IDACORP, Inc. Q3 2008 Earnings Call Transcript

Nov.24.08 | About: IDACORP, Inc. (IDA)

IDACORP, Inc. (NYSE:IDA)

Q3 2008 Earnings Call Transcript

November 6, 2008, 4:30 pm ET

Executives

Lawrence Spencer – Director, IR

LaMont Keen – Power President and CEO

Darrel Anderson – SVP, Administrative Services and CFO

Ric Gale – VP, Regulatory Affairs

Greg Said – Director of State Regulation

Lori Smith – VP, Corporate Planning and Chief Risk Officer

Analysts

Paul Ridzon – KeyBanc Capital Markets

Emily Christy – RBC Capital Markets

James Bellessa – D.A. Davidson

Operator

Good day and welcome everyone to the IDACORP third quarter 2008 conference. Today’s conference call is being recorded and is being webcast live. A complete replay will also be available from the end of the day for a period of 12 months on the company’s web site at www.idacorp.com. (Operator instructions)

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

Lawrence Spencer

Thank you, Sarah, and good afternoon, everyone. Welcome to our November 6, 2008 third quarter earnings release conference call. We issued our earnings release before the markets opened today, and that document is now posted to our IDACORP web site at www.idacorpinc.com. We also filed the Form 10-Q at the SEC today, and that document has also been posted to our IDACORP site.

On the call today, we have LaMont Keen, IDACORP and Idaho Power President and CEO and Darrel Anderson, IDACORP and Idaho Power Senior Vice President of Administrative Services and CFO. We also have other officers available to help answer your questions during the Q&A period.

Before turning the presentation over to LaMont, I’ll cover a few details with you. First, our presentation today may contain forward-looking statements, and it is important to note that the corporation’s future results could differ materially from those discussed. A full discussion of the factors that could cause future results to differ materially can be found in our filings with the Securities and Exchange Commission.

Now, I’ll briefly discuss the financial results from today’s earnings press release. IDACORP’s third quarter 2008 net income was $51.7 million, $22.8 million more than last year’s third quarter. Year to date, IDACORP’s net income was $91 million compared with $72 million in 2007. IDACORP earnings increased by $0.49 per diluted share quarter over quarter to $1.14 per diluted share. For the first nine months of 2008, earnings were $2.02 per diluted share, compared to $1.63 per diluted share for the same period in 2007.

With that, I’ll now turn the presentation over to LaMont.

LaMont Keen

Thanks, Larry, and greetings to all our call participants. We thank you for your interest in IDACORP and Idaho Power Company. As you all know, 2008 has not been without its share of challenges. We are experiencing a weakening local and national economy in the midst of extreme volatility and disruption in the financial markets. Despite these challenges, we continue making progress, strengthening Idaho Power’s financial and operational footing. The fundamentals of our strategy remain solid, and we are managing through the current financial market instability. This is evidenced in our third quarter earnings.

Our improved year to date financial results reflect the impact of three factors; progress from purposeful regulatory efforts, Mother Nature, and operational efficiencies company-wide. This year’s regulatory accomplishments, both in Idaho and Oregon, highlight the achievement of key steps in our strategy. We are progressing with the general rate case filed earlier this year in Idaho, as well as on improvements to the Idaho PCA mechanism. We are focused on the dual goals of obtaining a fair return for investors and providing reliable, reasonably priced energy to customers in the current demanding environment.

The general rate case filed with the Idaho Public Utilities Commission on June 27 requested additional revenue of $67 million annually, a 9.9% average rate increase. We received the PUC staff’s response and comments to our filing on October 24. We will respond to our differences through rebuttal testimony on December 3 and will work through the cycle of public meetings and workshops throughout December, still targeting an effective date of February 1, 2009.

Our service area experienced near-normal temperatures and better water conditions this year, in stark contrast to the extreme temperatures and drought of recent years. We also experienced better hydroelectric operating conditions quarter over quarter. Hydroelectric generation through the first three quarters of 2008 is up over last year’s poor water year, but is still below average.

Our work force is responding well to this year’s operational and economic challenges, and it is demonstrating the ability to effectively manage the bottom line, while continuing to provide our customers some of the lowest electric rates in the nation. We are very encouraged by our year-to-date results; however, there is still work to do. While our performance is an improvement relative to prior quarters, we are still not earning our allowed rate of return. Looking forward, we must continue our strategy of timely regulatory filings to match our revenues with our costs.

We will also continue our efforts to evaluate and manage capital and operating expenditures to match current economic realities, while at the same time, responsibly preparing for the future. We have the need for additional generating resources and transmission interconnections to meet growing long-term customer demands and many of these projects have long lead times. We must manage the business to reflect the realities of today, but keep an eye toward tomorrow.

To wrap up, we are pleased with our progress thus far, in 2008, and are taking proactive steps to enable future success in challenging economic times. And with that, I’ll now turn it over to Darrel Anderson for an update on our financial results.

Darrel Anderson

Thanks, LaMont, and good afternoon everyone. Larry has already provided a summary of our quarter and year-to-date results, so I will review the earnings drivers for the quarter, discuss liquidity and short-term borrowings, and then provide an update on the 2008 key operating and financial metrics. After that, we will take your questions.

I’ll start with the primary financial drivers. More than 90% of today’s reported quarterly earnings came from our regulated business unit, Idaho Power, compared to 83% last year. Part of the increase is attributable to a change in the power cost adjustment methodology regarding the allocation of base power supply costs that increased operating income $17.6 million when compared to last year. This change in methodology, while not expected to have a material impact on annual earnings, did improve third quarter performance while reducing our second quarter results. The balance of the increase is due to the benefits of increases in customer prices, more moderate temperatures, and slightly better hydro-electric operations.

During the third quarter, general business revenues increased $34.8 million, roughly half from the increase in retail base rates and half from an increase in PCA rates. Moderate customer growth was offset by reduced usage from weather-related factors. Improved hydro-electric operating conditions decreased net power supply costs, which are comprised of our fuel plus purchased power less off system sales by $27.2 million, with hydro-electric generation increasing by approximately 22% or 328,000 megawatt hours over third quarter 2007.

Other operation and maintenance expenses increased by $5.6 million or 8.1%, due to increases in payroll related expenses of $6.4 million and water lease costs of $2.2 million, partially offset by decreases in the fixed cost adjustment mechanism expense of $3.3 million. For the first nine months, operating expenses increased $3.5 million or 1.6% due to increases in payroll related expenses of $9.4 million, water lease costs of $2.2 million, and purchased services of $2.7 million. The increases are offset partially by lower outage costs at thermal plants of $5.7 million and a decrease of $4.1 million from the fixed cost adjustment mechanism.

The fixed cost adjustment mechanism pilot program is designed to improve Idaho Power’s disincentive to invest in energy efficiency programs by decoupling the recovery of fixed costs from the variable kilowatt hour charge and linking it instead to a set amount per customer. The over under recovery is then returned to or collected from customers in a subsequent rate adjustment. Overall, Idaho Power’s operating income increased from $48.6 million to $81.1 million or $32.5 million quarter-over-quarter. Interest charges were up $2 million over third quarter 2007, largely due to higher long-term debt balances.

Now turning to IDACORP’s liquidity for the nine months ended September 30. Cash flow from operations increased $68 million to $115 million for the nine month period ended September 30, 2008. The increase is primarily attributable to increased net income and a reduction in the amount of net power supply costs deferred in 2008 compared to 2007. Idaho Power Company has collected approximately $44 million more due to the PCA in 2008, than in 2007.

Cash used for investing activities decreased by $13 million in 2008, as Idaho Power’s expenditures for utility plant were $27 million less than year-to-date September 2007. The decline in spending reflects the continued reduction in new customer connections, and the deferral of certain capital expenditures.

In 2008, we also withdrew $20 million from the $45 million refundable income tax deposit that we had made with the Internal Revenue Service in 2006. Investing activities in 2008 also include the $6 million proceeds from the sale of the Southwest Intertie Project rights of way, $8 million of additional investments at IDACORP Financial, and $3 million in investments in Bridger Coal Company.

We have certainly seen extreme volatility and disruption in the credit markets over the past few months. IDACORP and Idaho Power continue to issue commercial paper, but at a higher interest rates and shortened available maturities.

In early October, Idaho Power used the swing line loan feature of its bank credit facility to establish a $30 million loan to repay maturing commercial paper. The loan was subsequently repaid with new issuances of commercial paper.

In mid-October, IDACORP made a $35 million floating rate draw on its credit facility, which continues to be outstanding. Overall, IDACORP’s short-term borrowing as of quarter end increased $14 million over year-end 2007 levels. Proceeds were used to fund Idaho Power’s ongoing capital program, as well as current year deferred power supply expenses. In July, Idaho Power Company issued $120 million of ten-year, first mortgage bonds at a rate of 6.025%. Proceeds were used to pay down short-term debt balances.

I’ll now update you on the key operating and financial metrics for 2008. These are also shown in today’s earnings release issued earlier in the day.

We reduced our estimated range of capital expenditures now projecting an investment range of $235 million to $250 million. This represents a decrease of between $45 million to $50 million from our original estimate provided to you in February. The lower range is mostly due to the expected impact of the continued decline in the number of new customer connections and the continued deferral of certain other capital expenditures.

Our expected hydroelectric generation, which during a normal year is 8.5 million megawatt hours, is forecasted to be between 6.7 million and 7.2 million megawatt hours. We narrowed the range as we refined our forecast of river flows for the remainder of the year.

We are not forecasting any current changes to the range of operation or maintenance expenses, non-regulated subsidiary earnings or effective tax rates. We did convert our estimate for non-regulated subsidiary earnings from earnings per share to a dollar range.

There has been a general slowing in economic growth across our service territory. Idaho Power has experienced a slow down in new customer connections, and one of our largest industrial customers recently announced significant work force reductions. In response, we are reviewing our capital plans, which may result in the cancellation or deferral of projects relating to customer growth and other non-core projects.

We are also implementing hiring restrictions, expecting to slow the estimated growth of our operation and maintenance spending in 2009. The economic slow down may provide Idaho Power an opportunity to delay some of our growth-related capital expenditures.

On a positive note, the storage levels and the reservoirs above the Brownlee Reservoir are slightly higher than average, and significantly greater than this time last year. We expect to provide 2009 key operating and financial metrics with our 2008 year-end earnings release in February, 2009.

This concludes my financial update. We would now like to respond to your questions.

Question-and-Answer Session

Operator

(Operator instructions) We will take our first question today from Paul Ridzon, KeyBanc Capital Markets.

Paul Ridzon – KeyBanc Capital Markets

Good afternoon.

Darrel Anderson

Hi, Paul.

Paul Ridzon – KeyBanc Capital Markets

Where are you on a trailing 12 ROE on a regulatory basis?

Darrel Anderson

Paul, I don’t have that right here in front of me. As you know, you can calculate, obviously, the nine months, we’re a little bit over 7% and if you annualize that number, which I probably wouldn’t annualize that number that puts you north of 9%. So it’s somewhere in the, I think, 7% to 9%, but I don’t have it right here in front of me.

Paul Ridzon – KeyBanc Capital Markets

And could you discuss the status of your pension and your outlook for 2009?

Darrel Anderson

Sure. Paul, one of the things, as everyone is probably fairly familiar with, is that the changes with respect to and pension plans and funding have been pretty erratic with respect to the market. And I want to first start out with our pension accounting summary is, first of all, we currently don’t expense our pension expenses as it sits today, because we’re not funding our plan. We have a regulatory order that allows us to, first of all, defer to those pension expenses.

Secondly, as we went, just prior to the financial crisis, we went in with where our ABO, Accumulated Benefit Obligation, we were actually in an over-funded position at that time. Obviously, since then, we’ve seen a decline in our market price of our pension assets. And if you get a chance to take a look at our 10-Q – we have disclosed in our 10-Q, based on various assumptions what additional funding might be required under the Pension Protection Act. And currently we estimate to reach 100% funding over seven years. That number would be approximately $40 million in 2010, $20 million in each of 2011, 2012, and 2013. And as you know, that would be based on a whole series of assumptions based on assets to where you are right now. So it is a range, and we continue to monitor that. We have a very good asset allocation model with respect to our pension assets. And so if and when we would be required to put cash in, it would be a time that we would then go to look for recovery of those pension contributions.

Paul Ridzon – KeyBanc Capital Markets

But any contribution would be deferred and trued up in the next rate case?

Darrel Anderson

We would, depending on the timing of the contribution and other regulatory filings that we would have at that time, we would – whether we would go on a one off basis or we would combine it with another filing that we would have. It would kind of depend on the timing of when we’d actually have to fund that pension contribution.

Paul Ridzon – KeyBanc Capital Markets

Can you give an update on the status of discussions with Idaho parties with regards to utilizing the forward-looking test year for rate making? You’ve obviously made some pretty good strides with regards to your sharing mechanism.

Darrel Anderson

Paul, I’m going to have – Ric Gale is here, who is our VP of Regulatory Affairs, will, we’ll ask him to give an update on where we’re at with that component of the rate case.

Ric Gale

Hi, Paul. We have the – as said in the opening remarks, we have received the testimony of the staff and the other parties to the case. The staff, actually continue to support a forecast year, we just don’t view them as, calculating it very well. But they stayed with the concept of the forecast year as discussed in our workshops earlier this year. You might recall we had workshops regarding the forecast year, we had the conceptual design, we filed that way, and then the staff has responded but just, not quite like it was hoped. So I would say we’re still optimistic of a commission order that would allow our test year as we filed, and hope to argue successfully the differences between the way we put the forecast together and the way staff forecasted it.

Paul Ridzon – KeyBanc Capital Markets

Thank you.

Darrel Anderson

Thanks, Paul.

Operator

(Operator instructions) Next, we’ll hear from Emily Christy, RBC Capital Markets.

Emily Christy – RBC Capital Markets

Good afternoon.

Darrel Anderson

Hi, Emily.

Emily Christy – RBC Capital Markets

A couple of questions, kind of around the Idaho economy a little bit. Have you started to see any increase in bad debt or increase in customer shutoffs?

Darrel Anderson

Emily, right now, we are seeing, obviously, as a percent of revenues, we actually are, we’re not even at levels that we saw in 2000 and 2001. I think it remains to be – so we are seeing in – on an overall basis, we see increased write ups not as a percentage of revenues as it stands right now. And as we move farther into, if the economy continues to slow, we’ll continue to monitor that and determine if that is going to have an impact on us. But there is that potential, we have seen one of our largest employers lay off a lot of people, and we have seen some potentials impacts of that down the road but we kind of have to wait and see at this point.

Emily Christy – RBC Capital Markets

Okay, and in terms of the rate case, it is never really good timing, really to be asking for increases when economic conditions are poor and may be worsening, is there anything in the filing or anything supplement to the filing to address concerns of that nature, that regulators might have?

Darrel Anderson

We haven’t, Emily, we haven’t filed our rebuttal testimony at this point in time. We expect to file that in December, and so obviously since the time we file to the point in time where we are today a lot has happened, and obviously that will be some consideration as part of our rebuttal testimony.

Emily Christy – RBC Capital Markets

Okay. Thanks very much.

Darrel Anderson

Thanks, Emily.

Operator

From D.A. Davidson and Company, James Bellessa.

James Bellessa – D.A. Davidson

Good afternoon.

Darrel Anderson

Hi, Jim.

James Bellessa – D.A. Davidson

How much was stolen out of the second quarter as a result of this mechanism change in the PCA? It appears that maybe you just had a $0.24 benefit from the mechanism change in the third quarter, so how much was reduced in the second quarter?

Darrel Anderson

The number, Jim, was about $9.2 million, pre-tax.

James Bellessa – D.A. Davidson

In the second quarter of 2008?

Darrel Anderson

Of 2008, yes. We had talked about that as part of our second quarter discussion, and so that is what – when we talked about the second quarter is that, that had a negative impact on our second quarter with the expectation that we’d know we’d get some of that back in the third quarter.

James Bellessa – D.A. Davidson

And do you envision any change in the fourth quarter?

Darrel Anderson

Generally, it’s really not – the way the allocation worked, it really didn’t have a lot of impact difference in the fourth quarter. And Jim, I’d point you to – in our 10-Q, we actually do talk about it so you can lay out the expected impacts amongst the quarters, if you get a chance to look at it. It’s on or around page 50 or so.

James Bellessa – D.A. Davidson

Okay.

Darrel Anderson

It shows about a minus $200,000 negative impact.

James Bellessa – D.A. Davidson

Minus. Now, if I’m understanding correctly through this workshop process you’ve come up with a stipulated agreement that the commissioners are going to be looking at, and it’s changing the mechanism again from what it was through this last six month period. How might the shape of earnings be changed next year as a result of the potential of this approval of new mechanism?

Darrel Anderson

Jim, let me do two things with this. Actually, let me – Greg Said, who is our Director of State Regulation, let me give him a chance to walk through some of those key components of the stipulation. I think that might be beneficial. Then I’ll come back to your other question of what that might look like. Is that all right?

James Bellessa – D.A. Davidson

Thank you.

Darrel Anderson

I will ask Greg to address that.

Greg Said

Jim, the stipulation addressed a number of areas. One is the sharing percentage, which moved from 90% to 95% and then the shape that we talked about – the settled shape for this year is a relatively flat shape and the new shape that we’ve put in is the shape that is based on revenues as they come in across the year. So the shape is a little different than flat across the months in that those quarters that have slightly higher loads would suggest that the shape is slightly different than flat but not a big change from flat.

Darrel Anderson

Jim, I’m going to have Lori Smith refer to and she’s going to refer to some materials that were presented as part of the PCA workshop where that change in allocation was shared. So I’ll have Lori kind of respond to your question here.

Lori Smith

Hi, Jim. I think your question was the impact on 2009 on this change in shape – the most recent and final change in shape is that correct?

James Bellessa – D.A. Davidson

Yes it is.

Lori Smith

Yes, there will be very little impact going forward because what we have in place right now is an equal distribution of the net power supply costs and the normalized shape will be only just very slightly different than where we are currently. So there won’t be very much impact going forward into 2009 and when we get into our comparisons then there will be more explaining to do as we’ve changed it, like you said in the beginning, a couple of times this year.

James Bellessa – D.A. Davidson

Thanks for your responses.

Darrel Anderson

Thanks, Jim.

Operator

(Operator instructions) I show no further questions at this time. Mr. Keen I’d like to turn the conference back over to for any additional or closing comments.

LaMont Keen

All right, thank you, Sarah, our operator; and thank all of you for participating on our call this afternoon. We look forward to seeing many of you next week at the EEI Financial Conference in Phoenix and in any event. Thank you for your interest in IDACORP. Good day.

Operator

And again that does conclude today’s conference and thank you all for joining us.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!