Good afternoon, and welcome to the IDACORP Third Quarter 2020 Earnings Release Conference Call. All participants will be in a listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Mr. Justin Forsberg, Director of Investor Relations and Treasury.
Please go ahead.
Thank you, and good afternoon, everyone. This morning, we issued and posted IDACORP's website our Q3 2020 earnings release and Form 10 Q. The slides that accompany today's call are also available on our website. We'll refer to those slides by number throughout the call today. As noted on Slide 2, our discussion includes forward looking statements, including earnings guidance, which reflect our current views on what the future holds, but are subject to several risks and uncertainties, including those related to the COVID-nineteen pandemic.
This cautionary note is also included in more detail for your review in our filings with the Securities and Exchange Commission. These risks and uncertainties may cause actual results to differ materially from statements made today, and we caution against placing undue reliance on any forward looking statements. As shown on Slide 3, on today's call, we have Lisa Groh, IDACORP's President and Chief Executive Officer and Steve Keen, IDACORP's Senior Vice President and Chief Financial Officer. We also have other company representatives available to help answer any questions you may have after Lisa and Steve provide updates. Slide 4 shows our quarterly financial results.
IDACORP's 20 2Q3 earnings per diluted share were $2.02 an increase of $0.24 per share from last year's Q3. IDACORP's earnings per diluted share for the 1st 9 months of 2020 were $3.95 an increase of $0.27 per diluted share from the same period last year. Today, we also tightened our full year 2020 IDACORP earnings guidance estimate upward by $0.10 to be in the range of $4.55 to $4.65 per diluted share with our expectation that Idaho Power will not need to utilize any of the tax credits in 2020 that are available to support earnings in Idaho under its regulatory settlement stipulation, nor do we anticipate any revenue sharing as Idaho Power is expected to earn a return on year end equity between 9.4% 10% in its Idaho jurisdiction. These are our estimates as of today, as we have seen a relatively modest net financial impact from the COVID-nineteen pandemic to date. However, as you would expect, it is difficult to predict the full impact of evolving economic conditions on Idaho Power's customers and suppliers and how that could affect the upper end of the earnings guidance range or the use of tax credits if the pandemic worsened significantly this quarter.
I will now turn the call over to Lisa.
Thank you, Justin, and thanks, everyone, for joining us on today's call. Given the ongoing impacts of this pandemic, it seems appropriate to start by once again acknowledging outstanding job our employees have done managing and responding to this crisis. Their focus on safety, taking care of our customers and managing expenses has been incredible. Idaho Power continues to provide reliable energy to our customers and I am so grateful to have such a talented, adaptable and dedicated workforce. This situation is ever changing and so our response to it remains nimble.
Most of our office employees have now been working remotely for more than 7 months, while our line and field crews continue to take extra precautions to ensure the safety of our employees and the public. I commend our workers for their continued vigilance, which has allowed our operations to carry on. In turn, we've been able to continue our essential work of providing the energy that is critical to the daily lives of the customers, businesses and communities we serve. Cost control has long been an important ingredient of our success and it is magnified in these uncertain times. Our company's operating and maintenance expenses are lower over the 1st 9 months of 2020 compared with the 1st 9 months of 2019.
There are several contributing factors, which Steve will walk us through in a minute, but prudent financial management continues to be a focus for our employees and company. Customer growth, as noted on Slide 5, higher irrigation sales, increased transmission Wheeling related revenues and lower O and M costs have more than offset any decreased commercial customer usage resulting from the pandemic. In fact, on August 18 this year, Idaho Power experienced a near record peak of 3,408 Megawatts despite irrigation having begun to taper off by that date due to the normal harvesting cycle. We remain cautiously optimistic by both our near term business goals and the long term resiliency of the economy in our Idaho and Eastern Oregon service areas. While uncertainty lingers from the virus and its impact, our service area remains one of the fastest growing in the nation.
Local housing markets, incoming businesses and the continued availability of reliable, affordable, clean energy point toward future sustained growth. Idaho Power's service area continues to lead the nation for not only in migration of new residents, but also in new business opportunities. Notable examples of business development activity in the past quarter include the groundbreaking on Frigitec's new 200 and 80,000 square foot cold storage facility, the announcement of True West Beef's $200,000,000 processing plant and the relocation of 2 new customers formerly based in California, AFC Finishing Systems and Fiber Care Bath. The new Amazon fulfillment center we talked about last quarter officially came online in September, and Amazon has indicated they will be ready for the holiday shopping season. It's also worth noting that September was a record month for new large load inquiries at Idaho Power, with several projects over 1 megawatt in active discussions with us to potentially expand or relocate in our service area.
This includes manufacturers, distribution centers, dairy and other food processors. Other projects continue to be in the build phase from additional food processing, healthcare facility expansion and manufacturing additions. As of the end of September, unemployment in our service area was 6.6% compared with 2.8% in September of 2019 and the current 7.9% nationally. The number of people employed in our service area was relatively flat compared with the same period last year. Moody's forecasted GDP now calls for decline in output of negative 3.8 percent
with a
projected rebound of 5% in 2021. These numbers compare favorably with the projections for the entire U. S. Economy. The economic data in our service area have, of course, been impacted by COVID-nineteen, and we continue to monitor them.
GDP forecasts have incorporated the most current expected impact. In September, the Board of Directors approved an increase in regular quarterly cash dividend on IDACOR's common stock of 6% or $0.71 per share, as shown on Slide 6. At the new rate, the indicated dividend is $2.84 per share on an annual basis. Our Board has now approved an annual dividend increase every year since 2012, representing an overall increase of 137% in IDACOR's quarterly dividend over that period. Our customer and earnings growth have allowed us to increase the dividend to shareholders, all while Idaho Power customers continue to benefit from some of the lowest energy prices in the nation.
We currently expect to recommend future annual increases in the dividend of 5% or more with the intent of keeping the company within our current target payout ratio of between 60% 70% of sustainable IDACOR earnings. Last quarter, I mentioned Idaho Power and its partners in the Boardman to Hemingway 300 Mile High Voltage Transmission Line project, we're exploring several service arrangements aimed at maximizing the value for each partner's customers. One potential change could include Idaho Power acquiring Bonneville Power Administration's ownership share and in turn providing transmission service to BPA and Southeast Idaho customers. Under this scenario, Idaho Power could own up to 45% of the transmission line and we would expect the structure we would expect to structure an arrangement where our investors earn a normal return on the capital investment. At the same time, our retail customers would not bear the cost of that portion of the project as funds would come from the transmission service provided to BPA.
Our discussions are ongoing on this front. I have two updates related to Idaho Power's path away from coal, a key component of our goal to provide 100% clean energy by 2,045 and seen on Slide 7. First, the Boardman plant located in Oregon ceased operations earlier this month, bringing an end to coal fired generation in the State of Oregon. Idaho Power owns 10% of Boardman with the remaining 90% owned by Portland General Electric. Transmission projects like Boardman to Hemingway will be key to replacing the lost generation capacity from Idaho Power ultimately ceasing its coal operations and facilitating our clean energy goal.
Secondly, Idaho Power's recently filed 2nd amended Integration Resource Plan or IRP shows the company potentially ending participation in Unit 2 of the North Balmy coal plant as early as 2022 as opposed to 2025. The 2019 IRP is pending with the public utility commissions in Idaho and Oregon. However, further analysis will be needed to decide where in that range of date makes the most sense from a customer, financial and system reliability perspective. Last quarter, I stated Idaho Power did not plan to file a general rate case in Idaho or Oregon in the next 12 months. That remains true today.
But given the ongoing impacts of the COVID-nineteen crisis and its potential impact on the economy and the communities we serve, we will continue to monitor that situation closely. Steady customer growth, constructive regulatory outcomes and effective cost management all play significant roles as we look at the need and timing of a future general rate case. Now I'd like to acknowledge our newest Board member, Odette Bolano, who was appointed in September. Odette is President and CEO of St. Alphonsus Health System, where she provides executive leadership and strategic and operational oversight for a 5 hospital system across Idaho and Oregon.
Odette is a tremendously respected business and community leader whose commitment to the communities we serve make her a perfect fit for our Board of Directors. And you can see our full Board makeup on Slide 8. Finally, on Slide 9, it shows a recent outlook of precipitation and weather from the National Oceanic Atmospheric Administration. Current weather projections for the remainder of fall and early winter suggest a 33% to 50% chance for above normal temperatures and a range of normal to 40% chance of above normal precipitation in Idaho Power's service area. As always, weather and precipitation play an important role in Idaho Power's operations and reservoir storage levels for generating reliable, affordable, clean hydropower.
And with that, Steve will now walk us through the quarter's financial results.
Thank you, Lisa. Let's now move to Slide 10, where you'll see our 3rd quarter financial as compared to the same quarter last year. Despite the continued impacts of the pandemic on our large commercial customer sales, overall, we had solid results, which we believe positions us well as we head into the final months of 2020. On the table of year over year changes, you'll see that continued strong customer growth of 2.6 percent added $3,900,000 to operating income. Higher usage per residential and irrigation customer helped offset the negative impacts of the pandemic, which decreased our commercial sales volumes by about during the quarter.
Residential customer usage was 3% higher than last year, partly related to weather variations, but many customers also spent more time at home due to the public health crisis. The net result was a relatively modest $300,000 increase in overall usage per customer. Next on the table, you'll see that the increase in residential sales was offset by a $1,600,000 decrease in the fixed cost adjustment revenues. Moving further down the table, transmission wheeling related revenues increased $4,400,000 due to heightened market activity in the Southwest U. S.
And California. This increase in volumes was partly offset by Idaho Power's open access tariff rate, which declined by 13% back in October of 2019. Going forward, beginning with October 1, 2020, the tariff rate increased by 9.6%. Next on the table, other operating and maintenance expenses decreased by $4,400,000 A portion of this decrease was expected due to Idaho Power's exit from Unit 1 of the North Valmy plant last year, but the decrease also resulted from lower labor related costs from reduced variable compensation accruals when compared with the same period last year. Aside from those savings in O and M, in July, Commission issued an order granting utilities the authority to defer unanticipated emergency related expenses due to COVID-nineteen, net of any associated cost savings for possible recovery through future rates.
To date, Idaho Power recorded a modest $700,000 regulatory asset for its current estimate of those costs, including higher bad debt expense, net of estimated COVID related savings such as vehicle fuel and employee travel and training. Finally, the tax deduction for bond redemption costs incurred in this year's Q3 and other plant related income tax adjustments, partially offset by statutory taxes on greater income, led to a decrease in income tax expense of $2,400,000 this quarter. The changes collectively resulted in an increase to Idaho Power's and IDACORP's net income of $12,400,000 $12,100,000 respectively, while net income for the 1st 9 months of 2020 was 14 point $2,000,000 higher than the same period last year at IDACORP. IDACORP and Idaho Power continue to maintain strong balance sheets including investment grade credit ratings and sound liquidity, which enable us to fund ongoing capital expenditures and dividend payments. IDACORP's operating cash flows along with our liquidity positions as of the end of the third quarter are included on Slide 11.
Cash flows from operations were similar to the 1st 9 months of 2019. The $3,000,000 decrease was mostly related to the timing regulatory assets and liabilities and working capital fluctuations. The liquidity available under IDACORP's and Idaho Power's credit facilities is shown on the middle of Slide 11. At this time, we don't anticipate issuing any additional equity this year other than nominal amounts under our compensation plan. While cash flows have been minimally affected by the pandemic thus far, our combined liquidity along with expected regulatory support from our annual adjustment mechanisms is a substantial backstop to our expected capital and operating needs.
As planned, Idaho Power contributed $40,000,000 to its pension plan during the 1st 9 months of this year and has no further required additional Slide 12 shows our full year 2012 earnings guidance, which Justin mentioned had been tightened upward, and our key financial and operating metrics estimates. We now expect IDACORP's 2020 earnings to be in the range of $4.55 to $4.65 per diluted share. Our guidance continues to assume no use of additional tax credits, no revenue sharing and normal weather conditions for the remaining months of the year. Of course, our guidance could also be impacted if the pandemic worsened significantly. Our strong consistent financial results sustained cost management efforts during the past decade have preserved the full $45,000,000 of tax credits available to support our current minimum Idaho jurisdictional return on equity of 9.4%, and we are continuing our efforts to preserve them going forward.
Current year deferrals of plant maintenance at the thermal plants that I noted last quarter are now expected to be completed in 2021 as the timing of maintenance is discretionary. These deferrals account for most of the decrease to the range of our full year O and M expense guidance now in the range of $345,000,000 to $355,000,000 Our CapEx guidance remains in line with where we started the year, and we refined our expectation of hydropower generation to the range of 6,500,000 to 7,000,000 megawatt hours. I'll end with a brief comment on expectations for the Q4 of 2020. Recall that during Q4 of 2019, we benefited from distributions from affordable housing investments as well as heightened amortization of vintage tax credits not expected to recur this year. Those significant items boosted earnings to the highest Q4 in the history of the company and those results were 42% higher than the average of the 5 years 4th quarters prior to that time.
If weather continues as normal and if we perform similarly to an average 4th quarter, we would expect to finish 2020 within the current guidance range. With that, Lisa and I and others on the call are happy to answer your questions.
Thank you. We will now begin the question and answer session. Your first question today comes from Brian Russo with Sidoti. Please go ahead. Hi, Brian.
Good afternoon. Hey, how are you? Hi,
Brian. Hey, just
curious, the wholesale transmission revenues and the incremental wheeling, it's just an interesting dynamic. And I was hoping you could maybe share some more insight. Is it entities to the east of you utilizing your transmission system to move power west when there were shortages of power during that August time period?
Brian, it's a great question. This is Lisa. Really, when you look at the West as a whole and just what happened this summer, it got really hot. We had some market disruptions. And so really, it was not generally one direction.
So it was wherever the price arbitrage opportunity occurred. So whether it was east to west or north to south and we sit in the middle of the interconnection. So as markets have those kinds of opportunities, you'll see transactions flowing in many directions across our system.
Okay. Got it. And then maybe a related question. Does the dynamics unfolding in the Pacific Northwest, does that enhance the value of Boardman to Hemingway? And then even Gateway West Transmission projects that you're currently working on?
I'm going to have Adam Richins, our Chief Operating Officer, answer that.
Hey, Brian. It's a great question. Yes, I think as you see decarbonization become more popular and you see the need to move around some of these intermittent renewable resources, you're absolutely going to see huge benefits from transmission. In fact, during the heat wave that we experienced kind of in California and the whole Western United States, Ormond and Hemingway would have been absolutely critical to move energy through our system. There were large price spreads between the Palo Verde and the Mid Sea market and having additional transmission up to the Northwest would have been key because if you look at the region, a lot of transmission was capacity constrained.
So I think you're hitting on a key point. I think it's absolutely going to be critical in the future and that's why we're so bullish on Gorman and Hemingway and Gateway West for that matter.
Okay, great. And just some details on what the evaluation was for last month or the month before. It seems as if you've got a lot of liquidity, several $100,000,000 of cash on the balance sheet. Just curious, why not more than 6%?
Brian, you cut out there a minute. Were you asking about the dividend?
Yes, the 6% dividend increase. Given your liquidity and strength in the balance sheet, why not increase it more than 6%?
Okay. Thank you. Steve, you want to take that one?
Sure. That's great. Brian, I would say that it's a reasonable question. And I'd say if you looked at where we sit at this moment, I'm not surprised at all you ask it. You've seen the large amount of capital that we projected down the road.
And I guess we're keeping an eye on that and we're sticking with the plan that we wanted to provide meaningful and continual changes to our dividend on a slope, kind of like we started back in 2011. And we really haven't moved away from that. I think when you look at that current liquidity, you have to factor in that some of it was a response to the COVID-nineteen issues. We certainly looked at some of the short term options like others did. We would have preferred if it wasn't inside of a year.
And it turns out that the options we were really seeking were just gone, not just for us, but for everybody in the industry. And we took advantage of some of our long term debt, which we know we need in the near term, probably next year or the year after and secured some amazing rates. So we're a little bit ahead. And I apologize, I'm hearing an echo on the line if everybody else is getting that, sorry. But I hope that answers your question.
It's more of a sticking to our plan on the dividend side.
Yes, it does. Thank you very much.
Thanks, Brian. Thank you.
Thank you, Brian.
Your next question comes from Julien Dumoulin Smith with Bank of America. Please go ahead.
Good afternoon, everyone. This is Ryan Greenwald actually on for Julien.
Hi, Ryan.
Thanks for taking our questions. So maybe back to the updated guidance, appreciate the color there and the nuances kind of into 4Q here. Can you kind of just talk about load trends you're seeing as COVID spiking across the nation again and any early reads there?
Yes. This is Lisa. That one is sort of obviously hard to predict. We continue to see increases in residential for good reason. Interesting that we have seen our commercial our large commercial loads coming back to more historic levels, more normal levels, if you will.
We had a great irrigation season. We believe that was a lot weather related. Small commercial continues to be off a little, but that's sort of coming back to as people are trying to get back to some sort of normalcy. So really, I think the wild card will be what happens with the virus. And if we have to go back into some sort of economic shutdown, we don't foresee it.
I don't know if there's political appetite for it, but we're certainly trying to be ready for whatever happens. But the growth is the other side of that story that it just keeps coming. It's never stopped. And so that's both in residential and businesses. So we're very excited.
And again, every report that comes out is showing Idaho as really the fastest growing place in the nation. And we see that we believe it will be going that way for some time. Adam, is there anything that you would add?
No, I think you hit it perfectly. In terms of sectors, in the large majority of the sectors, we've seen some pretty steady movement in the industrials, everything from data centers to health care, food processing, our dairies are doing pretty well. There's a few sectors that aren't necessarily there and that's lodging and education and maybe on the office building side. But I think we've been pleasantly surprised by the fact that our industrials continue to do well under these conditions.
Got it. That's helpful. And can you guys talk a bit about how wildfire season is going in your service territories, suppression efforts and regulatory treatment in the jurisdiction?
Yes. I'll start this and then I'll hand it off to Adam or one of his Vice Presidents. We have been I almost hate to say it because we're not really through the season yet, but it has not impacted us nearly as badly as to our neighbors to the West. It's been we've had one fairly large fire that is now out and to our west. And beyond that, there's just been a few smaller ones here and there.
So we are certainly watching carefully. We are we've put together a mitigation plan that looks at those high risk areas and we are looking at vegetation management, some monitoring equipment, other equipment that does not throw off sparks when they operate, things like that. So we're really making sure that we are doing everything we can to both prevent and then mitigate, buyers. And so far so good. And as far as regulatory treatment goes, I will let, Adam, do you want to take that one, give an update on where we are with that?
Yes. You mentioned, Lisa, in your comments that we're finalizing a comprehensive wildlife management or wildfire management plan. And I think what we're going to do there is at some point we do plan to file with the Idaho and Oregon Commissions. Some of our neighbors have done it and it essentially walks through our approach as it relates to wildfires, utilizes a risk based approach that considers probability and consequence. It's very similar to what you've seen in California and with our neighboring utilities.
And so that's kind of the approach we'll take there. As Lisa mentioned, it's been a pretty normal fire year, knock on wood. We had to replace several distribution poles and have responded to some small outages caused by fires. But again, nothing wildly different from what we have had to respond to year in and year out.
Got it. And then maybe just lastly, there's obviously been a bunch of M and A developments and strategic kind of pivots we've seen across the space and large valuation discrepancies. Just kind of curious how you guys are framing any thoughts about potential strategic action?
Well,
we our history has been that we really don't comment on M and As. So I think that would be our comment.
Fair enough. Appreciate all the time.
Thank you.
Thank you.
Thanks, Ryan.
This concludes our question and answer session. I would like to turn the conference back over to Lisa Grove for any closing remarks.
Thank you. Thank you all for participating on our call today. We appreciate your continued interest in IDACOR and we look forward to seeing and speaking with many of you during the EEI Virtual Financial Conference on November 9, 10. It certainly is not nearly as fun as seeing you all in Florida, but I guess we'll do what we have to do in these circumstances. I wish you all good health and I hope you have a really great evening.
Thank you again.