Q2 2023 Idacorp Inc Earnings Call

Thomson Reuters StreetEvents

Fri, Aug 4, 2023, 6:09 AM30 min read

In this article:

Participants

Adam J. Richins; Senior VP & COO; Idaho Power Company

Brian R. Buckham; Senior VP & CFO; IDACORP, Inc.

Justin S. Forsberg; Director of IR & Treasury; IDACORP, Inc.

Lisa A. Grow; CEO, President & Director; IDACORP, Inc.

Tim Tatum; VP of Regulatory Affairs; Idaho Power Company

Alexander Mortimer; Associate; Mizuho Securities USA LLC, Research Division

Brian J. Russo; Equity Analyst; Sidoti & Company, LLC

Christopher Ronald Ellinghaus; MD, Principal & Senior Equity Utility Analyst; Siebert Williams Shank & Co., L.L.C., Research Division

Paul Andrew Zimbardo; VP in Equity Research & Research Analyst; BofA Securities, Research Division

Presentation

Operator

Welcome to the IDACORP's Second Quarter 2023 Earnings Conference Call. Today's call is being recorded, and our webcast is live. A replay will be available later today and for the next 12 months on the IDACORP website. (Operator Instructions) I'll now turn the call over to Justin Forsberg, Director of Investor Relations and Treasurer.

Justin S. Forsberg

Thank you, David, and good afternoon, everyone. We appreciate you tuning in for our call today. This morning, we issued and posted to IDACORP's website our second quarter 2023 earnings release and the associated Form 10-Q. The slides that accompany today's call are also available on IDACORP's website. We'll refer to those slides by number throughout the call today.
As noted on Slide 2, our discussion today includes forward-looking statements, including earnings guidance, spending forecasts and regulatory plans which reflect our current views on what the future holds, but are subject to several risks and uncertainties, including uncertainties surrounding the impact of future economic conditions.
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 3, on today's call, we have Lisa Grow, IDACORP's President and Chief Executive Officer; and Brian Buckham, IDACORP's Senior Vice President and Chief Financial Officer.
In addition to Lisa and Brian, we have other members of our management team available for a Q&A session following our prepared remarks.
Slide 4 shows our quarterly financial results. IDACORP's second quarter 2023 earnings per diluted share were $1.35 compared with $1.27 during last year's second quarter. Year-to-date, earnings per diluted share were $2.46 compared with $2.18 during the first half of 2022. Those year-to-date results include additional tax credit amortization of $7.5 million under the Idaho regulatory stipulation.
Today, we also reaffirmed our full year 2023 IDACORP earnings guidance estimate in the range of $4.95 to $5.15 per diluted share, which includes our reaffirmed current expectation that Idaho Power will utilize approximately $15 million of additional tax credits that are available to support earnings of the 9.4% return on equity level in the Idaho jurisdiction under its Idaho regulatory settlement stipulation. These estimates assume normal weather conditions through the remainder of the year.
I'll now turn the call over to Lisa.

Lisa A. Grow

Thank you, Justin, and thanks to everyone for joining us today. Let me begin by expressing my profound appreciation to the entire Idaho Power team that continues to show up and deliver results for our customers, owners and each other. I'm honored to share some of our accomplishments and future plans with all of you today.
I'm going to talk about 3 key areas of focus: growth, rate cases and infrastructure. I'll start with a headline of continued strong growth. We had a 2.1% customer growth since last year's second quarter, as you can see on Slide 5. It's a continuation of the trend we've seen over the past few years.
On the large load customer front, the True West Beef plant in Southern Idaho went live in June and is ramping up to full operation. We're also continuing to work with Meta on its data center and Micron on its expansion project. Strong interest remains steady from customers across a range of industries, including food processing, manufacturing and data centers. And I continue to marvel at the number of tower cranes across the Treasure Valley and the amount of infrastructure being built. Supporting that, the economy within Idaho Power service area continues to outperform national trends.
Moody's most recent GDP calculations for our service area forecasts strong growth of 5.5% in '23 and 3.9% in '24. Employment in our service area has increased 1.6% since the second quarter of '22.
Turning to Slide 6. I'll touch on the general rate case we filed in Idaho on June 1. Our case requests a rate increase of $111 million or 8.61% on average for Idaho customers with our expectation that new rates will be effective January 1, 2024. This case was filed 12 years to the day of Idaho Power's last general rate case in Idaho, and it's focused primarily on the more than $3 billion of infrastructure investments our company has made to serve our growing customer base since then.
In fact, our customer base has grown by about 120,000 or 23% which has consumed the capacity length our system once has. Adding new generation, transmission and distribution assets to meet our existing and growing demand is a key driver behind our filing of the case.
Since the filing, we have been responding to discovery requests and working through the regulatory process. The commission approved the schedule for the case this past Tuesday, showing public workshops scheduled for mid-August and technical hearing scheduled for late November. We are always mindful of the impact rate increases have on our customers, but we believe the rate case request is necessary to recover our costs, address growth, and maintain system reliability.
We expect to file a general rate case in Oregon late this year or early next year. Staying with the theme of growth, the current 2023 IRP shows a 5-year forecasted annual growth rate of 5.5% on retail sales and 3.7% on annual peak. These projections are premised in part on numbers provided by large load customers and are subject to change, but the continued growth underscores the importance of our ongoing efforts to strengthen and expand our system.
We are on track to file our 2023 IRP in September. There are lots of moving pieces in a long-term resource plan, including changing demand, developing technology, new laws and directives and other items. We are committed to developing a plan that directs near-term decisions to keep the system reliable while minimizing costs to customers.
While planning is critical to our success, execution is what ultimately keeps the lights on. So let's turn our focus to our infrastructure project. Turning to Slide 7, I'll address some key updates to our large transmission project. The Boardman-to-Hemingway project recently hit major milestones when the Oregon and Idaho Public Utilities Commission granted certificate of public convenience and necessity.
With those regulatory acknowledgments, we plan to break ground on B2H soon and hope to finish it in 2026. As I mentioned last quarter, our agreement with the Bonneville Power Administration to transfer its original 24% interest in B2H to Idaho Power brings our total interest to approximately 45%.
Idaho Power will provide long-term transmission service to BPA as part of the agreement. The Gateway West transmission project is also moving forward, and we expect it to be a part of our resource stack in our 2023 IRP. Majority owner PacifiCorp has constructed portions of the line in Wyoming, while preconstruction, which includes siting, permitting and engineering studies has begun in Idaho.
We expect the portions of the line that are partly owned by Idaho Power to start coming online as early as 2028. Both of these transmission resources will be key to maintaining reliability across our system particularly as we move away from coal-fired resources and toward a clean energy future.
We have RFP's out to meet 350 megawatts of peak capacity needs in 2026 and 2027, which may be met by 1,100 megawatts of variable resources. Some of that energy may be transmitted on B2H. Ultimately, these projects are subject to commission approval through a competitive bidding process, which is underway.
Idaho Power's first bank of 80 megawatts of utility-scale batteries came online this summer at our Hemingway substation. The 40-megawatt Black Mesa solar project is now online, and the 100-megawatt Franklin Solar project is under development. The Franklin project will be paired with an additional 60 megawatts of company-owned battery storage.
These projects and other planned battery and solar resources are expected to help us continue to meet peak demand during the hot summer months. This past month has brought consistently hot summer weather to our service area with temperatures in the 90s and 100. Thankfully, we haven't had any issues meeting peak demand, and it has also been a relatively quiet wildfire season thus far.
We have implemented our wildfire mitigation plan that has been a tremendous amount of work in preparation for this fire season, and we are actively monitoring the weather in our system.
With that, I will stop there and hand it over to Brian for an overview of our financial results.

Brian R. Buckham

Okay. Thanks, Lisa, and hi, everybody. Before I get started, I wanted to give a big thank you to Justin, and congratulations. Justin is leaving IDACORP later this month to join 1 of our peer utilities in an officer role. And I know he'll do great things there just like he did here, and we'll certainly miss them. .
And with Justin's departure, obviously comes some change, I'm excited to announce that Amy Shaw, the company's current Director of Compliance Risk and Securities will be returning to her roots in finance and accounting, taking on the Investor Relations function.
Amy's been with us for almost 20 years, and you'll find her to have an infectious enthusiasm that complements for a strong acumen and I look forward to introducing you to Amy in the coming weeks. We do plan to be out and about a considerable amount in the next few weeks and months, and we're, of course, happy to chat virtually or by phone at any time, and Amy's contact information is included at the end of our slides.
Slide 8 has our summary reconciliation of the second quarter's results, and I'll run through that. Compared to the second quarter of last year, customer growth of 2.1% added $4.1 million to operating income. Our residential customer growth rate remains strong at 2.3% over that time period, and we just received July's number and we saw an uptick to 2.2% on overall customer growth through July.
Lisa mentioned Moody's GDP outlook for our service area, and that points to continued strong customer growth. So we're planning our system for that activity. Overall, industrial sales volumes and revenues were higher for the quarter when you account for customer growth and usage, but industrial per customer usage was down 5%, that was partly related to slightly lower economic activity in a few industrial sectors, but also due to a cogeneration facility owned by a large industrial customer that was down for maintenance during much of the second quarter last year, but it was operational this year, and that offset that customer's usage on a comparative basis. And given that we didn't really see much of the increase in irrigation sales we were planning for after seeing low irrigation sales during the second quarter of last year, we feel pretty good about the comparative results in usage.
Essentially irrigation sales were relatively consistent in the second quarter of this year and last year, but in both cases, below average and below our expectations due to precipitation and temperature conditions. Further down, you'll see a $2.4 million increase in operating income from the change in net per megawatt hour revenue, the Idaho order from the Jim Bridger plant, which increased retail rates on June 1 last year drove that increase.
Next on the table, transmission wheeling-related revenues increased operating income by $1.7 million, resulting from elevated energy prices in the Western U.S. Also, customers paid around 1% more for transmission wheeling quarter-over-quarter after Idaho Power's transmission tariff rate increased in October of last year due to higher transmission costs.
Despite continued inflation-related pressures on labor and other costs, O&M expenses were lower quarter-over-quarter and year-to-date compared to last year. The quarter-over-quarter difference was mostly due to lower expenses from scheduled cyclical plant maintenance and a continued focus on operating efficiently and that was offset partially by inflationary pressures on labor related and other costs that I mentioned.
Depreciation expense was $12.3 million higher than during last year's second quarter. So that stands out. The comparable increase was from the notable impact last year of the Bridger-related order from the IPUC, remember that order authorized Idaho Power to accelerate depreciation on the coal-related assets at the Jim Bridger plant and it resulted from our recording the deferral of certain depreciation expense in the second quarter last year.
This year's increase is also partially related to an increase in plant and service. A decrease in net power supply expenses that were not deferred for future recovery in rates through the power cost adjustment mechanisms was the primary driver of the $3 million benefit from other changes in operating revenue and expenses you see next on the table.
We had power cost pressures through much of last year and in the first quarter this year, and fortunately, they moderated somewhat in the second quarter. At least for now, forward gas prices continue to look better than we saw last winter, but we'll see how the rest of the year plays out.
Next on the table, the $2.8 million decrease in nonoperating expense was mostly due to higher AFUDC from higher average construction work in progress and from higher interest income due to higher market interest rates.
These increases were partially offset by an increase in interest expense from bond issuances this past spring. We expect higher interest expense to continue to impact our results over the balance of the year.
Finally, higher income tax expense, mostly resulting from greater pretax income was more than offset by our reporting of additional amortization of accumulated deferred investment income tax credit of $3.75 million. We recorded this additional amortization based on our current expectations for full year results, which under the regulatory mechanism allows us to use a portion of the accumulated tax credit balance to help lift Idaho Power's return on year-end equities to 9.4% in the Idaho jurisdiction, $7.5 million of additional ADITC's recorded year-to-date is now 1/2 of our expected total additional full year amortization of $15 million.
Combined with nominal impacts from other IDACORP subsidiaries, all of these items combined led to a $4.6 million increase in net income over last year's second quarter.
Looking ahead, as we've mentioned before, we try to target a relatively even capital structure. Idaho Power's equity ratio has moved closer to that target compared to where we were at year-end, and now sitting at 52% at the end of Q2, given where we are on that ratio, we still don't see an equity issuance as imminent, but given the size of our capital plans and that we're approaching our target ratio, our financing strategy going forward includes a blend of both equity and debt to fund future growth.
We've been spending some time determining in more detail how we might make those debt and equity issuances. And in doing that, we're, of course, keeping in mind the need to balance items like credit ratings, capital market conditions and interest rates and dilution impact as we work on our plans.
Turning to Slide 9. Cash flows from operations during the first 6 months of the year returned to positive territory after starting the year seeing the effects of regulatory lag from abnormally high power and fuel costs. We received approval from the Idaho Commission to collect through the PCA $200 million for higher power and fuel costs over the past year from June 1 of this year through May of 2025. And that rate change has already begun to improve cash flows from operations.
As you can see on Slide 10, we continue to expect IDACORP's 2023 earnings to be in the range of $4.95 to $5.15 per diluted share. With the assumption that Idaho Power will use around $15 million of additional investment tax credit amortization to realize the 9.4% return on year-end equity in Idaho.
As I mentioned, we've now booked one half of that for the pro rata portion of the year, and this guidance assumes normal weather and more normal power supply expenses over the balance of the year. With our second quarter results, we've had a solid start to the year, and we're on track thus far for our EPS range.
We expect results in the second half to benefit from continued customer growth and hopefully a sustained moderation in power supply costs. On the other hand, we expect to see higher interest and depreciation expense in the second half due to our CapEx investment, and potentially lower transmission wheeling-related revenues compared to the fourth quarter of last year when Western Energy prices were abnormally volatile.
We continue to expect full year O&M to be in the range of $385 million to $395 million, with much of the expected savings related to less scheduled plant maintenance compared to last year and our typical cost management efforts, along with some federal credits and grants we've received.
With slightly lower O&M thus far this year, we're on track, and we're staying focused on it. We still expect this year's CapEx spending to be in the range of $650 million to $700 million, and we're trending at the higher end, we're working on capital budgeting for next year and expect 2024 CapEx could be larger than what we predicted for 2024 at the beginning of this year.
Finally, we are affirming our hydropower generation forecast to be within the range of 6 million to 7.5 million megawatt hours for the year. This compares with actual generation of 5.3 million last year, yet still below our 30-year average of 7.7 million. The strong winter snowpack has filled reservoirs well, which is helping us cost effectively meet demand in our high summer usage season.
Slide 11 shows the recent outlook for precipitation and temperature from Noah. Current weather projections for August through October suggest that forecasters see a decent chance for above-normal temperatures and are leaning towards normal precipitation over the balance of the summer.
I'll stop there, and Lisa and I and others on the call are happy to answer your questions.

Question and Answer Session

Operator

(Operator Instructions)
We'll take our first question from Paul Zimbardo with Bank of America.

Paul Andrew Zimbardo

Congratulations, Justin, we are sad to see you go. So congrats there.

Justin S. Forsberg

Thanks, Paul.

Paul Andrew Zimbardo

Thank you for the update on the customer growth through July. Just could you give a kind of a wholesome overview? I know you called it a little bit of slowing or slightly lower economic activity for some customers. You changed some of the customer mix on the -- at least the presentation slide, and there's just been noise around CHIPS Act. So you could just talk about overall what you're seeing on the ground there? That would be helpful.

Lisa A. Grow

Sure. I'll start, we are seeing growth across all the sectors, residential permits dropped off a little bit, but they're really starting to come back, there are some industries that just have a little bit of a cyclical sort of nature. But overall, we're not seeing any alarming trends, and Adam what would you add?

Adam J. Richins

In terms of the commercial industrial side, I think the inquiries have been as steady in the last 2 or 3 years. They just really haven't slowed down much, we talk a lot about Meta and Micron, both those projects are moving forward. We're doing a lot of work on both projects and are pretty excited that they continue to make progress there, and we're getting a fair amount of inquiries from data centers and other manufacturers who are interested in coming to our service territory. So from our perspective on the economic development side, it's been steady.

Brian R. Buckham

And Paul, what I would add is we still see some spec building out there, which is a beneficial aspect for the outlook on manufacturing sector. Some stability in housing prices. And as Lisa mentioned, that uptick in permitting applications will help with the supply of housing for the influx of residential customers. And the other thing I would mention is the customer number growth rate is one thing. But as you look at our load growth projections, they're pretty significantly higher than the customer growth rate, and that's driven by the commercial and industrial area of our business, accelerating relatively rapidly.

Paul Andrew Zimbardo

Okay. Great. And then on the proposed new GHG rules, you disclosed at Valmy and Bridger could be potentially running at reduced run time. Is there a scenario where you could need to invest in those plants or just otherwise look to change the outlook on potential retirement timings for those?

Lisa A. Grow

We've actually had a development down in Nevada where that's been stayed, so it won't impact our use this year. It will work its way through the court system, but we are very focused on conversion in those units with our partners, converting from coal to gas. So we see those as important sort of bridge generators as we are working our way towards our clean energy goal.

Adam J. Richins

And Paul, this is Adam. The integrated Resource Plan is set to come out in September. In that plan, we do evaluate reduced run rates in those units. And for the most part, it looks like the conversions are still showing up as economic. So at least we have to finalize the modeling. We have a couple of months to go, but it looks like it's leaning in that direction at least for now.

Paul Andrew Zimbardo

Okay. Great. And then last 1 related to Brian, if I heard right, I think you said that 2024 CapEx could be bigger than you thought originally. Just what's driving that? Kind of what categories? And if you have any sense of magnitude, that would be helpful.

Brian R. Buckham

Yes. I don't have a good sense of the magnitude at this point other than we're seeing some increases in costs across the board, inflationary costs associated with capital projects, not unanticipated. We're also seeing just an increase in the number of projects that we're working on, on transmission, distribution and generation. And then off of the 2024 batteries that we're installing in the system are included in that as well.
So we're currently going through the capital budgeting cycle, and that's just an early indicator that we've seen of capital increasing relative to what you saw in February when we published our last outlook on CapEx through the next 5 years.

Operator

Next, we'll go to Chris Ellinghaus with Siebert Williams.