Idacorp Inc (IDA) 2014 Q2 法說會逐字稿

Good day and welcome, everyone, to IDACORP's second-quarter 2014 conference call. (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, Kate, and good afternoon, everyone. Welcome to our second-quarter 2014 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.

On slide 2, we show the presenters on today's call. Darrel Anderson, IDACORP's President and Chief Executive Officer, and Steve Keen, IDACORP's Senior Vice President, Chief Financial Officer and Treasurer. We also have other individuals available to help answer your questions during the Q&A period.

Before turning the presentation over to Steve, I will cover our Safe Harbor statement which 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 risk 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 our quarterly and year-to-date financial results. IDACORP's second-quarter 2014 earnings per share were $0.89, a decrease of $0.04 per share from last year's second quarter. Recall the 2013 results reflect the impact of a change in method of accounting for investments in qualified affordable housing projects.

For the first six months of 2014, earnings per share were $1.43, $0.20 less than last year's comparable period. Steve will discuss these results in greater detail and review our key operating metrics.

Thanks, Larry, and good afternoon everyone. My comments today will focus on the major drivers of the second-quarter results, and then I will provide a brief update on the 2014 key operating and financial metrics.

On slide 5, we present a reconciliation of earnings from second-quarter 2013 to second-quarter 2014. Net income decreased $2 million quarter over quarter, in large part due to milder weather this year. It is safe to say that the weather swing from second-quarter 2013 to second-quarter 2014 impacted sales to most of the customer classes and is reflected in the comparative $8.6 million operating income reduction shown on slide 5.

Increased sales from customer growth, however, resulted in a $2.5 million operating income increase, partially offsetting the impact of weather. General business customers grew by nearly 7,500 or 1.5% from the end of June 2013 to June of 2014. This equates to nearly 24% more growth in customers than occurred in the 12 months ended June 2013, so growth continues and has accelerated.

Increased thermal maintenance expense and normal payroll and benefit increases combined to decrease operating income by $4.3 million, while $2.4 million of other nonoperating income and a $2.9 million reduction of income taxes helped mitigate the operating income decline.

Finally, $2.8 million of revenue sharing recorded in 2013 under our Idaho Regulatory Settlement stipulation did not recur in 2014, and thus is reflected as an increase quarter over quarter.

On slide 6, we show IDACORP's first six months of 2014 operating cash flows and liquidity position at June 30. Cash flow from operations for the first six months of this year was $163 million, an increase of $49 million over the same period in 2013. Changes in power supply costs collected under the Idaho PCA mechanism increased operating cash flows by $54 million. The remaining change resulted from working capital and other items.

IDACORP and Idaho Power currently have in place credit facilities of $125 million and $300 million, respectively, to meet short-term liquidity and operating requirements. The liquidity available under the credit facilities is shown on slide 6 as well.

Also, there are 3 million IDACORP common shares available for issuance under IDACORP's continuous equity program. No shares were issued during the first six months of 2014, and we do not expect to issue new equity during the remainder of 2014, except for modest amounts relating to employee compensation plans.

Moving now to our estimated 2014 key operating and financial metrics shown on slide 7. We are maintaining both the expected operations and maintenance range and the capital expenditure range that we recorded on May 1, but are changing the expected earnings support from amortization of additional accumulated deferred investment tax credits, or ADITC, in 2014 to zero from our previous estimate of less than $5 million.

As discussed in our earnings press release this morning and in our 10-Q filing, we reversed the $950,000 of additional ADITCs that we had recorded in the first quarter, and we now do not expect to record any additional ADITCs in 2014. This results from our current expectation that our year-end return on equity in the Idaho jurisdiction will be above 9.5%.

Recall our Idaho regulatory settlement provides for use of additional ADITCs only when our return on year-end equity in Idaho is less than 9.5%.

Now turning back to our operating and financial metrics. We have tightened our expected hydroelectric generation to a range of 5.5 million to 6.5 million megawatt hours as we near the end of our water year. Lastly, based on our outlook for the remainder of this year, we are increasing our expected earnings-per-share guidance for 2014 to the range of $3.50 to $3.65 per diluted share, from the previous estimate of $3.40 to $3.55 per diluted share.

To summarize this quarter and our updated outlook for 2014, we see solid performance from our core business, even in a year where milder than normal weather reduced our revenues. Our updated guidance reflects our current expectation that we will exceed the 9.5% Idaho return on equity threshold, once again without support from ADITCs. We believe our continued focus on controlling costs, coupled with positive customer growth, have been the primary contributors.

I will now turn the presentation over to Darrel to discuss recent regulatory actions, the EPA's proposed rules under Section 111(d) of the Clean Air Act, our continued economic progress and other important matters.

Thanks, Steve, and good afternoon everyone. Before I comment on a few of the regulatory and operating areas, I want to reemphasize an observation in Steve's comments. We continue to stay focused on the core business, the basic blocking and tackling that we believe provides value to our owners and customers. Last quarter's results reflect this continued effort, and ranks second only to last year's record second quarter when we look back over the last 10 years.

In addition, if we achieve the upper end of our updated earnings guidance range, IDACORP will record a seventh consecutive year of earnings growth.

With that, I would like to take a few minutes to update you on a few items. As many of you know, we have a settlement stipulation addressing earnings in our Idaho jurisdiction. Steve referred to the tax credit feature of the settlement stipulation, which allows Idaho Power to amortize up to $45 million of additional ADITCs to help achieve a 9.5% return on year-end equity in the Idaho jurisdiction.

Importantly, the settlement also contains provisions for the potential sharing of revenues with Idaho customers. The features of the stipulation are shown on slide 8. As an example, last year's earnings benefited from weather conditions that helped deliver results above our sharing threshold return on equity of 10% in Idaho.

Our Idaho sharing mechanism lets customers participate in these positive results which, of course, also had a resulting impact on our earnings. We believe that the opportunity for Idaho customers to receive rate reduction benefits through the sharing mechanism as they did last year, combined with the potential earnings support the settlement offers below a 9.5% return on year-end equity in our Idaho jurisdiction, has been positive for both shareowners and customers.

In May, Idaho Power filed an application with the Idaho Public Utilities Commission to extend the settlement stipulation. In the application, Idaho Power did not request any changes to the terms of the settlement except that Idaho Power's regulatory authority to amortize additional ADITCs continue until the full $45 million is used up, or until otherwise directed by the Idaho Public Utilities Commission.

The Commission staff has scheduled a workshop for staff and the parties on August 11 to discuss their views on the case and explore settlement possibilities. We see this as a positive step in an effort to move the filing forward.

On a different regulatory front, the Environmental Protection Agency has recently released its proposed rules for existing generating plants under Section 111(d) of the Clean Air Act referenced on slide 9. These rules are intended to reduce carbon emissions from existing power plants.

A 120-day comment period began on June 18. Idaho Power is assessing the proposed rules and their possible impacts to the Company. Idaho Power is also actively participating with other utilities and relevant agencies within the states where we have generation facilities to formulate a response to the EPA's proposed rules.

The EPA expects to issue the final rules by June of 2015, with the state or regional implementation plans due between 2016 and 2018. We will continue working with our fellow utilities, regulators and state agencies to determine how we may comply with the final rules, while minimizing costs and system reliability impacts to our customers.

It is too early to determine how the rules will ultimately impact our operations. However, anything that increases power production costs will generally increase the prices our customers pay.

Moving on to some of our major projects. The Boardman to Hemingway 500 KB transmission project continues to move forward. One important milestone to continue to follow is the draft environmental impact statement which is scheduled to be released by the Bureau of Land Management in the fourth quarter.

Separately, the project team continues its work on the Company's applications for site certificate for the Oregon State siting process, and fieldwork and other project activities are ongoing.

As you are aware, late last year Idaho Power and its plant co-owner and operator, PacifiCorp, began installation of selective catalytic reduction or SCR equipment on two of the four generating units at the Jim Bridger coal plant in Wyoming. That work remains on schedule and within budget as described in our most recent quarterly update provided to the Idaho Public Utilities Commission on June 3.

Our share of the cost of the investment in the equipment as filed with the IPUC is expected to be approximately $130 million. These upgrades are included in Idaho Power's 2013 Integrated Resource Plan, which was accepted for filing by the Idaho Commission in February.

On July 8, the Oregon Public Utility Commission acknowledged Idaho Power's short-term action items in the IRP, but did not acknowledge the investments in SCR technology at the Bridger plant. The Oregon Commission stated that it would undertake a fair and thorough investigation of the prudence of the emissions technology investments at the Jim Bridger plant when Idaho Power seeks rate recovery for the investment.

Moving on to the economy, we continue to see positive signs of expansion and growth. I have some examples on slide 10. In June, a report issued by Thumbtack, a consumer service website, ranked Idaho number 2 and one of only four states to receive an A+ grade in a survey of more than 12,000 small businesses, assessing how they perceive the business environment in states and metro areas. Thumbtack partnered with the Ewing Marion Kauffman Foundation for their report.

Idaho ranked number 6 in a recent evaluation of states with the fastest job growth. The Kiplinger.com assessment pointed out that Idaho benefits from the high-tech and energy sectors, and the state will see the pace of new hiring climb significantly this year.

The Idaho Department of Labor announced July 18 that businesses in the state hired more people in June than during any month since the mid-2000s. The agency also shared that the state's seasonally adjusted unemployment rate fell another 2/10 of a percentage point to 4.5%. For the 35th straight month, the number of jobless workers has declined.

On July 1, stakeholders broke ground on the new $45 million 370,000 square foot Boise City Center Plaza. This project is a public-private partnership that will include office space, classrooms and laboratories for Boise State University, commercial space and an attached multimodal transit center. In part, due to these developments, Idaho Power continues to expect positive customer growth in its service area.

The updated temperature and precipitation forecast from the National Oceanic Atmospheric Administration, or NOAA, is presented on slide 11. According to NOAA's August through October 2014 outlook, our service area has between a 33% and 50% chance of above normal temperatures and an equal chance of above or below normal precipitation.

Our last item to share with you relates to our 2015 Integrated Resource Plan. We will be kicking off this process with our first advisory committee meeting on August 7. This planning process helps shape our future resource needs based on a myriad of assumptions, criteria and scenarios. We anticipate sharing updates to the process periodically between now and the time we plan to file the plan in June 2015.

Now, I and others on the call will be happy to take your questions.

(Operator Instructions) Paul Ridzon, KeyBanc.

Aside from the workshop that is scheduled, is there any formal schedule for the ADITCs?

No. Paul, this is Darrel. No, right now that is the current schedule, and that is coming up here on August 11, and we are going to see how that goes. I think from that would be a schedule would come out of it. It is not out of the realm of possibility that, as we said in my comments, that we could enter into settlement discussions even at that meeting.

Then did you book any provision for refund in the quarter?

Paul, this is Darrel again. No, we have not booked any provision for refund at this time. What I would tell you is that if you look at our earnings range right now that Steve updated you on, the upper end of that range doesn't quite get us to sharing. It is pretty close but doesn't quite get us there.

The upper end -- you're not sharing at the upper end.

That is correct.

Okay, thank you very much.

You bet.

Brian Russo, Ladenburg Thalmann.

Hi, good afternoon. Maybe we could just dig a little deeper into the increased guidance. It doesn't seem like weather was a driver of that. It is just the positive load growth and the operating performance, correct?

Brian, it is really a combination of the continued load growth, our efforts on our optimization efforts internally around managing our O&M expenses. Those are probably the two key components to what is driving that. We have -- there is a little bit of tax benefits that are flowing through there that are having a positive impact to those numbers.

But those are -- the same things really that drove the first quarter, I mean the first half of the year, really are driving the second half and the change in our guidance.

So the decrease in tax expense of $2.9 million, was that not contemplated in the original guidance?

Brian, this is Steve. Part of the change in our tax rate you could just equate to we have lower income and we have kind of a stable level of flow-throughs. But there is a small amount of uptick in what we would say is a flow-through deduction that is showing up that, yes, wasn't in our initial plan.

So they do move throughout the year. As Darrel said, that is a fairly modest change, and it is just a contributor to the other pieces that are really putting us at a level we can feel comfortable to raise guidance to the level we did.

Okay. The $2.4 million positive variance on nonoperating income and expenses, is there any significance about that?

One piece that I think will make sense to you is AFUDC is up as a contributor to that, as we have grown the amount of capital that we are spending, and our capital has been -- it's been growing inconsistent. We haven't seen the dip there. So that has contributed. We have a larger CWIP balance.

Okay. And then just to understand the various scenarios of the upcoming workshop, one scenario is you can reach a settlement, and that will be filed and made public. Another one is you can't reach an agreement, and a procedural schedule will be set for a more formal discussion and review with the -- we could file testimony, staff intervener testimony, that sort of thing?

Right. Yes, Depending on the outcome of the workshop on the 11th would then dictate whether or not we have a more formal schedule to get set up.

Okay. I realize it is early on in your IRP process, but any additional insight into any capacity needs between now and at least 2020 when the Boardman Hemingway Line might be operational?

Brian, this is Darrel. I think it is a little premature to even speculate on that. We spend a lot of time on a lot of input, as I said, a lot of scenarios that we will run. We will take into account 111(d); we will be part of that discussion. So there is a lot of things -- we do these every two years, but there's a lot of things that have moved in just two years.

So it would be premature to speculate on anything that is out there. But we are going into this with our advisory group and we'll be very thorough with it, and come out of there with what we think is the best alternative for us moving forward.

And just one last question; I think there was a docket opened in early July regarding your PCA and further review. Just any insight into that?

Brian, I am going to have Greg Said speak to us, because he is actually closest to those workshops. And I will let him speak to that because he has had recent conversations with those folks regarding those. Greg, you want to take that?

Sure. Good afternoon, Brian. There was a workshop yesterday where we got together with the Commission staff and the two parties in the case, which were the industrial customers. I guess they were the only intervener in that case, were the industrial customers. There were some other interested parties in the room, but the industrial customers were the only other party.

And the nature of the staff request for workshops was to have discussions as to whether or not Idaho Power's quantification of numbers in our filed power cost adjustment were appropriate and calculated in conformance with prior Commission orders. There was a couple of questions as to some of the moving pieces that weren't characteristic of prior years.

Anyway, following the discussions or as a result of the discussions that occurred yesterday, the parties agreed that Idaho Power had indeed filed its PCA in conformance with prior Commission orders. And at this point in time, we expect the staff to notify the Commission of that conclusion and suggest that that case be closed.

Okay, great. Thank you very much, appreciate it.

Thanks, Brian.

Chris Ellinghaus, Williams Capital.

A couple of questions. As far as the IRP goes for next year, how well do you believe that you can address the EPA issue, and how do you anticipate doing that at that time? Or will that take until 2017?

I think it is fair to say that will be a work in progress as we work through the IRP this go-around, most likely. Again, the rules as they stand today are draft. As we all know, they will comment filed and it is hard to say what the final rules might ultimately look like. So they will be a consideration, because remember, we plan to file this June of next year.

So we may have some inklings towards what might be in those rules and the status, kind of depending on the timing what EPA decides to do with those rules. But it will be a part of the discussion. Again, I don't think we know as we sit here today how much of an impact it will have until we really get into that process.

The one thing I will reiterate, Chris, just so you know is remember, our number one resource in our last IRP was Boardman to Hemingway. And just as a reminder as to why Boardman-Hemingway was the resources, because it was not building new generation. It was accessing already available generation in the region at the time that we needed it.

And our point with respect to Boardman-Hemingway today is if we don't build Boardman-Hemingway, likely you have to build something else. And we would make the case that just puts more carbon in the air, because it is likely to be a carbon-generating unit of some sort if we had to do that.

So by building this line puts us in a position to access generation that is already available, and again should help from a carbon perspective not force you into building some other generating resource. So that is kind of, as we put the spin on that and when we look at what the value of B to H is, it's the fact -- we are kind of looking at this really as the low carbon option.

Okay. Is that something that you can address in the IRP as a range of possible outcomes, or is that something that you would just say, look, we don't really know, so we can't address it at this point?

I believe and, again, we haven't started the process really in earnest yet, but I would believe that would be incorporated as some part of the options that might be out there.

Okay. Can you just walk us through a little bit of the ADITC history in terms of extension and the existing settlement? And do you have any color for sort of where interveners lay in terms of an additional extension or any issues that they might have?

I will try, and I will get corrected if I go astray here, but I believe -- I think at least in this current form -- it's like in its sixth year, I believe. And if you recall over those six years, we have yet to utilize any of the ADITCs throughout that six-year period.

And as Steve alluded to today, we now have recently changed our estimates of not using any this year either. I don't have the number in front of me, but we have shared a lot back with the customer. So I think the story of between -- and I don't recall what it is, but if we look at how the mechanism has worked with respect to the customer and the owner, I think there is a good balance there. So from that standpoint, we have a good track record.

Actually, I'm being told now that the total amount that we have shared over the life is $92 million. So, again, $92 million without using any of the ADITCs. We think we have been very prudent in how we have used the mechanism, and so the benefits have flown back. So we think we have a good story.

It is going to be a matter of sitting down with the staff, with the interveners, having the opportunity to talk about what it has done, what it maybe hasn't done, and have that conversation and see where people end up. It is fair to say, I think, that most folks would suggest it has been positively received.

Okay, good. Can you, Steve, can you go over the tax issues for the quarter again? I didn't quite catch that.

Chris, you recall we are a flow-through jurisdiction, and so we don't provide deferred taxes unless we are technically required to provide deferred taxes. So there are a lot of items -- repair allowance is one that has been talked about in recent years -- that has a deduction that is positive that helps earnings. There are other deductions that go the other direction. The AFUDC factors in, permanent differences factor in.

It was really a movement in multiples of those items, the largest change being repairs. Just as we have looked at capital as we have analyzed what we are spending and how we apply the latest regulations in various of these deductions to the actual things that are going on, or our estimates of what is going on, that those numbers have shifted slightly.

The biggest piece of our tax reduction is really just we made less money. We didn't make -- that doesn't account for the total change. There was a little bit of it that was accretive.

Okay. Can you tell us what you anticipate your tax rate to be this year?

Chris, this is Darrel. Last time we talked around the mid-20%s, and there is no reason that we would suggest we would be moving off of that based on what we know today. This quarter, you saw I think it was 24% or so. So it is in and around that range.

Okay, great. Thanks for the help.

Thanks.

Thanks, Chris.

Ashar Khan, Visium.

Sorry, I joined a little bit late, Darrel, so I don't know if this question was asked or not. But could you remind us, what have you said on the dividend in terms of the increase this year, at what level or something or what the goal is?

Right. That is a great question, Ashar. What we basically said is at least 5% is what we would anticipate increasing in September, at least 5%; with our goal continue to be to get within 50% to 60% of sustainable earnings.

Okay, so it is at least 5%, but it could be higher depending upon what we see in September, right?

At least 5%.

We said that we anticipated annual changes of at least or above 5% until we approach the upper end of the 50% to 60%.

And what was the timeline approaching that 50% to 60%?

We didn't set a hard timeline; we really didn't.

And Ashar, as you know, the dividend is always a board decision. So management can make recommendations, but ultimately it is a board decision at the end of the day.

Okay. And then if I heard you correctly, you said that the $3.50 to the $3.65, the upper end of the range still does not -- you don't, I guess, reach the ROE band, right, which is at 10.5% if I am correct? When the sharing starts, is that correct?

That would be 10%.

10%, sorry, 10%. So Darrel, when you come up with your guidance usually, what do you base it on? Do you base it on the 9.5% as the midpoint or usually in the beginning of the year, or how is it based?

Ashar, We base it on a whole lot of factors. The ADITC mechanism is a consideration in how we set earnings guidance, but we take everything into account as it relates to coming up with a number. And obviously, the ADITC mechanism today allows us to help kind of set a bit of a floor, but it is not a guaranteed floor either.

So it does help us, and so we start in and around that range and then move off of that, depending on what other operating issues are out there in setting that number. So a lot of variables. It is not just going to what does the 9.5% number say.

Okay. And if I can ask a last question. I know sometimes you have it; it's not on these slides. What is the rate base growth projected, Darrel, next year?

I'm going to let Steve answer that question.

Ashar, Future rate base isn't something we have actually publicized. We were at $2.5 million in our last rate case where we had a full general, and then we had the Langley Gulch closing that added about another $340 million. So you can say roughly a little above $2.8 billion is where we were really through our last rate filing, and that would have been mid-2012. So you can take a look at our additions each year and depreciation and come up (multiple speakers).

That is what I was going to ask. What is the latest CapEx number for 2015?

We are in and around $300 million on an annual basis.

And how much is depreciation usually on an annualized basis?

It is a little over $100 million, $120 million.

Okay, okay.

Ashar, Our 2015 CapEx range is about $315 million to $335 million.

So, in essence, if you subtract $120 million, there is nearly like $200 million of more rate base being added as part of the equation. I appreciate it. Thank you so much.

Bonus depreciation would have an impact on that as well. And that is one of the reasons that it is difficult to project where we would be in the future, is if bonus is there this year. But we will see when we find out if it is going to be there for next year or into the future. It would be nice to get some clarity on that prior to year end and not be floating into 2015, but there is certainly a lot of talk about extending bonus.

Okay, okay. I appreciate it. Thank you so much.

Thank you, Ashar.

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

Thank you all for participating on our call this afternoon and for your continued interest in our company. Goodbye.

Thanks, everybody.

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