Idacorp Inc (IDA) 2014 Q4 法說會逐字稿

Welcome to IDACORP's fourth 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 at the Company's website at www.idacorpinc.com. (Operator Instructions). At this time I would like to turn the call over to IDACORP's director of Investors Relations, Mr. Lawrence Spencer.

Thank you and good afternoon. As you have probably seen we issued our earnings release and form 10-K before the markets opened today and they were both posted to the IDACORP website. We will be using a few slides to supplement today's call and you can also find those on our website. We will refer to those slides as we work our way through today's presentation. On today's call we have 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 to help answer your questions during the Q&A period.

Before turning the presentation over to Steve I'll cover our Safe Harbor statement on slide 3. Our presentation today will include 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. So we caution you against placing undue reliance on these forward-looking statements.

Some of the factors and events that could cause future results to differ materially from those included in forward-looking statements are listed on slide 3 and included 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 fourth quarter 2014 earnings per diluted share were $0.69, an increase of $0.14 per share from last year's fourth quarter.

For 2014, earnings per diluted share were $3.85, $0.21 more than last year's comparable period. I'll now turn it over to Steve to discuss the annual results in greater detail and review our estimated 2015 key operating metrics.

Thanks, Larry. And good afternoon, everyone. I'll cover the reconciliation of earnings from 2013 to 2014, our cash flow and liquidity positions and, as Larry mentioned, some estimated 2015 key operating and financial metrics. To help understand our 2014 results, on slide 5 we present a reconciliation of earnings from 2013 to 2014.

Overall net income increased by $11.1 million, largely due to lower income tax expense resulting from a tax method change that I will discuss in a moment. Idaho Power's operating income declined by $38 million from 2013 to 2014. Lower overall usage in the residential and irrigation customer classes due to more moderate temperatures and greater precipitation reduced operating income by $38.1 million year-over-year. Those impacts were partially offset by increased sales from customer growth which benefited operating income by $9.1 million.

Compared to 2013, the weather in 2014 was much more moderate. In 2013 we experienced increased heating and cooling degree days throughout the year at record levels compared with the previous ten years. Operating expenses in 2014 were also higher by $8.4 million due to greater labor related expenses along with increased depreciation and property taxes. Increased revenue sharing also reduced our operating income slightly as we will again share benefits with our Idaho customers under our Idaho regulatory settlement.

Greater average construction work in progress representative of our ongoing construction activity resulted in a $3.9 million increase in the allowance for funds used during construction. Also an $11.6 million gain on sale of investments in 2013 did not repeat in 2014. The $29.1 million decrease in income taxes shown in the table represents the impact of a tax method change related to Idaho Power's capitalized repairs deduction.

This amount reflects the combined impact of $4.6 million of tax expense recorded in 2013, and $24.5 million of tax benefit recorded in 2014. We and others in the utility industry originally expected the new regulations to have a negative impact on capitalized repairs deductions. This expectation led us to accrue the $4.6 million of tax expense in 2013.

New guidance from treasury in mid-2014 modified our interpretation and increased our expected benefits. This updated guidance was reflected in our 2013 tax return which we filed in September of 2014. The resulting additional tax benefit for the 2013 tax year was included in our third quarter 2014 financial results. In the fourth quarter of 2014, we completed our adoption of the new method for all years prior to 2013.

The $29.1 million decrease in income taxes on the table reflects the impacts of the method change on all tax years through 2013 as well as the reversal of the $4.6 million tax accrual recorded in calendar year 2013. The methodology underlying this change is expected to deliver a level of increased benefit annually based on the nature and amount of capital work performed each year.

The table reflects that we recorded $7.8 million of additional tax benefit related to capitalized repairs in 2014 compared to the original tax accrual for 2013 which was based on the prior capitalized repairs methodology. In note two to the financial statements in the 10-K we filed today, the federal tax portion of this deduction is included in the line titled "Capitalized Repairs Costs" and the change from 2013 to 2014 is reflective of a single year federal income tax benefit from the new repairs methodology.

The previously discussed $29.1 million of tax change is reflected on the following line titled "Tax Method Change, Capitalized Repairs" where the comparison of 2013 to 2014 reveals the impacts relating to prior years. As we look at our potential future results we generally exclude the tax method change impacts from our earnings estimates. We are not currently aware of any additional forthcoming changes in tax policy that might cause adjustments to prior years. Please note that the capitalized repairs deduction originates in Idaho Power.

An effective tax rate in the low 20s is what we currently estimate for Idaho Power next year. The remaining $19.8 million reduction in income taxes for 2014 primarily resulted from lower pre-tax income in 2014 compared with 2013. Moving now to slide six we show IDACORP's operating cash flows for 2014 and the liquidity position at December 31. Cash flows from operations for 2014 were $364 million, an increase of approximately $59 million over 2013.

Changes in power supply costs collected under the Idaho Power cost adjustment mechanism drove most of the increase in operating cash flows. 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 the bottom of slide six.

Also there are 3 million IDACORP common shares available for issuance under IDACORP's continuous equity program. No shares were issued during 2014 and we do not expect to issue new equity during 2015 except for modest amounts relating to employee compensation plans. Turning now to slide seven. We are estimating 2015 O&M at between $340 million and $350 million.

As you can tell from slide seven, this is less than the actual 2014 expense of $355 million, which I will speak to in a moment. Also we did not amortize any additional accumulated deferred investment tax credits in 2014. Instead, under our Idaho regulatory settlement, in 2014 we recorded $8 million of current revenues to be refunded to Idaho customers and $16.7 million of additional pension expense, further reducing the amount of pension benefits needed to be collected from customers in the future. Our 2014 O&M expense included the $16.7 million.

Removing this impact, we anticipate only a modest increase in O&M for 2015, reflecting our ongoing diligence around actively managing costs. Our estimated capital expenditure range for 2015 is between $300 million and $310 million, which includes between $45 and $50 million for emission control equipment at the Jim Bridger plant. Page 54 in the form 10-K filed today details some examples of anticipated ongoing infrastructure projects. For 2016 the estimated capital expenditure range is also from $300 to $310 million. In total, over the next five years, we expect capital expenditures to approximate $1.5 billion.

On the next roll on slide seven we show there our expected 2015 hydroelectric generation ranges from 7.0 to 9.0 million-megawatt hours. As a reminder the median annual hydroelectric generation is 8.5 million-megawatt hours. Finally, we are initiating our 2015 earnings per share guidance in the range of $3.65 to $3.80 per diluted share which reflects normal weather conditions and our expectations of continuing effective cost management. As of today we do not expect to amortize additional accumulated deferred investment tax credits in 2015 under our new Idaho regulatory settlement. I'll now turn the presentation over to Darrel.

Thanks, Steve. And good afternoon, everyone. For 2014 we saw our seventh consecutive year of net income growth. In addition to that achievement, I want to highlight a few other 2014 items before looking forward. First, Idaho Power's 2014 return on year end equity in the Idaho jurisdiction exceeded 10.5% which resulted in the Company using no additional amortization of accumulated deferred investment tax credits under the 2011 Idaho regulatory settlement.

In fact, for yet another year, Idaho Power will share earnings with Idaho customers of almost $25 million. Over the last six years, the Company has returned over $118 million to customers, reflecting the fact that the mechanism has been a win for customers as well as for shareholders. Additionally, as illustrated on slide eight, and as we previously discussed, we executed a new settlement during 2014 that extends many of the benefits of the 2011 settlement potentially through 2019, which we again believe is a benefit to both shareholders and customers.

As a final note on regulatory matters, we have no intention to file a general rate case in 2015. Second, as to our large infrastructure projects, at the end of 2014 we achieved a notable milestone in one of Idaho Power's two 500-kilovolt transmission projects, the 300 mile Boardman to Hemingway line. On December 19, the Bureau of Land Management released the draft environmental impact statement for the project. Comments are due in March of this year, with the expectation that a final environmental impact statement will be issued by the BLM during 2016.

Third, in 2014, we implemented Safety For Life, an initiative to increase employee safety awareness and improve employee safety behaviors and practices while maintaining OSHA recordable injury rates well below utility industry national averages. For 2014 we saw a 40% reduction in the Company's OSHA recordable rate compared to 2013.

Safety is one of Idaho Power's core values and our employees have worked hard to focus on safety, assess the hazards of our work, make safe choices on how we work, and speak up when we see hazardous situations. We have made good progress and we will work to continue that positive safety momentum in 2015 and beyond. Finally, in 2014, Public Utilities Fortnightly named Idaho Power to its prestigious list of 40 best energy companies.

Our Company made a substantial jump in the rankings, from 29th to 17th, with our fully integrated business model cited as a key to the Company's continued success. Looking forward on the resource planning side, Idaho Power intends to file its 2015 integrated resource plan by mid-year. This biannual planning document is our 20-year road map for meeting customer demand in a responsible, cost-effective way.

In addition, Idaho Power will continue its optimization efforts targeted to prudently manage both operating and maintenance expenses and capital expenditures. While we continue that focus on cost management we will also continue our active promotion of growth in Idaho Power's service area. During the past four years we have experienced growth in our customer count and we have seen and helped to promote positive economic development. We are seeing those efforts pay off as a number of large businesses have elected to locate or expand their operations in our service territory.

Slide nine shows our customer growth increase of 1.4% from 2013 to 2014. During 2014, Idaho Power's customer count grew by more than 7300 customers. We believe that this growth will continue. Our most recent load forecast, which we expect to incorporate into the 2015 integrated resource planning process, predicts a 1.4% five year compound annual growth rate in residential loads, and a 2.1% five year compound annual growth rate in residential customers.

Other indicators of economic condition of our service area include an unemployment rate in our Idaho service area of 3.6% at December 31, 2014, compared to 5.3% a year ago, and a national rate of 5.6%. In addition, gross area product for our service area, as reported by Moody's Analytics, grew by 1.9% in 2014 and is projected to grow 3.1% and 3.5% in 2015 and 2016 respectively.

Slide 10 is a look at the projected March to May weather outlook. Temperatures for January were two degrees to six degrees above normal for the entire region, with the exception of the lower treasure valley which averaged one degree below normal. Precipitation was below normal for the entire region. During February we expect temperatures to be slightly above normal.

March through May projections suggest that there's an equal chance for above or below-normal precipitation in Idaho Power service area and a 40% to 50% chance of above normal temperatures. An additional area focus I want to mention today has been IDACORP's dividend. From the beginning of 2012 to 2014 IDACORPS board of directors has approved a collective 57% increase in a quarterly dividend, from $0.30 to $0.47 per share.

You may remember that in September of last year, the IDACORP board approved an increase in the quarterly dividend rate from $0.43 per share to $0.47 per share, a 9.3% increase. This was continued progress toward achieving IDACORP's previously adopted target dividend payout ratio of between 50% and 60% of sustainable IDACORP earnings. Management continues to anticipate recommending to the board additional annual increases of over 5% until the dividend reaches the upper end of the target dividend payout ratio.

One last bit of news for you is that the Governor of Idaho, Butch Otter announced yesterday in a news release that Kristine Sasser, a veteran legal counsel for the Idaho Public Utilities Commission will succeed retiring Commissioner Marsha Smith on a three member commission. Commissioner Smith is retiring after serving on the commission since being appointed in 1991. Like Commissioner Smith, Sasser is a Democrat and will serve a six year term as commissioner. Sasser's final appointment is subject to Idaho Senate confirmation. And now I and others on the call will be happy to answer questions you may have.

Thank you. Ladies and gentlemen, we will begin the question and answer session. (Operator Instructions). Our first question comes from the line of Paul Ridzon of KeyBanc. Your line is open.

Good afternoon, guys. How are you?

Hey, Paul.

Was weather in 2014, I know that it was below that of 2013 but how did it compare to normal?

Paul, we would it was pretty close to normal. If anything, it may have been slightly on the low side but very close. It was much more -- would proximate a normal year than 2013.

And I saw you had 10% industrial sales growth in the year. What drove that?

Paul, I would say that most of our growth is coming from items that you would say are not headline news. It's not big customers, it's kind of some growth with our customers that have already been here. We have had some expansions. We have had announcements that we put out a few years ago that some of those are now coming online and expanding their lines of operation, and it's really been small increments across the board. But I think industrial picked up and we continue to have residential inflow as the state of Idaho still looks like a favorable place to live.

You said you indicated low 20's for your effective tax rate this year?

That's correct Paul.

Where do you see that going in the next couple of years?

Paul, based on the primary impact on that is the repairs deduction. And with our planned expenditures being fairly close to what we did this year, and fairly level over the next few years, around $300 million, we don't expect major shifts. It is based on the type of additions you do each year, and it's a very technical process, actually, work order by work order. But as we would just look ahead, we would think that -- we don't see wild changes in that as we move forward. So that's the primary change from where we have been, or the stepped-up benefit coming out of the repairs side.

So you kind of think low 20s for the next few years?

We didn't -- I haven't looked at the rate beyond the next year. The rate for us, I would give you one cautionary thing there, is the rate is sensitive to changes in the top line. So as our revenues go up, the flow-through items don't necessarily move up and down based on changes in the top line. And 2013 is a good example of that. If you go run the numbers for 2013, you'll see that income before taxes is a lot higher. While flow-through doesn't necessarily lift up in proportion. And so what happens is you get a higher tax rate because you're not getting additional flow-through items for those additional revenues that show up. So it's hard to predict that in the future. And our 20%, low 20s, is really related to next year, as we sit here today, 2015.

Makes sense. And Darrel, I had one question. Do you think it would be okay if Steve and his guys did my taxes this is year?

I'll let Steve respond to that one.

I'm not worthy of that! Gene Marchioro and his team are probably the ones that you need to talk to on that. But they do a fine job for us. That's for sure.

They certain do. Thanks very much, guys.

Thanks Paul.

Thanks Paul.

Thank you. Our next question comes from Brian Russo, Ladenburg Thalmann. Your line is now open.

Good afternoon.

Hi Brian. How are you doing?

Good. Thanks. Just to clarify a response to the last question. Is the low 20% tax rate, is that for 2015 or is that for 2016?

2015. I kind of threw that in at the end, but yes, 2015.

And your guidance doesn't assume any sharing, does it?

You know, we didn't really address that. But if you look at where we were -- for instance, last year where we said zero to $5 million of ADITC, that's an indicator we're down near the floor where we are bumping into the 9.5%. There's a band of roughly $10 million, I would say, between there and where we begin to share. You add in this -- the tax item added a little over $7 million last year. It doesn't necessarily drive you up to a level where you're looking at sharing, because we didn't actually publish the exact number we had in our early forecast, it's somewhere between zero and five for last year. We've moved somewhere above the 9.5 line but my guess is that it's not enough to shift the level to sharing.

Bottom line is, Brian, the range that we have out there, we would anticipate that we are within that dead band area because obviously we're not using credits. So we're kind of living in that dead band with the range that we've provided.

Got you. Understood. And could you just elaborate on some of the commentary in the 10-K around the IRP? You guys said that you'll be able to meet near term peak capacity deficit until Boardman to Hemingway is completed in 2021? Maybe you could elaborate on that?

Sure. Brian, this is Darrel. As you know, we are right now in the middle of the IRP process. We're kind of going through our IRPAC process and meeting with the constituents that work on that process. And if you look at our disclosure on page 15 of our 10-K, we do talk a little bit about what some of those assumptions are that give rise to the date being where we say right now is in 2021 or so. So there are a number of things that can impact that. Probably one of the biggest things right now we don't have a really good answer for is what might be the impacts of 111-D.

As you know, we may hear something back from the EPA later this year on that. That could have an impact. Our growth numbers may have an impact. We talk about new large loads. That could have an impact. But based on the assumptions that we have in there today, we are saying that from a capacity perspective as we sit here today on a peak hour basis, 2021 or beyond is where we stand right now. Which does sync up, at least today, with respect to what we are anticipating the potential in-service date that we could see for Boardman to Hemingway.

Again, what I would tell you is we're right in the middle of that process, and we're going to have to let that process play out. We'll get a chance to update you on that, likely at our end of our first quarter call because we'll be pretty close to -- that will be well down the line as it relates to the IRP. So you'll have some insights there as to what direction that might be headed. I wish I could give you more definitive answers but right now it would be the cart way before the horse based on where that process is today.

All right. And then just to clarify, the change in the capitalized repair cost from 2013 to 2014, roughly $7 million to $8 million, that's what's ongoing. Correct?

That's representative of an annual amount. So that's why we've highlighted that and pulled it out of the prior year adjustment. It could vary. It's going to vary based on the actual capital that we spend and what kind of items that we might get qualified as repair. But we think that's representative of what we expect in the future.

Okay. And then lastly just an update on the Gateway West transmission line?

What kind of update would you like, Brian? It's ongoing. What I can do is have Vern Porter, who is with us today, who will be able to speak to Boardman to Hemingway for you. Excuse me, Gateway West.

Hey, Brian, this is Vern. So back in November 2013, as you remember, the BLM issued a record decision for most of the project, and we are continuing to work on the two most Western segments, segments eight and nine, that travel through the birds of prey area here before they get to the Hemingway substation. So a decision has been made to do a supplemental EIS -- Environmental Impact Study -- for that project, and we expect that the BLM will issue a record decision sometime in 2016 with respect to that. So work is continuing, and environmentally we'll continue to work on that and secure that record of decision.

And remind me, what's the total cost of that line and what's IDACORP's share?

Brian, our estimated costs on that line is $200 to $400 million is what we project that to be. But that's beyond any forecast periods that we have right now, when we would be looking to spend those dollars.

And just curious, if everything goes well with the permitting, as you stand today, hypothetically when would this transmission line be operational?

Brian, you're still speaking to Gateway, right?

Yes.

Okay. Vern, do you want to --

We expect that the project will be built from the East to the West. So we expect that sometime in the maybe end of this decade or early next decade, that Pacificorp would be building from Eastern Wyoming across to our populace substation which is -- well, to their populace substation -- actually, we joint own it. But sometime in that time frame. And then going all the way across southern Idaho to Hemingway substation would be sometime maybe early to mid-next decade.

Got it. Thank you very much.

Thanks, Brian.

Thank you. Our next question comes from Andy Levi of Avon Capital Advisors. Your line is now open.

Good afternoon, guys.

Good afternoon.

Good afternoon.

I just want to make sure I'm very, very clear on this. So the -- let's call it the $8 million for the repairs tax, that's about $0.15 a share, in 2015 and i guess my understanding is that you have about $300 million of CapEx every year. Right?

Correct. That's our current estimate.

And the CapEx is very similar each year. So with the exception of having to go in for a rate case, which you don't see for the foreseeable future, that $0.15 theoretically should condition in 2016, 2017, maybe even 2018. Is that kind of a fair way to look at it?

That is what we're telegraphing, and I would say there's variability around it. Could it be off 10%, 20%, if things move year-to-year and we'll watch that as we get closer. But we certainly have stepped up in increment from where we were prior to this new guidance.

And what would make it move around, just to understand that mechanically? Either higher or lower?

You know, it's really dependent on the actual work that we do.

So could you be more specific on that? Like, what qualifies?

Yes. For example, you could have a storm that blows down a section of line, and it's actually dependent upon how much of the line would get replaced. And there's a limit that qualifies for a repair, and if it goes beyond that, then it wouldn't qualify for repair. I would say that over time, we have tended to be fairly predictable with our repairs. And if you look at that note two, that we have, it's a pretty steady number that we've had in there in the past. So --

How much is that of your total CapEx qualifies for repair?

Gosh, the -- I'm trying to think here if I have a way to give you that.

You can back into it on the table, if you take the number there in.

I'll let -- I'll turn it over here to our tax expert, Gene Marchioro

Thank you. I'm just curious. I want to really understand this.

If you want to see the gross number, the non-tax effective number, if you go to note two, to the capitalized repair cost line, it's on page 91 of our 10-K, and you divide that by 35%, you'll get a gross number. That would be a gross deduction, that would be comparable to what would be being pulled out of our capital spend as a repair deduction.

Okay. I don't have it in front of me, page 91 of 10-K 35% -- which note is it? Note --

Note two, the first table in note two, and the line is called capitalized repair costs. $26 million. You divide that by 35%. That gives you a gross deduction amount.

And that's a total kind of CapEx -- that's a CapEx number. So it's really not that big a number out of the total CapEx, I guess.

That's about $75 million if you do that math.

That's the portion of the CapEx that's qualifying.

Okay. So that continues on until either you don't have that repairs amount. But let's just assume you do every year. I assume you are repairing things all the time. What would make it go away? Is it a rate case or --

Well, in terms of how it -- that's a good question. In terms of how it provides an income lift is -- would predominantly be a rate filing. When you do a rate filing, you reset everything that's included in cost of service. This would be one of the line items that would be part of that. So you would see an adjustment at that time. A change in the regulations clearly has moved it. In this case it was a change that lifted our expectations for future deductions.

And just a change in what you are -- in terms of your expected types of CapEx, and we highlighted a few more infrastructure changes in our 10-K this year to give you an idea of the ongoing nature of what we're doing. But as you look through those, you'll see that they really are things that last over a period of time. It's not like a big project that's going to be done in six months. It's really things we do each year.

Right. It's really -- other category, flow-through accounting, I guess, from what Larry was telling me, right?

Yes, and the flow through relates to why we don't put deferred taxes against that which would eliminate it having an income impact, it would simply be a cash benefit. And that is due to a choice that was really made by our regulator in Idaho that that is the method of accounting we follow for these and it's a couple of decades old that we've been on that methodology.

Okay. And then it's really the tax ruling from last year that's kind of increased the amount I guess, right?

Right. And the repairs regulations impact a lot of industries other than utilities. I think prior to this updated regulation, utilities were one of the more predominant users of repairs. And I know the initial thoughts were when the regulations were issued, it appeared that they might be a little more constraining in terms of what would qualify and what would not.

It was really some clarifications that came out mid-last year that explained that in a way that we could see that it brought up a little more benefit. We actually brought that back, put it into a tax return, gave that to the IRS and they looked at it for 2013 and we have a result that has been agreed to for last year that's now reflected and it's really that methodology that we've rolled into 2014.

And the IRS doesn't have to approve it every year. Now it's kind of like a given, right?

Well, they will look at the tax returns every year. We do get audited annually. But the fact that -- I get some comfort in the fact that they did look at our tax return last year that had the new methodology and we reached an agreement. And as Gene's team goes forward they take what they learn out of each audit and apply it kind of to the next year. So you have -- it's not a guarantee they're going to do everything exactly the same year to year, but it's nice to have that current of a year that they have reviewed.

Okay. And then basically this obviously adds to your common equity, so it gives you head room as far as your ROE is concerned, and obviously to be quality earnings that way. And it also allows you, between that and your ADITC, to stay out of the rate arena for quite some time. But when you do go back, whenever that may be, if it's 2019 or 2020, or whenever it is, when you go into the rate arena, that's when the rate base will be trued up based on this. Is that correct?

We would true everything up. You would true up the rate base, and you would also true up your cost of service line. All your expenses would be updated as well.

So it really behooves to you stay out as long as possible and at the same time benefits the customer because you're not going in for rates.

Well, I would say that the repairs deduction does provide cash flow as well. You get the deduction and you also get some cash from it, which that's helpful. But the decision on whether you file a rate case is really more something you look at independently, and we watch both the rate base side and the cost of service side. It's really when that gets out of balance and you feel like you need to go recover more that you go file. I don't know that this is really viewed as an item to keep us out. It's another change and it does help our earnings a little bit and provides some cash flow. But if you spend enough on CapEx, you still have a need for a rate case.

Okay. I'm probably getting daggers from people here in New York who want to go home. So I'll ask the other questions I've got offline. But thank you very, very much.

Thanks, Andy.

Again, ladies and gentlemen, (Operator Instructions). One moment for questions. That does conclude today's question and answer session. Mr. Anderson, I'll turn the conference back over to you.

Well thank you and thanks everybody for participating on our call this afternoon. We actually also are with you with all the tough weather a lot of you guys have had here this winter, and we hope you guys are all surviving. We also appreciate your continued interest in our Company. We look forward to talking to you guys in the future. Thanks a lot.

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