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IDACORP, Inc. (NYSE:IDA)

Q2 2008 Earnings Call Transcript

August 7, 2008 4:30 pm ET

Executives

Lawrence Spencer – Director, IR

LaMont Keen – President and CEO, IDACORP, Inc. and Idaho Power

Darrel Anderson – SVP of Administrative Services and CFO, IDACORP, Inc. and Idaho Power

Steve Keen – VP and Treasurer, IDACORP, Inc. and Idaho Power

James Miller – SVP of Power Supply

Analysts

Steve Gambuzza – Longbow Capital

Emily Christy – RBC Capital Markets

Eric McCarthy – Praesidis Asset Management

Operator

Good day and welcome everyone to the IDACORP second quarter 2008 conference call. Today’s 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.idacorpinc.com.

(Operator instructions)

And now 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, Dustin, and good afternoon everyone. Welcome to our August 8 – August 7, excuse me, second 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 a Form 10-Q with the SEC today and that document has also been posted to our IDACORP Web 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 here today to help answer your questions during the Q&A period.

Before turning the presentation over to LaMont, I will 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. Also the information that we are required to provide in connection with certain non-GAAP financial information presented during the call may be found in our earnings release located on our IDACORP Web site.

Now, I’ll briefly discuss the financial results from today’s earnings press release. IDACORP’s second quarter 2008 net income was $17.5 million, $1 million less than last year’s second quarter. Idaho Power’s second quarter 2008 net income was $17.7 million, $1.6 million more than the second quarter of 2007. IDACORP earnings decreased by $0.03 per diluted share quarter-over-quarter to $0.39 per diluted share.

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

LaMont Keen

Thank you, Larry. And greetings to our call participants, we thank you for your interest in IDACORP. 2008 has not been without its share of challenges, but I am pleased with the progress we have made thus far. Idaho Power is just beginning to see earnings and cash flow benefits from recent regulatory efforts, and we have other regulatory initiatives under way. We are responding operationally and financially to the challenge of growing peak loads and rising costs while also recognizing a slowdown in the local economy. The results Larry just summarized include the first full quarter of collections of new rates that became effective March 1. These new rates resulted from a settlement of our 2007 general rate case in the Idaho jurisdiction. That increased our annual revenue an average of 5.2% or $32 million annually.

As we have previously disclosed, the settlement also changed the methodology for recording power supply costs. While this change is expected to be neutral over a 12-month period, you will see significant differences in the results when compared quarter-over-quarter. This quarter, the results were negatively impacted by the new methodology, while next quarter will see a significant benefit. This summer, the Idaho PUC is conducting workshops to address this and other important PCA related issues.

We continue our strategy of making timely regulatory filings in order to recover our investments as quickly as possible. In our first quarter conference call, I went through a list of pending filings. They were resolved in Idaho PUC orders issued on May 30. The Commission approved the following items.

A 10.7% increase or $73 million to our annual power cost adjustment. This enables us to collect revenue to recover excess power supply costs previously incurred, and we had an increase to our conservation program funding charge by 1% to 2.5% or $7 million annually, enabling us to continue expansion of our energy efficiency initiatives. We also had a $2.4 million rate reduction, pursuant to the fixed cost adjustment pilot program, which is designed to offset disincentives for enabling energy conservation. And our request to begin earning a return on and recovering expenses associated with $65 million in costs and investments for the 170-megawatt expansion to the Danskin power plant. This increased customer rates by 1.4% or $8.9 million annually.

We filed a new general rate case with the Idaho PUC on June 27 based on the 2008 forecast test year. We’re asking for additional revenue of $67 million annually, a 9.9% overall increase in that filing. We requested that any rate adjustment become effective on February 1st next year. On March 28, Great Basin Transmission, LLC exercised its option to purchase the southern portion of our Southwest Intertie or SWIP project, the rights-of-way for that project for approximately $6 million. This transaction closed in the second quarter and SWIP’s southern portion extends from a point near Ely, Nevada through southeastern Nevada to the Dry Lake area north of Las Vegas. The company also extended the term for exercise of the option with Great Basin Transmission, LLC for the northern portion of the SWIP through December 31, 2008.

Operationally, this has been a more normal summer for us than what we have experienced in recent years, temperatures have been running near historic averages. We did set a new summer peak on June 30 of 3,214 megawatts, however, reflecting growing loads on our system, and while our loads do continue to grow, new customer connections slowed this year.

In the second quarter, we connected 1,831 new customers and 2,703 year-to-date for a total of 484,354 general business customers. This is lower growth than we have experienced over the past several years and reflects a slowing economy across our service territory. Hydro generation through the first two quarters of 2008 is up over last year’s poor water year. However, the overall water picture remains mixed. Reservoir levels in the Snake River Basin are above average, even though stream flows into Brownlee Reservoir are below normal. Brownlee inflows were 4.4 million acre-feet during this year’s April through July run-off period, normal inflows are 6.3 million acre-feet in that timeframe.

The company continues to move forward with its advanced metering infrastructure project or AMI. The AMI rollout is scheduled to begin in late 2008 and is planned to be completed in 2011. In addition to the operational benefits, and they would be reduced labor and improved outage management, AMI will provide necessary infrastructure to expand our energy efficiency efforts and a foundation for wide-scale pricing and other applications to become a reality. On August 4, the company filed an application with the IPUC for a Certificate of Public Convenience and Necessity for the AMI project. The company anticipates making a future filing which will determine the impact on customer rates.

To wrap-up, the first half of 2008 brought new rates, improved water conditions, a slowing in customer growth, and progress on refining our current regulatory mechanisms. We are diligently working to optimize our operations, refine plans for needed plant additions and better connect the costs we incur with the prices we charge. These efforts support improved financial performance in 2008 and beyond.

Darrel Anderson will now update you on our financial results.

Darrel Anderson

Thanks LaMont and good afternoon everyone. Today, I will review some of the key points related to our second quarter 2008 results, discuss updates to the 2008 key operating and financial metrics and update you on our 2008 financing plans. We will then look forward to taking your questions.

I’ll begin with our recent results. As previously summarized by Larry, IDACORP reported second quarter net income of 17.5 million or $0.39 per share compared to 18.5 million or $0.42 per share in 2007. Idaho Power contributed 17.7 million or $0.39 per share compared to 16.2 million or $0.37 per share in the second quarter of 2007.

At Idaho Power, second quarter 2008 general business revenues increased by 26.5 million or 16%, when compared to 2007. Changes in Idaho base and PCA rates from last year accounted for 31.2 million of the increase. Growth in customers added an additional 2.2 million, although lower electricity usage due to weather-related factors accounted for a decrease of $6.9 million. Our irrigation customers were the customer class primarily impacted by these weather related factors. This increase in general business revenues, combined with better hydroelectric operating conditions and reduced operation and maintenance expenses contributed to an increase in quarterly operating income of $4.5 million.

A change in the PCA methodology for allocating base power supply expenses that became effective March 1 reduced operating income 9.2 million in the second quarter of 2008. The methodology change is expected to increase operating income in the third quarter by approximately $17 million, but as LaMont mentioned, the new method is expected to be neutral over a 12-month period.

Favorable hydro conditions during the second quarter resulted in an increase in hydroelectric generation of approximately 35% or 538,000 megawatt hours over second quarter 2007. This decreased the company’s reliance on more expensive thermal generation and purchased power. Other operation and maintenance expenses in 2008 decreased 4% or approximately $3.3 million quarter-over-quarter. This is primarily due to decreased operating expenses of 3.7 million at our fleet of thermal plants. Interest charges were up 1.6 million over 2007, largely due to additional interest on higher long-term debt balances. During the second quarter, we purchased 166 million of pollution control revenue bonds to adjust the interest rates from an auction interest rate mode to a weekly interest rate mode. The company purchased the bonds with the proceeds from a new 170-million term-loan credit agreement.

Turning our discussion to liquidity, cash flow from operations increased to 53.5 million for the six-month period ended June 30, 2008, compared to $41.5 million for the same period in 2007. The operating cash increase is attributable to a reduction in the amount of net power supply costs deferred in 2008 compared to 2007, combined with increases in working capital items, primarily fuel and materials and supplies.

Cash used for investing activities increased slightly over 2007 due to additions to property, plant and equipment at Idaho Power Company and additional investments at IDACORP Financial and Bridger Coal Company. These additions were offset by the withdrawal of $20 million from the $45 million refundable income tax deposit made with Internal Revenue Service in 2006. Investing activities also reflect the $6 million proceeds from the sale of the Southwest Intertie Projects rights-of-way.

IDACORP’s short-term borrowings for the first six months of 2008 increased $89 million over year-end 2007 levels. Proceeds were used to fund Idaho Power’s ongoing capital expenditure program as well as current year deferred power supply expenses. On July 10 of this year, Idaho Power Company issued $120 million of 10-year first mortgage bonds at a rate of 6.025%. Proceeds were used to pay down the short-term debt balances. I’d now like to update you on the key operating and financial metrics for 2008. These are also shown in today’s earnings release and our Form 10-Q both of which were issued earlier today.

Our outlook for operation and maintenance expenses, our non-regulated earnings contributions and the estimated effective tax rates for Idaho Power Company remain unchanged. We reduced our estimated range of capital expenditure now projecting an investment range of 255 to 270 million. The lower range is mostly due to the expected impact of the decline in the number of new customer connections and the deferral of certain other capital expenditures. We anticipate financing the capital program with a combination of internally generated resources, common equity and debt. We have access to our continuous equity program with approximately 1.1 million shares of common stock available. Maintaining a capital structure comprised of roughly 50% equity and 50% debt remains our long-term goal. Our expected hydroelectric generation, which during a normal year is 8.5 million megawatt hours, is forecasted between 6.5 and 7.5 million megawatt hours. We narrowed the range to reflect refinements related to forecast river flows for the remainder of the year.

Our ability to reach the upper end of the range is primarily dependent on receiving above normal precipitation during the rest of the year and to a lesser extent certain water leases we have recently signed or are currently negotiating. These water leases may provide additional water flows to our generating facilities during the balance of the year. We increased the effective rate range for IDACORP reflecting a greater estimated income before tax at Idaho Power Company for the year as compared to previous estimates.

In conclusion, our second quarter results reflect progress in pursuing effective regulatory mechanisms, management of expenses, and prudent capital spending. We would now like to respond to your questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions) We’ll go first to Steve Gambuzza with Longbow

Capital.

Steve Gambuzza – Longbow Capital

Good afternoon.

Darrel Anderson

Hi Steve.

Steve Gambuzza – Longbow Capital

For the rate case in Idaho, do you exclude short-term debt from the capital structure?

Darrel Anderson

We’ll have Steve Keen kind of talk about the capital structure related to the Idaho Power rate case.

Steve Keen

Short-term debt isn’t looked at in that capital structure; it’s left out.

Steve Gambuzza – Longbow Capital

It is not, it’s left out.

Steve Keen

That’s correct.

Steve Gambuzza – Longbow Capital

Okay. But your target is for like – that’s for a 50/50 kind of all-in capital structure?

Steve Keen

It is, and it’s not an exact science, it does move. We’ve been both sides of 50/50, but that’s – we try to bring it back in line, if we get 1% or 2% one direction or the other, we do what we can to bring it back in line.

Steve Gambuzza – Longbow Capital

Okay. And what equity ratio did you file for in the case?

Steve Keen

I don’t have that exact number.

Steve Gambuzza – Longbow Capital

Roughly 50%?

Steve Keen

It is roughly 50%. I believe it’s off like a percentage point, like 1% higher on debt.

Steve Gambuzza – Longbow Capital

Okay.

Darrel Anderson

It’s just – Steve, this is Darrel. It’s actually in the 8-K that we filed, it’s 49.27%.

Steve Gambuzza – Longbow Capital

Okay. I’m just looking at the balance sheet at the end of the quarter, and it looks like it was – total debt to total capital was about 54%? I’m just wondering do you have to adjust that during the time period of the rate case or was 49% the rate – was that the regulatory capital structure based on the test year that you filed?

Steve Keen

It was and it’s a forecast. So, we were looking ahead and it encompasses getting though the entire year. So, wherever you are at right now, you are missing two quarters of earnings and whatever we do on the equity side going [ph] forward.

Steve Gambuzza – Longbow Capital

Okay, so it includes –

Steve Keen

So that was looking at the entire year of 2008.

Steve Gambuzza – Longbow Capital

And so it includes the assumption of financing in 2008?

Steve Keen

Yes, it included – I think the financing we did was very close to what we had in the rate case. It might have been slightly smaller by maybe $5 million.

Steve Gambuzza – Longbow Capital

I guess really what I am asking is do you have to issue equity in 2008 to meet – to true up your capital structure to what you filed?

Darrel Anderson

I would say, it is fair to guess, there is a little bit in there, yes. Earnings are going to drive part of that.

Steve Gambuzza – Longbow Capital

Okay. All right, great. Thanks a lot.

Steve Keen

It's based on the utility. There has to be some equity infused into the utility.

Steve Gambuzza – Longbow Capital

Understood, thank you.

Darrel Anderson

Thanks Steve.

Operator

(Operator instructions) We’ll go next to Emily Christy with RBC Capital Markets.

Emily Christy – RBC Capital Markets

Good afternoon.

Darrel Anderson

Hi Emily.

Emily Christy – RBC Capital Markets

Question on these water leases that you mentioned, I am just kind of – one of you go into a little more detail as to how they work, how available they are and kind of how it affects the overall hydro generation in terms of quarterly or what not...?

Darrel Anderson

Emily, this is Darrel. I am going to have Jim Miller talk about that, but the other thing is we do have a fair amount of disclosure in the Q we just filed this morning, it’s there, but we will have Jim Miller who heads up the power supply side of things to talk about those leases.

Emily Christy – RBC Capital Markets

Okay, thanks.

Darrel Anderson

Okay.

James Miller

Hi, Emily, when it comes to water leases, it’s a questionable thing. It’s based on precip and climatology during the year. And in the last several years there hasn’t been water available to lease upstream. This year because we did have more normal snow pack, some of the upstream reservoirs ultimately did fill. There was surplus water available that was for lease out of the water bank and we’ve been negotiating with a couple of other parties that might have excess water. So, we’re moving forward on that, but quantity isn’t great. The numbers we’re talking about now may amount to 100,000 megawatt hours of additional energy out of the hydro system. But we are moving forward on that and every bit will help.

Emily Christy – RBC Capital Markets

Okay. And then just one follow-up and I apologize if you went into this earlier, I was a little bit late on the call, the irrigation impact for the quarter, is that almost entirely correlated with rainfall? I mean that demand obviously dropped quite a bit more than the rest.

Darrel Anderson

It was a combination of precip and temperatures.

Emily Christy – RBC Capital Markets

Okay. Thank you very much.

Darrel Anderson

You bet.

Operator

And then we’ll take our next question from Eric McCarthy with Praesidis Asset Management.

Eric McCarthy – Praesidis Asset Management

Hi, guys. Just to confirm, you said that generation from hydro was about 2076 megawatt hours in the quarter?

Darrel Anderson

Yes. For the quarter, could you just hang on one second? I don’t have it right at the fingertips, but I’ll have it in a second.

Lawrence Spencer

Yes, 2077.

Darrel Anderson

Yes, 2077.

Eric McCarthy – Praesidis Asset Management

And then you said going forward the rest of the year, it was based on above average precipitation, what’s driving that?

Darrel Anderson

Now, what we said was that – in order for us to hit the upper end of the ranges, we would have to see above normal precipitation to hit the higher end of our expected annual generation.

Eric McCarthy – Praesidis Asset Management

Okay. Great, thanks.

Darrel Anderson

You bet.

Operator

There are currently no further questions. (Operator instructions) And there appear to be no further questions at this time. I’d like to turn the conference back over to Mr. LaMont Keen for any additional or closing comments.

LaMont Keen

Okay. Thank you all for participating on our call this afternoon. You can rest assured that we apply ourselves each day to not only meeting our customers' electrical needs, but also to establishing a firm foundation for fair and consistent financial performance for our owners. Thanks again for your interest in IDACORP and good day.

Operator

And that does conclude today’s conference call. We again thank you for your participation and you can disconnect at this time.

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Source: IDACORP, Inc. Q2 2008 Earnings Call Transcript

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