Welcome to IDACORP's first 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 through a period of 12 months on the company's website at idacorpinc.com. If you need assistance at any time during the presentation, please press star zero on your phone. Now, I will turn the call over to Justin Forsberg, Director of Investor Relations.
Thanks, Allison. Before the markets opened today, we issued and posted to the IDACORP website both our first quarter 2018 earnings release and our quarterly report on 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 by number during the call. As noted on slide two, 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 that may cause actual results to differ materially from statements made today, some of which are listed on slide two and are supplemented by information in our filings with the Securities and Exchange Commission, which we encourage you to review. We caution you against placing undue reliance on any forward-looking statements.
As shown on slide three, on today's call, we have Darrel Anderson, IDACORP's President and Chief Executive Officer, and Steven Keen, Senior Vice President, Chief Financial Officer, and Treasurer, along with other individuals available to help answer any questions you may have during the Q&A period. On slide four, we present our quarterly financial results. IDACORP's 2018 first quarter earnings per diluted share were $0.72, an increase of $0.06 per share over last year's first quarter. We affirm our original 2018 earnings guidance estimate of between $4.10 and $4.25 per diluted share. I will now turn the presentation over to Steven.
Thanks, Justin, good afternoon, everyone. On slide five, you'll see a reconciliation of income from the first quarter of 2017 to the first quarter of 2018. Continued solid customer growth of 2.1% increased operating income by $2.4 million. Usage per customer, however, decreased operating income by $10.4 million due to moderate weather. Largely offsetting this was an $8.7 million increase in fixed cost adjustment revenues, as much of the decreased usage occurred in the residential and small commercial customer classes. Increased rates related to the North Valmy plant settlement, which were first recorded in the second quarter of 2017, were partially offset by a lower proportion of residential customer sales in higher rate tiers, resulting in a net increase of $1.2 million. The North Valmy plant settlement accounted for most of the $3.3 million increase in depreciation expense further down the table.
The settlement stipulations related to North Valmy that were approved by the Idaho and Oregon commissions in 2017 are expected to add about $5 million of net income annually, though the amount will gradually decline through 2028. Recall that last year, the impacts of the first quarter and second quarter 2017 benefits related to the settlement were all recorded during the second quarter last year. In addition to these changes in retail revenues, Idaho Power's operating income benefited from a $2.7 million increase in transmission wheeling due to an increase in the transmission wheeling rate that has been in effect since last October, as well as weather-related increases in wheeling volumes. The transmission rate is now closely aligned with the cost of providing transmission service. More closely aligned, excuse me.
Due to the regulatory orders received from the commissions earlier this year, Idaho Power recorded a $5 million reduction to revenue and corresponding regulatory liability for its first quarter estimate of financial benefits resulting from the federal income tax law that are expected to be returned to customers. Prior to this $5 million revenue accrual, operating income at Idaho Power had increased by $1.8 million. Overall, Idaho Power's operating income decreased by $3.2 million. Increased earnings from Bridger Coal Company compared with the first quarter of 2017 comprised the $2.9 million increase in earnings of equity method investment. We expect that this increase is largely temporary, and we anticipate annual earnings in 2018 related to this investment to be fairly consistent with recent years. Income taxes were $4.6 million lower, mostly related to the lower statutory rate.
The decrease in income tax expense was partially offset by a $1.4 million decrease in additional accumulated deferred invest or income tax credit, or ADITC amortization. Idaho Power accrued $0.5 million of additional ADITC amortization during the quarter under its Idaho regulatory stipulation as its 2018 Idaho jurisdictional year-end return on year-end equity is expected to be less than 9.5%. By comparison, $1.9 million of additional ADITC amortization was accrued in the first quarter of last year. Last year's first quarter accrual for the additional ADITC was reversed in the second quarter of 2017. These changes combined to increase both Idaho Power's and IDACORP's net income by $3.4 million and $3 million respectively over the last year's first quarter. IDACORP and Idaho Power continue to maintain solid balance sheets, including sound liquidity, and have maintained investment-grade credit ratings.
On slide six, we show IDACORP's operating cash flows along with our liquidity positions as of the end of March 2018. Cash flow from operations decreased $22 million, mostly due to changes in income tax accruals, retirement plan contributions, and the timing of working capital receipts and payments. You'll also note that Idaho Power issued a 30-year, $220 million bond with a 4.2% coupon rate during March this year. A portion of the proceeds from the bond were used for the early redemption of the 10-year, $130 million, 4.5% coupon bond that was due in 2020, and the remainder will benefit ongoing capital and operating needs. We expect to recognize the modest income tax benefit of approximately $1 million in the second quarter associated with the early bond redemption premium that was paid in April.
IDACORP and Idaho Power continue to have in place credit facilities of $100 million and $300 million, respectively, to meet short-term liquidity and operating requirements through 2022. The liquidity available under the credit facilities is shown on the bottom of slide six. At this time, we foresee no need to issue additional equity through the end of 2018. Slide seven shows our affirmed 2018 earnings guidance and estimated key financial and operating metrics for the full year 2018. We still expect IDACORP's earnings to be in the range of $4.10 to $4.25 per diluted share, a seventh straight year of relatively flat operating and maintenance expenses, less than $5 million of additional ADITC amortization at Idaho Power, and between $280 million and $290 million of capital expenditures this year.
Robust reservoir storage, combined with current snowpack levels that are slightly below normal due to early spring runoff, continue to suggest that hydroelectric generation will be in the range of 7.5 million to 9.5 million megawatt hours in 2018. As always, these guidance assumptions reflect normal weather conditions going forward. One quick note on operating and maintenance expenses will likely provide some clarity on accounting changes made beginning in the first quarter of 2018. The Financial Accounting Standards Board issued an accounting standards update requiring employers to disaggregate the service cost component from other components of pension costs on the income statement. The adoption of the standard resulted in the non-service cost components of pension expense being recorded outside of operating income on the company's income statements. As a result, an ongoing O&M expense will be slightly lower than it would've been, and the reclassification will be reflected in prior periods.
This presentation will not result in changes to net income. Full year 2018 O&M expense is expected to be approximately $3.7 million lower than it would've been without the adoption of this standard. While full year 2017 O&M expense will be about $3 million lower after the adjustment has been reflected. On slide eight, I would like to offer some comments on the recent settlement related to income tax reform in our Idaho jurisdiction. In January, the Idaho Commission ordered utilities to submit a report contrasting the actual federal income tax components for the 2017 year with recalculated amounts that would have occurred if the utility had been subject to the 2017 Tax Act's revisions to the tax code, including the lower corporate income tax rate.
On March 30th, 2018, Idaho Power reported that based on this evaluation, Idaho Power would have accrued about $26 million in lower federal income taxes. The pro forma analysis indicated lower current income tax of $11 million and lower deferred income taxes of $15 million. Subsequently, Idaho Power entered into settlement discussions with the Idaho Commission staff and one intervener with the goal of determining the most appropriate manner to flow these benefits to customers. We believe those discussions were productive and cooperative, resulting in a settlement stipulation filed April 12th with the Idaho Commission. The details of the proposed settlement are outlined in the Form 10-Q, as well as in the Form 8-K filed on April 12th.
The highlights are shown on slide eight, with an ongoing reduction in base customer rates of $18.7 million annually and an annual non-cash amount of $7.4 million to offset regulatory deferrals that would have otherwise been a future potential liability of Idaho customers. Additional one-time benefits related to income tax savings accrued over the first five months of 2018, as well as income tax savings related to Idaho Power's transmission tariff would flow back to customers through the annual power cost adjustment mechanism in the amount of $7.8 million beginning June 1, 2018 through May 30, 2019, reducing to $2.7 million from June 1, 2019 through May 30th, 2020 and ceasing entirely on June 1, 2020. In addition, as part of the proposed settlement, an extension of Idaho Power's ADITC earnings support and revenue-sharing mechanism was agreed to by the signatories. Those changes are illustrated on slide nine.
After 2019, the earnings support and revenue-sharing mechanism in the Idaho jurisdiction is expected to have minor modifications but no specified termination date. Any portion of the existing $45 million of unused additional ADITC remaining on December 31, 2019, would continue to be available for future use. Also, beginning in 2020, the earnings support line would temporarily move to 9.4% of Idaho Power's actual annual Idaho jurisdiction return on year-end equity, or Idaho ROE, until the Idaho Commission approves a change to the allowed Idaho ROE in a future proceeding, at which point the earnings support line would revert to 95% of the newly allowed Idaho ROE. The specifics of the revenue-sharing allocations would also change slightly under the extended mechanism after 2019, utilizing an 80/20 split going forward, with the nature of that sharing remaining consistent with the prior mechanism.
If the settlement is approved by the Idaho Commission, we believe that the extension of this earnings support and revenue-sharing mechanism could enhance earnings predictability for share owners and provide potential price stability for customers well beyond 2019. With that, I'll turn the presentation over to Darrel.
Thanks, Steve, and thanks, everyone, for taking the time to participate on our call today. It sounds like you guys have been pretty busy today. I will update you on economic drivers in our service area, some key accomplishments during the first quarter, and a little look at the weather. As shown on slide 10, customer growth continues to trend upward. Idaho Power's customer base increased 2.1% over this time last year, and national publications continue to highlight our service area as one of America's fastest-growing regions. In addition to the United States Census Bureau identifying Idaho as the fastest-growing state in the nation in 2017, Forbes named Boise number 1 on its list of America's fastest-growing cities for 2018. This ranking includes population growth as well as additional factors like wage growth, employment, real gross metro product, and home values.
In addition, Bloomberg named Idaho as the top-performing economy in the country in its latest survey. The good news spreads beyond Boise, as we are seeing positive growth trends throughout our service area. According to Atlas Van Lines' 2017 migration patterns statistics, Idaho had the highest percentage of inbound moves in the nation. These publications affirm what we are seeing across our service area in the form of growth and new business. Looking forward, according to Moody's latest forecast, Idaho's GDP is predicted to grow 4.4% in 2018 and 3.9% in 2019. In our last call, we also referenced growth in the area of cryptocurrency and blockchain in our service area. We continue to see a strong level of interest from this sector and expect to see new business from this segment beginning in the second quarter of this year. Employment within our region also continues to thrive.
The first quarter unemployment in Idaho Power service area was 2.9%, compared to 4.1% at the national level. Compared with first quarter last year, employment increased to 3.9%, now exceeding 517,000 people employed. We have already achieved several key accomplishments this year. On the regulatory front, we made three filings that, if approved, will reduce energy costs to our Idaho customers and further our efforts to maintain competitively priced energy services. The first decrease is related to tax reform that was previously discussed. Additional details on the proposed decreases from tax reform are included in the 10-Q. The second rate decrease comes through the Idaho Power Cost Adjustment mechanism. The PCA annually adjusts prices up or down by passing on the cost and benefits of supplying energy to Idaho Power customers. This year's PCA is an overall decrease of $22.6 million.
There are a few main factors contributing to this year's PCA decrease. The first relates to last year's actual power supply costs being less than anticipated, primarily due to better-than-expected water conditions, resulting in Idaho Power having more low-cost hydro generation available to reduce net power supply costs. This cost reduction is partially offset by an increase in the forecast component of the PCA, as well as the elimination of a one-time refund of energy efficiency rider funds provided through last year's PCA. The third filing relates to the Idaho Fixed Cost Adjustment mechanism. This year's FCA filing requests a decrease of approximately $19.3 million for residential and small general service customers. The FCA annually adjusts prices up or down based on changes in energy use per customer during the previous year. Combined, these three proposed rate reductions represent an approximately 7% decrease for an average residential customer in Idaho.
In addition to our spring filings, we have seen other successes on the regulatory front this year. As shown on slide 11, Idaho Power's 2017 IRP has now been acknowledged in Idaho and Oregon, which is significant because it is the first time that the Boardman to Hemingway Transmission Line Project activities beyond permitting have been acknowledged by both commissions. The Oregon acknowledgment is important in the continued pursuit of approval in the State of Oregon permitting process. We expect a draft proposed order later this year. In addition, the Gateway West Transmission Line Project recently reached a significant milestone when the U.S. Department of the Interior issued its record of decision approving the final two segments of the 1,000-mile transmission line project. The Bureau of Land Management-led environmental review process for Gateway West is now complete. Idaho Power and PacifiCorp will continue to coordinate timing of next steps.
We also received good news on the Hells Canyon re-licensing this spring. The Idaho Commission issued an order finding prudent $216.5 million in re-licensing expenses incurred through the end of 2015. We will submit those expenditures for recovery in a future rate proceeding. We had another key achievement with the go-live of our participation in the Western Energy Imbalance Market on April fourth. The Western EIM is intended to reduce power supply costs to serve customers through the most efficient dispatch of a larger and more diverse pool of resources, to integrate intermittent power from renewable generation sources more effectively, and to enhance reliability. We have asked the IPUC for approval to establish an interim method of recovery for costs associated with the participation in the Western EIM. We are awaiting approval determination from the IPUC.
Load growth combined with increases in customers, productive regulatory outcomes, and management of operating expenses all play significant roles as we look at the need and timing of our next general rate case. We do not expect to file a general rate case in either Idaho or Oregon in 2018, and we will continue to evaluate the need to do so in 2019 and beyond. Just as a reminder, Idaho Power has not made a general rate case filing since 2011. Lastly, I'll provide a brief update on weather. On slide 12, current projections from the National Oceanic and Atmospheric Administration, or NOAA, indicate a greater than 40% chance of above average temperatures in Idaho Power service area and a greater than 40% chance of below normal precipitation for the May to July time period.
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. If you would like to ask a question, please do so by pressing star one on your phone. We remind you to ensure your mute function is turned off before you ask your question. We will take as many questions as time permits on a first-come basis. Once again, that is star one on your phone to ask a question now. Our first question will come from Paul Ridzon of KeyBank. Please go ahead.
Paul?
Mr. Ridzon?
Sorry, I was on mute, sir.
Hi, Paul.
Please-
Hi, Paul.
Hi. Steve, can you run through the accounting on that pension change? You said O&M will be lower, but net income won't change. Where is the offset? What line item is that on?
Looking at the ten, let me flip here. If you go to Idaho Power's income statement, basically the amounts are coming out of the other operations and maintenance expense line, and they're moving down to, if you go to the, it says "other income," and then in parentheses, "expense." There's an "other expense" line underneath that. It's just a shift between those two lines. Again, it's a net zero in terms of net income. It's just a reclass. It will make the operating or the O&M expense have a reset of an amount. Once it's out of both years, the difference will be the same as well. They're pretty close to the same.
With assuming you get approval of your settlement on the ADITCs, do you think you can stay out of a rate case another year through 2019? In Idaho, at least?
Paul, this is Darrel. I think we're going to do everything we can to do that. We'll continue to look at it and see where the business is. The one hope is that we continue to see the growth materialize, and that would allow us to also to continue to stay out, along with support from the ADITC. We'll continue to look at all those factors, but we won't go in unless we believe it's the right thing to do, and we will just continue to assess that.
Paul, I think.
Paul, a real win from our side is that I think the way we can look at that mechanism now that it doesn't sunset, is that as we preserve credits, as we can do things in this year, it truly does transfer to a later year. There was always a cliff there before, and to have that gone, not have to worry about whether you got an extension is a pretty big thing in our minds, I think it allows us to just keep our focus and stay on this track.
Understood. Well, you guys have done a great job so far on staying out of cases by managing costs. Thank you.
Thanks, Paul.
Thank you, Paul.
Thanks for that.
Our next question will come from Julien Dumoulin-Smith of Bank of America Merrill Lynch. Please go ahead.
Hey, good afternoon.
Hi, Claire.
Thanks for-
Hi, Claire
Wanted to ask a quick question on strategy in terms of load growth. This is the latest in a series of quarters where you've seen a rapidly accelerating load growth. How are you guys thinking about it still? The last earnings call, you said it was still a bit of a wait-and-see situation. Are you still thinking that that's the strategy? Would we expect any updates on CapEx, for instance, or additional generation needed? Any color there would be great.
Okay, Claire, I'll start and maybe Steve will jump in a little bit too. First of all, as you know, one of the things we do an IRP every two years. We have just recently had our last one acknowledged, and we're actually interested in that. Already starting to gear up for the next one. That does help set our direction as it relates to resource needs. Obviously, we update load growth and all those sorts of things. In the near term, as we see a lot of very positive economic activity, we still have capacity in the system in which to absorb that growth. In the nearer term, we think the CapEx numbers that we have been providing, which over the next three years averages around $300 million ±, is probably still where we are.
We are continuing to work with various constituents in our service area on the whole economic development side of things. The one area I mentioned that is something that we are starting to assess as to how it could impact us is the cryptocurrency blockchain sector. If you follow that at all, they are obviously very big energy users, and they go out and seek competitively priced energy. We have competitively priced energy, that's one area that they are looking at. That, we have a harder time projecting, but we are seeing a lot of positive activity in that arena. As I said in my comments, we expect we will see some of that this quarter already. As we go into the balance of the year, we potentially see more of that.
We're also seeing growth coming out of existing businesses expanding as well, and that's in particular food processing and dairy. We are also seeing other entities looking to locate here, new businesses that are looking to locate here. There is a lot of positive vibe around that side of it. All of that will, on the longer-term look, will get factored into our IRP as we gear up for our 2019 IRP. In the near term, I think we feel we have adequate resource to meet the needs that we may see on the horizon. That's a long-winded answer to your question, Steve may have something to add.
I think you covered it pretty well.
Okay. Hope that's helpful, Claire.
Got it. I think the 2019 IRP will be something for us to watch then.
For sure. Claire, just to focus on that, though, as you know, in the 2017 IRP, our key resource there was Boardman to Hemingway. As we mentioned in my comments, one of the key milestones we just achieved was the acknowledgement by the Oregon Commission, which helps move that process forward in Oregon. That is, again, as we work on a lot of things in parallel, that is a key accomplishment for us. It allows us to keep moving that forward with our partners.
Yes. That was definitely a good milestone to hear on. I had another question, if that's all right.
Sure.
With, actually, your equity layer. Your equity layer continues to trend pretty high. I know while you guys stay out of rate case that it's not really a key concern, but I'm wondering if you have any color on what you will do to potentially bring down that equity layer.
I think our strategy right at this moment is that that higher equity layer allows us to use our debt and future debt on the balance sheet in order to deal with anything that does come our way. As you saw, we just borrowed some money to both reprice some outstanding debt at a little better rate, and then also give us a little bit of operating room in the near term. I would say that's the primary plan would be that we'll be able to access the debt markets without driving us directly to capital, the way you're hearing a lot of companies are having to hit both at the same time. We'll have the ability to grow the debt side of things without really any impact on equity. I think that gives us a bit of an advantage.
A further line is, as you saw, that we just did a 30-year bond. Most of what we've done the last few years has been pretty long in tenor. We also have opportunities that, should the rates start going up, we have ability to move across the spectrum in term of how long our debt is. We think we're poised pretty well if we do need to bring capital, that we can do it in a pretty cheap way.
Got it. I should think of it as dry powder.
That's a good way to categorize it. I like that.
Got it. All right. Well, thanks so much. That was all for me.
Thanks, Claire.
Our next question will come from Chris Ellinghaus with Williams Capital. Please go ahead.
Hey, good morning. Good afternoon, gentlemen.
Hi, Chris. It may feel morning to you, huh? You've been pretty busy today.
Feels like tomorrow morning already. Let me follow up on the equity question. Obviously, you just finished a settlement where the ROE was reduced again. You've been in a somewhat of a step-down function through the ADITC mechanism processes over the years. The staff must be pretty comfortable with your equity layer continuing to thicken, but they've been getting a little bit more stingy on the ROE. Is that how they have approached sort of adjusting for the equity layer? You must have had some discussions with them about where you stand on the equity side. Were they comfortable with where you sit today in terms of your equity layer?
Chris, I'll take a stab, there were others in the room that can probably comment. I think it was more a function of as we move to-- I'll start out by saying that this isn't done yet. It's not approved at this point. We've got a settlement agreement, but we'll need the commission to rule on it. The discussions were more around the side that as you went to an indefinite type of a mechanism that wasn't going to be looked at regularly That really locking that in with a rate that was, maybe it's okay today, but it was really set a few years ago, that some consideration for the fact that it could continue on for a period of time was something they were looking for. This, I think, was introduced a bit in our arrangement.
I believe it was the North Valmy settlement, one of our recent one has an element of, in the look ahead, the rate that covers the deferred cost is a little bit different as well. It was more of a theory that as you put things out into time and you're not continually addressing it through a general, that maybe some slight adjustment is appropriate. As you can see, they put it back that if you do have a rate case, it reverts right back to the old plan. It was more in that spirit that the indefinite nature of it made it stay out a while and maybe a slight reduction in for a lower risk and that sort of thing was appropriate.
Sure. They didn't have any concerns about the continuing growing equity layer at all?
That wasn't part of the discussions.
No, really. Chris, this is Darrel. It really kind of focused on what had been being granted in with others. Given the fact that we haven't been in for a while, so it was an opportunity to kind of reset based on what others had done. Recognizing too, that with the taking the timeframe off of the extension, the potential for us to stay out too. I think it was just an opportunity. I don't think necessarily equity layers was necessarily a component of the discussion. It was really more about what would be the appropriate equity number if you were going in today. That's what it was based on.
Okay. The sort of unusual level of Bridger earnings this quarter, what was that related to? Did it have anything to do with having good weather?
You could argue it's probably somewhat impacted by that, because what happens is they are solving to an annual number, but they are solving it with actual operations of the plant. As the plant maybe doesn't work exactly like a plan that was set a few months earlier because we have a lot of water and we run things differently, you get different answers. It's a perennial issue that we've actually considered whether there's accounting approaches that we could somehow smooth it. It happens year to year. That's why when it does move off of a number we've seen in a prior year, we try to explain it. We try to say, "Don't necessarily bank that," because the way the thing will work is it should correct itself in one of the later quarters of the year.
If you look back the last few years, the annual numbers have all been very close. You just have to keep that in mind as you're looking at what numbers you've got in second, third, and fourth quarter.
Sure. Okay, one last question. Looking at slide 12, it's got me thinking that, is this about the best set of circumstances that you could have for your agricultural customers, to have good water storage, but maybe below normal precipitation, but expecting warm temperatures? Is this like the perfect storm for you?
If you're talking from the utilities perspective or the farmer perspective, I think you're right. Given the weather forecast, first of all, it allows them to get in the field a little bit earlier. That's good news. I think the farmers know that we've got They had, I think, a heads-up generally early on that we're going to have good water going into this year. That was sort of the messages that were out there. With the weather the way it is shaping up, it should allow for a long growing season. Then at the same time, with adequate water, so if you're a utility selling energy to pumpers, yeah, from that standpoint, the potential is there to sell energy early to these guys. Yeah, from our standpoint, it could set up that way, but we've also seen these charts go against us, too.
It's a current look at what the weather appears to look like. Yeah, it could be a good irrigation season, which could then translate into a good farming situation, too.
And Chris, the last couple of years, that's been a part of our equation that hasn't been quite as good as we'd hoped. It hasn't really hit plan, I think, for a couple of years in terms of the irrigation load. We like how this looks, and we would be happy with normal if it came out that way, but we'll see how it plays.
Right. Yeah, I'm just thinking that this might be an improvement over your irrigation situation the last couple of years.
Yeah. No, it looks good. It's just having been a hydro company for a long, long time, we know that weather is fickle at times. We'll keep an eye on it. Let's put it that way. Call us when the next call happens if it's 110 degrees and it will have played out like this. We've had some hot Junes and Julys here.
Okay. Well, thanks for the color. I appreciate it.
Okay.
Thanks, Chris.
The final opportunity, please press star one to signal for a question. We'll pause for just a moment. That concludes the question and answer session for today. Mr. Anderson, I will turn the conference back over to you.
Thanks, Allison, and thank you all for participating in our call this afternoon. We appreciate your continued interest in IDACORP. Just as a reminder, we will be hosting our 2018 annual meeting of shareholders on May 17th at IDACORP's headquarters. We hope that you all have a great rest of the day and get to catch up on some sleep maybe with all these calls today. Thanks, guys.
That concludes today's conference. Thank you for your participation.