Welcome to IDACORP's 3rd Quarter 2018 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. Please go ahead.
Thanks, Gary. Before the markets open today, we issued and posted to IDACORP's website both our Q3 2018 earnings release and our Form 10 Q. The slides we'll be using to supplement today's call are also available on our website. We'll refer to those slides during the call. As noted on Slide 2, our presentation today will include forward looking statements, which represent our current views on what the future holds.
These forward looking statements are subject to risks and uncertainties, some of which are listed on Slide 2 and are also laid out 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. 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 and Steve Keen, Senior Vice President, Chief Financial Officer and Treasurer. We also have other individuals available to help answer any questions you may have after Daryl and Steve provide updates.
On Slide 4, we present our quarterly and year to date financial results. IDACORP's 2,008 Q3 earnings per diluted share were $2.02 an increase of $0.22 per share over last year's Q3. For the 1st 9 months of 2018, earnings per diluted share were $3.97 $0.53 higher than the same period in 2017. We have increased our full year 2018 earnings guidance estimate to a range of $4.40 $4.50 per diluted share. I will now turn the call over to Steve.
Thanks, Justin, and good afternoon, everyone. Continued strong customer growth, largely driven by new customers moving to our service area, combined with a return to more normal irrigation sales and the impacts of tax reform, have led to another solid quarter. There are a lot of moving parts, so using Slide 5, I will walk through a reconciliation of income from the Q3 of 2017 to the same period of 2018. Customer growth of 2.2% added $2,900,000 to operating income this quarter. Overall usage per customer, however, was lower, decreasing operating income by $2,000,000 Residential usage per customer was lower by 7% as there were fewer cooling degree days in 2018 than in last year's near record 3rd quarter.
Further down the table, you will note an increase of $5,100,000 in fixed cost adjustment or FCA revenues related primarily to residential customers, which partially offset the lower residential use. Irrigation usage per customer, however, was 6% higher as the service area was very dry compared with last year. Including the increase in the FCA, the revenues related to per customer use were $3,100,000 higher for the residential and irrigation classes. Lower customer rates related primarily to the tax reform settlements that were implemented June 1 this year resulted in a $10,200,000 decrease in retail the lower revenues per megawatt hour was a change in the customer sales mix as volumes sold to residential customers made up a smaller portion of that mix. Residential customers generally pay higher rates than other customer classes.
In addition to these changes in retail revenues, as you'll see next on the table, Idaho Power's operating income benefited from a $7,000,000 increase related to higher transmission wheeling rates and volumes. This rate resets annually and decreased about 10% effective October 1, 2018 to align with recent costs and volumes. Excluding the tax reform related to $2,900,000 of non cash expense amortization of regulatory deferrals, other operating and maintenance expense was $5,200,000 higher than in the Q3 of last year. Higher maintenance service costs led to a $1,400,000 increase in transmission and distribution asset maintenance expense, and labor and benefit costs increased $3,800,000 primarily due to higher variable employee related costs. Despite these differences for the quarter, we are maintaining our forecasted range of operating and maintenance expenses of $345,000,000 to $355,000,000 for the full year 2018.
Depreciation expense was higher by $1,400,000 over the comparative periods due to an increase in plant and service. Finally, IDACORP recorded 1 point a provision against current revenues to be refunded to customers through a future rate reduction. This sharing is based on our current estimate that our full year 2018 18 return on year end equity in the Idaho jurisdiction will exceed 10% under our current Idaho regulatory stipulation. We project $2,000,000 of revenue sharing for the full year. With all the moving parts, Idaho Power's operating income decreased by $8,300,000 relative to last year's Q3, resulting mainly from the customer benefit of the tax reform settlement on both rate reductions and increased amortization costs, which moved this line from an increase to a decrease.
Further down the table, the $1,400,000 increase in earnings of equity method investments relates to Bridger Coal Company and is timing related. We anticipate annual earnings in 2018 related to this investment to be comparable with recent years or roughly $10,000,000 Tax benefits from the remeasurement of deferred income taxes related to IDACORP's 2017 consolidated income tax return filings drove a $5,700,000 decrease in income taxes relative to the Q3 of 2017. These remeasurements relate to the change in the income tax rate and its impact on certain deferred tax items incorporated in the 2017 tax return. As you recall, we had a charge related to this in our 2017 10 ks of roughly $2,000,000 As final tax entries were evaluated, the remeasurement was updated. The largest impact relates to Idaho Power's 2018 pension contributions that were able to be included in IDACORP's 2017 tax return.
Sector wide concerns about credit related impacts of tax reform on the utility industry delayed our pension contribution decision until we received more certainty as to the outcome from the tax reform settlement discussions as well as help from positive weather impact through this summer. Because we had no required minimum contribution for 2018, we we monitored our cash flows early in the year before taking advantage of this benefit that is not expected to recur. The remaining income taxes were $13,100,000 lower largely related to the lower statutory tax rate. Overall, Idaho Power's and IDACORP's net income were respectively $11,900,000 $11,600,000 higher than last year's Q3. IDACORP and Idaho Power continue to maintain strong balance sheets, including sound liquidity and investment grade credit ratings.
On Slide 6, we show IDACORP's operating cash flows along with our liquidity positions as of the end of September 2018. Cash flow from operations increased approximately $20,000,000 mostly due to higher net income and the timing of working capital receipts and payments, offset by changes in deferred taxes and taxes accrued and receivables as well as changes in power cost adjustment related regulatory deferrals. 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 through the end of 2018 other than relative nominal amounts related to equity compensation plans. Slide 7 shows our updated and increased earnings guidance and estimated key financial and operating metrics for the full year 2018.
Our strong performance through the 1st three quarters allows us to again increase our earnings guidance for IDACORP to the range of $4.40 to $4.50 per diluted share. Based on this guidance, we expect to achieve our 11th consecutive year of earnings growth. This guidance change includes our expectation to once again avoid using any additional ADITC in 2018, preserving the full $45,000,000 for future years and also includes our expectation to share $2,000,000 for the year with Idaho customers. We reaffirm a 7th straight year of relatively flat operating and maintenance expenses and also reaffirm between $280,000,000 $290,000,000 of capital expenditures this year. Current conditions and actual results suggest that the hydroelectric generation range can be tightened to the range of 8,500,000 to 9,000,000 Megawatt hours.
We remind you that our guidance assumptions reflect normal weather conditions for the last quarter of 2018. With that,
I will turn it over to Darryl. Thanks Steve and thanks everyone for being on the call today. It sounds like you guys have had a pretty busy day. The growth trend continued in the Q3 for Idaho Power and Idaho Power as new residential and business customers continue to drive higher loads. We also saw progress on the Boardman to Hemingway transmission project in addition to the productive regulatory outcomes that guide our path forward.
We are executing on our business strategy and our shareholders and customers are both benefiting from our efforts. On Slide 8, we see that customer growth remains strong at 2.2% over the last 12 months. Our service area continues to earn national recognition as one of America's most desirable regions to live and work. CNBC and Magnify Money included Boise in recent articles listing 15 cities where jobs are clinical and business is booming as well as America's biggest boomtowns. We saw load growth in food processing over last year and economic activity is projected to bring additional large load customers onto our system over the next couple of years.
Provide a couple of examples. Last quarter, I told you about new colds plans to build a cold storage facility in Burley, Idaho. As reported, an additional cold storage facility has chosen to site a new 280,000 square foot $40,000,000 facility on property surrounding the Pocatello, Idaho Airport to support area farmers and food processors in the region. The facility is expected to support up to 80 full time jobs and the project is expected to be completed by the fall of 2019. Our existing customer Simplot has broken ground for its new 11 story cold storage operation in Caldwell, Idaho.
The facility will be highly automated, utilizing the latest in cold storage technology. It is our understanding that the Food Safety Modernization Act has increased demand for cold storage nationwide, and we are pleased that these new and existing customers have chosen to locate these facilities in Idaho's fertile agricultural areas. These facilities are expected to further enhance the business prospects for food growers and producers in our service area. Another example is Premier Technology, a vertically integrated engineering, manufacturing and construction company based in Blackfoot, Idaho, which has chosen to expand its manufacturing footprint in the area. The company recently broke ground on a new welding and fabrication facility at its existing operations in Blackfoot, in addition to expanding 2 existing buildings.
The expansion is expected to create up to an additional 150 new jobs. According to Moody's latest forecast, gross domestic product in Idaho Power Service Area is predicted to grow 4.2% in 2019. Employment within our region remains on a positive growth curve. Compared to this time last year, employment within Idaho Power Service Area has grown 2.6%, now exceeding 521,000 people employed, a new record. Unemployment at the end of the 3rd quarter in Idaho Power Service Area was 2.4% compared with 3.7% nationally.
Now turning to Slide 9, shareholders are continuing to benefit from our earnings growth in the form of increased dividends. In September, IDACORP's Board of Directors approved another quarterly dividend increase of $0.04 per share from $0.59 to $0.63 per share or a 6 0.8% growth. This increase when combined with increases approved by the Board since 2011 represents a 110% increase in the dividend. We expect to recommend to the Board future annual increases of 5% or more to remain near the upper end of the target payout ratio of between 50% and 60% of sustainable IDACORP earnings. I want to briefly address general rate cases.
I stated last quarter 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 at the next 12 months. Steady load growth combined with increases in the number of customers, productive 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. Turning to Slide 10, the Boardman to Hemingway Transmission Line Project or V2H recently received another significant milestone as the Oregon Department of Energy or ODOE announced Idaho Power's application for site certificate for B2H is complete and ready for review and recommendation to the Energy Facility Siding Council or FSEC. This is a major milestone for the State of Oregon's permitting process and a positive indicator the project is moving forward.
The next major milestone, the draft proposed order, is expected in Next, I would like to take a look at weather on Slide 11. Next, I would like to take a look at weather on Slide 11. As Steve discussed, we experienced favorable weather conditions during the Q3 with warmer and drier weather in July August in particular. The projected outlook for the period from November through January calls for comparatively mild and dry conditions. The good news is that we are beginning this water year with relatively healthy reservoir carryover conditions.
We actively manage our total resource requirements on an ongoing basis with a robust risk management program that considers several factors, including weather conditions. And as a reminder, our power cost adjustment mechanism in both Idaho and Oregon reduces earnings volatility related to changes in our resource mix and associated power supply costs. I want to close with a comment about our energy efficiency programs. Earlier this week, the Governor of the State of Idaho presented Idaho Power Company with the Governor's Award for Excellence in Energy Efficiency. The award honors an organization that demonstrates a commitment to energy efficiency at all levels of the organization through its programming, implementation and promotion.
On behalf of our employees and customers, I was proud to accept this award that recognizes our long term commitment to energy efficiency programs. So with that, Steve and I and others on the call will be happy to answer any questions you may have.
Thank you. Ladies and gentlemen, we are ready to begin the question and answer session. Our first question comes from Julien Dumoulin Smith with Bank of America Merrill Lynch. Please go ahead.
Hey, good morning. Good afternoon, Karl. Sorry, I'm losing my mind. That's a long day.
It's a long
day. With respect to the IRP update, just can you clarify a little bit? How are you seeing Bitcoin miners and some of the other growth? I suppose, candidly 1.3% versus the 1.1% in 2017. I was thinking maybe it might be a little bit better.
Are there any other offsets to that number that we should be thinking about or any other moving pieces?
Well, so as it relates to Jillian, this is Daryl. So as it relates to the 29 on IRP assumptions, we are for the retail sales growth for the near term 5 years, we are using 1.3%. For peak, we're using 1.4%. And obviously, you have to take a look at that over the long term. You referenced the Bitcoin miners and crypto currency folks.
And I will tell you, as we've talked about before, we saw a lot of interest in the crypto Bitcoin marketplace, but that has actually pretty well dried up as we have seen it now. We still have some interest, but we have a lot of that what we thought was coming really hasn't materialized at this point for probably a lot of different reasons. But so when we look at the 1.3 and the 1.4 respectively, that's really based on long term sustainable growth. We weren't really sure the sustainability of some of the crypto and blockchain or the crypto and Bitcoin markets to begin with. We had heard from others in the region that to be cautious and to begin with.
And so the good news is, I think we have been. And so these numbers really don't factor that in. These factor more of the things that I've talked about with respect to the more sustainable businesses and the manufacturing that we've been focused on in the food processing, dairy side of things, the technical side of things. So that's really what those growth numbers are focused on.
Jamie, this is Steve. I would just say too that as you look at we are moving up on the actual the retail growth from 1.1 to 1.3. So that's about a not quite 20%, it's 18% increase. And then it's a 5 year number. So it isn't necessarily going to come out exactly that every year.
There could be a shape to that and it could be a little higher earlier. But we do those in increments of years. So you get one change for the first five and then we have a different change that we use over the 20 year.
And I think the other part of that, I think we probably have when you look at over 20 year, that's a long period of time. And the near term, we have a little more intelligence on what's going on in the marketplace versus necessarily what's really going to happen in 20 years. But I will just tell you, I think the one thing we do know for sure or relatively sure and that is the people Idaho has been discovered and we're getting a lot of people coming here for a lot of different reasons. And so, I think the in migration side of this, just the 2.2% customer growth side of that is a really positive message and we still see customer growth strong. The question is going to be, hey, how much juice are they going to Energy efficiency, as I noted earlier, has had an impact obviously as we see more efficient appliances, smaller footprints on residences and where people live.
And so all those things come into play. And so to still have the 1.3% number out there despite all those things, I think is a pretty strong message.
Got it. In fact, let me just make sure I'm reading between the lines appropriately. Are you kind of suggesting that the near years might be better than the 1.3% and that this might be a conservative kind of 5 year view?
Yes, I'm not basing that exactly on the IRP, but when we look at other projections, whether it's Moody's or someone else, it's usually a curve. So, them is at a flat number for 5 years. And so, in the IRP, we use they use these inputs that are over periods of time. So, you have to factor in the fact that it may not come exactly that amount every one of those 5 years. And as Daryl said, we are stronger in the early years than we are in the 'twenty, but both of them actually went up from a use standpoint.
So that's a good thing from our perspective.
Got it. And then turning to the other side of capital investment, I believe you have something like around $100,000,000 give or take to replace scrubbers at Bridger by 2021. Are you still more likely to run the plant at a lower rate than spend that capital? How are you thinking about the merits of that? And how are you thinking about acceleration of end of life of units more broadly?
So Julien, at Bridger, that's an ongoing conversation we're having right now with our partners. So, we're going to look at what's in the best interest for our customers, what's in the best interest for our resource portfolio, along with staying tied to where our partners are headed. So what I can tell you there is that's ongoing conversations and we will as that unfolds, we will have the opportunity to share that in subsequent calls. But right now, what I can tell you right now is just working closely with our partners is to determine what the ultimate course of action is going to be there. As you know, we've got 2 of the units are scrubbed, 2 of the units aren't scrubbed, and we're assessing what the best course is as we go forward.
But that Is
there a timeline for oh, sorry.
I would just say, I would say, when we have this year end call, when we have our call in February, we'll likely have an opportunity to give you an update then.
Last quick one for me on just Boardman Hemingway, good stuff in terms of the execution in the quarter here. Anything that you're keen to get done by end of the year given some of the political changes out of the elections, etcetera? Or are you pretty satisfied in terms of the successes and milestones achieved thus far?
Well, we're in the middle of that process now. So, from a political perspective, it's more in the process standpoint as it relates to Oregon. We're expecting we're hoping it's an FSAC decision by sometime early 2019. So, I'm not sure the election should have an impact on that, because it's now it's within the agencies working through the agency process. So, I think that's we have to trust the process as it stands right now.
And given where we stand right now, I think we're confident that it's moving on
pace. Excellent. All right. I'll leave it there. Thank you all very much.
Thanks, Julian.
The next question comes from Paul Ridzon with KeyBanc. Please go ahead.
Good afternoon. Hi, Paul. Hi, Paul. Daryl, I kind of missed what you said about the rate case outlook. Could you just repeat that?
Yes. As we sit here today, as we look forward for the next 12 months, we don't see we have no plans to file a general rate case in either Idaho or Oregon. And that's really based on as we look on the horizon, continued load growth that's coming. Steve talked about our cost management that we have been successful on. Those two things are going to continue to drive that and we have other mechanisms that are in place that helps us continue to manage the business, and we're going to do everything we can to try to manage that and not have to go in if we don't have to.
And so that's as we look on the horizon today, we don't expect to have to do that in the next 12 months. And then just as a reminder, our regulatory process in Idaho, remember, so it's a 7 month process basically. So you think about that a year from now and if we haven't filed let's just say we were hypothetically to file something a year from now, that's basically 19 months out before we would likely see a rate change.
And from a practical standpoint, you typically file mid year. So can we assume that you're not thinking about a
rate case at least until mid-twenty?
I'm just going to say right now, we have no plans for the next 12 months because historically you're right, what we've generally done is synced up those cases so that we would generally have a price change that would take place in and around June 1st when we adjust our power supply costs. But that's not always a hard and fast as you noticed with well, I guess Langley was similarly scheduled up. But that's sort of the idea. But we're going to look at it as it relates to what the needs are and determine our filing schedule based on need.
Okay. That was my only question. Thank you.
Thanks, Paul. Thanks, Paul. And a final opportunity. That concludes our question and answer session for today. Mr.
Anderson, I will turn the conference back to you.
Thank you, and thanks everybody for participating. We know you've had a hectic day. We'd like to thank you for your continued support in IDACORP, and we look forward to seeing many of you at the EEI Financial Conference later this month in San Francisco, and we hope you guys all have a great rest of your day. Thank you much.
This concludes today's conference. Thank you for your participation. You may now disconnect.