Avista Corp (AVA) 2002 Q4 法說會逐字稿

Good morning, and welcome to the Avista Corp. Q4 2002 and year-end earnings conference call. All lines will be in a listen-only mode until the Q&A session of the conference.

Today's call is being recorded. If you should have any objections, please disconnect at this time.

I would now like to turn the conference over to Mr. Dave Brukardt, Chief Communication Officer and VP of Corporate Relations and Strategic Planning. Thank you, sir. You may begin.

Thank you, and good morning. Welcome to Avista's fourth quarter and year-end 2002 earnings conference call. Avista's earnings were released pre-market this morning.

With me here today in our offices in Spokane are Avista Corp Chairman, President, and Chief Executive Officer, Gary Ely, and our SVP and CFO, Malyn Malquist. Malyn was named our CFO during the company's November board meeting.

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 these factors are not discussed on this call.

This morning, Gary and Malyn will provide a progress report for the quarter and for the year, and an outlook for 2003. Through (ph) 2002 we've taken additional strides forward in aligning Avista's strategies and focusing on our 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.

Avista recorded substantial progress this past year in its strategy to restore its focus on the basics. Our two principle energy businesses operated profitably, generating solid cash flows. We took advantage of those cash flows to repurchase $204 million worth of debt, reducing future interest expense and achieving a debt to equity ratio of approximately 55 percent below the average for the nation's utilities and receiving an upgrade in our credit outlook to stable from Standard and Poor's.

With the resolution of an important rate case in the state of Washington, we put in place a mechanism that will enhance the predictability of future earnings. And finally we made significant progress in resolving the federal energy regulatory commissions investigation of Avista's trading practices. We enter 2003 with a commitment to a continued disciplined focus on getting Avista back to the basics. We intend to concentrate our energies on delivering reliable low cost energy, generating enhanced cash flows and continuing our cost containment measures. We do so mindful of the challenges presented by an uncertain economy and equally uncertain weather conditions.

Looking at fourth quarter of 2002, Avista reported net income of 23 cents per diluted share. Our performance reflects a number of factors. The quarter's earnings were impacted by market conditions that reduced earnings at Avista energy. Yet our team at Avista energy turned in its 11th consecutive quarter of positive earnings. Avista utilities delivered increased earnings with improved margin, and reduced interest expense. And for our information and technology businesses, are making progress of holding the line on costs, meeting budgets and achieving milestones.

In 2002 we took a number of steps to improve our financial performance. We also made substantial progress in refocusing our business on our core energy related fundamentals. I'd like to highlight three key areas of progress.

First, chief administrative law judge Curtis Wagner approved a joint motion filed by a Avista in the federal energy regulatory commission staff to suspend the procedural schedule in the pending investigation before the federal energy regulatory commission. And that joint motion, the parties announced that FERC's trial staff investigation found no evidence that Avista knowingly engaged in or facilitated any improper energy trading strategy nor made any efforts to manipulate energy markets during 2000 and 2001. The FERC staff also found that Avista did not withhold relevant information in prior inquiries and that Avista cooperated with FERC's investigation.

Avista and the FERC staff soon expect to file a formal agreement and resolution with Judge Wagner; Which, if approved by FERC, would resolve all issues in the investigation. The parties will request that Judge Wagner certify the agreement to the FERC for approval following the 30-day comment period after it is filed. We are looking forward to reaching final resolution on this important matter.

Our second key story for the year is the aggressive steps we've taken to rebuild our financial health by improving our cash flow, managing our costs, and paying down debt. During 2002, as I mentioned earlier, we repurchased $204 million in higher cost debt and in.Q4 Standard and Poors affirmed its credit rating for Avista and upgraded its credit outlook from negative to stable.

And third, we achieved several favorable regulatory outcomes in 2002 through our interim and prudence electric rate filings in Washington, we received approval to recover $196 million or 90%of our deferred power costs. We were able to reach an all party settlement agreement in our Washington general rate case which included a 19.3% base retail rate increase that contributes to earnings and the implementation of an energy recovery mechanism or ERM. With the ERM in place in Washington, Avista now has the cost recovery tracking mechanisms in place for both our electric and natural gas operations in all states that we serve.

These mechanisms allow Avista to periodically recover or rebate to customers the changes in electric and natural gas commodity related costs. We expect these mechanisms to help stabilize Avista utilities' future financial results.

The ERM in Washington has now been in place for nearly six months. To the extent that our actual costs vary from the base costs set in our last rate case, we either benefit from or absorb the first $9 million annually. Changes in energy costs exceeding $9 million annually are shared on a 90/10 basis, 90% of any variance beyond that level is deferred for future recovery or rebate to customers, and 10% is expense or benefit to our company shareholders. In 2003, Avista expects to recognize the full $9 million in increased energy costs during the first quarter, which will reduce earnings in Q1. The majority of these increased energy costs are related to fuel contracts and will be entered into in the year 2001 for our gas turbine generators. These contracts expire in late 2004.

For the remainder of 2003, 90% of the energy cost differences will be deferred for later recovery from our customers. The remaining 10% will be an expense to our company shareholders. These expectations are already factored into our guidance for 2003.

We knew the ERM would result in recognizing increased costs during 2003 and 2004. The mechanism provides recovery of the large majority of our costs and will provide increased stability for our financial results in the future.

Likewise, in Idaho the power cost adjustment mechanism or PCA allows us to defer 90% of any variance from the base cost. In October of 2002 the Idaho public utility commission issued an order extending a 19.4% PCA surcharge for Idaho electric customers to continue to recover deferred power costs.

As is always the case during this time of year, weather is a major factor for Avista utilities and we're keeping a watchful eye on the situation. During November and December the inland northwest experienced warmer than normal temperatures. According to the national weather service, November temperatures on average were nearly 2 degrees above normal and December temperatures were 6.5 degrees above normal. These warm temperatures reduce the utilities electric loads by 3% for the quarter.

During the month of December alone, electric loads were 7% below normal. Unlike the rest of the country, the month of January has also been a warm one for us; With temperatures averaging more than 6 degrees above normal. Overall, we've had a dryer than normal fall and early winter, too. Our most recent figures so that the snow pack for the Clark Fork river basin is approximately 60% of normal. Current projected natural runoff for the Clark Fork is 60% of normal for 2003. The Spokane river snow pack is 65% of normal and projected run off is 68% of normal for 2003.

With this year's El Nino effect we are not expecting to fully make up the difference in the months ahead, although the effects of El Nino may be starting to abate, at least that's what some of the forecasters are telling us and we're also seeing some more moisture across the region. In any case, even with the expected below normal hydroelectric conditions, Avista has sufficient resources to cover its load requirements, and will choose the most appropriate cost-effective resources to serve its customers' loads. And again, the ERM in Washington and a similar power cost adjustment mechanism in Idaho will allow us to defer for a later recovery 90% of the increased costs associated with these below normal hydroelectric conditions.

On the thermal generation side of our business, we experienced another set back at the Coyote springs 2 plant. When the damaged or when actually the replacement transformer for the original fire damaged transformer was damaged during shipping. The transformer is currently on a rail car headed to Los Angeles for repair by the manufacturer in a U.S. repair facility. Our revised start up date for the 280 megawatt gas fired generation plant in Boardman Oregon is now mid 2003. In the meantime, we purchased replacement power for the Coyote Springs 2 unit. We don't expect a material financial impact as a result of this added delay.

On another note, in November-- excuse me. In November, Montana voters soundly defeated initiative 145, the Montana hydroelectric security act, which would have allowed the state to consider buying a dozen privately owned hydroelectric dams. Of this 550 megawatt [inaudible] dams remains one of our company 's most valuable assets.

Now for some comments about our unregulated businesses. First, Avista energy. Despite continued market conditions and fewer credit worthy counter parties now participating in the electric and natural gas wholesale markets, Avista energy's team was able to maintain its solid performance. We believe its success demonstrates how well we've managed this business. At the same time, we understand that market conditions could impact Avista energy's potential earnings going forward, depending upon the duration of these conditions. Our teams' experience and knowledge of western markets differentiates Avista energy from most other energy marketing businesses. Avista energy's asset backed optimization of combined cycle combustion turbines and hydroelectric assets, long term electric supply contracts, natural gas storage and electric and natural gas transmission and transportation arrangements collectively provide a strong stable base that contributes to the ongoing success of this business.

Our information and technology businesses continue to improve operating performance and reduce costs. Our facilities management business, Avista advantage, continues to improve margins, reduce costs and grow revenue. In fact, revenues at advantage have improved approximately 30% year over year. Processing costs per bill has been reduced 50% with a comparable reduction and overhead costs. Operating cash flow reached break even. I'm happy to say in November and December period, and should consistently be positive by midyear of 2003. We are comfortable with the progress that advantage has made.

Avista labs has delivered better than budget financial performance in 2002, and accomplished all the milestones set for the year. In addition, labs continue to sell products. In fact, they shipped 57 new independent fuel sell systems in the second half of 2002 and a total of 67 kilowatt units for the year. Our fuel cell business continues to strengthen its intellectual property protection, having received 6 additional patents in 2002 for a total of nine patents.

Currently, we are in discussions with potential partners and involved in the due diligence process with multiple parties. Our intention is to own less than 20% of this business by spring of this year.

As we begin the New Year, I am pleased with our progress. It continues to be a challenging time for our nation, our economy, and the energy industry. Through it all, we remain focused on executing our back to basic strategy as we focused on energy and energy project-- energy related businesses.

In the months ahead we will maintain strict measures to control costs. We will continue to take the necessary steps to keep improving cash flow and rebuilding our financial health. And we will continue to manage loads and resources that allow us to remain a low cost provider of power. We will sustain the momentum we built through hard work and dedication in 2002. We remain firmly committed to delivering results.

Here now to discuss our financial results in more detail is Malyn Malquist, Chief Financial Officer and Senior Vice President.

Thanks, Gary and good morning, everyone. Today we're reporting fourth quarter consolidated revenues of $265.3 million, and net income available for common stock of $10.9 million, or 23 cents per diluted share.

For the full year 2002 consolidated revenues were $980.4 million, and Avista 's net income available for common stock was $28.9 million or 60 cents per diluted share. Prior to the cumulative effect of accounting changes related to goodwill required by the financial accounting standards board during the first quarter of 2002, and discontinued operations, we generated 67 cents per diluted share.

We are making significant strides in improving the company's financial stability. We realize it will take time, and we expect our financial situation to improve so that by 2005 we should be much closer to earning our allowed rates of return in all the states we serve.

Our operating cash flow was positive and getting stronger thanks to a combination of cost cutting measures and rate relief. Our 2002 capital expenditures and operating and maintenance expenses were below budget for the year, and we will continue to aggressively manage all costs that are within our control.

One issue that we're addressing is our under funded pension plan. Like many other companies, we're feeling the effects of the languishing stock market. As a result we've been supplementing our pension plan. We don't expect the situation to significantly improve and we're planning ahead for 2003. Currently we expect our pension costs for 2003 to be approximately $15 million. We will expense 70% of this amount, which will impact earnings. Cash flow will also be impacted because we plan to contribute $12 million of cash to the pension plan. These costs and cash requirements are already factored into our guidance for 2003.

Given these significant pension expenses, as well as increasing insurance and health care costs, it will be critical for us to control costs in order to meet our earnings commitments.

We will continue to recover deferred power expenses in 2003. At the end of the fourth quarter, 2002, our total deferred power costs were $155.3 million, including $123.8 million in Washington and $31.5 million in Idaho. There was an increase in the deferred power cost during the fourth quarter, due primarily to lower hydro generation and an unexpected outage at one of the coal strip units in Montana.

Warmer temperatures resulted in decreased loads, as customers used less energy to heat their homes, which in turn reduced a level of deferred costs collected from our customers. If hydro conditions and customer usage continue at these lower levels in the near term, it will extend the recovery period of our Washington and Idaho electric deferral balances.

In 2002 Avista energy and Avista utilities provided such strong cash flow that we were able to repurchase approximately $204 million of high cost debt by year-end. Our debt ratio is now below the utility industry average at about 55%, and that's down from just about 60% at the end of 2001. We're making progress and we'll continue to reduce the debt ratio. Our goal is 50%, and we should be able to make additional progress towards this goal in 2003.

On the subject of Sarbanes Oxley, Avista is in the process of evaluating the requirements of the Sarbanes Oxley act of 2002 and will comply with all new rules implemented by the Securities and Exchange Commission.

One final note; As we mentioned last quarter, the financial accounting standards board has changed the accounting rules regarding energy trading activities. The majority of these changes will become effective beginning in the first quarter of 2003. As a result of these accounting changes, Avista energy will account for contracts that meet the definition of a derivative, using the mark to market method of accounting under SFAS number 133.

Contracts not meeting the definition of a derivative will be adjusted to their cost basis on January 1st, 2003, as a cumulative effect of a change in accounting principle and prospectively accounted for under the accrual method.

Avista energy has evaluated the contracts under the provisions of SFAS number 133 and determined that the initial impact, the cumulative change in accounting principal is expected [inaudible] plus or minus $5 million.

The impact beyond this one time change is difficult to determine because it's based upon changes in market conditions. As we look ahead to 2003, we are trying to mitigate the impact of SFAS 133 to future earnings at Avista energy.

In conclusion, we're reaffirming our financial outlook for 2003 and expect our consolidated corporate earnings to be in the range of 80 cents to one dollar per diluted share. This guidance is prior to any adjustments related to the cumulative changes in accounting principles and includes a range of 60 to 80 cents for Avista utilities, a range of between twenty and thirty cents for the energy trading and marketing segment, and a loss of between ten and fifteen cents per share for the information and technology businesses.

This outlook is based on what we see today regarding the uncertainties surrounding volatility in the wholesale energy markets, our increasing concerns about warm weather, and the lack of snow pack we're experiencing in the Pacific Northwest, and the increased pension expenses just mentioned.

This year our focus will remain steadfast on improving cash flow and earnings so that our core earnings will be more predictable and growing, and on continuing to strengthen our financial position and working to restore our bond rating to investment grade. We anticipate it will take a couple of years to accomplish these goals. Yet, I believe we have clearly identified our strategic focus and have already taken significant steps down the path that will lead us to our destination.

We expect to continue to improve our financial condition so that by 2005 we should be much closer to earning our allowed rates of return in all the states we serve. If you calculate the earnings capacity for the utility, using 11% as our authorized return on equity times our rate base, that reaches approximately $1.25 per share for the utility. Now, we're not yet giving earnings guidance for 2005, but we do want you to understand our potential and the goals that we are working towards.

With that, I'll turn things back over to Dave Brukardt.

David Brukardt, Avista Corp - Chief Communications Officer and VP of Corporate Relations 4

Thank you, Malyn. We will now open this call to analysts and investors' questions. I would like to remind any members of the media who may have questions to please contact Lorene Jew at 509-495-4174. And with that, Laura, we're now ready for our first question. Thanks.

Thank you. At this time if you would like to ask a question, please press star followed by 1 on your touch tone phone. You'll be announced by name prior to asking your question. Once again, to ask a question, please press star followed by 1.

Your first question comes from Neal McAtee, and please state your company name.

Hi, good morning, CFS Morgan Keegan. Hey, let me understand-- I'm trying to understand-- first off, can you give any cash flow information? I guess I'm assuming that with, you know, the higher deferred power costs and the lower-- the lower demand, that did you actually-- I understand why the profit is still there, but was the cash flow still break even or negative, or how should we look at that?

Good morning, Neal. I'm going to have Malyn answer that. The answer is the cash flow is still positive. Go ahead, Malyn.

The cash flow is still positive even with the fact that the weather is causing our sales to be a bit lower than we expected. And we're forecasting something less than normal hydro conditions. While the deferred balance might grow a little bit year to year, we expect still to be able to generate enough cash to repurchase about $50 million worth of debt during the year, over and above the $70 million that we have yet to retire in the summer period. We're continuing to hold the line on capital budget. The capital budget will be under $100 million. We still should generate a good positive cash flow throughout the year of 2003.

And maybe, Neal, just to add onto that a little bit, as far as the stream flows and such, you know, the recent storms we've had moving through, in fact even the last few days has continued to improve. What we have is an official snow forecast as of January 10th; the next official snow forecast will come out February 10th. And we expect that to improve and improve in the water basin.

In addition, something that I think gets missed in this is that our reservoirs are much fuller than what they would suggest by just natural stream flows. If we look at two years ago, the runoff was similar to what we look at this year. However, the reservoirs were very dry because we got into a period of drought. The reservoirs were basically full at this time, so we expect better generation than would suggest by the stream flows.

Okay, good. I wasn't sure if that was quite the right question because it seems like a series of good news, bad news, you know, the bad news is the demand is down and the stream flow is down. The good news is the reservoirs are high and I guess the really good news is that unlike a couple years ago when you had to go out and buy power and you weren't sure how you were going to get repaid for it, there is a price recovery mechanism in place to make sure that you do get paid for it. And I guess other good news is the way your managing the company, even though it may be, the cash flow may not be as strong as it would have been otherwise, it didn't go negative like a couple years ago. Is that a fair way to summarize it?

It's a good way to summarize it. The only thing I'd add to that, Neal, is we have gone out ahead of time and purchased resources because we knew that El Nino was a possibility from our long term forecast. And as I said in my comments, we basically have resources to cover all of our [inaudible]. So we don't have to go out to the market unless we lose a unit or something on that order.

Okay. It looks like you've got the non utility businesses-- got the cash burn on those continue to come down.

Yeah, it does. As a matter of point in there, I mentioned we would expect to take less than 20% of the labs by the end of the-- well, sometime during the spring of this year. We have full cash burn in our numbers projected out for the full year of 2003. So if we're successful in doing, which we expect to be getting partners into that business, then that will cut the cash flow and the losses on that business also.

No second thoughts about lowering your earnings share? Because they seem to be one of the few fuel cell companies out there actually selling something. Sounds like you actually have something there.

Well, we do, Neal, but the issue there is, as we return to basics and focus on the things we do, I want to keep an up side because I really believe in that business. But by bringing others in, one, it will validate that we in fact are correct that it is a business to go forward. And secondly, it takes those cash drains and things off the company. We really do have to take and use the cash to repurchase debt and get the company back to investment grade and that's the direction we're taking.

All right.

If I had lots of money, I'd do something different, but I don't.

I understand. Great job and Dave did a great job for us on Tuesday. Glad you came out to talk to us. Thank you.

Thanks, Neal.

Thank you. Your next question comes from Bobby Anameca. And please state your company name.

Good morning It's Bob Anameca at Gennison. How's it going, guys?

Good morning, Bobby.

Congratulations on a strong year in terms of your environment and also the effort in debt pay down. I want to congratulate you on that. And specifically on the last issue that you talked about with Neal with labs, I wanted to clarify that the ' 03 numbers in terms of your estimates for what you're going to get out of the information and technology segment, I was wondering if you could break that out a little bit, the 10 to 15 cent loss, I wanted to know how that broke out between labs versus advantage. Obviously you made progress on both fronts. Advantage is cash positive at this point, and in terms of a run rate. I was just wondering, were you still expecting net income losses out of advantage in '03?

Bobby, I'll let Malyn answer that. But just so we understand, we've been very conservative on both advantage for the year as well as on labs, and we have the full cash burn and full run rate for labs in for all of 2003. So, go ahead.

Bobby, it's Malyn. Hi. We expect advantage to lose a little bit in terms of earnings per share, probably in the 2 to 3 cents range for the year. So we're getting close to turning positive and should be positive by the end of the year. But we have budgeted a loss for them. We've budgeted about a dime loss at labs, but that assumes that we have 100% ownership and continue to fund them for the entire year. So I think that is a conservative estimate, given the interest that we're seeing in taking a position and, essentially, others funding that business after the first quarter.

Right. That was the other thing I wanted to clarify, and it came up in that last-- your answer to Neal. So I appreciate that. Just for our part, I know that we've talked to you numerous times in terms of, you know, wanting to see the loss from that segment reduced and want to congratulate you on your efforts to, you know, to actually see that come to fruition. We understand the fact that you like to keep some up side, and we support that, but we definitely do appreciate your concerted efforts to reduce the loss from that segment.

Thanks, Bobby. We appreciate that.

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

Good morning, Merrill Lynch. Malyn, can you elaborate a little bit in terms of the range of guidance you've given, there's two questions I'd like to ask. One, you have an 82 dollar overall view, but the individual components would suggest if you go to the extremes a little bit wider range. And secondly, within the utility, since you're assuming, as I understand it, you're assuming the full $9 million hit on increased power costs, can you give us an idea what drives that rather wide range in variability that you see?

Hi, Sam. Sure, I'd be happy to address those questions. We realize that if you just add the numbers together, the low end and the high end is a little different than the 80 cents to a dollar. Our experience has been that as the utility does well in a very stable environment, that Avista energy perhaps doesn't do as well in that environment. And likewise, if we get into situations of shortages, of increasing fuel prices and things like that, energy tends to do well and the utility doesn't do as well in that environment, even with the fuel balancing accounts that we have in place.

And so we've tried to look at probabilities of outcome, and using those, felt comfortable narrowing the range on a consolidated basis, believing that there would be some pluses and minuses in all of the business segments that would get us to that 80 cent to a dollar range. Is that clear? Did I answer--

No, that makes sense. But I guess the other part of my question, within the utility, since you have made the assumption that you're going to eat the full $9 million, what are the other factors that-- the sensitivities that drive that 60 to 80 cent range? The first part does make sense.

And I think what's driving the 60 to 80 cents is primarily weather related. We're seeing impacts of weather. We're also-- have some concerns about the water situation. Even though we get 90% recovery of that, eventually through the deferred case, we'll still be absorbing about 10% of-- we will be absorbing 10% since we're at the low end of the range. And there could be some variability associated with that.

Also, Coyote Springs 2, when will that come on line? We continue to capitalize some expenses associated with that. That's giving us actually a break on our O and M budget until it comes in. But when it comes in, then there will be some O and M costs that will kick in. We don't know the timing on that and that can be fairly significant in and of itself and you have kind of normal other uncontrollable expenses that can come as time goes on. We're hoping to offset some of the higher costs associated with fuel by buying back as much debt of the high coupon debt as we can throughout the year. And that enters into the forecast. There's just a wide range of things. And frankly, we're trying to be a little more conservative than perhaps we've been in the past in terms of the estimates that we're giving.

Okay. And I guess the last thing I want to ask, you alluded to the cumulative effect on your FAS 133 issue being $5 million or less, and then you spoke about having an ongoing impact. I know you didn't give a number, but do you see that as potentially being material, or do you think it's going to be a [inaudible] impact.

Sam, I think it's not going to be a significant impact and I think what we are really talking about is timing; To the extent that for example we were to write up the assets or have to write up the assets by $5 million, we believe we're still accounting for those and actually estimating the impact of those over the long term correctly. Therefore, we think we will be giving back that $5 million over time, or vice versa if we take a write down of $5 million to reflect it, we think we'll be getting that back over time. And so it really is more of a timing only issue as we go out rather than a longer term negative or positive for the company.

Okay. That's clear. Thanks a lot.

Thanks, Sam.

You bet.

Your next question comes from Doug Fischer. And please state your company name.

A.G. Edwards, and good morning.

Good morning, Doug. How are you?

Just fine, Gary. A couple of my questions have been answered, but just a couple others. Could you give us a little more detail on the expected sources and uses of cash in ' 03, maybe summarizing that? And then, Malyn, rehearse for me what you said about debt reduction. Is it 50 plus 70? Rehearse that for me. And I'll have a follow-up after that.

Happy to do that. We expect cash from operations to be at around $120 million, perhaps a little bit above that. That's under our low hydro forecast versus in 2002 we had about $110 million from operations. We expect to spend about $100 million on our capital budget, a little less than that, but close to $100 million; Whereas last year we spent about $75 million on capital budget. That $100 million is still well below what we historically spent, but does represent some things that we need to do on a moving forward basis. In terms of subsidiary cash requirements, we expect-- and this is assuming that labs were being funded for the entire year, that the cash flow would be about $20 million into those subsidiaries. And again, we are hoping to shrink that over time. And that gets offset by the dividend that we will take out of Avista energy, and we are continuing to plan for a dividend from energy of plus or minus $35 to $40 million coming out of energy for the year. In terms of the financings, we have about $70 million left of maturities of roughly $175 million that we had outstanding. We bought most of that back, but there's still about $70 million that matures in August, as I recall, of this year. And we plan to buy back roughly another $50 million over and above that during the year, throughout the year. Doug, does that pretty well answer your question?

Yes, it does. And any other external financing needs that you anticipate during the year?

We have no need to go to market for any debt or stock. However, to the extent that an opportunity presents itself to reduce our cost of debt by buying back some additional, we obviously would take advantage of that, and that might-- I think given our condition, we're hearing from investment bankers that we likely could finance somewhere around 7%. And if you can buy back 9.75 and replace it with 7, the math on that's pretty easy to try to do. We do have bank line renewals that we will need to do our Avista corp. line, utility line basically comes due in May, and we are fairly-- we don't have a lot drawn on that line. At the end of the year I think we had about $30 million outstanding and maybe another $15 million on a line of $210 million, as well as energy 's line comes due in June, and they have $110 million line. They had $17 million in LCs outstanding at the end of the year. So I do expect that we may see a little bit more short term debt as we get towards the end of the year, but we think that's very manageable given our bank lines that are outstanding.

Okay. And can you update us on-- are there any pending regulatory cases on the gas side or any electric cases that are on the radar screen that are pending during ' 03?

Doug, one of the things that we are doing is going through and looking at our cost of service on, especially on the gas side because it's been a few years since we've been in for those. We haven't made a determination yet, but we'll probably be looking at a gas case in the state of Oregon, and that would be filed sometime later this year. So that's basically what we have on the horizon there.

Do you have any-- is some kind of increase built into the ' 03 outlook guidance?

No. We've assumed no increase in ' 03 in the guidance.

Okay. And then finally, this other category where you lost 26 cents for the year, explain that to me and explain what the outlook is for that line for ' 03.

Doug, I was afraid you were going to ask that so Malyn is going answer to answer it for you.

Thanks, Gary. The other business segments, Doug, relate to other lines of business, including Avista ventures, Avista capital and Penser corporation and a few other minor subsidiaries. The most significant factors in the 2002 loss was the legal expenses and a settlement related to a Penser subsidiary that was sold to creative solutions a few years ago. It was $9.25 million that was charged there. And we also had some other issues there that were really ongoing metal effects close to becoming profitable. We're trying basically to work our way through all of those situations that relate back to a few years ago. Just to give you I hope a little bit of comfort, for 2003 we're expecting a loss in that segment of about 3 cents. We think we're through with the major issues there, and we plan-- the few businesses we have essentially work our way out of those over the next year or two. We have one more lawsuit that's pending. That relates again to a Penser company that was sold. We think we're adequately reserved for that. And again, this is really stuff we're trying to clean up, and I hope it is all cleaned up by the end of 2003.

So is all of that Penser, or are there a couple of other things?

Well, Doug, most of it's Penser. Some of it is Avista ventures. You remember we had some investments in technology funds. Those recorded losses so we record the losses. They weren't real large, but they're parts of that. And the likelihood of getting out of those funds any time in the near future is probably small, so we could have a few more losses that's in the 3 cents that Malyn talked about. Metal effects have done an excellent job of getting their costs under control and back to a point where they month to month hit on break even. We don't expect a lot of things there. And as the economy picks up, and we hope it will, then they will get to a position where we can actually take and they'll turn very profitable and we'll go ahead and sell that business.

Okay. And do you expect to get any cash proceeds from your sell down of labs?

Cash proceeds, no. The way it will be done, they will actually fund ongoing requirements in that business.

Okay. All righty. Thank you very much. Appreciate it.

Thanks, Doug.

Thank you. Your next question comes from James Bellessa and please states your company name.

DA Davidson and Company. Good morning.

Good morning, Jim.

I'd like to ask about pension costs. It was said that they would be about $15 million in 2003. What were they in 2002?

In 2002, Jim, they were $9.3 million and 70% of that was booked to expense earnings and the rest was capitalized. And of the $15 million this next year, again about 70% would be expensed and 30% capitalized.

What brings about that kind of accounting expensing in capitalization?

Basically we assign overhead costs to all of our capital budgets, construction projects. It follows where the labor goes. So to the extent that our employees are charging labor to capital project, we also charge all of the employee expenses associated with that, pension expense, health care expense, all of those things get loaded into capital.

Now, does the pension cost expense fall into the administrative and general line item?

Yes, it does.

And in the fourth quarter, the number jumped about $5 million to $30 million from $25 million in the third quarter. Was that the pension expense hitting in the fourth quarter?

Well, we booked that pension expense throughout the year. Let me just look at my notes here for a minute, if I might. You know, Jim, I don't know what's driving the $5 million. If you look year over year, the difference is almost flat year over year. I'm at a loss as to what drove that in the fourth quarter.

Okay. The deferral was $155.3 million. Is that the correct number that I heard?

That's right.

And that's made up of two components, Washington was at what level?

Let me get my notes. While I'm checking on that for you, I think I do know a big chunk of that administrative expense in the fourth quarter had to do with legal costs associated with defending ourselves at FERC. I think that was a couple million dollars there. Looking at year-end ' 02, $123.7 million in Washington, deferral balance of $31.5 million in Idaho.

And then how long does it take to work through the deferral? What is your estimate now that--

Well, our estimate was that we were looking at Idaho at around 2005 to 2006 and Washington around 2008. And obviously to the extent that we defer more this year, that could push that out a little bit longer. We're reluctant to make a forecast of that at this time in time because frankly as Gary said, we're seeing a bit more rain right now. There are other things that could offset that to some extent. So I would just answer the question by saying we think it's going to be a little longer at this point.

It really is, Jim, a function of what resources we have to sell in the market, prices in the market, stream flows. When we're talking over that range of years, it could be shorter than that; it could be longer than that. But if you just divide the numbers out, that's based on today's projections. That's about where you fall.

Are you getting any cost of carry for that?

Yes, we do.

What rate approximately do you get an accrual on?

It's different on each of them, Jim, both between the gas and electric.

In Washington it's 8.8% and in Idaho it's about 4%.

And then I heard that the Avista advantage, something about break even. But I looked at the numbers in the fourth quarter, they weren't break even yet. What was the words break even attributed to?

They were break even on an EBITDA basis or essentially they were covering their cash flow. But when you factor in depreciation and some other items like that, then they're not break even yet. And that's why we're still forecasting an earnings loss for 2003 that they are very close to being cash flow break even right now.

In fact, they were break even cash flow in November and very close in December. And we'd expect them early in 2003 to be cash flow. And then break even-- turn to profitability by year-end.

You've given relatively detailed guidance for 2003, and I appreciate that. I'm going to be asked by my company to try to take a stab for 2004. Is there any characterization you'd like to provide me that I would have some wisdom?

Jim, I think, you know, what we did is we gave you some guidance for 2005, and if you want to take and just kind of draw a line between 2003 and 2005, who knows.

Be careful there, Gary. The CFO is a little uncomfortable with that one. And the reason for that, let me explain to you what happens.

There's a big item that goes away between '04 and '05. That is, we expect to continue to be outside the dead band and take a $9 million loss this year, and again in ' 04. Late in '04 the gas contracts that are fairly high priced fall off. They expire, turnout; Such that that $9 million or roughly 18 cents a share goes away going into ' 05. And so I'm not sure it's quite linear, Jim, but we do expect to see earnings growth and earnings progress from '03 to '04. If nothing else, we should have eliminated all of the negatives in the subsidiaries, Which is probably what Gary was referring to. The boss is always right.

Thank you very much.

Thank you. Your next question comes from David Pickens, and please state your company name.

Hi, it's David Pickens at deep haven. Welcome back Malyn.

Good morning. Hi, David.

Hi. Most of my questions have been answered. A couple kind of things around the edges. Can you give us some idea of your sensitivity to water levels, you know, assuming we're outside the dead band? Some idea we can kind of perhaps take these percentage numbers that we see out of the river forecasts and try and put it into some form of framework?

David, it's real hard to put it in some kind of percentage framework. And the reason being, what I was saying is two years ago when we were roughly-- actually it's a little bit less than what it was this year forecasted as far as stream flows. Most of the reservoirs were drawn down already because of drought. This year Hungry Horse and some of them on the upper Clark fork are at much higher levels. Much more water back there, so we're in much better position. So even though the stream flows are down, the generation will actually be substantially higher than it was two years ago. So it's not a direct correlation between stream flow and the other.

The other thing is we're early in the year. January 10th is the first official snow pack survey. We do know because we have some independent sites. It's not a an official measurement at all. But snow pack has been improving through this month with the storms we've been having move through. So we expect when February 10th comes with the official snow forecast, it will have improved even for what we have given you.

And it's early. We usually get our snow pack on out through March and into April. That being said, it's real hard to forecast exactly what the-- how quickly El Nino conditions will weaken. Where in the jet stream flows because since we set right up against the Rocky Mountains, a lot depends on the jet stream and which way it breaks. It also-- that same break of the jet stream brings either cold air out of the gulf of Alaska down in here to our area which can drive our retail revenues. If it breaks east of the Rockies, then what it does, it brings the warm air from the jet stream out of-- from the gulf of-- down of Hawaii brings warm airs in and causes to be warmer than normal. So it's real hard to try and take any numbers and predict anything on it.

What I would say is that, because our resources are such-- you mentioned the $9 million dead band. Because our resources are such, we have enough sufficient resources to supply all of our needy [inaudible]. Therefore it's issues like last year we mentioned we lost again at coal strip. It was actually out of service for 60 days so we had to go out in the market and replace that until the unit was brought back on line. We're currently projecting our Coyote Springs unit to be back up by midyear of this year when they get the transformer repaired.

Now, that transformer is going to really [inaudible] L.A. like I mentioned or to repair manufacturing facility in L.A. And until we actually get it un tanked, we don't know for sure how much damage there is in shipment. We're hoping not much. They've been down in the tanks, had individuals go down and inspect it and from what they can tell there should not be a problem getting it repaired back on the site and the plant started up. Once they un tank it and actually look at the windings and such to see what the damage is, then it may change those dates. That would cause us to do maybe have to purchase some more power out onto the forward months.

That being said, with the [inaudible] being filled both this year and next year, then all we're looking at is a 90/10 sharing. If you think about the numbers that we incurred in 2003 as an example, to give you a range here-- excuse me, in 2001, to give you a range, you know, if we had a purchase power and it was $200 million, then what we would be exposed to would be 10% of the $200 million or $20 million, and that would be-- and we don't expect it to be anywhere near that, simply because we have enough resources for all of our [inaudible].

Right now probably the biggest cash impact might be somewhere between maybe $15 to $30 million for the year.

Okay. That helps. The other cost I had was pension. Over what period or do you have a smoothing mechanism in place and over what period is that?

David, we don't have a smoothing mechanism in place. Our estimates are that for the next few years, we need to continue to fund cash wise at about a $12 million per year funding.

Okay. But in terms of the direct expense impact of that, it's just depends entirely on the market?

That's right. And we are not-- that's one of the issues that we're not recovering fully in rates at this point in time. So it's an issue that we'll need to address on a going forward basis.

Okay. My last question is could you help me understand a little bit the counter cyclicality if you will between energy and the utility, you know? Obviously if we have a period of low water, you're using higher priced alternatives at the utility to meet your native load. But at the same time, isn't a preponderance of the power that you are marketing for others, for example, inside energy coming from hydro sources that are going to be also suffering from lower output, or is it just an issue that enough comes from non hydro sources and the prices are high enough that it tends to offset the lower production?

Yeah, David, just maybe too straighten one point, most of our power and energy comes around assets that are thermally based.

Okay.

And although we manage the 2000 megawatts on the mid Columbia system and we manage another 400 megawatts in Canada, most of that is around capacity. And day to day stuff, whereas the Lancaster unit, we have the units that we have on the west side of the state for Clark County and others, those are all gas fired turbines. And it is a little counter cyclic to what you would think.

Fair enough. Thank you very much.

Thank you. Your next question comes from Andrea Feinstein. And please state your company name.

Hi, it's Andrea Feinstein from Angela Warden. How are you?

Good, Andrea. How are you?

Good. I have a couple questions. I want to make sure first off that I understand the recovery mechanism. I know we've gone through it a couple times, but my specific questions are, first off, the $9 million dead band. Is that an annual dead band or is it a dead band over a course of a couple of years? I just want to make sure I understand the distinction.

Andrea that is an annual dead band and it's positive or negative. So from a dead band standpoint, if we have $9 million of increased expenses or $9 million of increased or decreased expenses, those go to the company.

Great, okay. And from the perspective of what you're building into guidance now, are you assuming that you get into the 90/10 portion of the recovery mechanism, or are you assuming based on current hydro forecasts that you will not see costs in excess of that $9 million debt band?

No, in our forecast-- we have assumed that we will see a 10% of what we're forecasting for the balance of the year.

And can you just to help me get my arms around that, can you give me some sense of magnitude above the $9 million as to what you are expecting is going to fall to the bottom line for poor hydro conditions?

Andrea, this is Malyn. I guess the way that I would answer that is Gary mentioned that we might see as much as a $15 to $30 million cash impact as a result of the changing hydro conditions. And so roughly 10% of that would flow to the bottom line. That is built into our earnings guidance.

Okay. And when we talk about it being built into earnings guidance, the $9 million in and of itself is, you know, just under 20 cents of earnings impact, excluding the incremental 10% that we're talking about here. Should I assume, then, that that's basically how I get from the low end of your utility earnings guidance to the high end, is the 80 cents assume normal hydro?

No, it doesn't. No, we-- our-- let me just say that our mid point of our earnings guidance assumes the conditions that we're forecasting going into the year which perhaps wasn't quite the conditions that we have today. It assumes closer to a normal hydro situation than we're experiencing.

But it did assume that we were going to eat the $9 million dead band in the first quarter of the year and essentially that was it. So to the extent that we might see a little bit more on that, that might drive the range just a little bit more from the mid point to a little bit lower.

Okay. So the $9 million impact is reflected in the mid point of the utility guidance?

Yes. Then from there you're into variations in weather. That could be happen throughout the year and a number of other things.

Understood. That was very helpful. And just in follow-up to somebody's earlier question on external financing, while you don't necessarily need to tap the equity markets over the course of the year, can you talk about whether you would choose to do so or are planning to do so in the context of achieving the debt to total cap ratio target that you set out earlier in your own remarks?

We have no plans to access the equity markets this year.

Great. Okay. That's my question. Thanks.

You bet.

Thank you. Your next question comes from Janet Clay. And please state your company name.

State Street research; Just a couple of housekeeping items on the balance sheet. What was the cash at the end of the year?

Good morning, Janet.

Good morning.

We'll let Malyn dig that out.

Hang on just a second. Our consolidated cash balance at the end of the year was $186 million, roughly $150 million of that was on the books at Avista energy.

And so what does that mean? Is it available, or is it--

No, actually we have been dividending money out of energy on an ongoing basis and we plan to dividend about $30 to $40 million this next year. However, we have to get the bank's permission to do that, otherwise it is essentially backing that business.

So the corporation's cash would be closer to that $30 to $40 million range, the difference between the two.

Right. And what's the total debt figure for the end of the year?

Total long term debt is just over $900 million.

And the short term?

Short term borrowings were $30 million at year-end.

Okay. That doesn't include the current portion of long term of $70 million?

That is correct.

Okay. That's the amount of current portion, $70 million. Okay.

Yes.

A couple other questions. One, who are your top counter parties in energy trading these days?

Well, one thing that we don't do is usually give out, Janet, who our counter parties are. We manage those. We do-- I will suggest to you that our top counter parties are either A. or triple B. rated counter parties.

Okay. And then on the bank line you mentioned that the utility one is coming up in May and the energy one is coming up in June. Have you commenced discussions with the banks? Do you have like a time line you're thinking about in terms of closing a new line or new lines?

We have commenced discussions. The banks have been actually very pleased with the financial progress that we have made throughout the year. We're getting strong indications that they're all planning to renew the credit, and we hope to take the utility bank line to the board of directors at the May meeting, which is in early May. So it's about three weeks in advance of when the line expires.

Okay. Thanks very much.

You bet.

Bye.

Bye, Janet.

Thank you, and once again to ask a question, please press star followed by 1 on your touch tone phone.

Your next question comes from Paul Dabass and please state your company name.

I'm with Value Line.

Hey, Paul.

Hi. First I have a question about Avista labs. If you do get down below the 20% ownership, the way the accounting for that works, does that mean that the losses are no longer reflected on the income statement?

That is correct.

Okay. Also you've given the increase in the pension costs and other factors you mentioned. What year to year change are you expecting in O and M.

It's probably going to be up about $5 million, Paul.

Okay. Thank you.

Uh-huh.

Thank you. Your next question comes from Mike DeMasso, and please state your company name.

Good morning, Gugenheim partners. I just wanted to walk through [inaudible] your sources and uses. Assuming a scenario where you don't have access [inaudible] or bonds. It appears you have $36 million of corporate cash. How do you-- I guess bridge me through that. I came up with a cash use of $100 million in 2003 based on all the numbers you gave. I'm trying to make sure I'm bridging the numbers right.

Could you give me your question one more time? I didn't follow it.

Sure, no problem. With the cash you have at corporate $36 million, and the uses that you have shown in sources in 2003, I'm just trying to bridge how you can fund those, what appears to be $100 million net at the end of the day uses in 2003.

We're actually showing a short term bank balance of closer-- a little bit in excess of $100 million at the end of the year versus a starting point of $30 million. And so we are letting our short term debt rise a bit during the year.

Okay, okay. And can you use your revolver to buy back bonds?

We can use our revolver to buy back bonds, yes.

Okay. Thank you very much.

Thank you. Your next question comes from Michael Werner, and please state your company name.

Excuse me, hi, it's Kennedy Capital. I just wanted to clarify one more time, I know you've gone through this, but are you going to be in a cash flow neutral or cash flow positive situation by year-end, 2003?

Well, we are cash flow positive ...

Cap ex and dividends?

Before essentially buying back the debt that we're planning to buy back throughout the year. And that's why we're letting the short term debt rise some, because we're not enough positive to be able to fund all of the maturities and buy back all of the high cost debt that we plan to buy back.

I see. But from your-- the cash flow from your utility should-- as far as I see, would cover your-- would at least cover your dividends and maybe some of your cap ex needs; is that correct?

That is correct.

Thank you. Thank you very much. Good quarter.

You're welcome.

Thank you. Your next question comes from Phyllis Gray and please state your company name.

Phyllis Gray with [inaudible] management.

Good morning, Phyllis.

Good morning, how are you?

Good.

Could you remind me what your cash from operations was in 2002?

$110 million. That's the utility.

In total?

It was about another 150- or so, so it's-- we're getting the numbers for you, Phyllis.

Thank you.

I don't think we have that with us here.

I think, if I remember correctly off the top of my head, I think it's about $156 million from energy from cash flow from last year.

Those were the dividends?

No, no. That's just cash flow. It was almost $160 million from energy and about $110 from the utility, so we were at about $270 million cash flow last year.

And then the $120 million secure you gave for 2003, then, was that for the utility?

That is just for the utility.

That is just for the utility.

Okay. And could you clarify the $70 million in maturities and the $50 odd million that you may repurchase throughout the year, are you going to do all of that through your bank lines and the $35 or $40 million in cash that you have?

It is through a combination of the two. It also-- we do plan to have another dividend come from Avista energy, and we will use that dividend to essentially buy back bank loans-- excuse me, to buy back debt.

I see. And what are your dividends expected to be during the year?

Our current dividend is 48 cents on an annual basis.

Okay. And do you anticipate any change in your dividend?

That's always something that the directors talk about every quarter.

Okay. I think my other questions have been answered. Thank you.

Okay. Thank you.

Thank you, Phyllis.

Thank you. This concludes today's question and answer session. I would now like to turn the conference over to Mr. Dave Brukardt.

Thank you. 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 on Saturday. The number for the replay is 402-998-1460. A web cast of today's call will be archived for one week through 8:00 p.m. Eastern Time on February 6th. To access the web cast archive, please go to the Avista corp. home page. And again, thank you for joining us and have a great day.

Thanks, everybody.

Thank you. This does concludes today's conference call. We thank you for your participation.