IDACORP, Inc. (IDA) Earnings Call Transcript & Summary

Hello, good afternoon. My name is Brian Russo, and I'm an Equity Research Analyst at Sidoti. Joining us here today is IDACORP, ticker IDA, Boise, Idaho, regulate electric utility. Participating in the presentation will be IDACORP's CFO, Steve Keen; Special Counsel and Head of IDACORP's ESG efforts, Brian Buckham; and then Justin Forsberg of IR. And with that, I'll hand it over to Justin to begin the presentation.

Thanks, Brian, and thanks for joining, everybody. Thanks for your interest in IDACORP. Just quickly the presentation itself, I believe we uploaded it into the Sidoti Conference section as well as it's available for download on our website. I'll just -- we'll just spend a few minutes just walking through high level, our story, especially for those of you who may not be as familiar with IDACORP or maybe even with electric utility industry. But essentially, IDACORP primarily our largest subsidiary, about 98% of the company is Idaho Power Company, which is an electric utility primarily in the state of Idaho, with a small service area in the state -- in Eastern Oregon as well. And something that's unique from our perspective is if you look at the -- on the right-hand side of this slide, about half of our -- while about half of our sales go to residential customers, a pretty sizable portion goes to irrigation customers as well using pump irrigation during primarily the summer months. And so that's just -- can create a little bit of uniqueness to our story from a weather perspective year-over-year. But at the end of the day, IDACORP really vertically integrated electric utility energy company, generation, transmission and distribution large hydro power-based and a pretty decent track record over the past decade or so from an earnings growth and a dividends growth perspective and solid ROEs along the way. And Steve, maybe you'll talk -- you want to talk a little bit about our growth story?

Yes. Welcome, everybody. Thank you for taking some time to listen to our story. And we're going to hit some of the high level points for those that are less familiar, but we're also going to leave some time to dig into things if there's any particulars you'd like to dive into, we can do that. But certainly, customer growth has been a big piece of our story. We're going on 13 years now, Justin, that -- we've been through 13 years of growth in our earnings. And that has largely been fueled by just a continual growth in the service territory we already have, that's people moving in the in-migration, the growth of the businesses that have always been there that have expanded and then a lot of new business that has come in. And in the last few years and even through, I think what we maybe didn't expect is during the period of COVID, it has continued, and it's even accelerated to the point that it has really fueled our growing earnings and today, we've got efforts going on to deal with all that new growth that's probably going to fuel our future rate base as well. So it's a nice story. It's a combination of new revenues today and rate base opportunities tomorrow. And I would just say that for those that have -- that are new to us, people have looked at our rate base, and we haven't filed a case in a number of years. Our last general case was far back in '09, I believe. And we've had a lot of small cases. We've had a lot of one-off type changes. We've actually brought 2 of our coal plants that we've been in for a long time, now have end-of-life plans where we're committed to be out. We're out of one of them, the Boardman plant that was in Oregon. We have plans to be out of one of our units in -- in fact both the units in Nevada with Valmy. So we've had recent cases where we walked through significant items with our regulators, and they've been very successful. In fact, we were able to negotiate things that actually helped us earn on all the money that we spend on those plants and has a plan to help us earn all the way through to the end of life and to cover the costs there. So we've been active on the rate front, just not via the general rate case. But when people come to our earnings on an annual basis, and they're trying to say, well, what are you going to earn next year? It's often been driven by the fact that we just have more sales than we thought the year before. And it's a -- I can tell you it's a good problem to have, to have people coming in and using more of your product. We can't always predict exactly where it will be, but it does feel like Idaho has been discovered, and we have been the beneficiaries of that, and we've been trying to be the best stewards of it as well in managing that growth. This next slide that Justin just went to gives you a feel for the economic growth in the state, it's kind of outstripped everybody's expectations, including the state government, which I know a lot of states are struggling with things. They're trying to figure out how to pay for things. They're raising taxes. Our governor last year gave not only a tax reduction, but he gave a tax rebate because the money came in. There's just so much more that rolled in, they chose to give a lot of that back to taxpayers and that can happen again in the coming years. So different setting than maybe you see in every state. Our government is pro growth. They've done a lot to help these people. They've certainly via eliminating red tape and making it an easy State to move into. And I would say, the governor's had the doors open and that has helped us be the beneficiaries of new sales. And it's really happened across all of our sectors. We've certainly had a lot of residential growth. I think there's a retirement element in Idaho today that maybe didn't used to be there, and it's shown up. And the housing costs in Idaho have skyrocketed, which it will be nice when we sell the house we have, it will be -- many are finding it's a real challenge when you try to find the thing you want to move into that you were hoping for and suddenly costs way more than you thought. But to people that have come in from out of state, that was a very beneficial thing to find that they could afford a lot more real estate than maybe they could at home. All of that story has fueled this ability for us to somewhat live off this growth year after year. And I'd say that this year has proved to be not a lot different. Our IRP plans have kept that growth. We're right in the middle right now of updating our next IRP in 2021. And I kind of think it will have a better flavor of this major change that's gone on because it really has accelerated just the last couple of years. And the data that was fueling that 2019 IRP, probably started being accumulating shortly after the 2017 IRP. So it's back a few years when you look at what rolls into the IRP plan. And so the '21 plan will have much more of a flavor of the current environment. And I think that's going to be the fuel that gives us the future -- that growth. And as you see this year, we raised our guidance at the second quarter partly, there's some weather that helped us out. We had a pretty hot spring, which really did help us going into the end of the second quarter. But underneath that is just a lot of growth in our use of our power. And so as we sit here today, we've got RFPs out looking for new ways to serve that load. About 1.5 years, 2 years ago, we started putting out a chart of what we saw as our rate base future and we can jump to that later on, Justin, but we'll get to that. But it's really given us a path that at some point, we will move from being a company that is just getting more revenues than we had in the plan, and that's enough to make us deliver a good earnings growth to all of you. And we'll [ swing to ] a company that's really more like you see in most of the utility sector, where we have a growing rate base and we'll be filing regular cases. And we're approaching that transition point. We're not quite there. It's not in the 12-month window, but it's probably getting closer by the day and it could be sped up by the amount of capital that comes at us. This chart is one we talk about a lot, just because I don't know how many others have done this. I can tell you, we have never done this. And we went back 40 -- maybe -- it's probably 50 years back now, looking at our company's history. And if you could find a sustained period of time where we kept O&M under, I don't know, 2% to 3%, there's actually over a long period of time, it was closer 4%. It was rare. And if you did find a time when O&M was flat or negative, what you usually found was a year or 2 later, you had double the O&M. And so it kind of came back and corrected itself pretty quick. This change where we've held our O&M really relatively flat for a decade is something we're pretty proud of, and we actually have gotten compliments from our regulator on it. They understand this is not what typically has happened. Some of it is changing how we run the system. I can tell you at the same moment we did this, our customer satisfaction has remained exceptionally high. Our reliability has been phenomenal, and we've operated safely. So we're ticking off all the bars that matter, and we're still doing it with a reasonable cost. We think this is sort of the piece that softens up our next ask when we go in for a rate cases. Our regulator has seen us be responsible and we hope that brings a good tone when they look at what we will need because we will need help. This level of growth is something that is going to cost some money at some point and O&M is probably going to -- could be in flat, we'll always be trying to manage it in a responsible way, but I think it will be a modest up as we see inflation pressures and other things picking up. So -- but a good history and something we're proud of. And it's all resulted in this earnings growth chart. If you look -- just a really brief comment on this one. Those of you who have followed us, the lighter blue bars are really what we've guided typically at the start of the year. And our guidance is aided by an earnings support mechanism that really says if we can -- if we fall short of a level that is over this period of time, it's been just a few basis points underneath our allowed return, then you have this earnings support mechanism that will kick in and help us get to this level. And that bar has been not exactly that number, but it's been reflective of that. Every year that we put that out, we've tended to overperform in this period, which is also becoming an expectation and makes it hard for us when we look ahead to think, wow, how do we jump last year's actual bar, but this is a reflection of the fact that we have grown over this entire period of time, that's really growth in revenues that have fueled that combined with us controlling costs. And it's been a great run. We think we have a few more years of that, for sure. And then you'll see us transition to a little bit more of a rate base focused guide. We'll still be diligent about costs, and we'll maybe have even a more predictable future because the spend some time is more predictable than what might move into your territory or what kind of load growth you've got. So anyway, that's kind of the overview. We've had a good history of delivering good returns. Our allowed return in our largest jurisdiction is a 10% return. We've made it a few years. There's -- but we've been close really about every year. At the holdco level, we're a little lower. Our ROE is a little lower in Oregon, and we have -- we don't -- it doesn't have the mechanism we have in Idaho, and we have some subsidiaries that also have good years and other years are not quite at the same level. So a little softer at the very IDACORP level, but still historically for our company, those are really nice levels of return. And it's been very steady. Completing our -- what we're getting to our share owners is that really this side of the story is our common stock dividend. We started raising it back in, I guess '11 and we have 150% increase in the dividend rate since then. We really took a focus of -- and Justin has heard this story many times, we actually went out and talked to a lot of our investors at that point in time. We realized we've been a little slow in moving the dividend up and we asked investors what's most important to get the number just at a certain level today? Are you looking for a big increase? And it was overwhelmingly that what they really wanted was this to be a steady, predictable piece of our return. And we made a couple of fairly large jumps out of the barrel so that we could get more in line with peers, but we've been on this steady change year after year, and it's allowed to have a growth rate occurring on our dividends. At the same time, it's been occurring on our earnings side. And the 2 together have really been a good story. We appreciate all the investors have ridden through this period with us. And I could tell you our plans are not dramatically different. We just are seeing we have a little bit more -- the demand is even outstripping what we thought, I guess, in some cases. We're responding to that as quickly as we can, but there's been no major decisions to go a different course. We know that increasing dividends matter to you guys. We just made a dividend change, a little over 5%; 5.6%, I think, is a change we made September and looking ahead, we're hoping to do 5% or more again. And I can tell you, we'll continue to be diligent on our earnings and managing the cost side as well. The other part of our story, I don't know that it falls exactly in line is we've done a really good job on the latest things in the industry, too, such as ESG. And Brian is on the call with us today and he and Justin have both been a big part of this. I might let them talk a little bit. But at the same time, we've been focused on earnings. We've been doing our best to be focused on a clean future. And we've put a lot of things in place on the -- on that, we've put a lot at the entire structure of ESG. We feel like we've addressed and we've had some -- these guys went out on the street and had some great meetings with probably different side of the shop than is on the call today, but I'll let you guys talk about that a little bit because I think we're hitting the mark on this side too.

Yes, I might start and then turn some color to Brian, but I think it's a good lead-in. It's important, I think, for folks today just to understand. I mentioned briefly at the beginning that we are a hydro, primarily a hydro utility, and that gives us a pretty good foundation as we look toward a cleaner future. So we do have this tagline that we're clean today, but we're -- we have goals to be cleaner tomorrow. Steve briefly mentioned our shutdown timelines for 1 of our 3 coal plants is done. It was shut down in October of 2020, and we also ended our participation in 1 of the 2 units of the North Valmy plant back in 2019, and then we have a plan there to exit that one in 2025. And then this past June, we did file with the Idaho Public Utilities Commission to plan to exit the Jim Bridger coal-fired plant earlier than was originally planned. And really, today, we have this 60% clean energy mix. These are just real-time numbers from 2020, and you see compared with the national average, essentially, it kind of turns it on its head. Idaho Power is sort of the opposite of what the national average is in terms of clean sources. And of course, hydroelectric energy is a big piece of that for us this year. As happens from time to time, we do have some drought conditions in part of our service area. So our hydro is a little lower this year than kind of the normal average. But the reality is, is that it continues to be a big important base of our story as we move forward. And I think, Brian, I don't know if you want to add any color on some of that story there?

Yes, just real quick. One thing I'll mention is you mentioned the environmental side. And 1 thing we're really focused on is just kind of the environmental stewardship side, the Snake River. You can see the hydro facilities we have on the Snake River. We have a significant Snake River stewardship program that we're working through things like AV and protection. So a lot of programs on the environmental side. I won't get into detail, they are in our ESG report that we published, a pretty robust report this year. It's on our website. But just some of the areas we're focused on are -- customer rates are big for us, community involvement or we have some of the lowest rates in the nation, and we work in that regard. Reliability of the system, as you see growth that we've talked about so far, we're keeping our commitment to reliability associated with that. And we have a pretty robust EEI initiative at the company, which we outlined in our ESG report. So you've seen a lot of dialogue out there on metrics and how you measure ESG and that's one of the things that I think a lot of companies have been working towards. And we've got, in our ESG report, EEI. They have a template, SASB and TCFD, we've adopted and then also CDP. So we're tracking, and you can see on this slide, some of the metrics that we're looking at as well. So a pretty robust program on the ESG side that we're happy to talk to people about.

And I think -- I don't know, Brian, Russo might jump in with some questions, but I did see 1 on the chat, Steve, that I can -- I'll just read the question. It's from Rob Van Bergen. He said a question about potential seasonality in Q4. So essentially, it's talking about the last few fourth quarter earnings. You might remember, in 2019, we had $0.93 a share. 2020, it was $0.76 and analysts, I think, average are saying $0.67 for this year's fourth quarter. His question is, without commenting on fourth quarter '21 consensus, I'm wondering if there's some new element of seasonality that I might have missed. It seems other quarters in 2021 will be higher than corresponding periods in 2019. So seasonality in the fourth quarter, I think, is his question.

You have to be a little bit careful attributing it to just seasonality. And I have to go back and look at the years you're talking about because we do have -- for instance, the things that have already been mentioned when Boardman and Valmy were both rolling through the quarters that we got answers on those kind of have an outsized change possibly that rolls in. The other part is -- I alluded to, we have this earnings mechanism. And the important -- one thing is there is a somewhat of an upward limit or at least it slows dramatically when we hit the point that we have hit our allowed rate of return. We have a sharing mechanism in Idaho. And we give -- you can argue it's -- I guess it's $0.03 out of $0.04 goes back to the customer. And that has a -- can have a real diminishing effect on Q4. Now you're happy with that year, you have that happen because you've hit a number that you maybe weren't expecting anyway. So you're at a good level, but it can sometimes tamper with how much of your earnings actually shows up in Q4. So that's a play in our system that's kind of different than a lot of companies. And so you have to roll that in too. I'd just say if you have questions about those kinds of things, those are things we can talk about. We can go back and help people break out what occurred in this quarter or what somewhere else, and we can help you. We can't talk about what's going to happen in the coming one, but we can certainly talk about what happened before. And we've even occasionally put out kind of our own look at how much happens quarter-by-quarter. I would tell you that the summer is still the very biggest part of our year. So when you look at what happens in Q2 and Q3, that's the bulk of what we get. And the other 2 tend to adjust off of kind of how those -- how the summer months come in. So -- and our guidance, we have been good about, as we've seen an opportunity or we thought we could get to a better number we have raised. We've made an adjustment in Q2. And so if you steer off of that kind of fact that the third quarter is usually a pretty big percentage of our year, the fourth kind of just falls out as to wherever you think it's going to be. And that I know that's rolling into some of the numbers.

Yes. And Steve, I guess for Rob, the benefit, I can add in 2019, we did have, I think it was $0.12, maybe $0.13 of onetime nonrecurring items that happened in that fourth quarter. And our fourth quarter tends to get hit with that, especially with this earnings support mechanism we have in place that has a revenue sharing component at the top end. And so if we over earn above 10%, then we have shared those over earnings, if you will, with customers and a big -- that tends to impact the fourth quarter as well. So I agree, Steve, it's not necessarily weather seasonality necessarily, but it's -- there have been some nonrecurring items in recent years. So I think a more normal fourth quarter is what we're projecting, which I think analysts have picked up as you indicated. Maybe, Brian, you can go ahead. Brian Russo?

Yes. Yes. Thanks, Justin, Steve and Brian. You discussed several differentiating characteristics of IDACORP relative to your regulated utility peers. One is your customer mix and the irrigation customers. Can you explain the dynamic of irrigation sales and margins when you experience hot and dry weather conditions like you did towards the end of 2Q and through the early part of this summer?

Yes. The significance of the irrigation side, which oddly enough is one of our lowest cost classes. They pay a really low rate, but it's not a -- we have no mechanisms around the irrigation side. So we don't have anything that trues it up, that gives anything back to them if things change. So if irrigation comes in better or worse, by and large, we bear that. And certainly, this year when the irrigators had sort of a pretty hot, somewhat dry, spreading those 2 combine and they use a lot of energy to move the water. So they're pumping a lot more. It's not falling out of the sky. The heat is making them need more and they're either pulling out from the ground or they're pumping up from the river, and that is a really good use of energy when that happens. It is one of the more unpredictable sides of our business because it is somewhat weather driven. And we get a pretty good level through most years, but it can certainly be above or below what we expect. And this year it was a year certainly [indiscernible] it was above.

Okay. We have another question from the audience. Boise and Coeur d'Alene are in the news a lot these days. What are some of the other emerging areas in the state that you serve?

Well, we have a lot of [indiscernible] ag-focused state and [indiscernible] there's a lot of livestock and mining and things over there that are really unique. They don't happen everywhere in the state. Idaho has those elements. It has mining elements. It's got ag, kind of reaches into both the crops and the livestock. But that's still a huge driver for our economy. And I would say it probably is where the bulk of the people are. Our roots are somewhat grounded in those things. Many of us came -- that grew up here, came out of those industries. So there's a lot of thought about -- I argue it's made us environmentalists before it was kind of cool to be an environmentalist. We care about the land. We know how important the land is. We -- there is mining, but I think the state is really conscious there too of trying to take care of its land. And same with the way we manage crops and the way our farmers -- the raising of livestock, those things are big parts of our economy. You don't hear about them as much as you do Boise and Coeur d'Alene, but that's our state is rooted in that. And a lot of our growth a few years ago was predominantly in that area. We have the Chobani's and -- dairies and a lot of things relocating into Idaho because we were -- hey, we will reclaim. We had low-cost energy. There was room, they could come here and find the land and make it go. And so that's been a fueler of our business as well. Of late, it does seem like the in-migration has been the biggest talk and by numbers, Boise and a couple of our other large towns, really win with that. That's where the bulk of it has come. But if you go look at these small rural communities, they've had the same kind of the percentage changes. It's just not as many hard numbers, but a lot of them are in housing crisis too because the few spec homes that might have been built every year were gone first of the year, and now people are just scrambling trying to find places to get new homes in or places to live. So Idaho is really going through that, I would say, top to bottom. And we've always felt like the lower part of the state probably has been more benefited by growth than maybe the -- you get to Coeur d'Alene. Coeur d'Alene has grown a lot, the northern regions of the state from there up and it's colder up there, and it's a little rougher territory. I don't think it's grown quite like the rest of Idaho, but it certainly had a lot of growth too.

Okay. We have time for one last question. You mentioned well above national average customer growth due to in-migration, economic development, and you also touched on the likely need for future rate based investment opportunities to support that growing customer demand. Could you talk just a little bit with the remaining minute that we have. What types of investment opportunities? Is it transmission? Is it distribution, generation?

It's a little of all of that, Brian. And I would just tell everybody, the slide is Slide 13, if you go to our deck and it is -- with that, we tried to give a representation of what we see coming. And it's not specific years. The numbers are somewhat big and round, but we have a very -- a couple of pretty large transmission projects that have been underway a long time that we really feel -- we feel good about. We feel like they're going to get done. We have a major construction or relicensing going on at one of our hydro facilities that when it closes, it's a pretty big deal. It's in the hundreds of millions. We have a lot of infrastructure. When you look at substations, distribution, build that's -- those -- that's the under buildings of all of these things. And you look at just the increases in spend in '21, '22 and '23. They're a little bit more blocking and tackling kind of things. They're not all headline projects. So it's kind of across the board. That slide is really the kind of the entry way into understanding kind of why we think we have a good future post this kind of living without rate cases. We think it's a good future because we switched into a rate based growth company and from all we can see, it looks like there's a lot of rate based growth to come, and we'll start with pretty low rates. So we think it's something we can handle and that we can absorb, and we've shown that we are good stewards over the last number of years that we haven't raised rates. We think that buys us some goodwill going into the time we have to ask for this.

Okay. Great. Well, thanks, Steve, and we're about out of time. So I want to thank the IDACORP team for presenting their story today as well as all the participants on the call. Have a great day.

Thank you.

Thank you.