IDACORP, Inc. (NYSE:IDA) Q3 2023 Earnings Call Transcript

IDACORP, Inc. (NYSE:IDA) Q3 2023 Earnings Call Transcript November 3, 2023

Operator: Welcome to IDACORP’s Third 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 will now turn the call over to Amy Shaw, Director of Investor Relations, Compliance and Risk.

Amy Shaw : Thank you. Good afternoon everyone. We appreciate you joining our call. This morning we issued and posted at IDACORP website our third 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. As noted on Slide 2, our discussion today includes forward-looking statements, including earnings guidance, spending forecasts and regulatory plans that reflect our current views on what the future holds, but are subject to risks and uncertainties including uncertainties surrounding the impacts 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 third quarter 2023 earnings per diluted share were $2.07 compared with $2.10 during last year’s third quarter. Year-to-date earnings per diluted share were $4.53 compared with $4.28 for the first three quarters of 2022.

The year-to-date results include a total of $7.5 million of additional tax credit amortization under the Idaho regulatory stipulation, which is the amount we recorded in the first half of the year. Today we raised the bottom end of our previously issued full year 2023 IDACORP earnings guidance by $0.10 to a range of $5.05 to $5.15 per diluted share, which includes our current expectation that Idaho Power will use up to $10 million of additional tax credits available to support earnings at the 9.4% return on equity level in the Idaho jurisdiction under our current Idaho regulatory settlement stipulation, which is down from the $15 million we anticipated at the end of the second quarter. Now I’ll turn the call over to Lisa.

Lisa Grow : Thanks Amy, and thanks to everyone for joining us today. I want to begin by addressing three main areas this afternoon: customer growth, infrastructure to address that growth, and rate cases. I’ll start by highlighting the strong growth that continues across our region. As you can see on Slide 5, we’ve had 2.3% customer growth since last year’s third quarter. This growth is in line with the trends we’ve seen for several years now and is readily apparent throughout our service area. There continues to be a number of tower cranes visible near our headquarters in downtown Boise 26 throughout the Treasure Valley area to be exact and construction is booming. You can see on the slide that Moody’s GDP growth at — what their growth forecast is.

We’re working hard to ensure we continue supplying our growing customer base with a safe reliable affordable clean energy they depend on every day. On the large load front, The Stow Company’s facility in Nampa went live in October and will ramp up operations over the next several months. In addition, several dairy biogas projects in the Magic Valley completed construction and started operations in Q3. Interest remains steady from customers across a range of industries, including food processing, manufacturing and data centers. We’re continuing to work with Meta on its innovative data center in Kuna and on the Micron expansion, which had its first official concrete for earlier this month. Micron is also making a strong push to recruit its suppliers to locate facilities near their expansion, creating the potential for additional load.

I’m happy to provide an update on the general rate case we filed in Idaho on June 1. Parties in the case have agreed to a settlement of all issues in the case. We filed the settlement stipulation last week with the Idaho Commission, and some of the details are included on Slide 6. If approved the stipulation would provide for an increase in annual retail revenues of $54.7 million, or 4.25% on average for Idaho customers effective January 1, 2024. That’s in addition to moving the recovery of certain costs from other regulatory mechanisms into base rates. And Brian will touch on the details of that in a moment. We believe the settlement demonstrates our continued constructive regulatory environment in Idaho. As a reminder this is the first general rate case we filed in 12 years.

Our case, focus primarily on the infrastructure investments we’ve made to serve our customer base which has grown by 23% since our last rate case filing. As we look forward to our capital investment plans over the next several years, we anticipate more frequent general rate case filings. We also expect to file a general rate case in Oregon next month. In another positive regulatory outcome, the Idaho Commission recently approved Idaho Power’s, Clean Energy Your Way program. This program expands clean energy options available to our customers, including a construction offering that allows industrial customers to partner with Idaho Power to develop new renewable resources through a long-term arrangement. Meta and Micron have agreements in place to participate in this program which will help them achieve their clean energy goals, while also complementing our goal of providing 100% clean energy by 2045.

We’ve also seen interest from others as well. As part of our efforts to meet customer demand and keep up with growth we recently filed our 2023, Integrated Resource Plan. Creating a long-term resource plan is an increasingly complex process and we remain committed to developing a plan that keeps our system reliable while minimizing price impacts to our customers. Filed in Idaho and Oregon every other year, the IRP offers a 20-year forecast for energy demand in a preferred portfolio of resources to help us meet that demand. Slide 7, summarizes some of the notable changes from our 2021 to our 2023 IRP. I think the IRP is worth a review and in particular the preferred portfolio that came out of that process. We’ve been busy with infrastructure development and the IRP illustrates what we expect to be focused on for energy and capacity in the coming years.

One infrastructure addition in particular I want to highlight is the Gateway West transmission line. In the 2023 IRP, the need for at least one segment of the transmission line moved into our five-year action planning window and we’re now working with our partner PacifiCorp to move that forward. This is in addition to the Boardman to Hemingway transmission line where we have preconstruction and land acquisition activities happening and construction is expected to begin in the first half of 2024. We believe both lines will be, key to maintaining reliability across our system particularly as we move toward a clean energy future. Beyond transmission, we’re making progress on our other energy and capacity resource procurement and we’ve included Slide 8 to summarize our status.

For the RFPs for 2023 to 2025, we’ve installed 120 megawatts of the 293 megawatts of the company-owned storage that resulted from those RFPs. Evaluations continue on the RFPs we issued to meet approximately 350 megawatts of peak capacity needs in 2026 and 2027, which we estimated could be met by up to 1100 megawatts of variable resources. We expect some of that energy may be transmitted by B2H. We received over 180 proposals including Idaho Power’s own self-build projects and are working to develop a short list. We expect to make the awards in the first quarter of next year. I’ll note quickly that FERC recently revised its schedule for issuing the supplemental environmental impact statement required for relicensing the Hells Canyon Complex.

We continue to feel positive about the progress we’ve made towards relicensing, but this development likely pushes back a new long-term Hells Canyon license until 2025 or later. And last but not least, as I reflect on the summer, I’d like to thank our teams for their great work maintaining reliable service for our customers throughout plenty of 100 degree days. Our employees continue to drive positive results for our customers, our owners and our company. It’s been a very busy year with our typical workloads increasing with the general rate cases, transmission development, reliability projects, security enhancements and a host of other objectives we’ve been pursuing. Our remarkable employees that powered through it and they continue to impress and inspire me.

With that, I’ll hand the presentation over to Brian, for an overview of our financial results and some additional details on our pending rate case settlement. Brian?

Brian Buckham: Thanks Lisa. Hi everybody. Let’s start on Slide 9, which has a reconciliation of the third quarter’s results compared to last year’s third quarter. Customer growth of 2.3% increased operating income by $4.6 million. Our residential customer growth rate remains strong at 2.4% over that time period, which is slightly up from a quarter ago. Usage per customer decreased operating income by about $17 million in the third quarter compared with the third quarter of last year. Higher precipitation and more moderate temperatures led irrigation customers to use less energy to operate their pump and it causes residential and commercial customers to use less energy per customer for cooling. The impact of the decrease in sales volumes per customer was partially offset by revenue from the fixed cost adjustment decoupling mechanism for residential and small commercial customers.

Transmission wheeling-related revenues decreased comparative operating income by $2.8 million, mainly due to less volatile energy prices in the Western US, which reduced transmission system demand and revenues. At the same time that reduced volatility helped with power supply costs further down on the table. O&M expenses were lower due to our ongoing focus on operating efficiently and a couple of other things. One was the impact of lower expenses from scheduled cyclical plant maintenance with last year having an atypically high amount of that maintenance. The other was the timing of regulatory deferrals. Equally offsetting the O&M savings was depreciation expense, which increased by $4.9 million over last year’s third quarter. This isn’t surprising given our infrastructure work and the resulting increase in plant and service and we expect that to continue at an elevated rate with our increased CapEx going forward.

Other changes in operating revenues and expenses increased operating income by $5.3 million, primarily due to lower property taxes and a decrease in net power supply expenses that were not deferred for future recovery in rates through power cost adjustment mechanisms. Lower wholesale power purchase volumes and prices decreased net power supply expenses compared with the third quarter of last year. Non-operating expense increased slightly on a net basis. The allowance for funds used during construction increased as the average construction work in progress balance was higher. Also interest income increased due to higher interest rates on our cash and investments. These increases were partially offset by higher interest expense on long-term debt.

Finally, we didn’t report any additional amortization of accumulated deferred investment tax credits in the third quarter and is based on our current expectation for the full year. As a reminder we have a regulatory mechanism that allows us to use a portion of Idaho Power’s tax credit balance to help lift Idaho Power’s earnings up to a 9.4% return on year-end book equity in the Idaho jurisdiction. At the end of the second quarter, we recorded $7.5 million of additional ADITCs. And as Amy mentioned we now expect to use up to $10 million for the full year. So we didn’t report any additional tax credit amortization in the third quarter. We already added on the books. Combined with nominal impacts from other IDACORP subsidiaries, we saw a $1.1 million decrease in net income over last year’s third quarter.

But for the year-to-date, we saw a $13 million increase in net income over the first nine months of last year. I don’t know if ours move closer to the company’s target debt-to-equity ratio compared to where we were at the year-end. As I’ve mentioned before, our goal is to maintain our current stable credit ratings as well as a capital structure in nearer 50% or 51% equity all in the face of our CapEx plans over the coming years. And to do that, we’re still planning to blend debt and equity issuances. We don’t have any sizable maturities to address in the next few years, which helps on the debt side and also with our credit ratings. Also our September debt issuance enhanced our cash position for the near-term and our rate settlement if approved would help with cash flows.

And that increases our flexibility and our ability to act opportunistically on our equity issuance timing and approach. Turning to slide 10. Cash flow from operations improved after starting the year seeing the effects of regulatory lag from abnormally high power and fuel cost. As we discussed on the last call starting on June 1st, we received approval from the Idaho Commission to collect a $200 million increase in power supply costs from customers. Those are for higher power and gas costs over the past year with collection from June one of this year through May of 2025. That rate change has helped improve cash flows from operations as has moderation in power supply cost volatility as the year has gone on. Again, the rate changes from the Idaho rate case settlement assuming it’s approved would also benefit cash flows.

Looking back at September, IDACORP’s Board of Directors approved a roughly 5% increase in the quarterly cash dividend on IDACORP’s common stock from $0.79 to $0.83 per share. They’ve approved a 177% increase in quarterly dividend over the last 12 years. I think that’s reflective of our company’s commitment to its owners, while at the same time we’ve maintained some of the lowest energy prices in the nation for our customers. As Lisa mentioned relating to our Idaho general rate case filing, parties in the case have agreed to a settlement of all issues. If you joined us late, our summary of the pending settlement is on Slide 6. The stipulation provides for an increase in annual retail revenues of $54.7 million, effective this upcoming January 1.

That’s net of some transfers of cost recovery of base rates including $168.3 million from current PCA rates and $3.5 million from the energy efficiency writer. The settlement includes an ROE of 9.6%, which would set our overall rate of return at around 7.247%, with an unspecified capital structure cost of debt. The vast majority of the additional reduction from our original ask is regulatory lag. So not capital disallowances, but instead delayed collection that results from Idaho’s use of a historic test year, with only certain known and measurable adjustments including using a 13-month average on rate base and our retrospective look at labor costs. A part of it is also moving certain items to mechanisms like riders and deferrals for certain costs.

That lag in collection given our CapEx outlook is, what will likely put us in front of the commission with another general rate case or another form of rate request potentially as soon as 2024. There’s no stay off provision in the settlement so it can accommodate an upcoming requests. One important attribute to the settlement that I want to highlight pertains to the ADITC mechanism. The sharing line for the mechanism will now be at 9.6%, and the ADITC usage mark will be reset to 95% of that which is a 9.12% return on year-end equity in the Idaho jurisdiction. Under the settlement the investment tax credits generated by the batteries, we’re installing in 2023 would be added to the existing mechanism that’s probably around $50 million in new ITCs added to the mechanism.

As we contemplated in our original filing, a portion of those credits are intended to cover the revenue requirement for those batteries as a rate mitigation measure. Then under the settlement, which is a notable change from our original application, the mechanism would no longer have a cap on the amount of credits that Idaho Power could use in any particular year, for the current cap of $25 million of additional ADITCs per year would be removed. This is to accommodate the battery storage revenue requirement and also that help provide stability to earnings as we continue our elevated CapEx and work through the regulatory cycle to recover on that CapEx, all while feeling the effects of higher depreciation and financing costs and the regulatory lag introduced by the historic test year.

We view the ADITC mechanism component as a particularly constructive outcome from the settlement. The settlement also has a rate design element to it where the residential service charge will increase from $5 to $15 per month over two years. And the small general service charge will increase from $5 to $25 per month on January 1. This change helps with a more timely and actable recovery of our fixed costs. The settlement went to the commission earlier this week during a scheduled decision meeting to reset the case schedule. The next steps in the process include, testimony from the parties in the middle of this month, with the opportunity to reply if necessary. Additionally, the commission scheduled customer and technical hearings for the last week of this month.

We still expect the case will conclude by the end of this year and new rates would be effective January 1 2024. Slide 11, shows our updated full year earnings guidance and key operating metrics. As Amy noted, we expect IDACORP’s earnings this year to be in the range of $5.05 to $5.15 per diluted share, with the assumption that Idaho Power will use up to $10 million of additional investment tax credit amortization, that’s down from our estimate of $15 million last quarter. We expect results in the final quarter of the year to benefit from continuing customer growth, O&M expense management and hopefully a sustained moderation in power supply costs. On the other hand, as I alluded to earlier, we expect higher interest and depreciation expense to continue through the end of the year from our CapEx investments and plan going into service.

We could also see potentially lower transmission wheeling-related revenues compared to the fourth quarter of last year when we saw the Western energy markets, with some abnormal volatility. We continue to expect full year O&M expense 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. We’re on track with our lower O&M thus far this year. We expect this year’s CapEx spending to be slightly higher than our initial expectations. So we’ve increased our estimate by $25 million to a range of $675 million to $725 million. And then looking past this year, we’ll give a longer-term CapEx forecast update on the fourth quarter call in February.

But our current CapEx budget for 2024 is trending higher than we anticipated in February this year, and we’re expecting it to be in the range of $850 million to $950 million as of now, which is up from our earlier estimate of $800 million to $850 million. We think that theme of higher CapEx will continue in subsequent years as we address growth in our service area. We’re currently estimating that our CapEx for 2025 through 2027 will land in the range of $2 billion to $2.5 billion over that three-year period, which is a pretty significant increase from what we included in our estimate last quarter, which was $1.5 billion to $1.7 billion for that thee-year period. Currently our estimates don’t include the upcoming RFP results for 2026 and 2027.

So any owned resources coming out of those RFPs would be incremental to the amounts I mentioned. We’ll continue to refine our plans and budgets during the fourth quarter and into early next year and plan to provide an update on our Q4 earnings call, which is our usual cadence. Finally, given our most recent forecast of hydropower operating conditions, we’ve tightened our hydro range as we move further into the final quarter of the year. So that’s a lot and I’ll stop there and we’re happy to address questions you might have.

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Q&A Session

Operator: We are now ready to begin the question-and-answer session [Operator Instructions] And we do have a question in the queue. Are you ready to take our first question?

Lisa Grow: Sure.

Operator: All right. Great. Your first question comes from the line of Paul Zimbardo with Bank of America. Paul, please go ahead.

Lisa Grow: Hi, Paul.

Paul Zimbardo: Hi. Hi, good afternoon, team. It’s very well done on the settlement and nice to see in such a quick fashion as well. Did want to probe into that a little bit. And I think Brian you mentioned related to the kind of the 9.1% level for amortization is that kind of what we should expect on an earned return basis kind of as you execute on the high build cycle and more lag? Or are you able to use the sharing credits or sort of the ADITC to push you up towards that 9.6% sharing level. Just if you could help unpack kind of expectations there and how the mechanism works with lag?

Brian Buckham: Yes. So when you’ve got depreciation and interest expense cost by CapEx, it does in fact create some lag. The ADITC mechanism functions such that we can use the tax credits to get up to the 9.12% level. If we’re above that there’s a bit of a dead band until you get to the sharing level at 9.6%. So we’ll come out with guidance in February. But in a year like this one where we suggested that we may be using additional ADITCs, it would look like we would be trending towards that lower end because of the use of ADITCs. So if we come out next year with guidance that includes the use of an ADITCs that means we’re targeting that 9.12% level. Remember that 9.12% level moves with year-end book equity from a modeling perspective. So you have to look at that when trying to estimate year-end results.

Paul Zimbardo: Yes. Okay. No that’s what I thought. I just want to be clear on it. And just going to the IRP for one second. I know you kind of characterized some of these higher kickers in the past just given how fast the backdrop has been evolving. Like would you anticipate a need for an acceleration of the next IRP? And just kind of how current is the latest IRP if you get the question?

Lisa Grow: Well certainly, you can recall that we delayed the submission from June to September, really for that very reason is to make sure we have the most current information given how quickly things are changing. I will also say that it never really seems like we ever stop planning – seems like we’re in constant analysis for one issue or another. So I don’t see that the cycle which we submit to the PUC would change but ongoing analysis of needs that come up in between IRPs, we certainly do that frequently. Adam, anything you would add to that?

Adam Richins: No, I agree. I mean in the past when we would file these they would kind of be good for a couple of years now. The way growth is looking and the way our resource needs are looking, we are updating it honestly monthly. It feels like sometimes even weekly depending on what we’re seeing in the market. So the other thing that’s in IRP that you might have noticed is we had kind of a large load scenario, where we added what might happen from a load and resource perspective, if certain loads came to fruition. And so I think that’s something to look at to if we start to see these loads come about we’re going to need to make some changes. We’ve also had a fair amount of inquiries on the data center side of things that, as you know these are pretty large loads. And if any one of them come into play, it will change the way we’re looking at our resource future.

Paul Zimbardo: Okay. Yeah. I did noticed that one. Great. And then the last one kind of big picture point together, assuming rate cases approved and settled do you have any plans to kind of finally move towards a longer-term EPS CAGR?