout ratio of between 50% and 60% of sustainable earnings, of course with the flexibility to achieve the payout ratio over time and to adjust the payout ratio or to deviate from the target payout ratio from time to time based on the various factors that drive the Board's dividend decisions.

We cannot predict whether the Board will adopt a formal dividend payout policy or the specific terms of the policy, however if the Board were to adopt a formal dividend payout policy we expect that it would seek to incrementally increase the IDACORP dividend over time to achieve the target payout ratio.

I will now turn it over to Darrel who will further update you on our financial results.

Thanks, LaMont and good afternoon everyone. Today I will discuss the key items driving our third quarter earnings results as compared to last year's third quarter. There is a lot to talk about.

The Uniform Capitalization Tax Method change, our current liquidity position at IDACORP and our key operating financial metrics for 2011. I will also give you an update on our revised earnings guidance range for 2011 which now reflects the benefits from the Uniform Capitalization Tax Method change recorded in the third quarter as well as our recent application to extend certain aspects of our 2010 regulatory agreement in Idaho. After that we look forward to taking your questions.

On slide five we present a reconciliation of net income attributable to IDACORP for the three months ended September 30, 2011 to the comparable period in 2010. This shows an increase in net income of $40 million, base rate changes, improved sales volumes, increased transmission revenues and changes in power supply costs net of the related PCA mechanisms increased operating income by approximately $13.8 million for the third quarter of 2011 relative to the same period in 2010.

Third quarter 2011 retail sales were up 3.9% quarter-over-quarter in large part due to a 24% increase in cooling degree days driving additional air conditioning use. Irrigation pump usage increased due to below normal precipitation during this year's third quarter.

The revenue increases were offset by an increase in other operating and maintenance expenses, depreciation and property taxes of $14.9 million. Of the $14.9 million increase, $6.3 million was from increase in pension and payroll related expenses due partially to incremental amortization of pension costs concurrent with the authorization to recover these costs in revenues. The pension related increase is earnings neutral given the corresponding increase in revenue effective with our Idaho rate order received in May 2011.

The 2011 third quarter included recognition of $56.9 million income tax benefit from a tax accounting method change relating to approval of Idaho Power Company's method of uniform capitalization. This method contributed to the triggering of the sharing mechanism under Idaho Power's January 2010 Idaho Settlement Agreement which provides that Idaho Power earnings over a 10.5% return on year-end equity in the Idaho jurisdiction are to be shared equally between Idaho customers and the Company.

The sharing mechanism resulted in Idaho Power recording an accrual for $18.1 million of Idaho customer refund with the impact of reducing operating revenues for the period. The recognition of the tax benefit also contributed to the reversal of $6.8 million of additional accumulated deferred investment tax credit amortization that had been recorded during the first six months of 2011. Over the three-year period of the January 2010 settlement that covered the years 2009 through 2011 Idaho Power will not have used any of the $45 million of deferred investment tax credits that were available.

As you can see from the slide, the impacts of the tax accounting method change and related impacts of sharing and the reversal of the ADITC had a significant impact on the quarter. Further details of the impact of these items on the quarter and on comparability are included in the reconciliation table included as part of the Executive Overview of the 10-Q filed today.

Now I will move to IDACORP's liquidity for the third quarter and year-to-date. IDACORP's cash flow from operations for the first nine months of 2011 was $235 million, an increase of $12 million from the same period in the prior year. Cash flow from operations was positively impacted by reductions in the level of pension contributions and increases in income tax refunds.

These increases were offset by changes in working capital accounts and the impact of changes in regulatory accounts related to the PCA mechanism and the recording of amounts to be shared with customers.

Key financing activities for the first nine months of 2011 included Idaho Power's repayment at maturity of $120 million in first mortgage bond in March 2011, approximately $45 million in cash dividend payments and IDACORP's net issuance of $10.4 million of common stock under the Dividend Reinvestment and Stock Purchase Program.

As of September 30, 2011 there were approximately 1.2 million IDACORP common shares remaining available for issuance under the Continuous Equity Program as we did not issue any shares under this program during the quarter. The current program expires later this month and we are currently evaluating an extension or renewal of that program before entering into a similar program.

Cash and cash equivalents at the end of the first nine months of 2011 totaled $31 million compared to $229 million at the end of December 31, 2010. Commercial paper outstanding at IDACORP as of June 30, 2011 was $51.5 million compared to $67 million at December 31, 2010. Idaho Power Company had no commercial paper outstanding at either date.

Revolving credit facilities at IDACORP and Idaho Power at September 30 were $100 million and $300 million respectively with $48.5 million available at IDACORP and $275.8 million available to Idaho Power as of September 30, 2011.

On October 26, 2011 we executed new five-year credit agreements which increased the size of the IDACORP facility to $125 million but maintained the Idaho Power facility at $300 million. We expect minimal need for external financing for the balance of 2011 and into 2012 at both IDACORP and Idaho Power other than issuance under the dividend reinvestment and employee related plans as well as the refinancing of maturing first-mortgage bonds.

We do, however, monitor debt and equity market conditions and may issue debt or equity securities when we determine that under the circumstances and in light of the timing and extent of financing needs conditions are favorable for issuance of such securities. For the remainder of 2011 and into 2012 we will continue to focus on controlling costs and generating sufficient cash from operations to meet operating needs and contribute to capital expenditure requirements.

I will now update you on the changes in our 2011 key operating and financial metrics. These are shown on slide six. The only metric that has changed from our previous estimates was the expected level of hydroelectric generation. The expected range for 2011 has been updated to the range of 11 million to 11.5 million megawatt hours as compared to our previous range of 9.5 million to 10.5 million megawatt hours.

This range now reflects actual hydroelectric generation through September and forecasted hydroelectric generation for the remainder of the year. For reference, our modeled median annual hydroelectric generation is 8.6 million megawatt hours adjusted to reflect the current level of water resource development. The increase reflects the expected benefits from good reservoir carryover from the Upper Snake River drainages combined with La Nina weather conditions forecasted for this winter and into next spring.

Before I move to discuss our revised earnings guidance there is one last item I would like to mention. Recall there were two important features of the January 2010 Idaho Settlement Agreement regarding Idaho jurisdictional earnings.

The first included authorization to use additional amortization of accumulated deferred investment tax credits to help achieve a minimum 9.5% return on year-end equity. The second is a provision for an equal sharing of any earnings exceeding a return on year-end equity of 10.5%. Recognition of income tax benefits in the third quarter of 2011 contributed to triggering of the sharing mechanism under the settlement agreement.

As a result, Idaho Power recorded an $18.1 million regulatory reliability reflecting 50% of Idaho Power's estimated 2011 earnings over a 10.5% return on year-end equity. The current full-year 2011 estimated amount of sharing to Idaho customers is $20 million.

With that, yesterday Idaho Power filed an application with the Idaho Public Utilities Commission requesting an extension of the two elements of the January 2010 settlement agreement described above under the following terms.

First, Idaho Power may continue to use up to $45 million of additional deferred investment tax credits to help achieve a minimum 9.5% return on year-end equity in the Idaho jurisdiction in 2012 and 2013. The application would allow Idaho Power to use up to a maximum of $25 million of ADITC in 2012 and any unused portion of the $45 million could be carried forward to 2013.

Second, if Idaho Power's Idaho jurisdictional return on year-end equity in 2012 or 2013 exceeds 10% the amount exceeding 10% would be shared equally between Idaho Power and its Idaho customers in the applicable year.

In consideration for these terms, Idaho Power would allocate to customers 50% of Idaho Power's share of estimated 2011 Idaho jurisdictional earnings over a 10.5% return on year-end equity reflected as a reduction in customer rates or an offset to amounts that would otherwise be collected from rates.

The application is separate from the 2011 general rate case proceeding and the associated settlement stipulation. The application also states that Idaho Power's proposal to apply a one-time adjustment to the 2011 sharing calculation is contingent on the completion of a signed settlement stipulation agreeing to the extension and modification of the ADITC amortization and sharing mechanisms on or before December 31, 2011.

If the arrangement contemplated by Idaho Power's application is ultimately adopted, Idaho Power will record a reduction in earnings in the fourth quarter of 2011 for additional sharing allocated to Idaho customers. At this time we cannot predict the outcome of the proceedings. The request set forth in the application assumes approval of the general rate case stipulation by December 31, 2011.

Now I would like to turn to our updated earnings guidance. As Larry indicated earlier, we are increasing our previous 2011 annual earnings guidance from the range of $2.80 to $2.90 per diluted share to a range of $3.35 to $3.45 per diluted share. The range reflects the net benefits of recording the Uniform Capitalization Tax method as well as an estimate of approximately $10 million of pre-tax for a charge that will be recorded should the Company receive a signed settlement stipulation by the end of the year related to yesterday's application.

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

(Operator instructions). Please stand by for your first question. Your first question comes from the line of Paul Ridzon with KeyBanc. Please proceed.

Good afternoon guys. Congratulations.

Hey, Paul, thanks a lot.

I have a question on the $18.1 million refund. Is that a straight revenue or is that gross margin?

That would be a revenue reduction so that is included as a revenue reduction in the revenue line. If that is your question.

It is.

It is the current estimate through the first nine months of the year.

That is probably subject to true-up once we file at year-end, correct?

Right. As I said earlier, I did indicate we currently estimate based on what we know today the total of that should be around $20 million.

You indicated the pension driving up O&M. Is there a real-time recovery on that? In other words are those revenues, did those hit in Q3 or are those --

Right, what we are doing, Paul, again remember we are on a cash basis program for pension so when we were able to increase the amount we were recovering in June was the time we increased our amortization related to our pension and so the revenue amount is offset against the amount of pension amortization that we have in the same year.

Same quarter as well?

Yes.

Lastly, when do you think you are going to engage the parties in discussions around rate making for Langley Gulch?

Right now as it relates to Langley Gulch, as you know that is expected to come online. We are projecting June at this point in time. As we sit here today we would expect to engage that sometime after the first of the year.

Your application you filed yesterday does not include these payout provisions, is that correct?

That's correct.

Okay, thank you very much.

Thanks, Paul.

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

Hi, good afternoon.

Hi Brian.

Just to follow-up on the Langley Gulch recovery, how exactly will that work? So you do get the extension of the ADITCs and the 9.5% floor, how does recovery of Langley Gulch kind of mesh with that?

Well, I think the way it would work, Brian, is that would be included as part of any earnings contributions that would take place in the given year, for instance in 2012, so that would just be part of the measurement of attaining the threshold of the 9.5% we use to measure those earnings. Any earnings contributions coming from there would be included in that.

Right, okay. Understood. Also, I think you mentioned the Board is meeting or management will propose to the Board in November a 50% or 60% payout. Is that accurate?

That is correct.

How will the Board's decision-making process coincide with the pending general rate case settlement still pending approval and then also what could be an extension of the ADITC type structure?

This is LaMont and obviously all of those would support their review of that dividend policy. However, even if we should stumble on one of those I believe that we feel we have reached the point where we can make that recommendation to the Board based upon the strength of the balance sheet, the increase in the size of the Company and the earnings level that we are achieving that we could set that as a target payout ratio and seek to achieve it over a period of time.

Okay, so the Board might approve a dividend target prior to reaching final approvals on the general rate case and/or the extension of the ADITCs?

Yes, that is true. Timing wise the November Board meeting which is really just two weeks from today is not a Board meeting where they set a dividend. It has already been done for this quarter. So that is why we are taking to them adoption of the policy and their first opportunity to actually act on effecting that policy is January Board meeting which is in the middle of January.

Okay. Can you talk a little bit about your CapEx outlook, remind us what 2011 was and what 2012 and 2013 is expected to be?

Sure Brian. As it relates to what we did on the CapEx side of things, we did not change our current guidance as it relates to CapEx for 2011 where the current range is $320 million to $330 million. We are going to be in and around that range as we projected for the balance of this year.

In the 10-Q we talk about what our expectations are for both combined 2012 and 2013. As it stands right now those numbers really haven't changed a lot right now. We are in the middle of firming up our 2012 capital budget in anticipation of putting that in front of our Board in January so the numbers we have included in the 10-Q we have not changed those. We have kind of left those in there from a CapEx standpoint.

I can give those to you in a second here. Right now for 2012 and 2013 the range for the combined years is about $450 million to $470 million of which about $35 million to $39 million of that is the remaining piece of Langley. The majority of that is kind of ongoing CapEx. None of that includes any potential CapEx for any of our major transmission projects other than permitting and siting because those projects really wouldn't be kicking into gear until outside of that 2013 timeframe.

Alright, so if I was just to dock the $35 million from that range could I then split it evenly between the two years?

I don't have the separate numbers in front of me right now Brian. It would be close. You wouldn't be a long ways off. We will have better numbers for you in February after we have kind of gone through and finished scrubbing up our capital numbers. Again, we are also taking a look at all of the factors that go into that, the economy and all of those things and taking a look and see what it is we absolutely have to spend.

Lastly on the Boardman-Hemingway line development, I know the line was included in that federal fast track program or initiative. I just wanted to get a quick update on where that line stands in development.

We are continuing to pursue permitting and siting of that project. What I will do is I will have Vern Porter, who heads up our transmission group talk a little bit about the President's fast track team and kind of what the implications there are. We have met with those folks and I will let Vern kind of talk a little bit about where we are at with that.

Thanks, Darrel. We have actually had a phone call with the folks on the rapid response team. So far the first call is really just to get to know you and to try to see what types of things they are going to be able to help us out with. Basically it is about cutting red tape, breaking down barriers. The federal agencies working better with each other, working with the states and even some talk about even some of the local jurisdictions to help streamline the process and make it go forward faster. We will have future calls with them.

They are currently figuring out how they are going to address each of these projects and we will eagerly wait to see how they can help us move these things forward. So a lot to be learned as we move forward with this.

I would just add we would look for any support to help us get through the maze of regulations that is required to get these projects permitted and sited and if the federal government can step up and help us in that regard that is a good thing for us.

So it is still scheduled for a 2016 start date?

That depends on permitting. We have a long ways to go and we have to work through all that process to determine when we can actually start construction.

Alright, thank you.

Thanks, Brian.

Your next question comes from the line of Jim Bellessa with D.A. Davidson. Please proceed.

Starting with these transmission lines that you have proposed, there is a Gateway West and that was one of these the government was trying to help you out with. I sense that from the literature I saw from the government's point of view that they are trying to get these up and running by the middle of this decade. But I think your own plans call for it to be built and put into place in the next decade. Is that wrong?

Jim, I will have Vern Porter again address the question about the timing around Gateway and our participation in that.

You are right as far as the administration's desire to get these transmission projects moving faster. We are as far as Gateway West of course we have a draft environmental impact statement that was issued this summer and comments were filed here at the end of October. Work will continue on with the final environmental impact statement and so we expect that at best at the end of next year and then followed by a record of decision.

But as far as the actual construction of segments of Gateway West it will be determined by the individual project proponents; us, and PacifiCorp and determining the timing for when each segment is needed. We could see some segments built earlier than others and certainly those could start construction here in the later half of the decade.

This is Darrel. Just to add to that, the difference between Boardman-Hemingway and Gateway West is that Boardman-Hemingway is a project you build from start to finish because it goes to a destination. It is not going to build in segments. Gateway West is really a project that is going to be built more in segments so you are going to see different timing on different segments on Gateway West.

Do you have a partner identified yet in the Boardman-Hemingway section?

We are continuing to pursue partners on that and as that matures we will make sure that that information gets disclosed.

On the hydroelectric generation estimate that you have now for 2011, it is up 10% to 15% from what you set forth in August. Has it rained all that much since August, which I doubt? How did it go up 10% to 15%?

It is really a reflection of the upstream carryover impact. That was the wildcard and what we are seeing now is a lot more water being released from drainages up above us and so that is what we are seeing. It was difficult to estimate what the impact was going to be out of that. What we are seeing now is an increase.

We also are projecting, also included but not only that, as you probably know because you are familiar with the northwest, they are projecting a La Nina weather pattern as we go into this winter which then should suggest more than average precipitation going into this fall so it is a combination of both of those factors.

You are right, it is significant. If you look about where we were last year and we did about 1.5 million megawatt hours of hydro last fourth quarter and if you look at our range that would suggest we would maybe do almost one million more megawatt hours in the fourth quarter this year versus what we did last year.

And the reservoirs upstream, are they all above normal levels at this time of year?

Yes they are.

Thank you very much.

Thanks Jim.

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

Hey guys, great quarter.

Hi John, thank you.

Just a few quick questions. First off, on CapEx, what do you plan to spend on the two big transmission lines in 2012 and 2013 roughly?

They are fairly modest numbers, John. I think I will see. We may have those disclosed and we may not. I don't recall. It is fairly modest because it is permitting and siting costs. Just a second if you have a minute.

Sure. All of this weekend.

Okay, in the current year we are going to spend anywhere in a range of $12 million to $16 million in 2012 and 2013 $20 million to $25 million combined.

For both of those lines?

Yes. I would say one place to look at that too is in the 10-Q we have a small table in there that shows our CapEx and lays that out and it is under that Other Major Projects is the amount for the transmission projects.

That was for both those lines, right?

That's correct.

Is there going to be any significant deferred tax or bonus D&A taken as a result of Langley?

We do anticipate taking advantage of the bonus depreciation for Langley. That is planned for 2012.

Is it 50% for 2012?

Yes. That's correct.

Great. Lastly, for the dividend would you foresee the Board doing it in one big step-up or in two successive chunks, kind of one at the beginning of the year and one maybe mid-year when you get the Langley Gulch increase?

This is LaMont again and that would obviously be at their discretion but I think it is more likely that we have established a target and they tend to work towards that over a period of time. Likely a period of years, I am guessing.

So, a couple of steps. Then I guess just one other, as part of your settlement do you guys have to refile a rate case -- the 14th is it?

We don't have any specific requirements for any filing based on the application that we filed.

So you don't have to go back in?

No.

That's great. Alright, thank you very much. I appreciate it.

Thanks a lot.

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

Thank you, Stacey. I thank all of you who participated on our call this afternoon. We hope to see many of you next week at the EEI Financial Conference in Florida. We are going to have a contingent there. This is LaMont. I'm not going to be there but we will be well represented.

So once again thank you for your interest in IDACORP and have a good day.

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