Welcome to IDACORP's 3rd Quarter 2019 Earnings Conference Call. Today's call is being recorded and webcast live. A complete replay will be available from the end of the day for a period of 12 months on the company's website at idacorpinc.com. Now, I will turn the call over to Justin Forsberg, Director of Investor Relations and Treasury. Please go ahead.
Good afternoon,
everyone. Before the markets opened this morning, we issued and posted to IDACORP's website both our Q3 2019 earnings release and Form 10Q. The slides that accompany today's call are also available on our website. We will refer to those slides by number throughout the call. As noted on Slide 2, our discussion today includes forward looking statements, including earnings guidance, which reflect our current views on what the future holds.
These forward looking statements are subject to several risks and uncertainties, some of which are listed on Slide 2. This cautionary note is also included in more detail in our filings with the Securities and Exchange Commission, which you should review. 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 Daryl Anderson, IDACORP's President and Chief Executive Officer Lisa Growe, President of Idaho Power Company and Steve Keen, Senior Vice President, Chief Financial Officer and Treasurer. We also have other company representatives available to help answer any questions you may have after Steve, Lisa and Daryl provide updates.
On Slide 4, we present our quarterly financial results. IDACORP's 2019 Q3 earnings per diluted share were $1.78 a decrease of $0.24 per share over last year's Q3. IDACORP's earnings per diluted share for the 1st 9 months of 2019 were $3.68 a decrease of $0.29 per share over the 1st 9 months of 2018. Year to date, IDACORP's earnings are the 2nd highest achieved in its history, exceeded only by last year's record results. Today, we raised the bottom end of our full year 2019 earnings guidance estimate to the range of to $4.50 per diluted share.
We also decreased both ends of the range of our estimate of operating and maintenance expenses by $5,000,000 I will now turn the call over to Steve.
Thanks, Justin, and happy Halloween, everyone. Overall, despite some challenging weather, we saw operating income relatively flat to last year's Q3. The nonrecurring effects of income tax reform and other positive tax return adjustments last year led to our lower net income. With that, I'll walk you through the drivers quarter over quarter on Slide 5. Customer growth has continued to rise in Idaho Power Service Area at a rate of 2.6% over the last 12 months.
This growth, along with lower expenses, nearly offset the decrease in retail and transmission revenues resulting from the combination of milder regional weather and greater precipitation in our service area. Net customer growth added $5,500,000 to operating income in the quarter. An overall decrease in usage per customer, mostly related to lower irrigation sales and weather, decreased operating income by $8,600,000 an increase of $1,700,000 in fixed cost adjustment revenues, next on the table, offsets most of the lower usage per customer In addition, overall cooling degree days were 7% below last year. Next on the table, net retail revenues per megawatt hour decreased operating income by $1,000,000 The settlement stipulations associated with the income tax reform reduced revenues more significantly this year as anticipated. These items together net to a $2,400,000 decrease to operating income.
Transmission Wheeling related revenues were down about 24% or $5,100,000 Lower hydropower generation in the Pacific Northwest and more moderate temperatures throughout the region resulted in lower wheeling volumes this year. In addition, the open access tariff rates declined by about 11% over the comparable period. The tariff rate filed with the Federal Energy Regulatory Commission decreased by $4,400,000 due to a $1,600,000 decrease in labor and benefit costs in 2019 and a $2,900,000 O and M non cash amortization expense of regulatory deferrals in 2018 related to tax reform that did not continue. Finally, during last year's Q3, Idaho Power recorded $1,500,000 as a provision against revenues for sharing of earnings with customers under the Idaho earnings support and sharing mechanism. As we currently anticipate Idaho jurisdictional return on year end equity to be less than 10% this year, Idaho Power has not recorded any such provision in 2019.
These items collectively net to an operating income that is comparable with last year's Q3. Earnings of equity method investments, which largely consist of earnings from Bridger Coal Company, returned to a more normal level this quarter, resulting in a 2 point 5 in quarter of 2018 included $5,700,000 of tax benefits at Idaho Power from remeasurement of deferred taxes due to income tax reform. There was no such remeasurement in 2019. Also typical third quarter updates to deferred income tax and plant related tax return adjustments increased Idaho Power's income tax expense this year compared to a decrease in last year's Q3. Overall, Idaho Power's and IDACORP's net income were $12,200,000 $12,300,000 lower than the Q3 of last year, respectively.
IDACORP and IDACORP and IDACORP continue to maintain strong balance sheets, including investment grade credit ratings and sound liquidity, enabling us to fund ongoing capital expenditures and dividend payments. Regarding dividends, in September, the Board of Directors approved a 6.3% increase in the quarterly dividend from $0.63 to 0 point 67 dollars This latest increase means that IDACORP has increased the annualized dividend by a total of 123% since 2011. We also expect to recommend an annual dividend increase of 5% or more to the Board of Directors in the coming year, and Daryl will be providing additional color on our dividend policy later on the call. In addition, Idaho Power purchased and remarketed 2 of its outstanding series of pollution control tax exempt bonds this August, totaling about $166,000,000 with a great outcome. These two bonds were remarketed with substantially the same remaining terms, but with lower interest rates.
The term interest rate on the $49,800,000 bond due in 2024 decreased from 5.15 percent to 1.45 percent and the term interest rate on the $116,300,000 bond due in 2026 decreased from 5 0.25 percent to 1.7 percent. Going forward, we expect the lower interest rates to reduce interest expense by approximately $5,600,000 annually for the next 5 years until the smaller bond matures and $3,900,000 annually thereafter for the final 2 years of the long life bond. This successful transaction benefits both shareholders and customers. On Slide 6, we show IDACORP's operating cash flows along with our liquidity positions as of the end of September 2019. Cash flows from operations were about $79,000,000 lower than the 1st 9 months of 2018, mostly related to changes in income tax balances and regulatory assets and liabilities, as well as the timing of working capital receipts and payments and lower net income.
The liquidity available under IDACORP's and Idaho Power's credit facilities is shown on the bottom of Slide 6. At this time, we do not anticipate issuing additional equity in the remainder of 2019 over the relatively nominal amount under compensation plans. Slide 7 shows our updated full year 2019 earnings guidance and our key financial and operating metrics estimates. With financial performance to date and our outlook for the balance of the year, we have lifted the lower end of IDACORP's 2019 earnings guidance to the range of $4.40 to $4.50 per diluted share. In the Idaho jurisdiction, we are currently forecasting Idaho Power to be atorabovea9.5% return on year end equity with our full $45,000,000 of allocated tax credit support still available if needed.
We have also changed our expected O and M range to $345,000,000 to $355,000,000 which would not only be lower than last year's O and M expenses, but also keep O and M close to the $350,000,000 level for the 8th straight year. We reaffirm our expectation that capital expenditures will be in the range of $280,000,000 to $290,000,000 Our current reservoir storage and streamflow forecast suggests that hydrocar generation should now be in the range of 8,000,000 to 8,500,000 megawatt hours. As always, our metrics reflect an assumption of normal weather conditions for the remainder of the year. Looking ahead to this year's Q4, keep in mind that in the Q4 of 2018, Idaho Power recorded $3,500,000 of revenue sharing and the earnings from Bridger Coal Company were negative. Assuming normal weather conditions, we expect this year's 4th quarter earnings to be more typical because we do not expect it to include revenue sharing adjustments under the Idaho sharing mechanism, and we expect full year Bridger Coal Company results to be in line with prior years.
With that, I'll turn the presentation over to Daryl.
Thanks, Steve, and thanks to everyone for joining today's call. I will break format a little bit today and begin my remarks by acknowledging some organizational changes that reflect our long term succession planning efforts. As we announced in September and we show on Slide 8, Idaho Power's Board of Directors named Lisa Groh as President effective October 1. Lisa brings a tremendous level Her Her deep industry experience has been key during a time of unprecedented operational and financial success. I continue as CEO of Idaho Power and President and CEO of IDACORP.
Lisa has held many important roles over the years, primarily in leadership positions within engineering and operations. Most recently, she served as Idaho Power's Senior Vice President and Chief Operating Officer. With Lisa's promotion to President, the Board also named Adam Richins as Idaho Power's new Senior Vice President and Chief Operating Officer. Adam brings a unique background in both engineering and law to his new role. He joined the company as legal counsel in 2011 and has since served in several key leadership positions, most recently as Vice President of Customer Operations and Business Development.
Lisa and Adam's promotions were among several changes to our executive team effective on October 1. These changes are highlighted on Slide 8 and more details are posted on IDACORP's and Idaho Power's websites. With that, I would like now to turn the next portion of the call over to Idaho Power's new President, Lisa Growe.
Thank you, Daryl. I am excited to be here with everyone today and I am thrilled and honored to serve as the President of Idaho Power. With Daryl, our Board of Directors and the entire executive team, our company has an outstanding leadership group and I am grateful for the opportunity to serve them serve with them. I would like to walk through some of the high level trends that are helping drive our business. Customer growth is at the forefront as shown on Slide 9.
As Steve noted, growth continued upward with a customer growth rate of 2.6% over the past 12 months. It continues to be an exciting time to live and work in Idaho with new customers of all kinds moving into and expanding in our service area. We hear from many of these customers that the reliable, affordable, clean energy that Idaho Power provides is one of the key drivers for the economic decisions they are making in our region. As far as the activity from large business customers goes, particularly the food processing, particularly the food processing, manufacturing and distribution sectors, I have a few to highlight today. Notable large load projects that came online during the Q3 include an expansion to the Tamarac Mill in the northern part of our service area and a large expansion of Idaho milk products in the agricultural area located in South Central Idaho that continues to see major growth.
Some of you might not be aware, but Idaho is actually the 3rd largest milk producing state in the country. We also have several large industrial and commercial projects scheduled to begin taking service later in 2019 and beyond, including a recently announced 650,000 Square Foot Amazon Distribution Center in the Boise Valley. The center, which is expected to bring 1,000 jobs to the area, has a forecasted in service date of September 2020. Moody's current forecast of gross domestic product in Idaho Power service area predicts growth of 3.7% in 2019 and 4.2% in 2020. Employment within our region also remains on an upward trend.
Compared with this time last year, employment within Idaho Power Service Area has grown 3.3% with 543,000 people now employed, again a new record. Unemployment in Idaho Power service area at the end of the third quarter was 2.8% compared with 3.5% nationally. Turning to Slide 10, in our most recently filed integrated resource plan, Idaho Power identified ending its participation in 2 Jim Bridger coal fired units in 20222026 respectively, supporting our clean by 2,045 goal. With early exits already planned at Valmy and Boardman coal plants, the Jim Bridger plant represents the 3rd and closing chapter along our path away from coal and we are committed to working with all interested parties to ensure the timing of the exit to make sure that the timing of the exit will make sense for both shareholders and customers, while looking for prudent new investment options to replace the lost capacity that will result. As a reminder, we have been providing some additional modeling within our integrated resource planning process and we plan to supplement the currently filed IRP with additional information and modeling results by the end of 2019 or early 2020.
The results of this effort could change the timing of potential exits from the Jim Bridger units, which would ultimately be done in collaboration with Pacificor, the majority co owner in the plant. On another generation issue, recall that Idaho Power signed a 20 year power purchase exercised its contractual right in the agreement to negotiate during the Q4 the acquisition of the facility. The power purchase agreement and acquisition are subject to state regulatory approvals. Last quarter, Daryl stated that we did not plan to file a general rate case in Idaho or Oregon in the next 12 months. That remains true today as we look towards the next 12 months.
Steady load growth combined with increases in our customer base, constructive regulatory outcomes and effective management of operating expenses all play significant roles as we look at the need and timing of our next general rate case. Next week in connection with the EEI Financial Conference, we plan to publicly provide on IDACOR's website and in an 8 ks we will file some further context surrounding where we see forecasted rate base today as well as explore some potential scenarios for Idaho Power's future rate base growth. Before turning the presentation back over to Daryl, I would like to recognize our employees for the great work they have done on the customer experience front. You will see on Slide 11 that while Idaho Power scores in J. D.
Power and other national rankings have traditionally been strong, We have made great strides over the past 2 years and are continuing to improve. In fact, during the Q3, the results of the 2019 residential study showed record high scores for our company, which put Idaho Power among the highest scoring energy companies in the nation. From outstanding reliability and a better customer experience on our website to a redesigned bill and an enterprise wide focus on customer service, virtually every Idaho Power employee has played a role in this success. It is something we are very proud of and it raises the bar for measuring customer satisfaction going forward. And with that, I will turn the time back over to Daryl.
Thank you, Lisa. Steve and Lisa's remarks here today have done a good job outlining some of the opportunities our company is facing as well as the excellent job our employees are doing to help ensure our continued financial and operational success. I want to briefly return to the dividend topic. As Steve mentioned and as you can see on Slide 12, our customer growth and financial success has enabled us to more than double the quarterly dividend since 2011. We continue to expect to stay near the upper end of our current target dividend payout range of between 50% 60% of sustainable IDACORP earnings.
We expect to further discuss with the Board the appropriate target payout ratio in mid November. We recognize that when we began raising the dividend about 8 years ago, we set the target payout ratio with the median of our utility peers in mind. We also recognize that many of our peers have increased their target payout ratios over the years and the median is now higher than the level we currently target. This fact will inform our discussion with the Board at its meeting next month as we consider a potential increase to the recommended target payout ratio range. Since it is Halloween, we think it is only appropriate to end with 13 slides and I will use the 13th slide for a look at projected weather outlook.
The National Oceanic and Atmospheric Administration currently suggests an equal chance of above or below normal precipitation levels throughout most of Idaho Power service area and a 40% to 50% chance of above normal temperatures into the early winter months. Of note, our early look at October weather statistics indicate it was the coldest October since 1985 with heating degree days showing about 50% above normal for the month. It looks to be a brisk evening tonight for those trick or treaters in our service area. Reservoir storage levels continue into this year's snow season should continue to provide favorable conditions for generation of low cost hydropower next year. As a reminder, our power cost adjustment mechanisms in Idaho and Oregon significantly reduced earnings volatility related to changes in our resource mix and associated power supply costs that can fluctuate greatly due to weather.
In addition, the fixed cost adjustment mechanism in Idaho reduces some of the volatility of temperature changes for residential and small commercial customer classes. With that, Steve, Lisa and I and others on the call will be happy to answer questions you may have.
Thank you. We are now ready to begin the question and answer The first question is from Brian Russo with Sidoti. Please go ahead.
Hi, good afternoon. Hi, Brian. Good to hear from you.
Yes, thanks. Just are there any more PCB remarketing opportunities that we should be aware of?
No more no, I'm sorry. Brian, that's the end of our pollution control bonds. That is the only set that we've still got outstanding. So no, there won't be another set there. I think we will continue to monitor the rest of our bond portfolio and it will all depend on interest rates and where that stands, whether there's opportunities to refinance early or not.
I do think we felt like we were through the majority of those, but if interest rates continue to stay where they are, there could be opportunities.
Got it. And then your comments earlier about the solar PPA and the option to purchase it or write a first offer, I guess. Any more insight on to that actual solar project, like number of megawatts? I guess you are the off taker, but just anything any more detail on that would be great.
Ryan, this is Daryl. It's a 120 megawatts project. So it's pretty good size. It'd be the largest in Idaho.
Okay. And it needs regulatory approval, so that assumes at some point you're going to want to add it to rate base?
Brian, it is structured as a PPA. So it's a purchase of power. I think if as we pursue or look into whether we could be an owner, it may put us in that same position that it would be some sort of a it would be a pricing constructed around that what's in that purchase power agreement right now. I don't really envision it becoming a true rate base asset the way it's entered into the consideration.
It could be Brian, it could become an investment outside of Idaho Power.
It could be non reg. A non reg investment for us.
Right.
Those are some of the things that we are looking at right now.
I would just say, Brian, a key component of why it's even being considered is the pricing. And so it is it would be around delivering that price that would make it an attractive thing that the commission might approve it. If that price and that will be what the commission will be deciding based on other information we still need to provide them that as to whether or not they feel like that's a good choice to take make an investment or a commitment, I guess you would say, for what they believe is a lower cost opportunity going down the road against other things that might be in the IRP. So they will have to look at that and determine if it's prudent. But it probably does lock it in on a price and make it a little more of that nature of an asset than something we would put in rate base.
Got it. Understood. Okay. And then not to jump ahead too far, but the expectation for rate base, current rate base disclosures at EEI. Just curious, how are you going to treat the quit balance on Hells Canyon?
I mean, is that going to be carved out or just any insight
I think what we envision is giving you an idea of the different buckets of spend over a couple of periods of time, maybe one in the near term that's kind of in our 5 year window and some that are a little longer. That amount has largely been reviewed from the standpoint of its prudency, at least the bulk of it. We've continued to spend dollars, so there's some beyond what went through the prudency review. But it will need to be close to plan at sometime in the future. And we'll give you an idea of when that is without specifics because as you know, that has been a difficult year to hit.
But it isn't it's nearing the window where we have to start looking at that as a likely rate base item in the near future. Okay. And then And it's beyond that. So, yes, I'd say the other piece I think the new news with that one will be once it's closed, the obligations that come along with retaining that license also introduce new spending down the road and that's a piece I don't think we've talked to you very much about.
Okay. And then lastly, just can you just comment on your participation in the EIM? How is that going? Is it actually reducing costs? And where do you see that whole EIM construct going in the future?
So, Brian, we're going to Tess Park, who heads up our power supply group is with us today and she was sort of instrumental at the I'm effort with her and her team. So we'll ask Tessa to briefly comment on how EIM is working for us and maybe a regional perspective.
So the EIM continues to provide benefits to Idaho Power and the region, the Cal ISO post regional benefits for that. As always, there's some question about the total value, but we continue to see benefits at the local level and increases in dispatch of units in our service territory, supplying the market as well as opportunities to buy at lower cost than what we could dispatch.
And Brian, as a reminder, the benefits of the EIM end up going back to our customers, which does help us manage the price impacts to customers, which kind of when you look at the bigger picture of regulatory, that's a real positive that way. So it's been today, it's been good and it continues to get larger with more participants coming on and we've got Bonneville now scheduled to join and some others coming on down. So, it's getting much larger footprint. Great.
Thank you very much.
Thank you, Brian. Thank you.
That concludes the question and answer session for today. Mr. Anderson, I will turn the conference back to you.
Gary, thank you so much and thank you for all participating on our call today. We appreciate your continued interest in our company and we look forward to seeing many of you in Orlando at the EEI conference in a little over a week or so. So thanks very much. Happy Halloween.
That concludes today's conference. Thank you for your participation. You may now disconnect.