Idacorp Inc (IDA) 2014 Q3 法說會逐字稿

Good day, and welcome everyone to IDACORP's third quarter 2014 conference call. Today's call is being recorded and webcast live. A complete replay will 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, and good afternoon, everyone. Welcome to our third 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'll 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 third quarter 2014 earnings per share were $1.73, an increase of $0.27 per share from last year's third quarter. For the first nine months of 2014, earnings per share were $3.16, $0.07 more 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. Today, I will discuss the reconciliation of earnings from third quarter 2013 to third quarter 2014, our cash flow and liquidity positions, changes to the 2014 key operating and financial metrics, and the impact of our current Idaho Regulatory Settlement Stipulation.

At the backdrop, 2014 has benefited from slightly above normal weather impacts this summer. However, in comparison to 2013, the current year has been more moderate. Last year benefited from increased heating and cooling degree days throughout the year at record levels compared to the previous 10 years. Thus far, 2014 has experienced closer to normal weather conditions with slightly above normal weather impacts in the third quarter.

On slide 5, we present a reconciliation of earnings from third quarter 2013 to third quarter 2014. Net income increased by $13.8 million in large part due to lower income tax expense, resulting from a tax method change that I will discuss in a moment. Overall, Idaho Power Operating Income declined by $10.6 million quarter-over-quarter. Lower overall usage in the residential and irrigation customer classes due to milder weather and greater precipitation led to an $8.3 million decline in operating income, while increased sales from customer growth benefited operating income by $3 million, partially offsetting the weather related impact.

Operating expenses were higher by nearly $4 million due to greater depreciation, increased property taxes, and normal payroll and benefit increases. Increased revenue sharing also reduced our operating income line by $1.5 million as we now anticipate sharing benefits with our Idaho customers based on our full year projection.

For current year impact, it's important to note we recorded a $4.9 million provision against revenues for the impact of sharing through the first nine months of 2014.

As I mentioned earlier, the $15.7 million decrease in income tax, as shown in the table, is due to tax method change related to Idaho Power's capitalized repairs deduction. This amount results from the combined impact of a prior year $4.6 million increase in tax expense in the third quarter of 2013 and an $11.1 million opposite direction benefit in the third quarter of 2014. Last year's additional tax expense of $4.6 million was related to the expected impacts of the tax method change for years prior to 2013.

Subsequent to the end of 2013, the US Treasury issued additional guidance, which allowed us to claim a higher 2013 capitalized repairs deduction with the filing of the 2013 tax return. That return was completed and accepted by our IRS audit team in the third quarter of 2014, resulting in an additional $11.1 million of additional tax benefit recorded in this quarter.

We believe the method change will deliver some level of increased benefit annually, depending on the nature of capital work performed each year. Looking at 2014, we have increased our expected current year deduction for capitalized repairs as reflected in note 2, on page 18 of our third quarter 10-Q, broken out under the heading capitalized repairs deduction. Through the third quarter, we have estimated $2.9 million in additional tax benefit this year over the same period in the prior year. As we finalize 2014 and complete the evaluation of impacts on the years prior to 2013, we will gain additional knowledge of the potential ongoing benefits. We intend to include the full year update for this item in our tax footnote, provided in our 2014 10-K next February.

As shown on slide 5, the remaining tax computations for the quarter resulted in a $7.8 million decrease in tax expense. This was largely the result of lower pretax income in 2014 compared with 2013.

Moving now to slide 6, we show IDACORP's operating cash flows for the first nine months of 2014 and the liquidity position at September 30. Cash flow from operations for the first nine months of this year was $316 million, an increase of $68 million over the same period in 2013. Changes in power supply costs collected under the Idaho and Oregon Power Cost Adjustment mechanisms increased operating cash flows by $57 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.

Also, there are three million IDACORP common shares available for issuance under IDACORP's continuous equity program. No shares were issued during the first nine 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 for 2014 that we reported on July 31. We also continue to expect no need for additional amortization of accumulated deferred investment tax credits, or ADITCs, in 2014. In fact, in the third quarter of 2014 we recorded $4.9 million of current revenues to be refunded to Idaho customers under the existing Idaho regulatory settlement stipulation. Our current expectation is that the full year return on year-end equity in the Idaho jurisdiction will be above 10%.

Turning back to our operating and financial metrics, we have tightened our expected hydroelectric generation from the range of 5.5 million to 6.5 million megawatt hours to the range of 5.9 million to 6.4 million megawatt hours as we near the end of the year. Lastly, based on our third quarter performance and outlook for the remainder of this year, we are increasing our expected earnings-per-share guidance for 2014 from the range of $3.50 to $3.65 per diluted share, to the new range of $3.70 to $3. 80 per diluted share.

To summarize this quarter and our updated outlook for 2014, we see solid overall performance in our core business, with the results further enhanced by the tax method change, even in a year where weather provided only modest improvements to revenues and operating income at Idaho Power. Our updated guidance reflects our current expectation that Idaho Power will exceed the 10% Idaho return on equity threshold, and we once again expect to share benefits with Idaho customers. We believe our continued focus on controlling costs, coupled with positive customer growth, have been important contributors to these results.

I will now turn the presentation over to Darrel.

Thanks, Steve and good afternoon everyone. I'm going to take a few minutes to update you on some regulatory and operational highlights from the quarter, provide updated economic information, and close with a look at temperature and precipitation outlooks.

On the regulatory front, the Idaho Public Utilities Commission recently approved a proposed settlement to extend Idaho Power's December 2011 Idaho Settlement Stipulation for up to five years. As shown on slide eight, the new settlement stipulation extends the terms of the existing Idaho revenue sharing ADITC mechanism with some modifications of a period from 2015 to 2019, or until the Company amortizes $45 million in additional ADITC.

During those years, the Company may amortize up to $25 million in additional; ADITC in a single year to help achieve a 9.5% return on year end equity in the Idaho jurisdiction for that year. Under the new agreement, the customer's share of earnings between a 10% and a 10.5% Idaho return on equity increases from 50% to 75%. Also, customers will receive a direct rate credit for 50% of earnings above a 10.5% Idaho return on equity with 25% of earnings applied as an offset to the pension regulatory asset balancing account.

As we shared with you on our second quarter call, Idaho Power began work on the 2015 Integrated Resource Plan, or IRP, in August. One of the first tasks to complete was to update the load forecast assumptions for the next 20 years. Based on that update, Idaho Power expects the 2015 IRP to reflect a slight increase in the average and peak load growth rates from those in the 2013 IRP. The average load growth moves up from 1.1% in the 2013 IRP to 1.2% in the 2015 IRP and the peak load growth moves from 1.4% in the 2013 plan to 1.5% in the 2015 plan. Idaho Power expects to file the completed 2015 IRP in June 2015.

Moving now to slide 9, in dividend news, as we previously announced, on September 18, IDACORP's Board of Directors approved an increase in their regular quarterly cash dividend on IDACORP's common stock of 9.3% to $0.47 per share. At the new rate, the dividend on an annual basis is $1.88 per share. This action by the Board of Directors continues to move the dividend payout ratio closer to IDACORP's stated long-term goal of between a 50% and 60% payout of sustainable IDACORP earnings, and is reflective of continued strong performance by the Company.

Management still anticipates recommending to the Board of Directors future annual increases to the common stock dividend of greater than 5% until we approach the upper end of our payout range goal.

On the operations side, on October 24, Idaho Power and PacifiCorp executed a joint purchase and sale agreement, in which the companies agreed to exchange specific transmission related equipment and reallocate ownership interest in certain jointly owned transmission related equipment. We believe the transaction will enhance the ability of both companies to better serve their respective customers.

The net book value of the equipment Idaho Power and PacifiCorp are exchanging is roughly equal at approximately $43 million each. The exchange transaction provides for the termination and amendment of a number of legacy transmission agreements between the companies. As part of the transaction, the parties also executed a joint ownership and operating agreement. That agreement is intended to provide Idaho Power and PacifiCorp with access to transmission facilities that aligns more closely with current industry standards and allows the parties to more efficiently satisfy regulatory and reliability requirements.

The joint ownership and operating agreement allocates the directional transmission capacity of the exchange transmission related assets between the companies, which will be managed pursuant to each company's open access transmission tariff. The joint ownership and operating agreement also provides for the operation, upgrade, repair, rebuilding, and decommissioning of the exchanged asset and certain other equipment each company owns. Closing of the proposed transaction, effectiveness of the joint ownership and operating agreement, and effectiveness of the termination and amendment of the legacy transmission agreements are subject to a number of conditions, including approval by several state public utility commissions and the Federal Energy Regulatory Commission. Given the regulatory approval requirements, we expect closing of the transaction will take several months.

Moving onto the economy, I will share with you a few examples of continued improvements in our state shown on slide 10. Recently released September 2014 unemployment numbers show a continued downward trend, with the unemployment rate in Idaho Power Service area dropping to 3.8%, an improvement from this time last year when service area unemployment was at 5.7%. Idaho has, for the third year, been awarded a State Trade and Export Promotion grant, also known as STEP. Funded in part through a cooperative agreement by the US Small Business Administration, the STEP Grant program focuses on increasing the number of US small businesses that export, and increasing the value of exports by small businesses. Idaho was one of 24 states chosen as a grant recipient.

Our state and its business continues to receive national media recognition as well. The 2014 Ink Magazine list of the 5,000 fastest growing private companies included several Idaho companies, including retail, telecommunications, software, health, and financial services businesses. Forbes Magazine identified Boise as one of America's best cities for young professionals, citing several factors including its median salary, education level, unemployment rate, and average yearly job growth.

Idaho is consistently recognized as a top state for business friendliness and the business community is paying attention. Chobani, Cliff Bar, Amy's Kitchen, and Scentsy are recognized companies investing in Idaho. Just yesterday, Idaho governor, Butch Otter announced that Amy's Kitchen will be taking over the former Heinz plant in Pocatello. Amy's Kitchen started in 1988 to create frozen meals for vegetarians and calls itself the nation's leading natural frozen food brand. Initially, Amy's is expected to employ 200 full-time employees and be operational by December of this year. We have continued our efforts to promote responsible and sustainable growth in our service area, and we are seeing those efforts pay off.

Finally, I'd like to update you on the precipitation and temperature forecast for November 2014 through January 2015. On slide 11, the forecast is looking drier and warmer. We have in place mechanisms such as the annual power cost adjustment mechanisms to help mitigate those times when Mother Nature has her own agenda, allowing us to share both the risks and the rewards of weather related conditions with our customers.

And now, I and other members of the management team on the call today will be happy to take your questions.

(Operator Instructions) Our first question comes from the line of Ashar Khan from Visium.

Hi. Good morning. How are you doing, Darrel? Congratulations.

Hi, how are you doing?

Pretty good, pretty good. Very, very successful year to date for you and the team.

Thank you.

Can I just, Darrel, if I was trying to do, right, cash flow is coming up really well this year, right, based on what you're showing.

Right, we have shown an improvement from a year ago, that's correct.

If we can kind of mint money at the same rate as we are doing this year, is my math correct, we really don't need equity at all over the next couple of years. Because our equity ratio is pretty damn good. I was just looking at the income statement on the Q, we are at 53% right now. So is my reflection pretty accurate, really? We don't need equity unless the weather [warms] or something really bad happens, which doesn't seem like foreseen because you're increasing the load forecast and peak load and everything?

I would agree. I don't believe there's a need for equity this year and we've stated that. As for further out, we have not made a statement with regard to future equity. But we have made the statement that given our ratios, as you've recited them, we certainly have the ability to go to the debt side of the world first without causing any issues with our ratios, and that would, especially in a world where debt is fairly inexpensive that would seem to be choice number one.

I would say on the cash flow side, there is an ebb and flow due to our mechanisms and how we collect into the PCA that can sometimes mislead a bit. It isn't necessarily all sustainable year in, year out and I believe we're in an upswing right now, collecting some of what we were behind on from prior years. And that will turn, will head back.

Then if I can just follow-up to something which you said in your commentary that you said some of the tax benefits are going to be repeatable next year as well, if I understood correctly in the commentary. Could you give us some kind of sense that how much is -- could be repeatable into next year as well?

Well, that's, Ashar, I gave a reference. If you look at our note 2, it's page 18 in the Q that we just put out, we're not really giving a full year projection. But through the three -- the nine months thus far, so through third quarter, we highlight that we're booking at a rate of [$19,061] million, versus last year's of [$16,129]. So roughly $3 million ahead of last year. And that's not a completely annualized number, but it will -- that number -- if things stay the same we'll be larger at the end of the year just because we'll have fourth quarter booked.

What we intend to do is watch this much closer. We've actually accelerated some of the work we're doing around repairs because as it's gotten bigger, it has a more significant impact and we plan to learn more about the 2014 year as we move through the remainder of the months. Our construction cycle is such that we build a lot during the summer and those -- closed a plant over the fall and into the winter. So we will be looking at that very closely. And it could be that there is some change to that by the end of the year.

But what I pointed others to this in the past, we've typically only put this schedule in the annual report and we broke the capitalized repairs out separately in our Q, and probably will do that if it stays at this level, would be an ongoing expectation so that we can give people an idea of any movement and impacts up or down. They can see that from our historical results.

Okay But based on the expenditures that you forecast for next year and what you're trying to do, we should expect this to keep on being an ongoing stuff for at least next year. Is that fair to say?

We do believe the clarifications that came from Treasury will give us a greater repairs deduction than we've had in the past. A little hesitant to say exactly what that will be. We obviously had a little more significant improvement than what we're booking this year, if you look at the amount, the $11 million that was trued up in 2013. But it is quite dependent on the type of work that gets done each year, and there were some large work orders that contributed to that.

Okay. Thank you so much. I have another question but I'll get back in the queue.

Thank you. Our next question comes from the line of Paul Ridzon from KeyBanc.

Could you -- just an update on the latest timing expectations around Boardman-Hemingway.

Sure, Paul this is Darrel. Because right now, probably the next biggest milestone that's coming up right now is we are looking for a draft EIS that is projected to come out by the end of this year. That's the current timeframe as it sits today, to get a draft EIS out. And so what we are saying right now that we would not anticipate in-service date on that project until at least 2020.

And then just back to the repairs deduction. Has that $3 million benefit year-over-year been already reflected in earnings?

The part that we booked through the third quarter has, yes.

Okay. Thank you.

Thank you. And our next question comes from the line of Brian Russo from Ladenburg Thalmann.

I'm just curious, the ADITCs can support a 9.5% floor, but you can -- I'm wondering in a normalized year with cost controls and the positive load growth, and the low tax rate, is it possible to earn, say, 10%?

Well, I think, Brian, I'll start first of all. As we are projecting for this year based on what Steve's comments as it relates to sharing, we are projected to be above 10% this year. And so -- because that puts us into the 50/50 sharing mode as we sit here today. So based on what we're seeing this year, we do project to be above 10%.

Of course, part of that is supported by the tax method change that Steve referred to earlier, which did add some tax benefits, which is what helped push us into recognizing the $4.9 million of sharing that we have recognized. So there is a component of that, but that would be the amount above, if you think about the above 10%, where we're at today. So even if you factored in the tax benefit, we would still be pushing that number.

And according to my calculation, it looks like the midpoint to the new guidance puts you in the 10% to 10.5% sharing band; is that accurate?

Clearly, we're sharing. Yes, we're above 10% at that range.

And let me ask a different question. In your original 2014 guidance, what were kind of the ROE kind of bookends? Or what was the earned ROE at the midpoint?

On the data, Brian, I would just say we've opened up each year for the last several years indicating there was some possibility that we would get -- that we would have a need for tax credits. And it's been less than $5 million I think each year. So that tells you that some part of that band is in a range where we're very close to the 9.5% line and dipping into the tax credits in order to get that number.

So we have been more in that range when you're planning on a normalized basis and looking ahead. Last year is a year where weather was the item that stepped in and really made the difference between starting at that level and ending at a much higher level. Again, obviously back up above 10% and I think we -- if memory serves me right, we got above the 10.5% last year.

So it's more of those -- the things that vary off of your just normalized look at things that take you up into those higher ranges.

Okay, and it looks like your year to date 2014 tax rate is about 17.6% as indicated in the Q. And I think in the past, you guys have mentioned that your tax rate will start creeping up in subsequent years. Any help or assistance on what your tax rate might look like post-2014?

Brian, the -- Darrel made a comment last quarter -- we'll go back to that -- where he indicated he -- on a go-forward, we thought tax rates were in and around the mid-20s. These numbers that are there for this quarter, obviously, are slightly low because there's a very -- pretty large discreet item that got booked all in this quarter, and that's giving us a lower rate. But I think going back to what Darrel said in the second quarter call, I think that mid-20s is a good place to plan for us as a normal -- when things are more in a normal basis. And it's, again, this repairs item is a slight tweak upward that -- but I think that's a good general range to use, somewhere in and around the mid-20s.

So like a mid-20% but then should we adjust it a little bit lower for what seems like an ongoing $3 million or so tax benefit?

Possibly. I don't know that that moves the dial very much, to be truthful, Brian. And the thing you have to watch is take a 2013 where our rates, our income, because of weather, ends up being quite a bit larger than we had planned. The items that are keeping that rate low are the flow through items. They don't fluctuate so much based on whether revenues are up are down. So what you have is kind of a fixed deduction working against a variable revenue. And so the rate is a little -- it can move. It's not just a flat rate regardless of where you are. So you have to watch what's driving the rate up and down.

Okay, thank you very much.

Thank you. Our next question comes from the line of Sarah Akers from Wells Fargo.

So I know the IRP filing isn't until next year, but based on your initial work, are you seeing a potential need for gas capacity ahead of Boardman to Hemingway?

Sarah, this is Darrel. I think right now it's really too early to kind of say anything because they are just right in the middle of looking at various alternatives. Because a couple things are coming into play and one of the big ones probably is 111(d) and what impact that could have between now and 2020 depending on what we might be required to do there. That could cause a change in what happens. We will be writing a 111(d) scenario as part of our IRP process this go round.

So I can't tell you. There may be a resource required, but I don't know until we get through the process.

Got it. And then --

And it's still pretty early is the thing. So there's going to be a lot happen over this winter and into early spring.

Sure. And then what are your latest thoughts on the strategy for getting recovery of Jim Bridger SERs?

That's a great question and I think, first of all, with the extension of the ADITC, first of all, so that -- with the extension of that going out for five years, that in essence runs into that potential period where we would consider a single item rate case possibly. But we would have to look at all of the factors that go interest -- all the other things that are going on, and how far -- how long it's been since our last general, which again is 2012. Would have to all go -- all those things would have to be taken into account to determine if that's the right strategy to go in on one one-off special rate case for that -- for those expenditures.

Thank you. And our next question is a follow-up from Ashar Khan from Visium.

I just wanted to go over -- I was just looking over your book value at September 30, kind of like for Idaho Power Company, something over $36 or so. So -- and I was also looking at --

$36.12 plus or minus.

That is correct. Then I was looking at the change over the last 12 months, or nine months, let's say nine months figure in the Q and it's nearly like $1.80 or so. So if one takes $1.80 and multiplies it within nine and three-quarters, which is I guess the midpoint of the 9.5 and the 10, it comes to something like $0.18 or so. So is it fair to say we are, with this, of course this new mechanism now approved and everything, that that is probably the growth rate that one should expect assuming of course we don't issue any equity, which is hope we don't, of at least growth rate of about $0.17 or $0.18 a year as the natural progression?

Ashar, I'm trying to follow your calculation. I think I follow you, but I'm not 100% sure. What I would tell you is arguably, as you know, with our mechanism that's in place today with the ADITC, which is based on year-end Idaho jursidicationalized equity. And so you can look at that, you can look at what you estimate the change in that year-end equity is, and that is one way you can go about anticipating what the growth rate could look like.

So I'm not 100% sure which way you were going, but if you focused on the year end equity and make some assumption for what that Idaho jurisdictional component is, that can give you -- that should give you some range of what the potential is for growth in earnings.

Okay. Another way to ask it, have you -- you haven't given out, Darrel, a growth rate for the Company, right? Is that correct?

That's correct.

Okay. But you have been clipping one normalized everything. It's been 5% is a pretty good number for you guys; is that fair, on a normalized basis?

If you look at over the last six or seven years, I think that number, Steve, is --

It's in that range.

It's in that range.

A little better than that, but it's in that range. We actually have a slide we have been debating bringing down to EEI with us that will be really a historical look back. It's all data you guys have today, but looking at what our opening guidance has done each year over a number of years. Our actuals do present an interesting look and it's mainly because of the mechanism. When you get to port at the bottom side and then as you have a good year, for instance this year, and you run into the top, it's like there's a governor on each side and it does kind of band you in there. But -- and we've done a lot of talking about our actual results is that it might be good to actually look at how we've opened guidance and what has happened there.

But on a historic basis that has been in and around the numbers you're talking about.

Okay. That's great. I really appreciate it. Thank you so much.

Thank you. And our next question is a follow-up from the line of Paul Ridzon from KeyBanc.

Thank you. My question was answered.

Thank you. (Operator Instructions) And this concludes our question and answer session for today. Mr. Keen, I'll turn the conference back to you.

Thank you all for participating on our call this afternoon and your continued interest in our Company. We hope to see many of you soon at the EEI Financial Conference in Dallas. Thanks again. Goodbye.

Thanks everybody.

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