Idacorp Inc (IDA) 2013 Q2 法說會逐字稿

Good day and welcome, everyone, to the IDACORP second quarter 2013 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 Director of Investor Relations, Mr. Lawrence Spencer. Please go ahead, sir.

Thank you, Ayasha, and good afternoon, everyone. Welcome to our second quarter 2013 earnings release conference call. We issued 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 2.

On the call today we have LaMont Keen, IDACORP's President and Chief Executive Officer; Darrel Anderson, Idaho Power's President and Chief Financial Officer; and Steve Keen, Idaho Power's 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 3. Our presentation today contains forward-looking statements.

While these forward-looking statements represent our current judgment or opinion of what the future holds, these statements are 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. A discussion of factors and events that could cause future results to differ materially from those included in forward-looking statements can be found on slide 3 and in our filings with the Securities and Exchange Commission, which we encourage you to review.

On slide 4 we present the quarterly and year-to-date financial results. As you can see, IDACORP's second quarter 2013 earnings per diluted share were $0.91, an increase of $0.20 per share over last year's second quarter. For the first six months, IDACORP's earnings per diluted share increased from $1.21 last year to $1.58 in 2013. I'll now turn the presentation over to Darrel to discuss our results in greater detail and review our 2013 key operating and financial metrics.

Thanks, Larry, and good afternoon, everybody. We are pleased to report a second consecutive quarter of strong performance in 2013. This quarter's results are our highest second quarter earnings per share since 2001. This follows the very strong first quarter we reported in May. The driver of today's earnings are clearly the result of more time on recovery of investments through rates, effective cost management and, of course, mother nature, which drove a significant increase in retail sales, especially from our irrigation customers.

On slide 5 we present a reconciliation of earnings from the second quarter of 2012 to the second quarter 2013. In short, net income increased $10.2 million. The full reconciliation table is included in the Form 10-Q we filed this morning and this also includes a year-to-date reconciliation. Rate changes that became effective in 2012 helped improve quarterly earnings -- quarterly operating income by $16 million. This was largely due to including the Langley Gulch power plant in Idaho base rates in July of 2012 and in Oregon base rates in October of 2012.

A hot, dry second quarter 2013 drove a significant increase in irrigation usage, as well as more modest increases in air conditioning load, resulting in a $6.5 million increase in operating income. Most notably, irrigation sales grew by 14.5% from the second quarter 2012, which was also an above average quarter for irrigation usage. Cooling degree days increased nearly 20% over last year's second quarter and were 30% greater than normal. New customers contributed $2.8 million in operating income, as we saw continued customer growth within our service territory.

We have added over 6,000 customers since June of 2012, an increase of 1.2%. Based on the terms of a December 2011 Settlement Agreement we entered into with the Idaho Public Utilities Commission and other parties, Idaho Power recorded a $2.8 million revenue sharing provision in the second quarter, representing a prorated estimate of amounts that would subsequently benefit Idaho customers based on expected annual net income.

The settlement stipulation requires sharing of earnings with Idaho customers when Idaho Power exceeds a 10% return on year-end equity in the Idaho jurisdiction. The $6.8 million decrease in allowance for funds used during construction, or AFUDC, was due to the Langley Gulch plant going online in June of 2012, therefore ending the accrual of AFUDC for that project. Finally, income tax expenses increased $6.5 million due to greater Idaho Power pretax earnings. Now moving to slide 6.

I want to highlight the story inside our story and that is the improvement we have seen in our operating income. Notably, the three and six months ended June 30, 2011, '12 and '13 show an improvement that we believe is reflective of the strength of our core business. While both 2011 and 2012 relied in varying degrees on tax method changes and tax settlements to reach our reported earnings per share, in 2013 our operating results deliver a much larger portion of our bottom line.

We continue to focus on enhancing the operating income line, as reflected in our reduction in our full year estimate of operating and maintenance expenses for 2013. On slide 7 we present our 2013 key operating and financial metrics. Four of the metrics have changed from those presented on our May 2 earnings conference call. We have reduced the range of anticipated operations and maintenance expenses by $5 million on the high and low end, to reflect both achieved and expected reductions in operating expenses for the year.

The reductions stem from efforts supporting our business optimization initiative, with an emphasis around labor and labor related expenses. The 2013 estimated capital expenditures are lower, due to moving some of the costs of the Jim Bridger selective catalytic reduction, or SCR, equipment out from 2013 to 2014. As LaMont will discuss later, we have filed with the Idaho Public Utilities Commission for a pre-approval of these emission control expenditures.

The expectation for the hydroelectric generation range in 2013 has changed from our May 2 report to today, from a range of 5 million to 7 million-megawatt hours to a range of 5.5 million to 6 million-megawatt hours. The majority of the financial impact of the decrease in generation will be subject to recovery through our power cost adjustment mechanisms in both Idaho and Oregon. With the year-to-date performance, we are increasing IDACORP's annual earnings per share guidance from the range of $3.20 to $3.35 per share, to the range of $3.40 to $3.55 per share.

The new range assumes revenue sharing with Idaho customers is triggered. The sharing mechanism has the potential to reduce the level and rate of earnings growth within the range, as earnings move from the 50% sharing level at a 10% return on year-end equity in the Idaho jurisdiction to the 75% sharing level at a 10.5% return on year-end equity in the Idaho jurisdiction. With that I will now turn the presentation over to Steve to discuss our liquidity position, recent re-establishing of financing programs and level of capital expenditures.

Thanks, Darrel, and good afternoon, everyone. On slide 8 we show IDACORP's year-to-date operating cash flows and liquidity position at June 30. Cash flow from operations for the first six months of 2013 was $114.2 million, an increase of $31.2 million over the first six months of 2012. Our total increases for the quarter approximated $70 million. Increased net income accounted for a $19 million increase in cash flow.

An additional $24 million increase is due to Idaho Power making a $10 million discretionary contribution to its defined benefit pension plan in 2013 compared to a $34 million cash contribution during the first six months of 2012. Also, a reduction of non-cash earnings associated with the collection of AFUDC increased cash flow by $8 million, as capital projects moved from their construction phase into rate base. The remaining approximately $20 million of increases resulted from a combination of changes in working capital and other items.

These increases were offset by a $30 million -- $39 million reduction in operating cash flows, mostly due to changes in power cost deferrals from the first six months of 2012 to the same period in 2013. IDACORP and Idaho Power currently have in place credit facilities of $125 million and $300 million respectively. Commercial paper outstanding at IDACORP as of June 30 was $61.9 million compared to $67.2 million at March 31, 2013. Idaho Power had no commercial outstanding as of June 30 and $16.6 million outstanding at March 31, 2013.

We also have $24.2 million of contingent bond purchase obligations at Idaho Power, which could potentially utilize available credit. As a result, at June 30, IDACORP and Idaho Power had $63.1 million and $275.8 million respectively in available liquidity under the credit facilities. Also as of June 30, there were 3 million IDACORP common shares available for issuance under IDACORP's continuous equity program, with no shares issued during the first half of 2013 and none expected to be issued during the remainder of the year.

Idaho Power's April 2013 issuance of first mortgage bonds utilized in full the amount available under Idaho Power's regulatory authority and under a sales agency agreement executed nearly three years prior. Consistent with Idaho Power's historic practice of maintaining long-term financing authority from state public utility commissions, in the first half of 2013 Idaho Power sought and received regulatory authority to issue up to $500 million in additional long-term debt from time to time in one or more transactions.

On July 12, Idaho Power entered into a selling agency agreement with eight banks in connection with the potential issuance and sale of up to $500 million of Idaho Power's first mortgage bonds. Separately, on July 12, IDACORP also entered into a new sales agency agreement with BNY Mellon Capital Markets under which IDACORP may offer and sell up to 3 million shares of common stock from time to time. The new IDACORP sales agency agreement replaces a similar agreement that IDACORP executed in December of 2011, under which IDACORP had not issued any shares.

We reestablished the IDACORP continuous equity program well before the termination date of the old program to align our IDACORP and Idaho Power registration statements for purposes of efficiency. At this point, we do not plan to issue additional long-term debt or common equity for the remainder of 2013. However, as we have stated before, we will continue to monitor the capital markets with an opportunistic approach to managing future financing needs.

And we believe having the selling agency arrangements in place for both IDACORP common stock and Idaho Power first mortgage bonds allows us to be opportunistic from a timing perspective. In regard to our capital needs, slide 9 shows Idaho Power's average capital expenditures over the last five years compared to our expected capital needs from 2013 through 2015. The first bar representing the 2008 to 2012 period includes the cost of the Langley Gulch power plant, a nearly $400 million project.

The subsequent periods from 2013 to 2015 show the expected range of capital investment by year. We forecast that capital expenditures will grow from the range of $230 million to $240 million in 2013 up to $300 million to $315 million in 2015. This is a positive growth trend and a significant but manageable level of capital expenditures that average slightly above the prior five-year period, which included construction of Langley Gulch. Now, I'll turn the discussion over to LaMont, who will update you on the state and service area economy, along with other important matters.

Thanks, Steve. Good afternoon, everyone. As Darrel pointed out, we again saw earnings improvement compared to the same periods a year ago, with a focus on our core business creating positive results for shareholders. This was a solid, quality quarter that continues an upward trend. Idaho Power has been successful in achieving a constructive regulatory framework, while focusing heavily on optimizing business operations and controlling costs.

We've also been able or active in supporting economic development activities in our service area and customer count and economic activity are increasing. As shown on slide 10, and as previously mentioned by Darrel, our general business customer count increased by more than 6,000 from the second quarter of 2012 to the second quarter of 2013. A continuation of the positive trend we have been seeing. The increased economic activity is also reflected in State of Idaho tax receipts.

The State of Idaho recently announced that its -- for its fiscal year ended June 30, 2013 tax revenue exceeded forecast for a third year, totaling $2.75 billion, which was 3.5% ahead of projections. Tax revenue has been rising consistently and was $2.44 billion in fiscal year 2011 and $2.59 billion for 2012. Officials point to growth in the retail economy, including new construction, as one of the drivers of the improvement. Turning to slide 11, at the end of June Idaho Power filed its 2013 integrated resource plan, or IRP, with the Idaho and Oregon Public Utility Commissions.

The IRP is updated every two years under guidelines established by those Commissions. The IRP includes a preferred resource portfolio, which identifies the Boardman to Hemingway transmission line as the major near-term supply side resource addition, as well as a number of significant plant upgrades and environmental control technology installations, all involving substantial capital expenditures. The IRP predicts that customer growth within our service territory will be positive over the IRP forecast period, which is 20 years.

The expected forecast predicts that the summer peak hour load requirement will grow at a compound average annual rate of 1.4% over the forecast period and that the average annual energy requirement will grow at a compound rate of 1.1%. However, these estimates do not include loads for new large customers, who may choose to locate in our service territory. The addition of new large loads has the potential to drive growth increases that exceed the rates included in the IRP. Should they do so, our infrastructure development plans would need to adjust accordingly.

Also at the end of June, Idaho Power filed an application for a certificate of public convenience and necessity with the Idaho Commission requesting authorization and a binding commitment to provide rate based treatment for an approximately $130 million investment in emission control equipment for Units 3 and 4 at the Jim Bridger power plant. The Company's application included a request for a decision by November 29. However, a schedule for the hearing has not yet been set.

Looking at our capital projects, as Steve pointed out, Idaho Power estimates growing capital expenditures from 2013 to 2015, reflective of substantial upgrades to and expansion of Idaho Power's existing infrastructure. With respect to the Boardman to Hemingway line, the Bureau of Land Management has requested additional information and that further analysis be performed prior to issuing the draft environmental impact statement for public review and comment. This is anticipated to delay the release date of the draft EIS from mid-2013 to early 2014.

As I mentioned in previous calls, IDACORP's Board will revisit the dividend at its September meeting. Based on IDACORP's current estimates for earnings and cash flow, IDACORP's management continues to anticipate recommending to the Board of Directors an increase to the quarterly dividend at that time of at least 10%. We have made considerable progress toward achieving the long-term dividend payout goal of between 50% and 60% of sustainable IDACORP earnings since 2011, with a nearly 27% increase on an annualized basis.

A further increase by the Board would represent continued progress toward that goal. In closing, I'd like to highlight some recent national media recognition for our state presented on slide 12. On June 20 CNN Money named Idaho one of the top 10 most entrepreneurial states in the nation. The outlet pointed out that we achieved our number seven ranking as an up and coming hub for technology and science start-up in part "Idaho is a strong hydropower state, so entrepreneurs can save on electricity bills, end."

Our state also received acknowledgement of the ability for growing businesses to receive tax credits for adding new jobs and expanding facilities. On July 10, CNBC ranked the state of Idaho number 10 overall as a top state for businesses in 2013, which is an improvement from the number 13 ranking in 2012. This most recent report shows Idaho as number seven for the cost of doing business, number five for business friendliness, and number three for the cost of living. This is certainly a welcomed recognition. And now I and other members of the management team will be happy to take your questions.

(Operator Instructions)

Brian Russo.

Hi, good afternoon.

Hi, Brian.

Just on the increased guidance, $0.20 on both sides of the range, are you able to break that down as to what is weather related versus what is kind of your O&M cost control efforts?

Brian, this is Darrel. We really don't have a breakdown. What we've done, basically, is assessed our current year-to-date results, taking a look at that, combined with what we see in the balance of the year, combining those with the changing metrics that we provided to you and we did, as you know, reduce the O&M number by about $5 million. So, obviously that has an impact with respect to the guidance overall. So, you can kind of get a sense as to how much of that impact it is.

It's really a combination of recognizing what we did in the first part of the year, but also as you look to the second half of the year, couple things to highlight and just a kind of reminder of what happened in 2012. During the second half of the year, if you look in the third quarter we did see some increased tax benefit that we recorded in the third quarter that don't necessarily repeat. And so with our guidance where it is, we're actually looking to exceed where we were last year despite not having the repeat of some of those tax benefits.

It's really kind of a combination of what we see as improved performance, along with the customer growth that we have that was experienced managing that with less expenses as we look going forward. The one thing that's not in that estimate, I will tell you, is really any impact of weather related activities in the second half of the year. And one thing we didn't mention, we mentioned in the earnings release briefly, but July weather in our service territory has been pretty hot.

Just in this morning's local paper actually the headline was July was a scorcher but not the hottest ever. It happened to be the third hottest July on record. But, so, that impact is not reflected in our guidance as we look just to the weather. We really kind of look at more normal expectations around weather. So, there's a lot there. I said probably you may have some follow-on questions to that. But there is a lot of things that go into that, but it is really kind of our best guess as we sit here on the first of August.

Okay, got it. So, that was my next question, that July weather benefit is excluded from this guidance revision. Should we view the O&M, $5 million cut, as sustainable or is there just timing issues with that?

Our goal really is to make those -- as many of those expenses as sustainable going forward as we can. As we indicated in my comments, a lot of our focus right now is taking a look at labor and labor related expenses. So, we would hope that we can sustain some of those. And again, when we talk to you in February we'll give you an update on our 2014 expenses and we'll be able to share with you how much of those, some of those savings we'll be able to sustain going forward.

The current guidance, does that put you in the 75% sharing band or above a 10.5% ROE of shareholder equity.

The upper end of our -- should we achieve the upper end of our range, we would expect to be in the 75% sharing, which is one of the reasons growing those earnings beyond that, if you're only bringing $0.25 on the dollar, it's harder to grow that at a rate that you might otherwise think. So, the upper end of that range does anticipate being in that 75%.

And what exactly is driving the capital expenditure trends and is there any Boardman to Hemingway CapEx, say, in the '15 number?

In the '15 number is really permitting and citing expenditures. We have not included any of the actual construction dollars regarding Boardman to Hemingway. What's really driving a lot of the capital spending is upgrading current infrastructure. We have a major underground cable replacement program that we're under way today that is an important component for reliability for us and we're spending a fair amount there and again, the system is old.

We're systematically going through the system and upgrading that system. And as we did mention, too, we talked about as part of those expenditures in that range is the selected catalytic reduction equipment at Bridger, so that is included they those numbers.

When does that spend pick up?

That spend has been pushed out from, well, some of it in '13, but a majority of that will kind of be in '14 and '15.

Okay. And with the delay of the draft EIS on Boardman to Hemingway, are you still forecasting the completion date of 2018?

Right now, based on what we know today, it would be no earlier than 2018 is kind of where we are right now. We kind of need to -- one of the things we'll have to do is when BLM does put out its draft EIS, we'll have to kind of see what's in that and then from there we'll evaluate what the schedule looks like.

Okay, thank you very much.

Thanks, Brian.

Ashar Khan.

Hi. I guess, good afternoon and congrats.

Thanks, Ashar.

How should we look at going forward? Should we be going to like 10 or what should we use as an ROE going forward to kind of estimate your earnings?

Ashar, this is Darrel. Well, first of all, remember that at least through end of 2014 we are still under our regulatory agreement in the State of Idaho with respect to the additional deferred ITCs, which still allows us a bottom end at 9.5%. If we don't get to 9.5%, then we have availability of ADITCs to utilize. From there we have the debt band between 9.5 to 10. And then from 10 we share 50/50 and after 10.5 we share 75/25.

So as it -- again, this mechanism has been in place for some time now and a couple different times that we've used it that we've never had to utilize the mechanism. So, that's kind of a starting point. Now, as it relates to what to use going forward, best thing I can tell you is starting with our allowed rate of return, which is in and around 10%, is a number that we would hope we could continue to try to earn on, but, again, there are things that play into that as to whether you can continue to hit that consistently.

Eventually we would probably need to go in for some regulatory assistance, but right now we don't know what that timetable is. We'll continue to monitor that. If we continue to see some of the organic growth that we are seeing just from customer growth, we would hope we can stay out, but if not, we'll continue to evaluate that. But we still have 15 months left -- excuse me, 17 months, I think it is, left on our current agreement and so, we'll continue to evaluate that as we look forward.

Okay. But the valuation period, don't you have to file. A case takes, what, six months, am I right, six or seven months, is that correct?

If we were to have rates to go into effect, there generally is a seven month timetable. We have the ability to file any time. We're not actually prohibited from filing. At least right now we are not planning a filing as we sit here today, but, again, we'll continue to evaluate that.

Okay. Okay. So, Darrel, going back to, I guess, is a big question that comes up on every call, is it better to go and try to extend this ADITC or is it better to just file when you feel that you're going -- not going to be able to earn the 10% going forward?

Ashar, we will just continue to evaluate that and there's a lot of factors that come into play in trying to decide whether or not we would go ahead and file or not file or do we - could ask for an extension of our existing agreement. Those are things that we continue to strategise on internally and, so, as soon as we know and we're in a place where we can discuss it publicly we will. But we're not in a position today to be able to talk about that publicly, but we'll continue to monitor that and kind of leave it there for now.

Okay. Okay. Thank you so much.

Thanks, Ashar.

(Operator Instructions)

Brian Russo.

Yes, hi, thanks for the follow-up. Just a follow-up on the last question of a general rate case. What are your, specifically what are your options? The plan expires at the end of '14, so A, you have to ask and receive an extension. Or B, file a general rate case. Is that accurate?

We could ask for an extension. We could file a general rate case. We could do nothing.

What if you do nothing?

Pardon?

If you do nothing, existing rates and structure will remain in '15.

Existing rates that we currently have in place today would stay in effect until the point in time that we would go in and ask to change prices.

Okay. Got it. Thank you very much.

Brian, this is Steve. I would just add that it's been a challenge, I know, for you guys with some of the unique items we've had over the last few years to get a handle of where that underlying engine for our Company is and I think 2013 is going to present you with a much better model to look at and say what does this Company do going forward.

And, so, our talking about the operating income and if you look at the breakout we gave in the earnings release, I think we're trying to give you guys some of the tools that you can look at and say what is the possibility if they stay here, if they have certain amounts of growth and that sort of thing. So, I do think '13 will present a cleaner slate to work off of. That's how it looks today.

Sarah Akers.

Hi, good afternoon.

Hi, Sarah.

As a follow-up to that and kind of getting a normalized earnings, in the table that provides the net income reconciliation from '12 to '13, is it reasonable to assume that the higher sales volume that's due to the usage per customer is mostly weather related or are you seeing some underlying growth in the usage piece?

Sarah, my comment would be I think the bulk of that is weather. On the per customer, we're not seeing massive growth there. There's still the natural attrition as people change out appliances and that sort of thing and we have -- we've had a very long and active, I guess, conservation effort here at the Company. So, ours may be a little more mature than some. It isn't like ours are brand-new and that we're seeing major reductions. That has not been a growing area. But new customers that come in and weren't using energy last year that are using energy this year are an additive item.

Right. That's broken out on the next line item, correct?

Yes.

Sarah, this is Darrel. For the first time really we wanted to try to capture what the impact on customer growth is, what is really the new customer component versus kind of melding it all in with just usage changes. So, we've gone through that process. So, you kind of see what the three and six month numbers look like as compared to last year.

Yes, that's very helpful. And then one last question. Do you have the dollar amount of the revenue sharing expected for the full year of '13.

This is Darrel. We haven't disclosed that. The $2.8 million that we have accrued is a prorated amount based on our anticipated earnings for the year. So, you can kind of back into that number and you can probably get pretty close, but we haven't publicly disclosed what the total estimated amount of sharing is.

Okay. And that's prorated based on the earnings received per quarter, that's how we should look at it, not just kind of on a monthly.

That's right.

Okay, got it. Thanks a lot. Appreciate it.

You bet. Thanks, Sarah.

John Alli..

Hi, guys.

Hi, John.

Just a clarification of Brian Russo's question. If you guys decide to stay out of a rate case for longer, your current rates exist where they are. But do you still have the flexibility around the ADITCs?

No, we would have to go in and ask for some extension around that program. That is set to expire at the end of 2014.

How many do you have kind of in the bank currently?

Well, we still have the $40 million that we had originally available, $45 million that we have yet to utilize any of that and we actually have more than that total available. But the original request for $45 million, of which you know we haven't used any.

Correct. Okay, thank you.

You bet.

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

Thank you and thanks for all for participating on our call this afternoon and your continued interest in IDACORP. Appreciate it. Hope everybody has a great day.

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