Avista Corp (AVA) 2002 Q3 法說會逐字稿

Good morning, and welcome to the Avista Corporation’s third quarter earnings conference. All lines will be in a listen-only mode until the question-and-answer session of the conference. Today’s call is being recorded on behalf of Avista. If you should have any objections please disconnect at this time.

I would now like to turn the call over to Mr. Dave Brukardt, Chief Communications Officer and Vice President of Corporate Relations and Strategic Planning. Thank you, sir, you may begin.

Good morning, and welcome to Avista’s third quarter 2002 earnings conference call. Avista’s earnings were released pre-market this morning.

With us here today in our offices in Spokane are Avista Corp. Chairman, President, and Chief Executive Officer, Gary Ely, our Senior Vice President and Chief Financial Officer, Jon Eliassen, and newly appointed Senior Vice President, [Malon Malquist]. During next week’s Board meeting Malon is expected to be named our Chief Financial Officer.

As we begin this morning’s conference call, I will caution you that during today’s conversation we will be making forward-looking statements that involve risks and uncertainties which are subject to change. I would direct you to Avista’s latest forms 10-K and 10-Q filed with the SEC for reference to the various factors which could cause actual results to differ materially from those contemplated, to the extent those factors are not discussed on the call.

This morning, Gary, John, and Malon will talk about the forward progress that Avista has made during the quarter despite the continued changes in the industry. As Avista continues to align and focus its strategies on improving the company’s core energy businesses.

At this time, I will turn the conference call over to Avista Chairman, President, and CEO, Gary Ely, for his opening remarks.

Thanks, Dave. Good morning, everyone. It’s a beautiful morning here with the temperatures in the teens, and the only thing that would make it any better is if we had better financial reports to give you.

We reported a net loss of five cents per diluted share for Q3 of 2002. Our performance reflects a number of issues. This quarter’s earnings were impacted significantly by the reduced net income primarily from Avista Energy and also from Avista Utilities.

Compared to last year revenues are down. Revenues for Avista Utilities were reduced primarily due to decreased wholesale energy revenues which were offset by increased retail electric revenues. John Elias will discuss this further in detail in a moment.

Even though the third quarter is typically the Utilities’ weakest quarter our cash flow situation has improved this year compared to 2001. During the past year we took significant steps to improve our cash flow by aggressively managing our costs, successfully working through regulatory issues, and paying down debt.

Additionally, we are continuing to see our deferral balances decline. Year-to-date deferral balances for both power and natural gas has been reduced by almost $90 million. All of these efforts are helping us to restore our financial stability. We’ve also made substantial progress in refocusing our business on core fundamentals, and are taking the right steps to improve our financial performance.

We expect greater stability in Avista Utilities’ future financial results due to the regulatory cost recovery tracking mechanisms now in place for both our electric and natural gas operations in all the States we serve. These mechanisms allow Avista to periodically recover or rebate to customers the changes in electric and natural gas commodity related costs. An energy recovery mechanism, or ERM, approved in Washington was implemented in July and set a base energy cost. To that extent that the company’s actual cost varies from this cost the company recognizes the expenses or receives the benefits from the variance outside of this range.

For 2002 because the ERM was implemented mid-year this amount was prorated to 4.5 million. The amount will be nine million in 2003, and in future years. During the third quarter Avista recognized the full 4.5 million expense for 2002, reducing earnings in this reporting period. The majority of these energy costs were the result of higher priced gas contracts which provided fuel for our gas turbine generators.

Now that we’ve met this amount energy costs exceeding the 4.5 million are shared on a 90/10 basis. Ninety percent of the energy cost differences will be deferred for later rebate or surcharge to our customers, and 10 percent will be an expense or a benefit to our customer shareholders. This framework allows Avista to recover a large amount of the costs related to energy contracts signed during peak energy markets. We knew this would result in losses during the early periods, but we believed this was acceptable. It provides recovery of the large majority of our costs, and positions us to benefit in later years.

In Idaho we’ve had a power cost adjustment mechanism, or PCA, in place for several years. The 90/10 sharing rule applies to all energy costs. Unlike Washington there is no range limit that needs to be met before the 90/10 rule applies in Idaho. Earlier this month the Idaho Public Utilities Commission issued an order extending a 19.4 percent PCA surcharge for an additional 12 months. The extension allows Avista to recover another 23.6 million of the remaining 37.8 million in deferred power costs that we incurred to serve our Idaho customers during the peaks in the energy crisis in 2000 and 2001. The IPUC set-up an annual review process to evaluate our remaining electric surcharge as we work down our deferrals in Idaho over time. The current Idaho surcharge will be reviewed again next October, and we expect that it will be treated favorably.

While we’re on the subject of cost recovery tracking mechanisms, we’re now fully recovering all of our existing natural gas deferrals. Therefore, our natural gas rates are being adjusted in response to current and projected wholesale natural gas prices. Avista Utilities has requested price reductions in Washington, Oregon, Idaho, and California. The Oregon Public Utility Commission has approved the rate decrease. Decisions are still pending in the other States.

On the power generation side of our business we continue to work with the manufacturer to replace the fire damaged transformer at the Coyote Springs Two Plant. The start-up date for the 280 megawatt gas-fired combustion turbine in [Bordman], Oregon is now projected for the first quarter of 2003. In the meantime we have adequate resources to meet our utility customer’s needs, including our own generation and short-term power contacts. Avista owns half of the project and there are a few, very few, capital expenditures remaining.

In Montana we continue our active opposition campaign to protect our 550 megawatt [Noxon] Rapids Dam from any seizure that would be allowed under Initiative 145, the Montana Hydro Security Act. Voter polls to date are running in our favor. The voters will decide at the election in November. We will keep you informed.

Switching gears we continue to provide information to the Commodities Futures Trading Commission and the Federal Energy Regulatory Commission as they conduct investigations into the Western energy market activities. A [FERC] administrative law judge was assigned in September, and a procedural schedule has now been established in the FERC case. Last week, several members of the FERC staff visited Avista headquarters in Spokane as part of the review process. We are fully committed, and have been since day one to working with FERC and the CFTC. We look forward to concluding these processes as soon as possible.

To some extent, regulatory and political uncertainties have affected Avista Energy’s results during the third quarter of 2002. Trading volumes are down. There is less volatility in the Western wholesale energy markets. And there are fewer credit-worthy counter-parties now participating in the electric and natural gas wholesale trading markets. These factors have had a combined negative affect on Avista Energy’s Q3 earnings, and depending on how long these market conditions continue they could impact Avista Energy’s potential earnings going forward.

Even in the face of these market conditions Avista has succeeded in delivering its tenth consecutive positive earning contributions this quarter. While the current market conditions have reduced earnings relative to performance in prior quarters we believe this demonstrates how well we’ve managed this business. Our team’s experience and knowledge of the Western markets differentiates Avista Energy from the other energy trading and marketing businesses. Avista Energy’s asset-backed trading around gas storage and transportation optimization, combined cycle combustion turbine optimization, and long-term electric supply and transmission contracts collectively contribute to the stable performance of this business.

As an example of Avista Energy’s asset management expertise, we recently were awarded a three-year contract extension of our relationship with Clark County PUD to assist in gas purchasing, gas transmission optimization, and heat rate optimization of their combined cycle generation plant. This represents Avista Energy’s continued efforts to leverage the expertise of our team at Avista Energy and the management of our customer’s assets.

Regarding our information and technology businesses, we’re continuing to make progress, improving operating performance and cost reductions at both Avista Labs and Avista Advantage. During Q3, for example, we narrowed the focus of Avista Labs and reduced its work force by an additional 25 percent. Our fuel sell business continues to be ahead of its milestone plan for the year and under-budget. Our fuel sell research efforts have been scaled-back and focused, while the 45 remaining Avista Labs’ employees and our two contract manufacturers concentrate on making and selling fuel sell products that the market wants today.

Avista Lab has three commercial products, three distribution channels, and recently added a key supply agreement with 3M. Just last week we announced that Avista Labs secured its third distribution channel agreement with SGS Future in Italy. This firm will purchase Avista Labs’ fuel sell products over the next two years and will sell them to its customers in Italy.

At Avista Advantage our facilities management business continues to improve margins, reduce costs, and grow revenue, while adding new customers. These include Dow Jones, K-Mart, and Hard Rock Café, adding to our strong base of North American clients. The Advantage business will be cash flow break-even early in 2003. A few months behind plan, but still on an acceptable path. Due to the current weaknesses in the economy it has caused a slowing in top line growth.

In the midst of the issues facing our nation, our economy, and our energy industry we are making progress in executing our strategy. The ERM in Washington and the PCA renewal in Idaho have allowed us to reach our goal of implementing regulatory mechanisms that allow for future electric cost recovery. Coyote Springs Two was included in the Washington rate base. The completion of this project in 2003 plus hydro upgrades and other small generation projects will put us in a position where our company-owned resources will exceed our projected customer needs.

We’ve maintained strict controls, managing loads and resources, and we remain a low-cost provider of power. At Avista Energy we’ve been able to maintain positive earnings even during continued challenging market conditions. We are delivering results.

Here to discuss our financial results in more detail is Jon Eliassen. As you know, Jon is retiring soon. Before I turn the call over to Jon, I want to take a moment to say ‘thank you’ to him. For more than three decades, Jon, you have dedicated yourself to making this company the strong, low-cost energy provider it is today. Thank you for your commitment to Avista. Jon.

Thanks, Gary.

Today we are reporting third quarter consolidated revenues of 189.8 million, and a loss of 2.2 million or five cents per diluted share. For the equivalent quarter last year Avista reported revenues of 232 million, and a loss of 33 million or 69 cents per diluted share. The 2001 loss was due to a 38.4 million after tax loss, or 81 cents a share related to the divestiture of Avista Communications.

As we look at our operating results, as Gary mentioned earlier, the biggest factor impacting Avista’s earnings this quarter was the reduced net income of Avista Energy. At Avista Utilities revenues decreased by 13 percent during the third quarter of 2002 year-over-year. But the primary reason for the reduced revenues was a decrease in wholesale electric revenues which were partially offset by increased retail electric revenues. The decrease in wholesale sales reflects reduced wholesale sales volumes from contracts from prior years that have expired, and a decrease in wholesale prices, as well.

Additionally, during the quarter we recognized 4.5 million in energy costs under Washington’s energy recovery mechanism. And while we are reporting a loss for the quarter, we do see significant progress towards the company’s financial recovery, and we continue to improve our overall financial health. We are managing the costs that are within our control, as well. In fact, capital expenditures and operating and maintenance expense remain under-budget for the year.

Strong cash flows from Avista Energy and Avista Utilities in 2002 have allowed us to repurchase high cost debt. So far this year we have repurchased approximately $200 million of high cost debt. The debt reduction will save us at least 10 million of interest expense between now and the end of 2003, and significantly reduce the amount of debt that matured in the next 12 to 15 months.

Our deferred power expense levels continue to fall. At the end of the third quarter of 2002 our total deferred power costs were $154 million composed of 116 million in Washington and 38 million in Idaho. During the Fall and Winter months deferral balances will be driven-down at a faster pace because of higher customer usage. Even so, we expect it will be 2008 before our Washington Electric deferral balance is fully recovered, and early 2006 in the State of Idaho.

As we update our financial outlook we are reaffirming our 2002 consolidated corporate earnings guidance of 60 to 70 cents per diluted share. However, last week the Financial Accounting Standards Board voted to change the accounting rules for energy trading activities, with the majority of changes effective beginning the first quarter of 2003 for this company.

As a result of these accounting changes Avista Energy will account for contracts that meet the definition of a derivative using mark-to-market method of accounting under SFAS 133. Contracts not meeting the definition of the derivative will be adjusted to their cost basis, and prospectively accounted for under the accrual method. We are now in the process of evaluating all of Avista Energy’s contracts under the provisions of SFAS 133, and we are determining the impact this change will have on the company’s financial reporting and its earnings. We’ll need to factor these issues of the FASB changes into our outlook for 2003, as well.

So with this in mind and based on what we now know about the uncertainties surrounding the level of activity and the price volatility in the wholesale energy markets we are revising consolidated corporate earnings for 2003 to be in the range of 80 cents to $1 per diluted share.

As I wind-down my career at Avista it is encouraging to see the company to continue to return to financially stable ground. And this will be my last conference call with you. And so, as I reflect on my career at Washington Water Power and Avista I’m reminded of the many strong relationships that have been built over the years. It has been a pleasure to work with all of you, and I look forward as a shareholder to watching the company continue to regain financial strength.

One of the key people who will help accomplish that, of course, is my successor, Malon Malquist. Malon has joined Avista just recently as Senior Vice President. He is a highly respected industry professional who has spent 24 years working with the utility companies in the Western United States, and worked with me and a number of the others of us over the last eight years in some degree. His resume includes key leadership positions at San Diego Gas & Electric, Sierra Pacific Resources, and most recently, the [Truckie] Meadows Water Authority. Some of you may have had the opportunity to meet Malon earlier this month when we were in New York celebrating Avista's 50th anniversary as a New York Stock Exchange listed company.

I am pleased now to turn the conference call over to Malon Malquist for a few words. Malon.

Thanks, Jon. And good morning, everyone. I probably know most of you from my past experience in the utility industry. I am pleased to be back, and I’m looking forward to working with all of you. I’m very pleased to be at Avista, and I’d like to tell you briefly why I’m here, my impressions of the company after one month on the job, and what my focus will be to help the company be successful.

I came to Avista primarily for three reasons. First, I see a company with significant opportunities. Yes, there are lots of challenges ahead for us to work through, but I do see great up side potential. Second, I had a desire to work with Gary Ely and the Management Team that he’s assembled. I’ve known Gary for eight years, and I know him to be a person of high integrity with a strong desire to be successful, and I believe that we’ll work very well together. Third, I’m convinced that my personal skill sets and experience will be of value to Avista in helping the company to be successful.

Today is my one-month anniversary, and I’d like to share with you some insights that may be valuable to you from an Avista newcomer with experience at other utilities. The company has made significant strides to restore its financial health. We had some severe liquidity problems and issues last year. Through a combination of cost-cutting and rate relief our cash flow is now positive and getting stronger. Perhaps not as much as we’d like it to be, but enough to repurchase approximately $200 million of high coupon debt. I must say, I am glad that we bought them last year and not this year. We have no current need to access the capital markets for at least the next 12 months. Our debt ratio is now below the industry average at about 56 percent, down from just about 60 percent at the end of 2001. We will continue this trend to bring the debt ratio down closer to our goal of about 50 percent.

Avista adopted aggressive capital and operating budgets last year, and we are under-spending both budgets. We are allowing the capital budget to grow a bit for 2003, but it will still be well below historical levels. Our 2003 operating budget is facing upward pressure from pension, insurance, and healthcare costs, but we are holding the line on other increases to make sure that we meet our earnings commitments. We are in the process of planning for the future, and as part of that work will conduct a benchmark study to determine where we might take additional costs out of our business in a more strategic fashion.

Avista has excellent regulatory relationships at the State level, and those relationships served us very well last year, as opposed to some of our contemporaries in the West such as the utilities I’m familiar with in California and Nevada. We still have some work to do, however, to achieve one of our goals which is to earn a fair rate of return in all of our jurisdictions. Unfortunately, we cannot do this overnight or even within the next year. It’s a longer term process due to the regulatory compacts we have in place which allowed recovery of most of our fuel expenses contracted during very difficult market conditions, but make it difficult for us to earn an appropriate return during the next year or two.

We are also living in a fairly depressed region of the country. Our unemployment rate is running over six percent. But as the economy starts to turn we expect our revenues and our profitability to improve.

Finally, we have some subsidiary issues to address. Gary has put the subs on a pretty short leash. Both Labs and Advantage have made progress this past year, and are meeting most of their targets. Gary has asked me to get quickly up-to-speed on the subsidiaries and advise him on appropriate strategies. We clearly need a plan to see shareholder value created from being in these businesses.

So where will our focus be? We will continue to focus on improving cash flow and earnings. Our goal is to strengthen core earnings to be more predictable and to be growing. To do so, we need to earn our authorized rates of return and to operate more efficiently. We will work to restore our bond rating to a strong investment grade. Clearly, this requires resolution to the FERC issues, followed by consistent performance on our part. This won’t happen quickly, but I am convinced that it will happen. And that the Management Team and all of the Avista employees are committed to making it happen.

I’ll now hand things back to Dave Brukardt.

Thanks, Malon.

We will now open this call up to your questions. I would like to remind any members of the media who may have questions to please contact [Maureen Ju] at 509-495-4174. Laura, we’re now ready for our first question, please.

Thank you. (Caller Instructions.)

Your first question comes from Mark [Reichman]. Please state your company name.

A.G. Edwards. Does the 60 to 70 cent 2002 EPS guidance exclude or include non-recurring items such as the first quarter nine cent per share related to goodwill impairment, and the second quarter five cent per share charge related to the lawsuit settlement?

Good morning, Mark. I’ll have Jon answer that. Go ahead.

Yeah. Now, Mark, everything is included. That’s a fully consolidated bottom line number for the year. No adjustment.

Okay, thank you.

Thank you. Your next question comes from Paul [Debas]. And please state your company name.

Value Line. Malon, could you elaborate on, you know, just what your – how badly you’re under-earning at the utility? Whether that’s true for all jurisdictions in both electric and gas? And also, where will capex wind-up this year? What’s the ’03 forecast? And what are your debt reduction plans for 2003?

Okay, Paul. Let me start, and I’ll ask Jon to help me with that a little bit also. We are under-earning in most of our jurisdictions. And actually are in the process of filing some rate cases to deal with the under-earning. If we were earning our full authorized rate of return we would be earning somewhere north of a dollar, probably in the $1.10 plus range at the utility business. And so, we do have plans to file for rate changes in those jurisdictions to true-up our rates of return.

Regarding the bond, the debt retirements, we’re looking at roughly an additional 30 million as I recall next year, Jon, in terms of additional debt retirements?

Yeah, let me jump-in, Paul, on that. There’s probably, there may be 50 to 60 million of debt that has to be, that matures between now and the end of ’03 that still needs to be refunded. But we have significant cash flow still from Avista Energy both in Q4 of this year, and also we expect to have significant positive cash flow from both businesses, at Energy and Utility, next year to be able to retire that debt. And so that’s not a concern.

Your question about under-earnings, I think in all fairness and Malon mentioned some of it, near-term versus long-term. Because, as you know, in the third quarter we did reflect the 4.5 million of additional costs in the State of Washington. And that is hitting our rate of return in the near-term. The settlement in Washington earlier this year will provide for some additional generation costs, primarily the cost of gas for gas turbine generation to be flowed-through to expense in ’03 and part of ’04 which will continue to cause us to under-earn in that 18 to 20 month period, compared to the full earnings that we should be seeing. And so that also is going to impact us near-term versus longer term. And I think Malon alluded to that in his comments earlier.

You also asked about capex. Originally our targets this year were capex of $79 million, including the completion of Coyote. We’re running slightly under that number today, and may end up under that number by the end of this year. Next year, we’re looking at preliminary numbers, including generation and some transmission work, that would put capital expenditures in the $90 to $95 million level. But still these are all couched within a plan that does not require any external financing to complete between now and the end of ’03.

And those capex figures are total company, not just the Utility?

I’m just giving you Utility numbers, but there’s very little capex that goes into other businesses.

Paul, it’s basically in total.

Okay. And do you have any range of, you know, what ROEs are actually earning on the utility businesses now?

Well, currently, Paul, because of all of the adjustments this year and because of the settlements we’ve entered into those numbers are pretty long, pretty low in the current period. The allowed rates, returns on equity, though, are in the 10 to 11 percent range in all jurisdictions.

I mean if you normalized that you’d still be having a single-digit return in most of your jurisdictions?

Again, because of the settlement in Washington and the fact that we will be, you know, we will be impacted as we were in Q3 by some additional gas for turbine generation costs, we would be under-earning, yes.

All right, thank you.

Thank you. Your next question comes from Bobby [Adameka]. And please state your company name.

[Dennison Associates]. Can you hear me good?

Good morning, Bobby. How are you?

Good morning. I have a few questions, but first just wanted to also pass along my thanks to Jon for all of his work over the years. My questions had to do, I guess, mainly on the Avista Energy side. But first, in terms of guidance for next year could you break-down the 80 cents to $1 in terms of the different segment contributions?

I think, Bobby, what we’ve done is we’ve taken a look at certainly energy, and we’ve looked at the others and made adjustments to all of them based on what we know. We’ve already mentioned that we’ve got the $9 million gap at the Utility from the gas contracts that we will actually eat next year. We know that band will be filled before we share 90/10. That’s an impact. And certainly the markets, and you know, if you have a crystal ball it’d be interesting to see what we thought we would be doing next year at this time around our wholesale markets, because there’s very little liquidity right now. And consequently, we’re, you know, doing the things that we have set-up as a basis. And if that continues through next year that’s reflected in our ability to get to where we’re at.

Okay, let me, I guess, try to ask it this way. Starting with Avista Energy, in the past you’ve said you’re kind of looking at, you know, a $20 to $25 million contribution from that segment. And given what you’ve just said in terms of, you know, the uncertain outlook for the wholesale markets, would you be still comfortable with that sort of contribution? Or you know, would you expect that sort of level to be reduced going forward?

Well, I think that’s what I just said. If you look at the wholesale markets I would expect that to be reduced. If you look at this year it might be a fairly representative year of what next year could be if things don’t change.

Okay, fair enough.

If that helps, yeah.

Could you talk a little bit about how much cash is at that unit currently, and just the year-to-date update on how much cash has been up-streamed to the parent for this energy?

Yeah, why don’t I have Jon cover that. He knows the numbers.

Yeah, thanks, Gary. Bobby, at the end of the quarter you’ll see a number, a consolidated cash number of which about one, plus or minus 190 million is cash at Avista Energy. And so far this year we’ve up-streamed roughly, well, between $80 and $90 million. We have a quarterly dividend, and then we have special dividends from time-to-time. And it is our intent to move some additional cash, not a significant portion, but some additional cash in Q4.

Okay. And in terms of the impact of higher pension and insurance costs, I’m sorry if I missed it. But can you quantify what you expect in terms of a year-over-year increase in ’03? And in that specific category?

We have not yet, Bobby. And I don’t know that there’s a number that we can really give you today on those specifically.

Okay. And I guess lastly on Coyote Springs Two, you talked about, I guess a new start-up date target is sometime in the first quarter. Can you just kind of go into a little bit more detail in terms of what needs to take place between now and then from an equipment standpoint? Are there, I guess, tests that are being run, and milestones kind of along the way that we could look to in terms of what you’re going to be expecting from the manufacturer?

Yeah, Bobby, the key is getting the transformer here. You know, we had the fire at the original transformer. It’s de-tanked in L.A., being repaired. We asked them to build a new transformer. They did that. It failed its testings about a month ago. They’ve gone in and repaired that transformer. It will actually be tested next week, and assuming the testing goes appropriately it will be on a boat shipped to Houston, and then railed up here to the site, getting here probably mid-January.

We’ve done all the testing on that unit that we can do. It’s been fired. The unit has been rolled. You know, everything that you can do until you can hook a load to the other end of it. And we need the transformer to do that. And so that’s why we’re waiting. We’ve basically reduced all the staffing at the plant down to a very minimal amount, and really aren’t spending a lot of dollars there. Basically, hardly any dollars there until the transformer arrives. And then we’ll do our final testing, and heat it up and get it online hopefully before the end of the first quarter.

Okay.

In fact, just as a side note on that, I met yesterday with the President of the International Group that oversees not only the transformer construction, but all of their other [T&V] work. And when he got back to Paris today he was going to call the plant and make sure that they were rolling on that.

Okay. And I guess, well, I had one more question. In terms of the contribution from the information and technology segment, would you expect, I guess, year-over-year the loss from that segment to be reduced given the progress that you’re making both on the revenue side at Avista, Advantage, and the cost-cuttings on both units?

Very definitely, Bobby. If it doesn’t happen we won’t be in the business.

Okay. Fair enough. Thanks, again. And thank you, Jon.

Thanks, Bobby.

Thank you. Your next question comes from Sam [Brothwell], and please state your company name.

Hi. Merrill Lynch. Good morning, everyone.

Good morning, Sam.

Hi, Sam.

Just kind of a following up on some of the points that Bobby raised. And if I heard correctly, when you talked about your ’02 view of 60 to 70, you have some negative one-time items in there of, was it nine cents and five cents?

That’s correct.

Okay, so actually on an operating basis you’d be about maybe 10, 15 cents higher than that? And as we look into going into ’03 where, I know there’s some negative things that factor in such as pension costs, and this nine million higher power costs. But still you’ve got a – you would have a full year of your rate increase. And I’m just kind of sitting here scratching my head a little bit, and I’m just not getting there. It would seem that you should still be able to be a little bit stronger than that.

And just a follow-on to that, can you give us any idea relative to this $9 million cost that you’re absorbing in the [indiscernible], or what was the, what is the power cost benchmark that’s included in your rate structure now that we [indiscernible] off of to get there? It’s probably kind of a loaded question.

Sam, let me kind of start backwards here. I think when you talk about power cost benchmark, in Washington I think the costs that are in base rates including transmission is roughly three cents a kilowatt hour or $30. So as costs vary around that plus or minus three cent level that’s when you will either have increased expense or increased benefit to the company after you get to the $9 million debt [band].

Okay.

That’s part of the answer. The, I think the other part of the answer is right now in the outlook for next year there is so much uncertainty about the size of energy marketing and trading markets, and what impact some of the ongoing issues are going to have in the market on counter-parties that we’re being very conservative in terms of what we’re looking at, in terms of availability of trading activity or marketing activity. Obviously, a lot of what Avista Energy does today is market from specific assets. And a lot of that product is sold directly to the end user utilities. But because the entire market is being impacted by liquidity and reduced activity we’re trying to be pretty conservative in the outlook for at least the next 12 months or so.

I think, Sam, you know, I’m always the eternal optimist, and – but I think, you know, Malon and Jon certainly ground me. And we are being conservative. I mean if you look at what the unit, our Lancaster unit which Avista Energy has full control of both the inputs and the outputs, both the gas-in and the electric-out, it basically during the third quarter sat idle. Now, if prices come back where we can start running that and things, it will have a positive impact on what we’re doing.

But you know, I – in looking at what’s going on out there, and what I think will still go on with some companies in the industry, I’m just concerned about getting -- I’m not becoming pessimistic, but I guess I’m being realistic, but I think you’ll still see a very slow and sluggish wholesale power market probably for the next, you know, anywhere from six to 12 months. And I – it may be longer than that. But at least at this point we’re being very conservative on that side of the business.

I guess maybe if we look at it another way we’re I think generally expecting that the drag from Labs and Advantage is going to drop-off rather significantly next year, or as Malon indicated, you would not be in this business. But just kind of doing some quick calculations. It looks like you would be expecting Avista Energy to roughly offset that lower earnings drag, and that really your [$8] guidance is driven principally by the utility. Is that kind of a fair way to look at it?

Well, Sam – this is Malon – I think that we are looking at energy roughly being about the same, year-over-year. We’re hoping to reduce pretty significantly the drain that the subsidiaries have. We are seeing upward pressure on our expense categories, and remember, we were operating under some pretty extreme conditions last year in terms of cost-cutting that went on.

This next year we’re going from hitting a dead band of $4.5 million to, we know we’re going to hit the $9 million, and so there’s an additional $4.5 million of costs. We have additional costs associated with Coyote Springs Two, maintenance – now, those are covered in rate so we’re getting the up side on the revenue, but we’re also seeing the additional expenses of roughly $3 million in O&M.

And then we don’t know exactly the impact of our insurance costs and our pension plan costs, but as everybody has been seeing with the poor stock market returns, unfortunately, that has an impact on pension and insurance. Our insurance carriers, liability insurance, for example, is telling us it’s going to go up between 70 and 100 percent year-over-year. And those are tough to absorb. Quantifying that, I think the pension and insurance probably adds at least an additional $5 million year-over-year to our expenses. So not insignificant challenges for us to try to absorb. And we can absorb some of those things, but we can’t absorb all of those things without some rate changes in the future. And how quickly those will come remain to be seen, and for us to work-out with our regulators.

Okay, thanks a lot.

Thank you. Your next question comes from James [Palessa]. And please state your company name.

D.A. Davidson & Company. Good morning.

Good morning, Jim.

Good morning.

This guidance for 2003, is this the first time you’ve given guidance?

Yeah, it is.

And had you given guidance earlier, had you given guidance earlier, how much of the lower level of guidance might there have been because of what you are building in for FAS 133?

Jim, this is Jon. Let me answer that. We’re not, right now in the guidance going forward we’re really not building in anything in ’03 that relates to that. And I don’t know that there’s going to be a significant impact directly on us. I think the bigger impact may be just in the market, in the uncertainty in the market, and the level of [creating] activity and marketing activity going forward with counter-parties.

The 80 cents to $1 implies what kind of return on your utility and equity?

The …

Not as high as we’d like, Jim!

Jim, I think we’d have to give you a pretty broad brush on that, I guess at this point in time, if we said anything at all. But certainly it’s going to be in the – it would be less than eight percent ROE, maybe less than seven percent ROE at that level. But again, remember what Malon mentioned, that these are near-term issues that some of the expenses need to be dealt with in future rate increase requests.

And you’re now reporting your revenues from Avista Energy on a net basis rather than a gross revenue basis. By my calculations that removes about a billion dollars out of this year’s revenues, and about $4 billion out of the first nine months of last year. Is there a way to get those historical numbers so that our earnings models are no longer non-sensical?

Yeah, Jim, there will be a table in the Q, and it will probably be pretty transparent on the transition so that you’ll be able to see before and after numbers, and be able to run your models, once we get the Q filed in the next couple of weeks.

Will that be by quarter, or just for the nine months’ period?

It should be both.

Very good. That will help. Thank you.

Thank you. Your next question comes from Thomas [Mockler]. And please state your company name.

General Electric. Good morning. I’m wondering if you can update us on your liquidity position, and give us some guidance perhaps on what we might expect for cash flow for ’03. And do you have any, you mentioned that there are no maturities in the next 12 months. Any non-bond type calls on cash related to collateral or other special type things we may not be anticipating? Anything lurking in the weeds along those lines?

Tom, this is Jon. I don’t think there’s anything lurking in the weeds. And there are some maturities that still come next year. As I said, there’s 50 or 60 million of debt that matures at various times in ’03. But it’s our anticipation that cash flow covers all necessary interest payments, dividend payments, the capex program that we talked about earlier, at the level we mentioned, as well as most of the maturities on the debt. And you know, at any point, you know, cash flows don’t always match quarter by quarter, but I think overall we’re pretty comfortable that the cash generated by the consolidated company over the next year pretty much matches those requirements.

All right, so identically it’s pretty much?

I’m sorry?

So if I’m trying to get a cash flow number I just add them all up and that’ll be the answer?

Well, it depends on how you look at cash flow. We always have a problem, you know, is it cash before interest, or after interest payments and EBITDA equivalent. But I think the answer is you can probably work it as easy from your end. If you have further questions, though, give Dave or Angie a call.

Okay, thank you.

Thank you. (Caller Instructions.)

Your next question comes from Neil [McGaddy]. And please state your company name.

Morgan Keagan. Actually this is [Tray Brown], his associate. We’re trying to get out of the queue. Our question had been answered. But thank you, anyway.

Thanks, Tray.

Thank you. And at this time we have no further questions.

Ladies and gentlemen, thank you for joining us today. An instant replay of today’s conference call will be available soon, and remain accessible through 11:30 a.m. Eastern Time this Friday. You can call 402-220-4745 to listen to the instant replay. The web cast of today’s call will be archived for one week through 8 p.m. Eastern Time on November 6th. To access the web cast archive please go to Avista Corp.’s home page at www.avistacorp.com. And again, thank you for joining us today, and have a great afternoon.

Thank you. This does conclude the Avista conference call. We thank you for your participation. 1