Idacorp Inc (IDA) 2012 Q3 法說會逐字稿

Good day and welcome everyone to IDACORP's third quarter 2012 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, www.idacorpinc.com. (Operator Instructions)

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

Thank you Derek and good afternoon everyone. Welcome to our third quarter 2012 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 website at www.idacorpinc.com.

We will be using a few slides to supplement today's call and these are also located on our 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 President and Chief Executive Officer, Darrel Anderson, Idaho Power President and Chief Financial Officer, and Steve Keen, Idaho Power Senior Vice President, Finance and Treasurer. We also have other individuals available to help answer your questions during the Q&A period.

Before turning the presentation over to Darrel I'll 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 made today. As a result, we caution you against placing undue reliance on these forward-looking statements which reflect our opinion 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.

On slide four we present the quarterly and year to date financial results. I'll now turn the presentation over to Darrel to discuss our results in greater detail and to review our 2012 key operating and financing metrics.

Thanks Larry and good afternoon everyone. I'd like to start with our wishes for a speedy recovery for all those that have been impacted by this super storm, Sandy. While we cannot directly relate to the devastation of such a storm we do understand the threat to life, property, and the uncertainty that Mother Nature can cause. In coordination with our neighboring Western Utilities, we are offering up line crews and equipment to assist in the restoration efforts in light of the aftermath of the storm.

Before I get into the details of the quarter I'd like to comment on the improvement we have seen in the core business as compared to last year's third quarter.

Operating income which is a key measure of the overall contribution of the operations of the business increased almost $41 million over the same period a year ago. As I will discuss, this improvement reflects our efforts to improve the timing of recovery of our investment in plant as well as our operating expenses combined with weather conditions that help increase usage during the quarter.

While overall we had a decrease in net income compared to last year's third quarter due largely to the impact of the income tax examination settlement, the core of our business continues to improve. Some of these tax benefits are ongoing though the amount recorded in 2011 was very significant.

Now I will take a little deeper dive into the results for the quarter. I will begin by reviewing the reconciliation of earnings from third quarter 2011 to third quarter 2012 and then update you on the 2012 key operating and financial metrics.

On slide five we present a reconciliation of net income attributable to IDACORP from the third quarter of 2011 to the third quarter of 2012. The schedule reflects a decrease in net income of $15 million from $107.1 million to $92.1 million. The full reconciliation table is included in the Form 10-Q we filed this morning.

Operating income increased $40.7 million over last year's third quarter and was positively impacted by $32.1 million due to timely recovery of revenue requirements through rates including increased rates related to Langley Gulch power plant and certain of our regulatory adjustment mechanisms.

Warmer temperatures combined with continued customer growth led to a slight increase in sales volumes and a resulting $3 million increase in operating revenues compared with last year's third quarter.

Cooling degree days were up almost 11% over last year and were more than 40% greater than normal. Precipitation during the quarter on the other hand, was very close to the same quarter last year but in both quarters, less than normal. Both factors influence our general business customer usage especially in the third quarter when rates are higher under our tiered and seasonal rate structure.

Reductions in payroll related expenses increased income by $2.3 million while the combination of changes in other O&M, depreciation in property tax combined with a decrease in allowance for funds used during construction, or AFUDC, decreased income by $6.9 million compared with third quarter 2011.

Largely offsetting this reduction was a $6.8 million change in net income due to the third quarter 2011 reversal of amortization of additional accumulated deferred investment tax credits that had been recorded earlier in 2011 with none recorded in 2012.

Based on our results to date and expected earnings over the balance of the year, Idaho Power recorded $12.1 million of sharing benefits during the quarter related to the settlement agreement approved by the Idaho Public Utilities Commission in December of 2011. This agreement provides for sharing with customers of the portion of 2012 Idaho jurisdictional earnings exceeding a specified return on yearend equity. We recorded $6.3 million as a provision against current revenues to benefit customers through rates. This is compared with the $18.1 million customer benefit recorded in the third quarter of 2011 under a similar mechanism for an overall $11.8 million increase in operating income.

Of the $12.1 million benefit recorded at September 30, $5.8 million represents funded additional pension expense which will benefit Idaho customers by reducing the amount of deferred pension expense that will need to be collected from customers in the future.

Finally, as shown in the table, approximately $56.9 million of previously unrecognized tax benefits were recorded in the third quarter of 2011 which did not recur in the third quarter of 2012. That coupled with other changes in income tax expense reduced net income $56.4 million excluding any impacts of sharing. Steve Keen will provide further information on income taxes and sharing when I finish my comments.

I would now like to share some information on recent retail regulatory activity in Oregon. On September 20th, the Oregon Public Utility Commission issued an order approving an approximately $3 million increase in annual base rates for recovery of the Oregon jurisdictional investment in the Langley Gulch natural gas fired power plant. New Oregon general rates became effective October 1, 2012.

I'd now like to update you on the progress on the proposed Boardman to Hemingway transmission line. On October 2nd, the Bonneville Power Administration issued a statement that it had completed an initial prioritization of potential service arrangements for its customer load in southeastern Idaho and while it has yet to make a final decision on service options, BPA identified the Boardman to Hemingway line with a transmission asset swap as a top priority for service options for its fiscal year 2013 and beyond because the new line and asset swap has the potential to keep BPA costs low relative to other options considered. We anticipate a draft environmental impact statement for the line to be issued in the first half of 2013. Current cost estimates for the project are between $890 million and $940 million including AFUDC. Idaho Power's estimated share of the cost of the permitting phase of the project after all partner contributions is expected to be approximately $13 million including AFUDC.

Before turning the presentation over to Steve, I'll cover the updates as to our key operating and financial metrics as shown on slide six. We have increased the range for operations and maintenance expense by $10 million to reflect an increase in the estimate of additional pension expense that is expected to be recognized due to the Idaho sharing arrangement. The increase in pension expense will be offset by customer funding through our sharing arrangement so it will have no impact on reported net income.

We have also tightened the estimated hydroelectric generation range to 7.8 million to 8.2 million megawatt hours. As a reminder, the annual median hydroelectric generation is 8.6 million megawatt hours. Based on these assumptions and our expectations for the remainder of 2012, we are increasing our full year IDACORP earnings per share guidance from the range of $3.20 to $3.35 per diluted share to the range of $3.30 to $3.40 per diluted share. As has been our past practice, we expect to initiate earnings guidance for 2013 beginning with our 2012 yearend conference call which is expected in February 2013.

Steve will now discuss IDACORP's expected debt and equity financing requirements for the remainder of 2012, further insight into the Idaho sharing arrangement, and our current liquidity position.

Thanks Darrel and good afternoon everyone. For the remainder of 2012 we do not anticipate needing external financing at either IDACORP or Idaho Power. While we do not currently plan to access additional long term debt or common equity through the remainder of the year, we do continually monitor the capital markets with an opportunistic approach to managing future financing needs. For the remainder of 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.

As pointed out in today's earnings press release we do not expect that will amortize any additional accumulated deferred investment tax credits in 2012. The full $45 million of tax credits originally allocated under the December 2011 Idaho sharing arrangement are expected to remain available for potential use in years 2013 and 2014. For 2012 we project earning above a 10.5% return on yearend equity in the Idaho jurisdiction and therefore, we expect to be able to share benefits with our Idaho customers.

As laid out in slide seven, based on projected yearend Idaho jurisdictional earnings we recorded benefits for our Idaho customers in the amount of $6.3 million through the third quarter with earnings expected to be above a 10% return but at or below a 10.5% return based on yearend equity. An additional $5.8 million was also recorded for the third quarter earnings, expected to be above the 10.5% level. The $5.8 million of benefits will be used to lower Idaho customers pension related obligation as agreed to in the settlement arrangement by funding an equal amount of pension expense recognized currently in O&M.

An additional notable item is that tax method changes have impacted our earnings for the last several years, much more so in 2011 than currently. However, it's also important to remember that our Company continues to benefit annually from the ongoing deductions related to both the uniform capitalization and repairs tax method changes. Those deductions help lower our overall tax rate as their flow-through treatment delivers a net benefit to income.

Turning now to cash flow and liquidity on slide eight, we show IDACORP's nine month cash flows and liquidity position at September 30. Cash flow from operations for the first nine months of 2012 was $181.5 million, a decrease of $53.4 million from the first nine months of 2011. The reduction was primarily due to $25.8 million more in pension plan contributions in the first nine months of 2012 compared with the first nine months last year and $13 million more in cash outflows related to income tax payments. Changes in the timing of actual collections from our power cost adjustment mechanisms also reduced cash flows.

IDACORP and Idaho Power currently have in place credit facilities of $125 million and $300 million, respectively. On October 12, IDACORP and Idaho Power executed extension agreements with each of our facility banks, extending for one year the maturity date under both credit agreements to October 26, 2017. Commercial paper outstanding at IDACORP as of September 30 was $51.4 million compared to $54.7 million at June 30, 2012. Idaho Power had no commercial paper outstanding as of September 30 compared to $10 million at June 30, 2012.

We also have $24.2 million of contingent bond purchase obligations which could potentially utilize available credit. As a result, at September 30, 2012, IDACORP and Idaho Power had $73.6 million and $275.8 million, respectively, in available liquidity under the credit facilities. Also, as of September 30, there were three million IDACORP common shares available for issuance under our continuous equity program with no shares issued during the first nine months of 2012 and none expected to be issued during the remainder of the year.

Now, I'll turn the discussion over to LaMont who will update you on recent dividend actions and other business matters.

Thanks Steve and good afternoon everyone. I'd like to share with you some additional highlights from the quarter.

On September 20, IDACORP's Board of Directors approved an increase in the quarterly cash dividend on IDACORP's common stock of 15.2% to $0.38 per share. This is shown on slide nine. At the new quarterly rate, the annual dividend is $1.52 per share. This latest decision is the second time in a year that we have improved our dividend payout. Our total change in dividend payout from 2011 on an annualized basis is nearly 27%. Our payout ratio continues to move closer to the Board of Directors long term target of between 50% and 60% of sustainable IDACORP earnings. To that end, based on IDACORP's current estimates for earnings and cash flow and assuming IDACORP meets those estimates, IDACORP's Management anticipates recommending to the Board of Directors an additional increase to the quarterly dividend in September of 2013 of at least 10%. You will find additional information and background on this action in our 10-Q released today.

We also achieved an important operational milestone during the quarter. When Idaho Power received a 30 year federal license from the Federal Energy Regulatory Commission, or FERC, to continue operating our Swan Falls power plant located on the Snake River about 40 miles south of Boise. Swan Falls was the first hydroelectric dam on the Snake River, built in 1901 to supply power to nearby mines. It became Idaho Power's original generation resource when the Company was formed in 1960. Though it is not the largest hydroelectric plant in our fleet, it is significant because Swan Falls is the nexus of our water rights on the Snake River.

First, granting of this new license is an important event for our Company both symbolically and practically as we look forward to our second century of providing clean, reliable low cost power from our fleet of hydroelectric facilities.

Finally, I have some good news to share on the economic front, shown on slide ten. Over the last year there have been a number of improvements in economic conditions in our service area. The service area unemployment rate fell from a reported high of 10% in early 2011 to 6.9% by the end of September 2012 according to preliminary data from the Idaho Department of Labor. The housing market has improved and customer growth numbers are climbing. During October we passed the 500,000 mark for customers connected to our system.

We are not the only ones making note of these trends. At the end of September, CNBC released its annual report on the best states for business. It found that Idaho is America's most improved state for business. The report cited Idaho as having extremely low costs, a great workforce and a business friendly regulatory climate. We view this as great news as we endeavor to attract companies to our service territory and grow our customer base.

And now I and other members of the Management Team will be happy to take your questions.

(Operator Instructions)

And our first question is coming from Paul Ridzon from KeyBanc.

Do you have any update on when the line from B to H could be in service? I think no sooner than '18 was your last commentary.

Paul, this is Darrel. That continues to be our estimate, no earlier than 2018 as we sit here today and I think as we indicated, the first real major milestone is getting the draft DIS in the first part of 2013 so that is kind of what we'll be looking to do, get through that draft DIS in the first half of 2013 and then move through that process.

When do you file your next IRP?

We'll be filing our next IRP in June of 2013.

Should we look for some potential generation to backfill the B to H shortfall on that?

I think what you'll see, again, they're right in the middle of that process as we see here today but what it will lay out, it will assess the impact of B to H and the timing of B to H as well as other alternatives that will be out there. They will all be evaluated as part of that process. It's too early today to tell you whether or not that will be an option or not but it will be something that will be considered.

And just bookkeeping item, do irrigation rates have summer peak levels or are they kind of flat to spring and summer?

They do pay a little bit more in the summer than the off season time. I'm looking over here at Warren Kline who heads up customer operations. Warren, do you want to comment on that?

It's a seasonal rate and during the summertime through August, there is a different rate.

Your next question is coming from the line of Michael Klein from Sidoti & Company.

What are your expectations for load growth for this year and next year?

Michael, one thing I'll comment on is as part of the IRP process, it's something that they do spend some time with in taking a look at the near term and longer term sales forecast and as part of that forecast and as part of that process, what they are looking at is very modest load growth in 2013 but then as we move into 2014 and beyond, slightly over 1%, 1% to 1.3% over that time horizon.

Can you provide just a little color on the business environment? I know in the past you've talked about a Chobani plant and just the overall state of the environment, any other businesses moving in or whatnot.

I will start and then others may add to that but one of the things that if you take a look on the slide, we have seen first of all two things that are happening. We're seeing real growth from the standpoint of real companies coming into our service territory but we're also seeing a lot of folks coming in and kicking the tires and so we're seeing a lot of what we call potential large new loads that we are evaluating and that the Department of Commerce and others are looking to court to come to our state. Those are numbers that we don't publicly disclose from a standpoint of to the public but I can just tell you there is a lot of activity going on there as it relates to folks that are kicking tires and we've talked about the, in the past about the Chobani yogurt facility that is located down in the southern part of our service territory. They're in the process of getting up and running which is adding 400 plus new jobs with the potential to expand down there. We see growth in the eastern part of our service territory where they've added a call center. They've added a structured housing facility that is bringing on 100 to 150 new jobs where they're building housing to ship off to the Dakotas. There are a lot of things that are happening around our region that are really positive and as LaMont indicated, the CNBC report I think really shows that Idaho is a good place to do business not only from a regulatory perspective but a cost perspective also with energy as one component of that.

Okay, thank you. That's helpful. And lastly, I think you mentioned $13 million in permitting costs and whatnot associated with the Boardman to Hemingway line. Is that correct?

That is our net expected cost for permitting after partner contributions. As you know, we are in partnership with Bonneville Power and PacifiCorp on that and so they are help sharing in some of the costs but our net number is expected to be around $13 million through the permitting and siting phase.

Okay and is that expected to be recognized in 2013?

Those would just be continued to become part of the project. It would eventually be close to plan at the end of the project.

Your next question is coming from the line of Brian Russo from Ladenburg Thalmann.

On the guidance, I just want to be clear. It looks like since the May guidance of $3.00 to $3.15 it looks like the midpoint has increased $0.35 and I want to understand what part of that was weather driven primarily due to residential and irrigation sales in the second quarter and it looks like residential sales in the third quarter and then what is driven by, say, additional tax benefits that you didn't consider early on? I think I read in the Q there is a $7.84 million tax benefit in the third quarter of this year.

Yes we did and I'll have Steve talk about that. Let me talk about the other part of the earnings, the range first of all. One thing to keep in mind, as we sit here today at $3.05 on a year to date basis and you look at, and I'll use the midpoint of our range which is $3.35, that suggests something around a $0.30 fourth quarter but you have to understand that also as we go into that fourth quarter we're also anticipating obviously to recognize a component of sharing and so every dollar that we earn in the fourth quarter is going to be partially offset by some of the sharing dollars so that is one of the reasons too you have to kind of look at -- the earnings potential continues to be positive ignoring the necessary ongoing tax benefits so that's the first part of it.

To attempt to break that down from a weather perspective, we really don't have that information for you as it sits here today. We attempted to capture in our reconciliation what we believe is the estimated amount from increased sales year over year. The one thing you have to recognize, while $3 million doesn't sound like a lot but you also have to look at it in the context of last year's was also a pretty good third quarter from a standpoint of where energy sales where so we had slight increases in energy sales over last year but last year was also a good quarter from a standpoint of weather and precipitation, providing our opportunity to sell more energy.

It's really hard to kind of capture that between the weather component so there is ongoing value to that. I just can't give you a quantification of it. I'll have Steve talk to you a little bit about the ongoing benefits. As he indicated in his comments, there are ongoing benefits from our tax deductions in light of some of the new regulations that came out so I'll let Steve talk to those.

Thanks Darrel. Brian, as you mentioned, there is a $7.8 million item that I would say is not likely to be there next year. It's an accounting method change and if you look at page 20 of the Q, in the Q we also reference back to the 10-K. If you go back to page 93 in the '11 10-K, you see how we do a much more detailed breakout of all the Schedule Ms and particularly the flow-through items in our K but for the quarter, if you'll look at that page, on page 20, the $7.8 million is a method, it's an additional method change which really just trued up our existing method that we had moved to based on some guidance that came out after we had reached our agreement with the IRS. They actually issued national guidance related to transmission and distribution property that was actually very close to what we had agreed to or we probably wouldn't have gotten the agreement initially with the IRS but once it was out and we looked at that new method and applied it to our circumstances, it generated a slightly higher adjustment which the IRS also agreed with so that was put in this year.

If you look below that line item though, for the quarter there is an item there at about $25 million, $25.8 million actually and for the nine months it's $37.8 million that relate to really the other items that are going through the tax line and it would be in that section that you'd find the recurring section and I think as we get to the end of the year we'd be able to get into that even a little bit more detailed because we don't break those out line by line for the quarterly reports but we do annually and so I think we might be able to give you a better picture once we get out. The end of 2012 we could look at the year by year and see the changes and you'd have a better feel for the incremental change year over year.

Brian, the one thing you should think about too because our earnings as we have reported them through the third quarter, we also included in there over $12 million of sharing that we are looking to get back and as Steve has talked about that one off item of $7.8 million, if you kind of look at that in the context of our overall earnings, if you after tax, the $12 million, those are going to not offset dollar for dollar but there are going to be relative offsets there which continues to say the business is doing better, as I indicated in my opening comments, at the operating level and then we also do have some slight increase in what we say is ongoing tax benefits. It should factor in in future years.

Just on the Boardman to Hemingway line, can you remind us what your anticipated ownership interest would be?

Right now, Brian, we're anticipating in and around 21%, 20%, 21% as it stands right now.

Okay and just to follow up on an earlier question on 2016 capacity needs, is it feasible for you to just sign capacity contracts with out of state generators? Is that feasible considering the Boardman to Hemingway line was designed to wheel in capacity, meaning are you transmission constrained in '16 and the most likely or logical scenario is to build?

I wasn't sure where you were going with that, Brian, to start with but now I think I know where we are. Your question is in between the time of where our potential need may be and the timing of when Boardman to Hemingway come online, what might our options be to fill the need that is out there? That is part of the process that is going to be evaluated as part of our 2013 IRP and so I think when you see that, and I think we expect to see a draft of that around June or so, that will be our roadmap to kind of spell out what some of those options are to fill that gap between '16 and '18.

Okay and just remind me, how many megawatts of capacity was Boardman to Hemingway designed to wheel into your territory?

Brian, Vern Porter who heads up that side of our business is here today so we're going to have Vern talk a little bit about that.

The line is designed to import 1050 megawatts.

So how much is needed to manage your peak load at Ida Power?

The 21% that Darrel mentioned before is actually a seasonally shaped capacity. We're looking for 500 megawatts in the summer and 200 megawatts in the winter.

Any idea or can you give us a sense of what your 2012 rate base looks like?

Brian, I don't have it but I think what we're probably going to do is have some of that information available when we're down at EEI but we don't have it readily available right now. Back at the end of 2011 and my recollection is around 2.36 billion I believe was the number.

In Idaho.

Larry is shaking his head yes. In Idaho, that is the number. We'll plan to have a schedule on that for the EEI meetings.

Okay but just to follow up on that, if you had yearend '11 of 2.36 billion, we should add 396 million for Langley Gulch minus depreciation?

Brian, you'd have to look at that actual case to get the right number because bonus depreciation was in effect so yes, it was actually a deferred tax offset that brought that down quite a bit.

Brian, that actual Idaho rate base number is 336 million of the 398 million. That is the actual rate base piece.

Okay, and I think the Oregon piece that you got recovery for is 121 million?

I don't have that handy. I'm looking around to see if -- I think that's probably close.

Your next question is from the line of Sarah Akers, Wells Fargo.

Question on the expense side, we're seeing a lot of other utilities targeting O&M growth kind of at or below sales growth for the next few years. I'm curious if Idaho Power has a similar target or what we should expect in terms of O&M trends over the next few years.

Sarah, you must be reading our minds. This is Darrel. We are actually taking a look at that. We started looking at that earlier in the year as we look forward in light of what our load growth may look like and so we're going to be looking hard at the expense side of the equation too and one of the things that we will be kind of looking at is just looking at the business overall and trying to manage the O&M as high as we can but at the same time be able to safely and reliably provide service to our customers so we are doing that.

Great and then question on Gateway West, I know a few months or maybe six, nine months ago we were talking about the early phases potentially going into service around the '15 to '17 timeframe. Is that still realistic for the early phases and would Idaho Power be involved in the early phases of that project?

Sarah, we're going to have Vern Porter take that one also.

Thanks Darrel. With Gateway West, of course as far as the next milestones we've got a final environmental impact statement expected to come out here before the end of the year with the Record of Decision sometime mid next year. It's always been the plan to start out in Wyoming and build west and so we would expect that the initial stages would be built more toward the, in Wyoming, more toward mid to late decade with getting to the Idaho sections and out here to the Hemingway area maybe toward the very end of the decade or into the next decade.

Okay, got it. So your portion of the project probably isn't until the second or third or fourth phases of the line?

Yes, the very last one.

(Operator Instructions)

And we do have a follow up question from the line of Sarah Akers.

Question on the environmental spend that you might incur, when could we start to see that CapEx kind of flow into your outlook?

Sarah, this is Darrel. We will, as we update our three year look on capital, we will be taking a look at it then and so the earliest you'd see that would be as we roll out our 10-K in February.

Okay and so there is not much, I should assume there is not much in that '14 timeframe?

There are modest amounts of spend in the period but as those come nearer we will disclose those, not dissimilar to the discussion we have on major projects in the Q and the K now. As they become nearer we will have disclosure on those projects.

That concludes the question and answer session for today. Mr. Anderson, I would like to turn the conference back to you.

Thanks. We'd like to just thank everybody for participating on our call this afternoon and your continued interest in our Company. We hope to see many of you in a couple of weeks at the EEI Financial Conference in Arizona. Again, thanks for your time this afternoon.

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