Idacorp Inc Q3 FY2020 Earnings Call

Good afternoon. And welcome to the IDACORP’s Third Quarter 2020 Earnings Release Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mr. Justin Forsberg, Director of Investor Relations and Treasury. Please go ahead.

Thank you, and good afternoon, everyone. This morning we issued and posted to IDACORP’s website our third quarter 2020 earnings release and Form 10-Q. The slides that accompany today’s call are also available on our website. We will refer to those slides by number throughout the call today. As noted on slide two, our discussion includes forward-looking statements, including earnings guidance, which reflect our current views on what the future holds, but are subject to several risks and uncertainties, including those related to the COVID-19 pandemic. This cautionary note is also included in more detail for your review in our filings with the Securities and Exchange Commission. These risks and uncertainties may cause actual results to differ materially from statements made today and we caution against placing undue reliance on any forward-looking statements. As shown on slide three, on today’s call, we have Lisa Grow, IDACORP’s President and Chief Executive Officer; and Steve Keen, IDACORP’s Senior Vice President and Chief Financial Officer. We also have other company representatives available to help answer any questions you may have after Lisa and Steve provide updates. Slide four shows our quarterly financial results. IDACORP’s 2020 third quarter earnings per diluted share were $2.02, an increase of $0.24 per share from last year’s third quarter. IDACORP’s earnings per diluted share for the first nine months of 2020 were $3.95, an increase of $0.27 per diluted share from the same period last year. Today we also tightened our full year 2020 IDACORP earnings guidance estimate upward by $0.10 to be in the range of $4.55 per diluted share to $4.65 per diluted share with our expectation that Idaho Power will not need to utilize any of the tax credits in 2020 that are available to support earnings in Idaho under its regulatory settlement stipulation nor do we anticipate any revenue sharing as Idaho Power is expected to earn a return on year-end equity between 9.4% and 10% in its Idaho jurisdiction. These are our estimates as of today, as we have seen a relatively modest net financial impact from the COVID-19 pandemic to date. However, as you would expect, it is difficult to predict the full impact of evolving economic conditions on Idaho Power’s customers and suppliers, and how that could affect the upper end of the earnings guidance range or the use of tax credits if the pandemic worsens significantly this quarter. I will now turn the call over to Lisa.

Thank you, Justin, and everyone for joining us on today’s call. Given the ongoing impacts of this pandemic, I want to start by recognizing the exceptional efforts of our employees in managing and responding to this crisis. Their commitment to safety, customer care, and expense management has been remarkable. Idaho Power continues to deliver reliable energy to our customers, and I am truly appreciative of our talented, adaptable, and dedicated workforce. This situation is dynamic, and our response remains flexible. Most of our office staff have been working remotely for over seven months, while our line and field teams are taking additional precautions to ensure the safety of our employees and the public. I commend our team for their ongoing vigilance, which has allowed us to maintain operations. As a result, we can continue our essential work of supplying the energy vital to the daily lives of our customers, businesses, and communities. Cost control has always been crucial to our success, and it is even more important during these uncertain times. Our operating and maintenance expenses for the first nine months of 2020 are lower compared to the same period in 2019. Steve will discuss several contributing factors shortly, but diligent financial management remains a priority for our employees and teams. Despite COVID-19, IDACORP is on track to achieve its 2020 strategy and financial targets. Customer growth, as highlighted in our presentation, along with higher irrigation sales, increased transmission-related revenues, and reduced O&M costs, have more than compensated for the decrease in commercial customer usage due to the pandemic. In fact, on August 18, Idaho Power experienced a near-record peak of 3,408 megawatts, even though irrigation had started to taper off by then due to the normal harvesting cycle. We remain cautiously optimistic about our near-term business goals and the long-term resilience of the economy in our Idaho and Eastern Oregon service areas. While uncertainty remains from the virus and its effect, our service area continues to be one of the fastest-growing in the country. Local housing markets, new businesses, and the ongoing availability of reliable, affordable, clean energy indicate potential for sustained growth. Idaho Power’s service area leads the nation not only in new residents but also in new business opportunities. Significant business development in the last quarter includes the groundbreaking for Frigitek’s 280,000 square-foot cold storage facility, the announcement of True West Beef’s $200 million processing plant, and the relocation of two new customers from California, AFC Finishing Systems and Fiber Care Baths. The new Amazon fulfillment center we discussed last quarter officially opened in September, and Amazon is ready for the holiday shopping season. Additionally, September was a record month for new large load inquiries at Idaho Power, with several projects over 1 megawatt actively in discussions with us about potentially expanding or relocating in our service area, including manufacturers, distribution centers, and food processors. Other projects are still in the build phase, including expansions in food processing and healthcare facilities, along with manufacturing additions. By the end of September, unemployment in our service area was 6.6%, compared to 2.8% in September 2019 and the current national rate of 7.9%. The number of employed individuals in our service area remained relatively stable compared to the same time last year. Moody’s updated GDP forecast predicts a decline of 3.8% with a subsequent rebound of 5% in 2021. These figures are favorable compared to projections for the overall U.S. economy. The economic data in our service area have been affected by COVID-19, which we continue to monitor. GDP forecasts have accounted for the latest expected impacts. In September, our Board of Directors approved a 6% increase in the regular quarterly cash dividend on IDACORP common stock, amounting to $0.71 per share. At this new rate, the annual dividend is $2.84 per share. Our Board has approved annual dividend increases every year since 2012, totaling an increase of 137% in IDACORP's quarterly dividend during that timeframe. Our customer and earnings growth have enabled us to raise dividends for shareholders, while Idaho Power customers enjoy some of the lowest energy prices in the nation. We expect to recommend future annual dividend increases of 5% or more, aiming to maintain our target payout ratio of 60% to 70% of sustainable IDACORP earnings. Last quarter, I discussed Idaho Power and its partners in the Boardman to Hemingway transmission line project exploring service arrangements to maximize value for all partners' customers. One potential change could be Idaho Power acquiring Bonneville Power Administration’s share, which would involve providing transmission service to BPA and its southeast Idaho customers. In this scenario, Idaho Power could own up to 45% of the transmission line, and we anticipate structuring an arrangement where our investors earn a normal return on capital investments, while our retail customers would not incur costs for that portion of the project, as funding would come from transmission services provided to BPA. Ongoing discussions are in progress regarding this. I have two updates on Idaho Power’s transition away from coal, essential to our objective of achieving 100% clean energy by 2045. First, the Boardman plant in Oregon ceased operations earlier this month, marking the end of coal-fired generation in Oregon. Idaho Power owns 10% of Boardman, with Portland General Electric owning the remaining 90%. Transmission projects like Boardman to Hemingway will be crucial for replacing lost generation capacity due to Idaho Power retiring coal operations, supporting our clean energy goal. Second, Idaho Power's recently filed second amended integration resource plan indicates the company may exit participation in Unit 2 of the North Valmy coal plant as early as 2022, instead of 2025. The 2019 IRP is pending with the public utility commissions in Idaho and Oregon. However, further analysis will be necessary to determine the most appropriate timing for our customers, financial stability, and system reliability. Last quarter, I mentioned that Idaho Power did not plan to file a general rate case in Idaho or Oregon in the next 12 months, and that remains true. However, due to the ongoing effects of the COVID-19 crisis and its potential economic impact on the communities we serve, we will continue to closely monitor the situation. Steady customer growth, favorable regulatory outcomes, and effective cost management are all significant factors influencing the necessity and timing of a future general rate case. I would like to welcome our newest board member, Odette Bolano, who was appointed in September. Odette is the President and CEO of Saint Alphonsus Health System, providing executive leadership and strategic oversight across a five-hospital system in Idaho and Oregon. She is a highly respected business and community leader, and her dedication to the communities we serve makes her an excellent addition to our Board of Directors. You can see the full Board composition in our presentation. Lastly, our latest outlook for precipitation and weather from the National Oceanic and Atmospheric Administration suggests a 33% to 50% chance of above-normal temperatures and a normal to 40% chance of above-normal precipitation in Idaho Power’s service area for the rest of fall and early winter. Weather and precipitation are crucial factors in Idaho Power’s operations and reservoir levels for producing reliable, affordable, clean hydropower. Now, I'll turn the call over to Steve to discuss the quarter's financial results.

Thank you, Lisa. Let’s now move to slide 10, where you will see our third quarter financial results as compared to the same quarter last year. Despite the continued impacts of the pandemic on our large commercial customer sales, overall we had solid results, which we believe positions us well as we head into the final months of 2020. On the table of year-over-year changes, you will see that continued strong customer growth of 2.6% added $3.9 million to operating income. Higher usage per residential and irrigation customer helped to offset the negative impacts of the pandemic, which decreased our commercial sales volumes by about 3% during the quarter. Residential customer usage was 3% higher than last year, partly related to weather variations, but many customers also spent more time at home due to the public health crisis. The net result was a relatively modest $0.3 million increase in overall usage per customer. Next on the table, you will see that the increase in residential sales was offset by a $1.6 million decrease in the fixed cost adjustment revenues. Moving further down the table, transmission wheeling-related revenues increased $4.4 million due to heightened market activity in the southwest U.S. and California. This increase in volumes was partly offset by Idaho Power’s open access tariff rate, which declined by 13% back in October of 2019. Going forward, beginning with October 1, 2020 the tariff rate increased by 9.6%. Next, on the table, other operating and maintenance expenses decreased by $4.4 million, a portion of this decrease was expected due to Idaho Power’s exit from Unit 1 of the North Valmy plant last year, but the decrease also resulted from lower labor-related costs from reduced variable compensation accruals when compared with the same period last year. Aside from those savings in O&M, in July, the Idaho Commission issued an order granting utilities the authority to defer unanticipated emergency-related expenses due to COVID-19, net of any associated cost savings for possible recovery through future rate. To date, Idaho Power recorded a modest $0.7 million regulatory asset for its current estimate of those costs, including higher bad debt expense, net of estimated COVID-related savings, such as vehicle fuel and employee travel and training. Finally, the tax deduction for bond redemption costs incurred in this year’s third quarter and other plant-related income tax adjustments, partially offset by statutory taxes on greater income led to a decrease in income tax expense of $2.4 million this quarter. The changes collectively resulted in an increase to Idaho Power’s and IDACORP’s net income of $12.4 million and $12.1 million, respectively. While net income for the first nine months of 2020 was $14.2 million higher than the same period last year at IDACORP. IDACORP and Idaho Power continue to maintain strong balance sheets, including investment-grade credit ratings and sound liquidity, which enable us to fund ongoing capital expenditures and dividend payments. IDACORP’s operating cash flows, along with our liquidity positions as of the end of the third quarter are included on slide 11. Cash flows from operations were similar to the first nine months of 2019. The $3 million decrease was mostly related to the timing of net collections of regulatory assets and liabilities and working capital fluctuations. The liquidity available under IDACORP’s and Idaho Power’s credit facilities is shown on the middle of slide 11. At this time, we don’t anticipate issuing any additional equity this year other than normal amounts under our compensation plan. While cash flows have been minimally affected by the pandemic thus far, our combined liquidity along with expected regulatory support from our annual adjustment mechanisms is a substantial backstop to our expected capital and operating needs. As planned, Idaho Power contributed $40 million to its pension plan during the first nine months of this year and has no further required additional contributions nor further plans to contribute to the plan this year. Slide 12 shows our full year 2020 earnings guidance, which Justin mentioned had been tightened upward and our key financial and operating metrics estimates. We now expect IDACORP’s 2020 earnings to be in the range of $4.55 per diluted share to $4.65 per diluted share. Our guidance continues to assume no use of additional tax credits, no revenue sharing, and normal weather conditions for the remaining months of the year. Of course, our guidance could also be impacted if the pandemic worsens significantly. Our strong consistent financial results and sustained cost management efforts during the past decade have preserved the full $45 million of tax credits available to support our current minimum Idaho jurisdictional return on equity of 9.4% and we are continuing our efforts to preserve them going forward. Current year deferrals of plant maintenance at the thermal plants that I noted last quarter are now expected to be completed in 2021 as the timing of maintenance is discretionary. These deferrals account for most of the decrease to the range of our full year O&M expense guidance, now in the range of $345 million to $355 million. Our CapEx guidance remains in line with where we started the year and we refined our expectation of hydro power generation to the range of 6.5 million to 7 million megawatt hours. I will end with a brief comment on expectations for the fourth quarter of 2020. Recall that during Q4 of 2019, we benefited from distributions from affordable housing investments, as well as heightened amortization of vintage tax credits, not expected to recur this year. Those significant items boosted earnings to the highest fourth quarter in the history of the company, and those results were 42% higher than the average of the five years’ fourth quarters prior to that time. If weather continues as normal and if we perform similarly to an average fourth quarter, we would expect to finish 2020 within the current guidance range. With that, Lisa and I and others on the call are happy to answer your questions.

Thank you. Your first question today comes from Brian Russo with Sidoti. Please go ahead.

Hi, Brian.

Hi. Good afternoon. Hey. How are you?

Hi, Brian.

Hey. Just curious about the wholesale transmission revenues and the incremental wheeling is just an interesting dynamic and I was hoping you could maybe share some more insight. Is it entities to the east of you utilizing your transmission system to move power west when there were shortages of power during that August time period?

Brian, it’s a great question. This is Lisa. Really, when you look at the West as a whole and just what happened this summer. It got really hot. We had some market disruptions. And so really it was not generally one direction. So it was wherever the price arbitrage opportunity occurred. So whether it was east to west or north to south and we sit in the middle of the interconnection. So as markets have those kinds of opportunities, you will see transactions flowing in many directions across our systems.

Okay. Got it. And then maybe a related question, the dynamics unfolding in the Pacific Northwest, does that enhance the value of Boardman to Hemingway and then even Gateway West transmission projects that you are currently working on?

I am going to have Adam Richins, our Chief Operating Officer, answer that.

Hey, Brian. It’s a great question. Yeah. I think as you see decarbonization become more popular and you see the need to move around some of these intermittent renewable resources, you are absolutely going to see huge benefits from transmission. In fact, during the heat wave that we experienced kind of in California and the whole western United States, Boardman to Hemingway would have been absolutely critical to move energy through our system. There were large price spreads between the Palo Verde and the mid-sea market and having additional transmission up to the Northwest would have been key because if you look at the region, a lot of transmission was capacity constrained. So I think you are hitting on a key point. I think it’s absolutely going to be critical in the future and that’s why we are so bullish on Boardman to Hemingway and Gateway West for that matter.

Okay. Great. And just some details on what the evaluation was for ix months, it increased last month or the month before, it seems as if you have got a lot of liquidity, several hundred million dollars of cash on the balance sheet, just curious why not more than 6%?

Brian, you cut out there a minute. Were you asking about the dividend?

Yes. The 6% dividend increase, given your liquidity and strength in the balance sheet, why not increase it more than 6%?

Okay. Thank you. Steve, do you want to take that one?

Sure. That’s great, Lisa. Brian, I would say that, it’s a reasonable question, and I’d say, if you looked at where we sit at this moment, I am not surprised at all you ask it. You have seen the large amount of capital that we projected down the road. And I guess, we are keeping an eye on that and we are sticking with the plan that we wanted to provide meaningful and continual changes to our dividend on a slope kind of like when we started back in ‘11 and we really haven’t moved away from that. I think when you look at that current liquidity. You have to factor in that some of it was a response to the COVID-19 issues. We certainly looked at some of the short-term options like others did. We would have preferred if it wasn’t inside of a year and it turns out the options we were really seeking were just gone, not just for us, but for everybody in the industry. And we took advantage of some of our long-term debt, which we know we need in the near-term, probably next year, the year after, and secured some amazing rates. So we are a little bit ahead. And I apologize I am hearing an echo on the line, if everybody else is getting that, sorry. But I hope that answers your question. It’s more of a sticking to our plan on the dividend side.

Yes. It does. Thank you very much.

Thanks, Brian.

Thank you. Your next question comes from Julien Dumoulin-Smith with Bank of America. Please go ahead.

Hi, Julien.

Good afternoon, everyone. This is Ryan Greenwald actually on for Julien.

Oh! Okay.

Hi, Ryan.

Thanks for taking our questions. So maybe back to the updated guidance, I appreciate the color there and the nuances kind of into 4Q here. Can you kind of just talk about load trends you are seeing as COVID’s spiking across the nation again and any early reads there?

This is Lisa. It's difficult to predict this one. We are seeing increases in residential areas for good reasons, and interestingly, our large commercial loads are returning to more typical levels. We had a great irrigation season, largely due to weather. Small commercial is still slightly down, but it's also starting to improve as people aim to return to some level of normal. The main uncertainty is what will happen with the virus and whether we might face another economic shutdown, although we don't anticipate it. I'm not sure there's much political support for that, but we are preparing for any outcome. On the positive side, growth continues unabated, both in residential and business sectors. We are very excited, and every report indicates that Idaho is one of the fastest growing areas in the country, and we expect this trend to continue for a while. Adam, do you have anything to add?

No. I think you hit it perfectly. In terms of sectors, in the large majority of the sectors, we have seen some pretty steady movement in the industrials, everything from data centers to healthcare, food processing, our dairies are doing pretty well. There are a few sectors that aren’t necessarily there and that’s lodging and education and maybe on the office building side. But I think we have been pleasantly surprised by the fact that our industrials continue to do well under these conditions.

Got it. That’s helpful. And can you guys talk a bit about how wildfire seasons going in your service territories, suppression efforts and regulatory treatment in the jurisdiction?

I will start this and then pass it off to Adam or one of his Vice Presidents. We have been careful about discussing the situation since we have not fully experienced the season yet, but it has not affected us as severely as it has our neighbors to the west. We have had one significant fire that is now contained, and aside from that, there have only been a few smaller incidents. We are monitoring the situation closely and have developed a mitigation plan focusing on high-risk areas. This includes vegetation management, monitoring equipment, and other tools that do not produce sparks during operation. We are committed to doing all we can to prevent and manage fires, and so far, things are going well. Regarding regulatory matters, Adam, would you like to provide an update on our current status?

Yeah. I mean you mentioned, Lisa, in your comments that we are finalizing a comprehensive wildfire management plan and I think what we are going to do there is, at some point, we do plan to file with Idaho and Oregon Commissions, some of our neighbors have done it and it essentially walks through our approach as it relates to wildfires, utilizes a risk-based approach that considers probability and consequence. It’s very similar to what you have seen in California and with our neighboring utilities. And so that’s kind of the approach we will take there. As Lisa mentioned, it’s been a pretty normal fire year, knock on wood. We had to replace several distribution poles and have responded to some small outages caused by fires, but again, nothing wildly different from what we have had to respond to year in and year out.

Got it. And then maybe just lastly, there’s obviously been a bunch of M&A developments and strategic kind of pivots we have seen across the space and large valuation discrepancies, just kind of curious how you guys are framing any thoughts about potential strategic actions?

Our history has been that we really don’t comment on mergers and acquisitions. So I think that would be our comment.

Fair enough. Appreciate all the time.

Thank you.

Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Lisa Grow for any closing remarks.

Thank you for joining our call today. We appreciate your ongoing interest in IDACORP and look forward to connecting with many of you during the EEI Virtual Financial Conference on November 9th and 10th. While it's not quite the same as seeing you all in Florida, we’ll make the best of the situation. I wish you all good health and a wonderful evening. Thank you once again.

This conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.