IDACORP Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

There are 10 speakers on the call.

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. I'll now turn the call over to Justin Forsberg, Director of Investor Relations and Treasurer.

Speaker 1

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 Q2 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.

Speaker 1

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 Growe, 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 and A session following our prepared remarks. Slide 4 shows our quarterly financial results.

Speaker 1

IDACORP's Q2 2023 earnings per diluted share were $1.35 Compared with $1.27 during last year's Q2. Year to date, earnings per diluted share were $2.46 Compared with $2.18 during the first half of twenty twenty two. Those year to date results include additional tax credit of $7,500,000 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 $15,000,000 of additional tax credits That are available to support earnings at 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.

Speaker 1

I'll now turn the call over to Lisa.

Speaker 2

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.

Speaker 2

We had a 2.1% customer growth since last year's Q2, 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 TruWest 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.

Speaker 2

Supporting that, the economy within Idaho Power's service area continues to outperform national trends. Moody's most recent GDP calculations for our service area forecast strong growth of 5.5% in 2023 And 3.9% in 2024. Employment in our service area has increased 1.6% since the Q2 of 2022. Turning to Slide 6, I'll touch on the general rate case we filed in Idaho on June 1st. Our case requests a rate increase of $111,000,000 or 8.61 percent on average for Idaho customers, With our expectation that new rates will be effective January 1, 2024.

Speaker 2

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 $3,000,000,000 of infrastructure investments our We have 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 Request and working through the regulatory process. The commission approved a schedule for the case this past Tuesday, Showing public workshops scheduled for mid August and technical hearings scheduled for late November.

Speaker 2

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.

Speaker 2

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 cost 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 projects. Turning to Slide 7, I'll address some key updates to our large transmission projects.

Speaker 2

The Boardman to Hemingway project Recently hit major milestones when the Oregon and Idaho Public Utilities Commission granted certificates 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, Idaho Power brings our total interest to approximately 45%. Idaho Power will provide long term transmission Service to BPA is part of the agreement. The Gateway West Transmission Project is also moving forward and we expect It to be a part of our resource staff in our 2023 IRP.

Speaker 2

Majority owner Pacific Corp has constructed portions of the line in Wyoming, While pre construction, which includes citing, 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 RFPs out to meet 3 50 megawatts of peak capacity needs in 2026 and 2027, which may be met by 1100 megawatts of variable resources. Some of that energy may be transmitted on B2H.

Speaker 2

Ultimately, these projects are subject to commission approval through a competitive bidding process, which is underway. Idaho Power's 1st 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.

Speaker 2

This past month has brought consistently hot summer weather to our service area with temperatures in the 90s and 100s. 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 and our system. With that, I will stop there and hand it over to Brian for an overview of our financial results.

Speaker 3

Thanks Lisa and hi everybody. Before I get started, I wanted to give a big thank you to Justin and a congratulations. Justin is leaving IDACORP later this month to join One 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 him. And with Justin's departure obviously comes some change.

Speaker 3

I'm excited to announce that Amy Shaw, the company's current Director of Compliance, Risk and Security We'll be returning to her roots in finance and accounting, taking on the Investor Relations function. Amy has been with us for almost 20 years, And you'll find her to have an infectious enthusiasm that complements her 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 months and we're of course happy to chat virtually or by phone anytime. And Amy's contact information is included at the end of our slides.

Speaker 3

Slide 8 has our summary reconciliation of the 2nd quarter's results and I'll run through that. Compared to the Q2 of last year, customer growth of 2.1% added $4,100,000 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 2.2 percent on overall customer growth through July. Lisa mentioned Moody's GDP outlook for our service area That points to continued strong customer growth that 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%.

Speaker 3

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 quarter last year, but 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 Q2 last year, Feel pretty good about the comparative results in usage. Essentially irrigation sales were relatively consistent in the Q2 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 $2,400,000 increase in Great 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 $1,700,000 Resulting from elevated energy prices in the Western U.

Speaker 3

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 and 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.

Speaker 3

Depreciation expense was $12,300,000 Higher than during last year's Q2, 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 Q2 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 and rates through the power cost adjustment mechanisms was the primary driver of the $3,000,000 Benefit from other changes in operating revenue and expenses you see next on the table.

Speaker 3

We had power cost pressures through much of last year and in the Q1 this year. Unfortunately, they moderated somewhat in the Q2. At least for now, forward gas prices continue to look better than we thought last winter, but we'll see how the rest of the year plays out. Next on the table, the $2,800,000 decrease in non operating 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.

Speaker 3

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 $3,750,000 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 equity to 9.4 The Idaho jurisdiction, dollars 7,500,000 of additional ADITCs reported year to date is now one half of our expected total additional full year amortization of The net income over last year's Q2. 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, 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.

Speaker 3

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 1st 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 $200,000,000 for higher power and fuel costs over the past year From June 1st this year through May of 2025 and that rate change has already begun to improve cash flows from operations.

Speaker 3

As you can see on slide 10, we continue to expect IDACORP's 2023 earnings to be in the range of $4.95 $5.15 per diluted share with the assumption that Idaho Power will use around $15,000,000 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 1 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 Q2 results, we've had a solid start 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 Same to moderation in power supply costs.

Speaker 3

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 Q4 of last year when Western Energy prices were abnormally volatile. We continue to expect full year O and M to be in the range of $385,000,000 to $395,000,000 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 and 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 $650,000,000 to And we're trending at the higher end. We're working on capital budgeting for next year and expect 20 24 CapEx to be larger than what we predicted for 24 at the beginning of this year.

Speaker 3

Finally, we are affirming our hydropower generation forecast to be within the range of 6 7,500,000 megawatt hours for the year. This compares with actual generation of 5,300,000 last year, Yes, still below our 30 year average of $7,700,000 The strong winter snowpack has filled reservoirs well, which is helping us cost effectively meet demand in our high summer usage Slide 11 shows the recent outlook for precipitation and temperature from NOAA. Current weather Objections for August through October suggest that forecasters see a decent chance for above normal temperatures and are leaning toward normal precipitation over the balance of summer. I'll stop there and Lisa and I and others on the call are happy to answer your questions.

Operator

Thank you. We are now ready to begin the question and answer live. We will take as many questions as time permits on a first come basis. We'll take our first question from Paul Zimbardo with Bank of America. Your line is now open.

Speaker 2

Hi, Paul.

Speaker 3

Hi, Paul.

Speaker 4

Hi. Good afternoon, team, and congratulations, Justin. We'll be sad to see you go. So congrats there. Thanks, Paul.

Speaker 4

And first, and thank you for the update on the customer growth through July, just could you give a kind of a wholesome overview? I know you call 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 chipsets. So you could just talk about overall what you're seeing on the ground there? That would be

Speaker 2

Sure. I'll start. We are seeing growth across all the sectors. Residential permits dropped off a little bit, but they really started to come back. There are some Industries that just had a little bit of a cyclical sort of nature, but overall we're not seeing any alarming trends.

Speaker 2

And Adam, what would you add?

Speaker 5

In terms of the commercial industrial side, I think the inquiries have been as steady It's 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.

Speaker 5

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.

Speaker 3

Yes. 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 And the other thing I would mention is the customer Number of 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.

Speaker 4

Okay, great. Thank you for all that. And then on the proposed new GHG rules, you disclosed that Valmy and Bridger could be potentially running at reduced 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?

Speaker 2

Well, we've actually had a development down in Nevada where that's been stayed. So it won't impact our use This year, will work 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.

Speaker 5

And Paul, this is Adam. The Integrated Resource Plan, it says 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 finalized the modeling.

Speaker 5

We have a couple of months to go, but it looks like It's leaning in that direction at least for

Speaker 4

now. Okay, great. And then related, Brian, if I heard you 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.

Speaker 3

Yes. I don't have a good sense of the magnitude at this point other than we are 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 transmission distribution and generation. And then also 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 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.

Speaker 4

Okay, great. Thank you. Congrats again, Justin and Amy. Appreciate it.

Operator

Okay. Next we'll go to Chris Ellinghaus with Seabert Williams. Your line is open.

Speaker 6

Hey, everybody. Brian, you sort of talked about this. The irrigation seems kind of odd considering what the conditions were in the quarter. Do you have any sense Why that might be?

Speaker 3

A little bit of indication on that. What we saw early on in the irrigation season was mild temperatures And then we saw a lot of precipitation that reversed itself pretty heavily later on in the irrigation season. There was a lot of factors that influence it even things like wind We also saw a slight increase in irrigation customers And then also the crops that were planted given that we had a high water supply this year, water intensive crops were planted by some of Ag customers in the area, so additional irrigation there.

Speaker 6

Okay. When you say In the guidance, you're anticipating normal weather for the rest of the year. Does that include the Seemingly pretty hot and dry July?

Speaker 3

That does include our relatively hot July, yes.

Speaker 6

Okay. Have you seen any pickup in irrigation in July?

Speaker 3

We don't yet have July irrigation numbers, so I'm not sure how they turned out. I would say based on hot temperatures, it should be beneficial. If you look year over year at irrigation, we had a pretty bad irrigation season last year and that was met the same this year, almost exactly. Some of those July high temperatures and just lack of precipitation over the last month may actually benefit irrigation sales, but we do have that built into our plan Going forward into our guidance.

Speaker 6

Okay.

Speaker 3

Just for July.

Speaker 6

That 5% decline in industrial usage, Do you know how much of that was that cogen customer?

Speaker 3

This is Brian again. I don't have an exact number, but it was a fairly significant driver of that 5% reduction. It's a sizable cogeneration of 1 of our industrial customers. So not an exact number, but significant. And that's a usage per customer issue rather than a total industrial use perspective.

Speaker 3

Total industrial use wasn't down much. That was just used per customer.

Operator

Right.

Speaker 3

There's also a little bit of an economic slowdown for some of our customers and some of them may be cyclical. It contributed to it as well. Okay.

Speaker 6

And you didn't really add or at least I didn't catch You were talking about the headwinds and the tailwinds for the rest of the year. Did you include weather as a tailwind?

Speaker 3

No. Weather is just one of those things that's so difficult to gauge. One thing that could influence that is transmission sales. So if we get really high temperatures or really cold temperatures that can influence our transmission wheeling volumes That can impact it. Really the if you look at headwinds, it's depreciation and interest expense, many O and M pressures that are out there.

Speaker 3

The Q3 of last year was really hot and that might not repeat itself. It did repeat itself in July so far, but we're only 3 days into August and we have a ways to go on what the impact of that will be for the rest of the year. Irrigation season though that's time limited at this point. We also have some tailwinds for us as well, including customer growth that we just continue to see and it's driving a lot of our business And a lot of our rebates could be related to the permitting issue where we did see just a slowdown when there were some recessionary forces about people moving into the area. Housing prices did moderate a little bit after being very, very high.

Speaker 3

So that might contribute to the uptick. But again, that was mostly in residential.

Speaker 6

Okay. Thanks for your details. Appreciate it.

Speaker 3

Thanks, Chris.

Operator

Okay. Next, we'll go to Brian Russo with Sidoti. Your line is now open.

Speaker 7

Yes, I got it. And execution of that project. And do you need, any landowner agreements or do you have a clear path of construction to meet that 2026 target, which I assume Is incorporated as the preferred resource in this IRP?

Speaker 2

It is. And Thanks for the question. Yes, we've been working on this for 17 years and finally getting past some of these milestones is really exciting and now it's time to go build it. Adam has much more detail, but we are working on securing the rights of way In Oregon, and a little bit in Idaho, but we're that process kicked off and they've been pursuing that with Ernest.

Speaker 5

Yes. There's really two things. This is Adam Bryant that we're looking at. 1 is, of course, getting the rights away from landowners. We're negotiating those Right now, a fair amount of them we had options on, so for the ones we didn't have option in the October timeframe.

Speaker 5

And You are right. I think Lisa mentioned it that it still is continuing to be the least cost, least risk we

Speaker 7

need to service your territory.

Speaker 5

Well, Brian, this is Adam. I can talk a little bit about our interest in it. As you know, it's a longer line that goes through Wyoming. Our interest is 33% in 2 segments. 1 is from the midpoint to Hemingway part of the project and the other 2 And using again 30% of the megawatts bidirectional, it's 1,000 bidirectional.

Speaker 5

So we would get our portion of it being that 30%.

Speaker 7

Okay, understood. And then just, the procedural schedule for the general rate case, Are there dates earmarked for settlement discussions and or staff testimony?

Speaker 2

Tim Fadem is here with us. I'll have Tim answer.

Speaker 8

Yes, sure, Brian. This is Tim. The case including staff have agreed Informally agreed to settlement discussions September 18th through 20th. Of course, the commission does not include those settlement dates In their order, but the parties have formally agreed to those dates.

Speaker 7

Okay, great. Got it. Thank you very much.

Speaker 1

Thanks, Brian.

Operator

And a final opportunity, press star 1 to signal for a question and we'll pause for just a moment. Next, we'll go to Alex Mortimer with Mizuho. Your line is open.

Speaker 2

Hi, Alex.

Speaker 9

Hi, good afternoon.

Speaker 3

Good afternoon.

Speaker 9

So you mentioned the future financing plans, including both the mix of debt and equity. Can you give us any additional detail on when we might get additional clarity

Speaker 3

on the timing of that? We're Through the capital budgeting process and our forecast for 2024, looking at things like our credit ratings and those are all going to be the factors that we assign Of the capital stack going forward, but we're not at the point where we have anything that we can share on that. We could have that Ready towards the beginning of next year as we look at our capital stack and our CapEx plan. But we're also looking at things like the timing of our cash collection on our actual spend versus things like power and gas cost impact. So those are liquidity items that we're looking at.

Speaker 3

So that will all impact our mix of debt and equity and the timing of those transactions.

Speaker 9

Okay. Understood. And then flipping more back to the rate case. Given the length of time between cases, how frequently you've been meeting with regulators in the lead up to this case? Maybe phrased a different way, can you speak to the state of your relationship with regulators, staff,

Speaker 2

That we have built over time with the regulators and we speak to them frequently on a number of issues and Really make sure that we don't surprise them, that we keep them apprised of things that are coming up on the horizon. And so, we really feel good about having a strong case and an open Regulator that is going to work through it with us.

Speaker 9

Understood. And then just finally on the rate case, do you expect any key items of contention as you work

Speaker 2

Well, there always is. I don't know if there's any in particular that we're Worried about more than others, but there's always a look at what we spent, why we spent it. And again, we feel very confident that we've put a Kate, before the commission that really demonstrates this is largely driven by infrastructure that is fueled by growth. So there's nothing that's jumping

Operator

Okay. That concludes the question and answer session for today. Ms. Groh, I'll turn the call back over to you.

Speaker 2

Well, thank you again for everyone joining us this afternoon and for your continued interest in IDACOR. And I will also Join in, in thanking Justin and wishing him all our best. We certainly will miss having you here, but we are excited To see what happens next for you. So good luck and I hope I wish you all a good evening. Thank you.

Operator

That does conclude today's conference call. You may now disconnect.

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