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

Good morning. This is Brian Russo, Equity Research Analyst at Sidoti. I want to thank everyone for joining us today for the IDACORP presentation. Joining us today is IDACORP's CEO, Lisa Grow; CFO, Brian Buckham; and Director of IR, Justin Forsberg. [Operator Instructions] And with that, I'll turn it over to Justin.

Thanks, Brian. Good morning, everybody, and thanks again for taking the time. Just a quick note on our forward-looking statements. Of course, our discussion does include forward-looking statements today or likely will, and including our guidance and forecast, which reflect our current views on what the future holds, sometimes our views as of our last 10-K filing, but also, they're subject to several risks and uncertainties. And that's included, of course, in more detail for your review in our filings with the Securities and Exchange Commission, which we encourage you to review. With that, I'll turn it over to Lisa.

Great. Thank you, and good morning to everyone. I guess it's still morning everywhere. I appreciate your interest in IDACORP Idaho Power, and we're excited to talk about what's going on over here in Southern Idaho and Eastern Oregon. I'll start really with our headline, and that is growth, and that's been that way for several years, but Idaho continues to be one of the fastest-growing states. We will talk about the infrastructure that's going to be needed to serve that growth. And Brian is going to cover that, and then I'll circle back and talk about our clean energy transition. It really is an interesting time to be growing our system at the same time that we're cleaning our portfolio and shutting down our coal plants. And so it's a lot of things that we've got to pay attention to all at once. And we're guided by really 3 tenets: reliability, affordability and then clean. And it's got to be in that order. Reliability, because we have to observe the laws of physics; affordability, because we have to observe the laws of economics; and then clean because we really do, want to do our part in helping to reduce the carbon emissions of our company. So you can see on Page 1 -- or Slide 1 that we've celebrated our 14th year of earnings growth. We're very proud of that. Again, that was in the -- during COVID, has made everything a bit challenging. And so we're really excited about that. And then on Slide 2, you can see that our customer growth rate continues to just go straight up. We had an exciting announcement about a month ago that Meta is opening their first data center in Southern Idaho. That will begin operations in 2025. You can also see that Moody's continues to show that their projections are continued growth in our service area. And we know in -- on Slide A6, you don't have to go to that slide, but if you note on Slide A6, our IRP -- our latest filed IRP shows in the 5 years, our sales -- we're projecting sales to be a growth rate of 2.6 and our annual peak growth rate is 2.1. So I think all good news, I will tell you that our teams are working so hard and really doing amazing work and with all of it -- supply chain efforts or disruptions that makes additional complication, but they're doing just an amazing way. And I'm deeply grateful for all of our employees and the work that they're doing in these really challenging times. So with that, I will hand it over to Brian to talk more about those projects.

Great. Thanks, Lisa, good morning, everybody. Thanks for joining us on the call today. I think I'll start out with a quick introduction and hello to everybody. I think I'm in a new face to most of you. I have of course, met Brian Russo several times. But new to many of you, I'm on week 3 as the CFO of IDACORP. And before that, I was the company's General Counsel. I spent a lot of time obviously with Ken Petersen and [indiscernible], probably worked within the past as well. So I've been at IDACORP for 12 years, formerly as General Counsel for the last 6 of that. So my law practice before that going way back was in capital markets, securities and M&A. Really looking forward to hoping you have a chance to chat with everybody today and then going forward as well. So thanks again for taking the time to join us. I'm going to go through some of the slides that we have to give some color on those. I'm going to start with Slide 4, there's some key operating metrics on there. We talked about those on our earnings call. So I don't want to spend a lot of time on those today. I think the one to highlight is the expected CapEx going into 2022. Our actual '21 CapEx was $315 million. If you look at 2022, though, it's $480 million to $500 million. So I want to provide everybody a little context around that big jump in CapEx. It's going to take me a few slides to do that. It also ties with what Lisa talked about in terms of our clean future. So Slide 5 gives you a little perspective on what that CapEx looks like. And this one, we're not looking at just 2022. But if you look at 2023 to 2026, they also have higher CapEx than what you'd be accustomed to seeing for IDACORP. Our historical spend is more akin to $300 million a year. So pretty big jumps here. We're still doing our standard maintenance and reliability work on our system of generation transmission, distribution all the way across. If you look on this chart, you can also see a pretty sizable thermal piece in '22 and 2023. And those are upgrades to gas plants, and those get additional capacity, additional megawatts out of those plants to make them more efficient and then, of course, have some attendant environmental benefits associated with that as well. So then as you get to '23, you can see the construction costs reporting to Hemingway, our 500-kilowatt transmission line start to come into the picture. We see about $100 million in each year from '23 to '26 as our estimate, with the planned construction through 2026 on that project, hopefully, a '26 in-service date. So the other thing you'll note on that slide going further up the bars there is the large spend on new capacity resources in '23, '24 and then also this year, in '22. And those planned resources stem from 2 RFPs that we issued, which I'm going to get to in a minute, so I'll provide some more info on that. If you go to Slide 6, it gives you a little more context around how this CapEx is influencing a rate base growth estimates. It's a pretty large number you see on the slide, the 9.8% CAGR. So one thing to note is that Idaho Power's last general rate cases filed in 2011, rates were effective in 2012. And we, of course, added that rate base since that time, but it's been a long time since we've been in for a general rate case. And you can see those net additions on that slide. And if you look at longer term past that, we've got the 9.8% CAGR on rate base, and that's part of the infrastructure build-out that we're predicting. So aside from just new infrastructure, that also includes projects like the Hells Canyon relicensing effort. That's been going on for quite some time, and we'll probably starting to see some light at the end of the tunnel on that project now after a very long effort on relicensing. So with these rate base additions, I think you could see a pivot for our company, and that's probably the one you would expect in a scenario like that. Since we haven't filed for a long time, that level of CapEx though suggests that we would be going for a general rate case, that we're at least approaching that time. So we're evaluating at this point what the timing of general rate case is. It's going to be based on all the factors you'd expect, like the level of growth in customers and revenues, which has helped us not file in a long time with the growth rates that Lisa mentioned; our capital spend, which we went through. You could see it's pretty significant. And then when some of those assets go in service for us, obviously. Interest rates volatility in the market, obviously, their impacts on ROEs. And then what other regulatory cases we have and how those turn out. We do have a case in front of the Idaho commission now for our Bridger Coal plant, and it looks roughly akin to what we did for the [Indiscernible] and Boardman plants to accelerate depreciation on full projects to more match their estimated life. So lots of moving parts in there, obviously, in terms of when the case would be filed. But from a visibility perspective, what we're looking for is we do have to file a notice of intent in Idaho at 60 days before we file a general rate case, and that notice is in public. And then the case would take about 7 months to get through is our estimate in Idaho. So while we're looking towards that general rate case, we're kind of hoping 2022 is in a way business as usual, business is normal. It would be nice to get a little bit of normalcy after what the world has been going through. So this year, we're addressing growth. We're managing O&M and we're trying to keep interest expense down with our capital spend. So obviously, hyper focused on that CapEx plan, takes a lot of our internal resources to execute on that, but really an exciting time in our company. We're also working on that Bridger case that I mentioned in 2022. So a little more on the capacity deficits on Slide 7 and what we're planning on to address them in terms of potential resources. So there were several factors that caused us to identify this really near-term capacity deficit. We had sustained customer growth for a long time now. We were long at one point on power, not anymore. And then also really fast changes in the transmission markets, which we see could address at length what happened in our transmission markets in the region. That's where those deficits originated. And when we did our 2020 Integrated Resource Plan, 2021 Integrated Resource Plan, and we did some of our summer readiness work, that's where we identified this issue. So to help with those upcoming deficits, we've signed a contract to purchase battery storage for 120 megawatts. Those would be owned resources. We just signed that within the last couple of weeks. And then we signed a PPA for 40 megawatts of solar. The output from that is designated for one of our large industrial customers who has a renewable energy pool. So those batteries and the PPA were both in response to an RFP that we sent out to fill the near-term 2023 deficits. There are deficits after that as well. So we did a second all-resource RFP for 2024 and 2025 resources, and the responses to that one came back just in the last few days. So we're going through that. Idaho Power did submit some self-build options in that RFP as well. So [Indiscernible] batteries, batteries plus solar, batteries plus wind or something else to help address these capacity deficits that you see on the slide. So Slide 8. That's another one of our large infrastructure projects. And so our latest news on the Boardman to Hemingway project is that we signed the term sheet to acquire BPA share of the project. That would increase our share from 21% to 45%. And so we're in the process now of drafting the definitive agreements to turning that term sheet into a definitive set of documents through a deal to iron out some of the final details around that. So part of that arrangement would be we'd sign a long-term transmission service agreement with BPA, so the BPA could serve the customer load in Southwest Idaho through the line -- Southeast Idaho through that line. And so from a regulatory perspective, another angle on that, is we plan to include our full interest in that project in rate base, and then the transmission revenue from BPA would offset our revenue requirements that we are -- our proposal. When we get our 2021 IR fee, Boardman to Hemingway had a substantial net benefit to customers to the tune of about $250 million compared to portfolios that didn't have B2H in. So you can really see the customer benefit of a transmission project like that, in addition to just the operational benefits that brings in -- and the clean energy benefits the transmission line like that brings to the region. So Status-wise, B2H did receive non-appealable federal permits for all of the federal lands that the project will cross. And then we're working through the Oregon state's permitting process, it's called the Energy Facility Siting Council, is the stage that we're at. Should have a decision from the administrative law judge sometime in the next few months. And we expect by at least second half of 2022, we would have the final order from the energy facility siting council. So still hoping to have that resource in service in 2026. So talking about CapEx, one of the things, I think, might be of interest to our investors is just plans in terms of financing. So going into a rate case, generally, we like to be close to a 50-50 cap structure when we get it. So right now, Idaho Power's at 45% debt. So we have quite a bit of headroom on our debt issuances to fund this CapEx that's coming up. A strong balance sheet. We have really limited maturities in the next decade. So we have a lot of debt after we get close to that 50-50. In the deck that's out there, it's Slide 8, 9 has our debt maturity schedule on, if you want to see how that looks going forward. So also, you might have seen an 8-K we filed recently for $150 million 2-year term loan agreement. Our plan is to use that as a shorter-term low-cost debt to fund some of the resource procurement that we've been talking about and some general expenses before taking that out with, some longer-term debt. So the next slide, Slide 9, is another important area of growth for us and for our investors as well. I think Lisa mentioned on our last earnings call, the company has paid a quarterly dividend every quarter since 1943. So 314 consecutive quarters. And you can see on this slide the growth from $1.20 annualized back in 2011 to $3 annualized by the fourth quarter of 2021. That amounts to an 8.7% CAGR over that span. So target dividend payout ratio, 60% to 70%. That puts our annualized dividend about the end of 2021, when you compare that to 2021 EPS at the lower end of that range for last year and then slightly below the target range for our non-annualized 2021 dividends. So as the slide notes, we've been committed to the dividend and the Board typically looks at the dividend each September. And then one thing that's been important to our earnings trajectory of just over the past decade has been our commitment going out. And you can see that on Slide 10, we've held O&M within a relatively narrow band since 2012, and we ended 2021 at $361 million of other amount. And our guidance for 2022 for February was set at $355 million to $365 million. So pretty consistent with where we ended 2021. I will say it's fair to say we're watching that closely. Holding O&M flat is increasingly challenging, as you might expect, like it probably is for everyone. You have inflation as a factor. Labor costs are certainly higher. So I think all in the lines been harder also with the growth we've seen in our service area, our distribution designers, our line workers and others have all been very, very busy trying to keep up with growth in demand and then also continue to be cost conscious, right? We've operated cleanly. It's part of our culture. I think it's in our DNA to be cost conscious. So we're still keeping our focus on that, committed to operate efficiently and working hard on O&M as we go through 2022. So wrapping up my piece here, there's a couple of unique things that I want to address just briefly on Slide 11. For 2021, we had a 14th consecutive year of earnings growth, which we think is pretty impressive. That translated into a 5.1% actual CAGR on EPS since 2010. And as you can see, we issued our '22 EPS guidance with a midpoint of $4.95, and that's compared to a midpoint of $4.70 on EPS for 2021. So last, I'm going to group Slides 12 through 14 together, commenting here. For the past 5 years, Idaho Power's earned near to like 10% authorized rate of return in Idaho. Remember, we have a unique regulatory mechanism in Idaho that allows us to amortize additional accumulated deferred investment tax credits, if our Idaho jurisdiction return on year-on equity would be less than 9.4%. And if it's over 10, we share part of our revenue with customers. The slide adjustments has up now illustrates how that mechanism works. And to date, we've shared almost $127 million with our customers. And on the other end of that mechanism, we haven't used any of the $45 million of ADITC that are available under the mechanism at the ROE floor. So one thing I'll mention is that mechanism is intended to survive a general rate case. There would be an adjustment where the mechanism would have the earnings threshold reset at 95% of the new authorized Idaho ROE, but nonetheless, expected to survive a rate case. We, of course, like the mechanism because it helps create a potential minimum level of earnings in the Idaho jurisdiction with a 9.4% year-end ROE floor and then our customers obviously could benefit from it in terms of sharing over the last few years. So those are the things I wanted to cover today. I'll turn it over to Lisa again for a discussion on the clean today, cleaner tomorrow side of the business.

Great. Thank you. So we're on Slide 15. If you recall back in, I believe it was April of 2019, we announced our 100% clean energy by 2045 goal. And we have already achieved getting out of 1 unit of our Valmy plant that's located in Nevada and Boardman coal plant, which is over -- was over in Oregon is now shut down. And then if you look at that time line, you can see that in 2024, we are converting Bridger units 1 and 2 to gas, which will cut the carbon emissions in half. And then you can see that Valmy Unit 2 ends in 2025 and Bridger units -- 1 of the Bridger units will end close to that time period. And then you can see that our latest IRP shows exit of the final unit of Bridger in 2028. So by the end of this decade, we will be completely out of coal. And we think that is a really exciting development. It's something that will take a lot of work because I will remind you that we do have to make sure that we're balancing reliability as we go through this transition. And we also want it to be fair and just to our customers. So we don't want to drive rates through the roof as we're doing it. And one of the things that I think some missed is the importance of transmission in this whole clean transition. So that if you think about the West and where the really intense fuel sources are for renewable energy or clean energy, the Pacific Northwest has the blessing of all the hydro power, which we are beneficiaries of. And then you think about the Desert Southwest, with all the solar, the east side of the Western interconnection has a lot of wind. And so rather than having every single balancing authority invest in assets that they need and that may be intermittent and highly, highly subject to the wins of the weather; in Idaho, we have high-pressure systems that will come and set up over the entire balancing area where you have no wind and you can have intense heat in the summer, certainly, you get some benefit of solar power during that time. However, it starts to turn off about 4:00, and our peak is 6 to 8 p.m. So we have these challenges that we -- transmission, when you connect all of it together, so that we take advantage of the low diversity and generation diversity, transmission is really the thing that unlocks the capability of fully utilizing the system so that we make good investments and keep reliability high for the region. And then economically, when you can move around these lower-cost resources, because they have really abundant fuel source, it makes all -- it just makes sense, and so we have really invested a lot of our future planning into transmission. And so we're really proud about that. We're excited about it, and we think that it benefits not only our company and our customers, but the region at large. And then if you look on Slide 16, just a note about sort of where we're starting on this. I mentioned the hydro power benefit. You can see we had a drought last year. So on a normal year we're somewhere above 50% hydropower, last year, we were just over 30%. But you can see in the colored bars of that graph how much of our power is clean in our portfolio. So roughly, if you look at that eyeball, it's about 2/3 clean. And then if you compare it on the right to what the national average is, you can see that, that's flipped where the national average is more fossil fuel-based than clean based. And so we believe we started in a very strong position, and it's very achievable. And we're really excited about it. Our customers are asking for it. Our employees are excited about it, and we think our owners should be too. So we feel like we're in a really strong position, and we're already off and running. Anything you guys would add?

That's great.

Great. I think, Brian, we're open to stand for any questions if anyone has.

Okay. Well, thank you very much, Lisa, Brian and Justin. [Operator Instructions] So maybe I'll start off. Clearly, several differentiating characteristics of IDACORP relative to other utilities and peers. One is on the capital expenditure plan, 5-year plan. Both utilities, you see a decline in CapEx in the outer years, where, in fact, for IDACORP, you're seeing an acceleration in that growth. What gives you confidence that, that CapEx will come to fruition in the time that it is needed? Maybe how that all plays into the IRP process?

I can start, and then you guys can add in. We've been talking about where we see our investments going over the years. And some of it were sort of buckets of dollars that we knew we would spend on certain kind of expenditure areas. But now given the growth, given the certainty of these projects in these customers committing to be here, we're going to have to build. And so it's really put the pedal down on the projects that have been identified in our IRP. And we generally don't, in the IRP, add a bunch of kind of spec load that we don't -- we can't identify. We just think it will come, and we want to make sure we're ready for it. In this case, we put in load that we have very high certainty of. So when you look at our IRP, it's certainly in the 5- to 10-year look. Those are generally pretty high likelihood projects and hence, why we have to build, right now in this 5-year look, it's an action plan that we've got to move on. So certainly, specific deadlines get shifted by external forces, regulations, supply chain, those kinds of things, which we -- that's not new. We always sort of have to go through the processes that can be very lengthy and complex, but we know how to do that, too. So I have very high confidence that what we're seeing in the shorter term kind of first 10 years of the IRP will actually come to fruition Anything you would add?

I agree. I'd just note that if you look at our prior spending, it's been pretty levelized on the CapEx side at that $300 million number. And that doesn't mean we haven't been invested in the system. We absolutely have things like some modernization efforts on the grid in that. I think you've seen quite a few utilities who did some CapEx spending over the last few years that we were coming in later than them, I think, on some of the resource build in terms of battery capacity and that sort of thing. So we've done some investment, but we're ramping it up now just maybe behind where some of the other utilities might have got an earlier start in some of the resource build-out. So you're seeing us come in a later cycle with these capacity deficits. Also we've been working on keeping O&M really stable, too. So as we come into this CapEx environment, we have a good story from a regulatory perspective just in terms of how we manage our business efficiently going into that regulatory cycle.

Okay. Great. And we could segue into O&M. Clearly, your chart implies nearly 10 years of relatively flat O&M. We're obviously embarking on an inflationary environment almost every industry. And what gives you the confidence level as you conveyed your 2022 O&M guidance relatively flat to 2021, given the inflationary pressures that the utility industry and other industries are facing, whether it's labor, raw material, inflationary pressures, what levers are you use -- are you pulling to offset those natural type inflationary increases?

Well, a lot of it, as Brian mentioned, is sort of in our DNA to really optimize and find ways to stop doing certain things that maybe aren't as high a priority. We really do spend a lot of time prioritizing the work and making sure set that we can get done and within a cost. We're very mindful of the cost. But your point is good that really part of the story of why we're going to have to go back in for a rate case is that we're not going to be able to hold this flat forever. And those costs are real. Those inflationary costs are real. I certainly was a baby engineer the last time we had to deal with inflation, the likes of which we're seeing now. So it is sort of a new complexity of our business, and so we're going to try and manage how we spend money, but also recognizing that we're building the system. It's getting bigger, so you're going to need more people to take care of that system. There's more things that need to be maintained. And so that generally puts pressure on -- upward pressure on rates as we start going into sort of a more rate case strategy.

And some of what we've done, we have contracts for some of the resources we'll need in 2022 already. That would be O&M expenses. So some of the inflationary pressure will always be deferred in that regard and the contracts are in place now. But I don't have a number on what specific portion that is. And then we're just mindful of our contract terms. We spend a lot of time working with our vendors, how we can be efficient and how we approach our work. So hopefully, that will help with some of the pressure. And then you look at some of the O&M expenses from last year that won't recur this year just in terms of a few smaller items that we don't expect to recur, also will give us a little bit of help on the O&M side as well.

And we look for things that are capital-type investments, where we're always monitoring what we're putting into maintenance versus replacement. So we have strategies like that, that we're watching that really overall keep cost down. And they're good investments, but we watch that carefully too.

Okay. Great. Well, it looks like we're at the 30-minute mark. So I want to thank the IDACORP team: Lisa, Brian and Justin, for joining us today as well as all the participants on the call. That concludes today's presentation. Have a nice day.

Thank you.

Thanks, Brian. Thanks, everyone.