Q3 2022 Idacorp Inc Earnings Call
Infrastructure projects, such as the federally permitted gateway West high voltage transmission line project, it's truly an engineered streams to be able to build such a historic project.
With these significant infrastructure investments, we believe it is likely that we'll file a general rate case in Idaho in the next 12 months.
Several factors impact, Idaho powers timing and need to file general rate cases, including the expected increase in depreciation expense from rate base eligible assets as they are placed into service.
The significant amount of investments we have made in our infrastructure since our last general rate case filed in 2011.
The expected financing cost of our Capex and a higher interest rate environment and inflationary pressures on O&M that we have discussed previously.
As a reminder, the Idaho Commission requires Idaho power to file a 60 day notice of its intent to file a general rate case, and we expect the processing of a general rate case in Idaho would stand at least seven months before new rates would be in effect.
We anticipate that future rate cases will help us deliver the returns our shareholders expect from our company, while recovering the cost to serve our growing customer base.
We have successfully managed our cost over the past decade, and though inflationary pressures and interest rates are driving many costs higher we believe we have a good track record of prudent spending to bring to the regulators.
Balancing the impact on customers continues to be a very important component of our efforts to control costs and make prudent decisions.
However, we will need to continue to make significant investments throughout our system are.
Our growing customer base will make will help us structure.
Rate requests that are affordable on a per customer basis.
With these objectives in mind, our list of ongoing project is significant.
In addition to the near term capacity deficits, we are working to address we continue to pursue pursue re licensing efforts for the <unk> complex, our largest hydropower resource.
In September we reached an important milestone on the Boardman to Hemingway high voltage transmission line as the Oregon energy facilities Siting Council voted unanimously to approve the site certificate.
This permit authorizes construction of the line in Oregon.
We plan for beach wage to go into service as early as 2025 and have begun pre construction activities.
Our negotiations with Bonneville power in Singapore to reach a definitive agreement for the ownership structure for the project during and after the construction phase of the line are ongoing.
I'll close my remarks by highlighting the dividend growth <unk> announced last month.
As noted on slide eight our board of directors approved a five 3% increase in the regular quarterly cash dividend on <unk> common stock for 79 per share or $3 16 on an annual basis.
We have now approved a dividend increase for 12 consecutive years with a cumulative dividend increase of 163% during that timeframe.
We are proud that our financials are strong financial and operational performance has allowed for these increases while Idaho power customers continued to benefit from some of the lowest energy prices in the nation.
Management expects to recommend future annual dividend increases of around 5% with the intent to move toward the higher end of our target payout ratio of 60% to 70% of sustainable core earnings.
And with that I will hand things over to Brian for a financial overview of the third quarter and our expectations for the rest of the year.
Thanks, Nathan and good afternoon, everyone. Thanks for joining us I'll start on slide nine where you'll see a summary of our financial results as Jeff noted earlier 2022 is that the highest earnings for the first nine months of any year in our history.
This year, we've seen continued strong customer growth and in Q3, we had higher weather related usage.
We also had sustained higher transmission Wheeling revenues that resulted in part from the energy market conditions in the west.
Also the rate change and the Jim Bridger order from the Idaho Commission. This summer impacted results for the third quarter.
The other hand, offsetting those benefits on a comparative basis were higher operating and maintenance expenses as well as net power supply expenses that were not deferred for future recovery under our power cost adjustment mechanism.
The Idaho fixed cost adjustment our decoupling mechanism also had a negative impact on comparative results affected by weather related usage.
And the table on a quarter over quarter changes, you'll see that customer growth added $3 $6 million to operating income.
As I noted we expect this growth to continue as existing businesses expand their operations and footprint and if people and businesses relocate to our service area.
It's probably no surprise that rising mortgage interest rates have resulted in some signs of recession like conditions.
Decreasing housing prices and property spending a little more time on the market for selling but we share the optimism and Moody's current positive GDP outlook for our service area frankly.
Frankly, the housing price reset will help with affordability in our service area, which in turn helps with hiring and continue to promote in migration.
However, you define a recession as I mentioned last quarter I think its 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.
Having said customer growth remains strong throughout the third quarter and as Lisa mentioned as we look ahead RFA to load forecast for our 2023 IRB includes significant commercial and industrial growth.
We are projecting a five year forecasted annual peak demand growth rate, increasing from two 1% from the previous IRB to four 8% in the 2023 IRB. So a notable increase.
Back to the third quarter's results higher temperatures and dry weather in the third quarter drove a 7% increase in usage per residential customer a 5% increase in commercial per customer usage and a 10% increase in usage for irrigation customer <unk>.
Industrial for customer usage was also the Ohio for the quarter.
These increases are all compared to last year's third quarter, which just by way of comparison was also relatively hot and dry.
While this summer we didn't exceed our all time record peak load set in June of 2021, we surpassed our previous peak 12 times between June and August and we had all five of August and September peaks. This year, we actually beat those previous peaks by about 3% and 6% in those two months.
It turns out 2022 was the year of 180 days in Boise.
Surpassing the high temperature mark well over the previous record number of days.
These weather conditions combined to cause much of the $12 $6 million net usage per customer increased operating income.
For the first nine months of the year, we saw an increase in volumes across all customer classes other than irrigation, which was a class impacted by lower sales volumes in the wet and cool second quarter of this year.
The $501 million decrease in Idaho powers fixed cost adjustment mechanism revenues that you see next on the table parts, partially offset the decreases in residential and small commercial customer usage.
Further down you will see a $10 $6 million increase in operating income from the change in net <unk> per megawatt hour revenue the Idaho regulatory order for the Jim Bridger plant, which increased retail rates on June 1st led to much of that increase.
Another piece relates to the change in customer mix in sales to higher margin customer classes compared with the same period last year.
Next on the table continued sustained transmission Wheeling revenues during Q3 of this year increased operating income by $1 $2 million, we owned customers paid 4% more for transmission Wheeling with Idaho Power's transmission tariff increasing in October of 2021 to reflect higher transmission costs.
Also a warmer weather throughout the west <unk> price spreads between energy market.
Which increase Wheeling activity across Idaho Power's transmission system.
And a further slight increase in the transmission tariff rate was effective on October one of this year, reflecting higher cost of operating the transmission system.
The higher other O&M expenses shown next on the table led to a $12 $9 million decrease in operating income this quarter compared with last year's Q3, as I mentioned last quarter, we continue to see inflationary pressures on labor related costs professional services and supplies and vehicle fuel.
Recall, though that a sizable portion of our higher O&M costs relative to 2021 relates to plant maintenance that doesn't recur annually, but instead is scheduled in cycles over a period of years.
Also from a timing and comparative perspective, we recorded about $2 million and higher performance based compensation accruals. During Q3 of this year based on expected full year payout.
The $1 $8 million increase in depreciation expenses further down the table reflects higher plant in service compared with the same period in 2021 as.
As well as the accelerated depreciation of the coal related assets at the Jim Bridger plant.
Which began on June <unk> of this year.
Recall that the order approved 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 still estimate that the order will benefit after tax net income for the full year 2023 by approximately $10 million.
With the benefit decline each year thereafter until the collection period ends.
The increase in net power supply expenses in the third quarter that were not deferred for future recovery in rigs group, Idaho Power's power cost adjustment mechanism in both Idaho, and Oregon led to the $4 $7 million.
Increase and other changes in operating revenues and expenses next on the table three items that led to higher net power supply expenses in the third quarter were higher and more volatile wholesale energy market prices in the Western U S.
Higher energy usage by our customers.
And below average generation from Idaho powers, lower cost hydroelectric facilities due to low water conditions.
A decrease in non operating expense, which was from higher allowance for funds used during construction from our IR Capex led to a $2 million increase in pre tax earnings.
Finally at IHOP with increase in net income of $2 2 million was primarily due to changes in tax basis adjustments between the periods that are subsidiary of adequate financial services, which was a comparative negative in last year's third quarter.
All of these changes in the aggregate resulted in an increase either corporate net income of $8 5 million or.
Or <unk> 17 per share for the quarter.
Yes.
You might have noted that our capex spending on a cash basis. So far this year increased by 55% over what we spent during the first nine months of last year and that was our expectation.
The bulk of that additional capex relative to last year and relative to our historic spending levels as part of a large large battery storage projects and some natural gas plant upgrades to obtain additional output and efficiency from the units.
Inflation has certainly had an impact on project Ark and lithium carbonate prices are a good example of that but inflation is impacted goods and services across the board in both labor and raw material prices.
We see that in our own operations do not just as a pass through from third parties and so we're continuing our efforts on being thoughtful and disciplined in our spending and our vendor selection and in our negotiation as well as finding areas for efficiency.
We plan to provide our updated capex five year forecast, along our normal timeline with the fourth quarter's release.
We expect that forecast will include updated cost assumptions for our major capital projects like the Boardman to Hemingway project and our other energy and capacity resource additions.
We also hope to have more visibility on the outcome of our Rfps for resource additions in 2024 and 2025 by then you.
You might have noted in our 10-Q to date or tenants that we were looking more towards the upper end of our estimated cost range for our Boardman to Hemingway project No engineering and design is still being finalized and we'll have more insight when the design is further along sometime later this.
Later this year.
Next year, we'll be looking at that next year.
At this point I think it's fair to say, our Capex will likely increase for the next few years compared to what we forecasted and included in our 10-K at the beginning of this year.
That's not only from inflationary impacts, but also the cost of filling projected capacity deficits in serving our growing customer base, which are all potential incremental projects for us.
With all of that anticipated spending in mind I'll point, you to slide 10, where youll see that item <unk> and Idaho power continue to maintain strong balance sheets and liquidity.
Our credit ratings remain solidly investment grade and we've kept the rating agencies informed of our most recent capital and financing plans.
Adequate to operating cash flows and liquidity position as of the end of September or also on slide 10 cash flows from operations in the first nine months of the year or about $34 4 million lower than the same period of 2021, but that decrease was mostly related to changes in income tax accruals and deferrals and fluctuations in working capital payments and receipts.
As we work to fund our upcoming capital plan as we've discussed on recent earnings calls our goal is to primarily finance the execution of those projects with that at least until the ratio is closer to a more balanced position from a regulatory perspective.
So as you can infer this mix in equity issuance over the next 12 months fairly unlikely.
We continue to search for resourceful ways to manage our debt financing given the rising interest rate environment, and so far we've seen relatively little impact to our income statement related to interest expense pressures.
The medium term note facility that we entered into last spring has proven to be a beneficial move.
The low spread on those notes is ultimately laid our need to issue bonds. So far this year and kept the incremental borrowing costs lower than it could have been.
We plan to continue to look for other thoughtful ways to finance, our capital spending plans and do as well is that we can managing interest expense and recover what will inevitably inevitably be higher financing costs as we move forward.
Slide 11 shows our increased full year 2022 earnings guidance and updates to our key operating metrics with the bulk of 2022 behind US. We now expect <unk> earnings to be in the range of $5 <unk> to $5 15 per diluted share.
This guidance assumes normal weather for the balance of the year. Our guidance also assumes Idaho power, we use no additional tax credits in 2022 under the Idaho regulatory stipulation, which as a reminder provides earnings support in the Idaho jurisdiction at a nine 4% return on year end equity.
And at this time, we don't expect to share any excess earnings above the Idaho, jurisdictional, 10% ROE with Idaho customers.
So long as earnings fall within that updated range.
Our full year O&M expectations now fall on the range of $375 million to $385 million.
While businesses like ours tend to have to react to macro inflationary trends as they occurred we're confident in our team's commitment to closely watch our spending going forward.
We're currently at the end stages of our budgeting cycle for 2023 and as we look ahead based on our work plans and plant maintenance schedule. We don't currently expect to see a rate of increase in O&M in 2023 like we saw this year.
Part of our culture of efficiency will be disciplined in our spending against the continued inflationary environment.
Our expectation on this year's Capex spending is still in the range of $500 million to $520 million. One update I'll note is that we expect to be closer to the lower end of that capital spending range. This year, that's driven not by a lower expectation on overall cost, but instead based on the timing of some year end progress statements for large capital projects.
Which could slip into early part of next year.
Finally, given our most updated forecast of hydro power operating conditions, we further refined our expectations on hydro power generation for the year with a reduced hydro output. This year, we're lucky to have a diverse portfolio of power supply resources, we can draw upon.
Slide 12 shows our recent outlet for precipitation and temperature current weather projections from November through January suggests we'll hopefully see some continued precipitation at the Isle of Asian regions as we head into the winter to help with water conditions in our area for the next year's Hydro season. Fortunately, we've seen snow in the mountains, both last week and this week and not.
Single anyone out, but its good news for skiers and hydroelectric dam owners.
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.
We would like to ask a question. Please do so by pressing star one on your phone. Please ensure your mute function is turned off before you ask your question.
We'll take as many questions as time permits on a first come basis. Once again that is star one on your phone to ask a question.
Your first question comes from the line of Paul Zimbardo with Bank of America.
Hi, Paul Paul.
Hi, good afternoon.
Thank you for the time.
First to kick it off on the increase in the O&M guidance expectation it looks like about 5% higher year over year and I know you discussed some of the kind of more one time nonrecurring elements of this but could you just give us some insight as we think about calibrating into 2023 kind of a normal level of cost increases.
Done a great job I think it's below 1% historical so just.
I'm, just trying to calibrate things that way.
Yeah, Paul Thanks for the question. So we will give our 2023 O&M guidance in February we are actually working on 2023 budgeting right now for O&M, what I did mention earlier, we don't expect the same size of increase in 2023 that we saw in 2022 adds up now so we would expect a deceleration in the growth rate of O&M. Thanks.
So I think we're focused on going into 2023 is cost management, you've seen us do it in the past, it's a cultural element of the way we operate to be lean and efficient in what we do and you've seen that run for quite some time, 2022% at a pretty significant inflationary aspect to it particularly on the wage side third party services, we saw a pretty significant increase.
In software things like that that really drove prices up but also what you mentioned the less scheduled plant maintenance next year as an expectation flavors, a little open, but possibly not as much as we've seen in at least for the run up in 2022 and that with wage inflation.
<unk> III is also likely to be capital intensive year. So you could see labor allocation associated with capital and O&M in 2023, So theres a few things that we're looking at that could impact 2023 relative to 2022.
So we would hope to see some moderation in the increases next year.
Okay that makes sense.
And then just with respect to the five year capital plan I know youll roll forward on the fourth quarter call, but I have to ask so you detail about $400 million plots of incremental capital needs for resource deficit and then I know you increased the need to buy.
That 400 megawatts plus is it fair to think about it you take the $2 eight layer and 400, and then layering in incremental for that latest deficit or am I doing some more double counting in there.
I don't think that's necessarily the math that I would do on the Capex forecast, we put out for 2023 back in February with $690 million to $715 million, but as we work through the Rfps thats really going to have an impact on what our capital spending plans are we're trying to meet pretty significant.
<unk> growth and we really need to know the outcome of those rfps before we update too much of our guidance.
Were also still working on the IRB and Thats going to have an impact on what the resource additions are that are part of that to meet all of the growth thats showing up.
We'll be out in February with updated numbers that will be as close as we can get in February . So I'll wait until then before doing too much incremental capex map.
Okay.
400 mining you call it in the queue for like the resorts deficit capacity deficit.
The latest RP update that is incremental to that $400 million.
It will be so the 400 million number that we gave you was associated with the 2021 IRB. So as we look through the 2023 ERP and the new growth assumptions that are in there.
We will update our capex forecast based on that new set of generation transmission transmission and other resources that we've put in place as a result of that new growth.
So incremental okay.
Okay.
Thank you for the patients I appreciate it.
Thanks, Paul.
And our final opportunity.
Press Star one to signal for a question and we'll pause for just a moment.
That concludes the question and answer session for today Ms grow I will turn the conference back to you.
Well. Thank you all again for joining us this afternoon and for your continued interest in <unk>.
Looking out the window there is lots of little out there. So please <unk>.
Can we make our plan is to come visit us here in Idaho I wish you all a good evening and we very much look forward to connecting with many of you at the EI Annual conference in Florida next weekend.
You.
That concludes today's conference. Thank you for your participation.
Okay.
Okay.
[music].
Yeah.