Q2 2022 Idacorp Inc Earnings Call
You bet customer growth added $2 $7 million of operating income.
Lisa noted we expect this growth to continue as people and businesses relocate to our service area and as existing businesses expand their operations and footprint. So we share the optimism and Moody's updated GDP outlook for our service area, but theres certainly been a lot of commentary nationally about a recession and if that recession currently exists or if it's yet to materialize.
I do think it's helpful to remember that Idaho power service area saw positive customer growth even during the nationwide downturn in the aftermath of the 2008 financial crisis.
So with that empirical knowledge, we're optimistic regarding the potential of the cities in our service area to attract businesses and residents. Despite some increasing evidence of a recession like slowdown nationally.
So back to this quarter's results mild temperatures and higher precipitation in the second quarter drove a 36% reduction in usage for irrigation customer.
It also caused a 10% reduction in usage per residential customer and a 6% decrease in commercial for customer usage industrial for customer usage was relatively flat for the quarter.
These reductions are all compared to last year's second quarter, which by way of comparison was significantly hotter and drier in this year's Q2, we hit our all time record peak load in June of last year.
So during April May and June of this year cooling degree days in Boise were 59% lower and precipitation was 86% higher than the same three months last year. So a fairly stark contrast in terms of weather conditions.
Effectively we're comparing to Q2 last year that was 25% driving a 109% hotter than normal and these weather conditions, all combined to cause much of the $25 $9 million net usage per customer decrease in operating income.
I think notable though despite these weather conditions in Q2 retail sales volumes increased across all of our customer classes for the full first half of the year other than irrigation customers.
And that's reflective of new customers and colder weather in the first quarter of this year and demonstrates the outsized impact of irrigation usage in the second quarter.
The $6 $3 million increase in Idaho, Power's fixed cost adjustment mechanism revenues that you see next on the table, partially offset the decreases in residential and small commercial customer usage for the year positive second quarter FCA revenues offset a similarly sized FCA revenue decrease recorded in the first quarter.
And further down you see.
$3 $9 million increase in operating income from the change in net per megawatt hour revenue.
The Idaho regulatory order for the Jim Bridger plant, which increased retail rates on June one this year led to a portion of that increase.
Another piece relates to the decrease in usage per customer that I just described for irrigation customers.
That results from monthly fixed charges being spread over fewer megawatt hours.
Using an increase in retail revenues per megawatt hour during the second quarter of this year compared with the same period last year.
Next on the table continued higher transmission Wheeling revenues during Q2 of this year increased operating income by $2 9 million.
Warmer weather in the southwest U S and milder weather in the Pacific Northwest led to a price spread between energy market hubs, which increased drilling activity across Idaho Power's transmission system.
Also we only customers pay 4% more for transmission Wheeling with Idaho Power's transmission tariff rate increasing in October 2021 to reflect higher transmission costs.
We recently filed our draft transmission tariff rate for the next tariff here.
With a further slight increase in the rate.
The higher other O&M expenses shown next on the table led to a $12 million decrease in operating income this quarter compared with last year's Q2.
Maintenance projects at the Langley Gulch natural gas plant that I mentioned last quarter contributed to the expected increase there.
This was our first scheduled major maintenance for the plant since it would build about 10 years ago.
Maintenance projects at the Jim Bridger plant and on the spillway at the American false hydropower project drove additional O&M much of the plant maintenance doesn't recur annually, but instead is scheduled in cycles over a period of years.
We also recorded about $2 million of higher performance based compensation accruals. During Q2 of this year and perhaps not surprisingly we also saw inflationary pressures on labor related costs professional services and supplies.
And on vehicle fuel.
As we look ahead I would note that we performed the bulk of our plant maintenance ahead of our summer peak load serving season. So much of the plant related maintenance was frontloaded for 2022.
With the outsized impact of element O&M on the first half of the year and with that cyclical maintenance, mostly out of the way we will remain focused on operating efficiently and managing expenses in the second half of the year.
Along those lines I will address our updated O&M guidance shortly.
The $8 $8 million decrease in depreciation expense. That's further down the table on slide six is where the bulk of the effect of the Jim Bridger order increased operating income for the second quarter.
The order approved investments made at the plants since the last general rate case is prudently incurred through the end of 2020.
And under regulatory accounting rules that resulted in the deferral of certain bridge related depreciation expense for those approved assets.
The order approved as a collection of depreciation over an accelerated period.
Along with a return component through the end of the Jim Bridger collection period, which is now 2030.
Looking ahead, we estimate the order will benefit after tax net income for the full year of 2023 by approximately $10 million with the.
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The decrease in non operating expense led to a $2 $4 million increase in pre tax earnings.
That was related to higher allowance for funds used during construction and to a lesser extent higher investment income due to rising market interest rates.
And also some interest on life insurance proceeds in the Rabbi Trust for our benefit plan.
And then finally in the decrease in income tax expense was due mostly to the net decrease in pretax income.
All of these changes in the aggregate resulted in a decrease in <unk> net income of $5 7 million or <unk> 11 per share for the quarter.
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You might have noted that our capex spending so far this year increased by 51% over what we spent during the first six months of last year.
As we expected the bulk of that additional capex relative to last year and relative to our historic spending levels as for our large battery storage project and for some natural gas plant upgrades to obtain additional output and efficiency from the units.
As we look at our Capex forecast for this year some of the potential inflationary impact is mitigated based on contracts already having been signed for the batteries and for some of the work, but ongoing inflation and elevated prices will likely continue to impact the products and services, we purchase going forward.
Like everyone seems to be experiencing.
In an inflationary environment, we will remain thoughtful and disciplined in our capital projects and spend.
And how we negotiate contracts with vendors and in how we access the supply chain.
So with that spending in mind I'll point, you to slide seven where you will see the hydrocarbon Idaho power continue to maintain strong balance sheets and liquidity.
In July Moody's made its expected downgrade at both <unk> and Idaho Power's credit ratings.
But those ratings are still slightly above those in S&P and they remain solidly investment grade.
Operating cash flows and liquidity position as of the end of June are also on slide seven.
Cash flows from operations in the first half of the year were about $11 million lower than the same period in 2021, and the decrease was mostly related to lower operating income.
The liquidity available under adding Corp's, Idaho Power's credit facilities is shown on the middle of slide seven.
As we work to fund our upcoming capital plans.
As we've discussed on recent earnings calls we plan to primarily finance those projects that at least until the ratio is closer to the target. This.
This makes an equity issuance over the next 12 months unlikely and probably not in 2023.
Slide eight shows our updated full year 2022 guidance with some regulatory uncertainties behind US we now expect IGT corp's earnings to be in the range of $4 95.
The $5 <unk> per diluted share.
This guidance assumes normal weather and economic conditions for the balance of the year.
Our guidance still also assumes that Idaho power will use no additional tax credits in 2022 under the Idaho regulatory stipulation, which as a reminder provides earnings support in the Idaho jurisdiction of nine 4% return on year end equity.
We've also updated our full year O&M expectations by $10 million now fall in the range of $365 million to $375 million keep.
Keeping up with the level of customer and load growth we've experienced in our service area and continued elevated prices have had an impact on that range.
We're confident in our ability to manage costs in the second half of the year.
By ongoing inflationary pressures.
Our expectation on 2022 Capex spending has also increased to now be in the range of $500 million to $520 million.
Additional project complexity and scope of increased cost for some of our existing projects.
And while we made the adjustment this quarter, we expect that we could be at the higher end of even the updated capital range for the year.
And finally, given our most updated forecast of operating conditions, we refined our expectations on hydro power generation for the year and.
In a year like this one we are fortunate to have a diverse portfolio of power supply resources.
As we've drawn on and we will continue to draw on all sources through the peak summer months.
On weather conditions slide nine shows the recent outlook for precipitation and temperature from the National Oceanic and atmospheric administration current weather projections for August through October suggests we will likely see warm dry conditions over the rest of the summer into early autumn, which is certainly what we've experienced during July and into this week and <unk>.
August .
With that Lisa and I and others on the call are happy to answer your questions.
We are now ready to begin the question and answer session. If you'd like to ask a question. Please do so by pressing star one on your phone.
Sure. Your mute function is churn of before you ask your question, we will take as many questions as time permits on first on basis.
Once again that is star one on your phone to ask a question now.
Your first question comes from Julien Dumoulin from Bank of America. Please go ahead.
Oh, Hey, good afternoon, thanks for the time.
And the opportunity.
Hi, good afternoon.
So just just at the outset here if I can just perfunctory AMC the situational Tac would love to hear you guys.
IRA at the outset here.
Yes.
Did you know you are talking about alternative minimum tax the 15% tax it's proposed yes, yes, exactly I just wanted to see how.
How you guys are reading out.
That's not too much of an issue for you guys right.
So our understanding of the A&P was it applied to net income exceeding $1 billion and while I would love to have that sort of net income we're not quite there. So at least at this point I'd like to change, we don't think that it applies to Idaho.
Alright, I wanted to get that one back past me here at the outset here, if I could and then separately I'll put it in.
If I could just coming back to the company.
Obviously, you alluded to in the comments here about the rate case.
Perhaps providing some ongoing updates here.
Are we to read that being ahead of planned accelerating seemingly some of the O&M on the maintenance front. It puts you in a pretty good position vis vis timeline and visibility to perhaps remain.
Out of one.
When we look at that every year or two to see what is that it will give us the best result.
Certainly that continues and Brian do you want to add something to that yes, I will just mentioned there is a lot of factors we're looking at Julien.
And revenues as one growth has kept us out of a rate case for quite a while amongst some other factors. So it had been beneficial we look at capital spend we're looking at the timing of in service dates for some of our projects and we have the battery storage project out there now that we expect to be done next year, that's a sizable <unk>.
In service project by then Hells Canyon complex is another one we look at we've been watching.
Credit ratings cash collection interest rates those are all factors. We've historically looked at we're also looking at the bridge order and the impact that that has so that's a benefit.
From a rate case perspective, so I'd say, there's a lot of moving parts. There from a timing perspective, I don't think we would expect a filing this year, perhaps second half of next year as a possibility under some scenarios, but again, we have to look at all of those factors when we decided the timing of our case.
Got it and can you elaborate a little bit on the Bridger resolution I mean, how much latitude that provide the here as you think about it.
Yes, when we look at that in terms of just the dollar impact one of the things. We noted is that the impact next year or at least are expected to impact of that order is about $10 million. So.
The commission determined that the investments we made at that plant.
From 2012 were prudent so adding that into rate base was beneficial and then we've got a mechanism for cash collection over a period of time for that and in a deferral mechanism for the portion that we don't collect so we think thats, a pretty constructive outcome for both us and our customers.
So that financial benefit of that that outcome will help in our view of a rate case going forward.
Got it and then lastly, just can you provide a little bit of an update on crypto here and how you're framing the potential tailwind, obviously theres been some waxing and waning where do things stand if you will quickly today.
Adam do you want to take that yes, im happy to chat about that we continue to get inquiries I will say, we haven't had any large movement in that regard, we obviously filed.
Speculative high density load filing with the commission.
<unk> some benefits I think at opportunities.
Potentially for crypto, but we haven't seen any large movements in that regard in terms of.
Actually moving forward with projects, although we do get a fair better inquiries on a monthly basis.
Alright fair enough guys.
That's all I've got thank you.
Thank you thanks Julian.
Your next question comes from Brian Russo from Sidoti. Please go ahead.
Hi, Brian .
Hey, Brian .
Yes, not hearing you Brian .
I apologize for that good afternoon.
Okay.
Given the obviously strong hydro conditions.
You're sort of return across the Pacific Northwest.
Does your guidance assume kind of a normal year of irrigation sales.
Relative to <unk>.
Abnormally high.
Demand for electricity from that customer class.
During this time for the last few years.
Well I'll start the answer and again not to Adam.
We don't have great water conditions in Idaho.
We really are seeing our second year of drought and while it was cold and wet in.
In May and June it just wasn't enough to really move the dial on on the drought conditions that we have the driest.
First quarter I think on record so we're still struggling through that and then.
You'll recall that June is when we saw last year pretty high irrigation.
Because it was dry where we didn't see that this year. So I think it remains to be seen what happens in the interim.
From this point forward when the season ends which is usually towards the end of this month, depending on the crops can go a little bit into September or anything that you would add no I think you might be referring to the mid Columbia, which has had a pretty good water year that just didn't reach out to us. The one thing that that has been benefited for US is the fact that the.
The power prices have been somewhat reasonable this year, despite the natural gas.
Commodity prices are obviously quite high so I think youre pricing about the mid C, which has really helped the PPA system, but yes, we're still in drought conditions here and Brian One thing I would add to that is last year, we had some conversations with water conditions about possible curtailments and there were some small scale curtailments throughout Idaho as we look at the water forecast.
This year there is still some small prospect for curtailments, but we don't think there would be curtailments on a large scale basis for the year in theaters. This year, yes, there has been one so far.
50000 acres very small so no real impact to our Aggregators at this point and we're seeing some of them come off their crops right. There is still some of the letters come up already.
Okay got it that's all.
That's all built into that five to $6 5 million megawatt hours of hydro generation right below the previous level got it.
Just given the weather patterns that we are seeing.
The regions West W.
Are you seeing.
Incremental transmission Wheeling revenues.
And the benefit of that.
In this third quarter.
We would anticipate that I mean that has been something that has come.
Come to be a trend just given the different the pricing differentials between the market of course looking prospectively.
Not to forecast too much because I'm generally wrong, but that is that is a trend. We've seen certainly yes, what we've seen so far is the mid C prices have been reasonable in our liquidity has been quite good and Palo Verde day, the prices have been high.
And so when you see that spread you typically see folks using our transmission system and over the last three years because of that we've seen pretty significant increases in volumes each of those years and again, we're seeing it so far this year as well.
Okay, great and despite the $10 million increase in O&M.
The guidance still assumes no usage of the Adi Tcs.
No.
I'm just curious.
Ah you're comfortably within your ROE band range in just $5.
The top end of your range.
Does that capture to nine four.
4%.
So at the high end of the range.
Yes, Brian I would say that the.
The bottom end of our guidance is quite a ways above that nine 4% figure for the 80 ITC usage.
Understood. Thank you.
Thank you Brian .
Your next question comes from Anthony <unk> of Mizuho. Please go ahead.
Hey, good afternoon, Lee just afternoon.
Hopefully one quick question.
In the prepared remarks, you talked about you're evaluating.
Filing of a rate case, if you could talk about I guess.
What are the decisions.
<unk> gone through and when will we know if not about when that evaluation is finished.
Brian .
Recapping, what he said earlier, but we.
We are required to give a 60 day notice to the PUC before we file but we've been trying to be pretty transparent as we go along it's just right. Now there are just a lot of moving parts and and as Brian mentioned earlier in this call that we don't see it at the end of this year.
Filing this year, but you want to.
To recap what you said before yeah, I'd just say one of the primary factors that we're going to be looking at is the in service date of some of the assets that we have so for example, the battery storage projects are 120 megawatts very sizable as those assets go into service, we have to finance those with debt. For example will have additional depreciation expense associated with that.
So interest expense to cover as well so.
So as we look at some of those additional incremental costs that come with just the growth that we're seeing in our capital plan going forward, that's probably going to be the items that most likely trigger the rate case. So we're actually doing some scenario planning now on what.
First data might be for bringing some of those cases.
We will have more visibility on that moving forward, but at this point, we just havent, we havent chosen to date far enough out that we haven't decided exactly when that's going to be and again. It's those factors that I mentioned earlier that are really going to be part of the decision. So a lot of different variables that we have in mind as we look towards the general rate case filings.
Great. Thanks, so much.
Hi, good afternoon.
And our final opportunity press star one to signal for a question and we'll pause for just a moment.
That concludes our question and answer session for today Ms. Karla I will turn the conference back to you.
Thank you all again for joining us this afternoon and for your continued interest in <unk> I wish you all a good evening and then Jason happy rest of your summer. Thank you.
That concludes today's conference. Thank you for your participation.
Okay.
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