Avista Corp (AVA) 2004 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Avista first quarter 2004 earnings conference call. My name is Carlo and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We'll be facilitating a question and answer session towards the end of this presentation. If at any time during the call, you require assistance, please press star followed by zero and a coordinator will be happy to assist you. I would now like to turn the presentation over to your host for today's Angela Teed Investor Relations Manager. Please proceed.

Good morning. Welcome to Avista's first quarter 2004 earnings conference call and web cast. Avista's earnings were released premarket this morning. With me today in our offices in Spokane, Washington are Avista Corp. Chairman of the Board, President and CEO Gary Ely, Senior Vice President, CFO and Treasurer, Malyn Malquist, the President of Avista Utilities, Scott Morris and Vice President and Controller Christie Burmeister-Smith.

As we begin this morning's conference call, I will caution you that during today's conversations, we will be making forward-looking statements that involve risks and uncertainties which are subject to change. I would direct you to Avista's 2003 form 10-K filed with the SEC which is also available on our web site 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 the call.

Now, I will turn this presentation over to Avista's Chairman of the Board, Gary Ely.

Thanks, Angie. Good morning, everyone. The results of the first quarter of 2004 were generally in line with our expectitions. We're are especially encouraged with the growth and earnings at Avista Utilities. Malyn will tell you more about that in a few minutes.

First, I want to take a moment to say how pleased we are to finally have conclusion to the FERC investigation of the trading practices of Avista Utilities and Avista Energy during the years 2000 and 2001. As noted in our news release this morning and on slide number two, the FERC trial staff found no evidence of any improper trading strategies and that our employees fully and completely cooperated with the investigation.

And that FERC did not assess any monetary remedy nor seek the relinquishment or modification of our market-based rate authority. This brings to an end, finally, the overhang that we've operated for under nearly two years. Other good news is we have energized two newly constructed 230,000 volt transmission lines as part of our major transmission infrastructure project.

You'll hear more about that from Scott in a few minutes. The challenges facing us now are from the weather. More specifically, the lower stream flows and precipitations since the 1st of February and the warmer than normal temperatures during March.

They will have an impact on our hydrogeneration as well as our retail and wholesale market activities. I've asked Scott Morris, the President of Avista Utilities to give you an overview of these and other issues at the utility during the first quarter. After that, our CFO Malyn Malquist will provide a summary of the business unit activities in our financial performance. Scott?

Thanks, Gary. As Gary mentioned earlier, we are very pleased to have final resolution in the FERC 206 investigation. And a number of state level regulatory issues have come to resolution as well.

We told you in past reports that one of our goals is to earn our allowed rates of return through our service -- throughout our service territory. Two years ago, we received approval for an electric rate increase in Washington. Last October, we had a natural gas rate case approved in Oregon.

And in February, 2004, we filed a natural gas and electric general rate case in Idaho. The case requests essentially an 11% increase above current electric rates and an increase of 9.2% above current natural gas rates. As you can see in slide number 3, which shows the proposed electric rate adjustment, we have an existing power cost adjustment surcharge of 19.4%, that's been in place in Idaho since 2001.

To lessen the impact of potential new rates on our customers in that state, we are requesting that this PCA be decreased and the remaining balance be recovered over a two-year period at a reduced rate. The requested new rate structure is designed to increase annual electric revenues by $18.9 million and natural gas revenues by $4.8 million. And to yield a 9.82% rate of return on an 11.5% return on equity.

The IPUC has established a procedural schedule which calls for the commission order be released in mid September of this year. In Washington, we received approval from the WUTC on the transition plan for the natural gas benchmark mechanism. We will begin moving Avista Utilities natural gas procurement functions from Avista Energy back to the utility beginning in May of this year and complete the transition by March 31, 2005.

I'm pleased to report that revenues in net income for Avista utilities increased for Q1 2004 over the same quarter last year. Our revenues were $30.3 million or 12% greater than Q1 2003. Including increases in both electric and natural gas revenues.

The natural gas revenue increase is partially due to natural gas rate increases from purchase gas cost adjustments or PGAs that were approved last year in all of the states we serve. They were implemented during the fourth quarter of 2003. In addition, many of the areas we serve had colder weather during this past winter than in 2003. And this led to an increased number of natural gas therms sold.

Our investments in the utility's infrastructure are also progressing. We just completed a $7 million upgrade of unit number two at Cabinet Gorge Dam on the Clark Fork River in Idaho. The upgrade of that unit will provide increased generating capacity of about 30% and improve its efficiency by about 5%.

On the transmission and distribution side of the business, we're continuing to make progress on the major transmission system projects we launched last summer. A map highlighting some of the projects is on slide number four. The completion of the Beacon-Rathdrum portion of the effort is a major milestone in this five-year upgrade.

Work continues on the planning and siding of two transmission lines in the Palouse area of southeastern Washington and the southern portion of our Idaho service territory. When complete, these enhancements will improve the delivery of electricity to meet existing and future power needs throughout our service territory.

Relieve current transmission congestion help improve system reliability and provide additional capacity as our region grows. We told you in January that problems were detected in the generator step up transformer up at the Coyote Springs 2 generating facility. It has been shipped to the manufacturer in Turkey for repair and we're closely monitoring the work being done.

At this point, the transformer has been disassembled and repairs are being made. We anticipate that the transformer will be shipped back to us in the next few weeks. The schedule calls for it to be -- to return to the generating facility in [Borvan], Oregon and to be back on-line in the third quarter.

A spare transformer has been ordered from another manufacturer and delivery is expected in the fourth quarter of 2004. One last note, we had some good snowfall this winter along with more normal temperatures. However, we were still 3% below normal in the number of heating degree days for the quarter.

Our spring has been warmer and drier than normal so this will impact our forecast for runoff and hydrogeneration this year. Unless we get some significant spring rains, we're anticipating annual runoff to be 85% of normal for the Clark Fork and Spokane Rivers and that hydrogeneration will be about 86% of normal assuming precipitation stays at normal levels for the remainder of the year.

The energy recovering mechanism or ERM in Washington and the power cost adjustment in Idaho will provide recovery of the majority of the costs associated with these below-normal conditions. In Washington, you'll remember we have a $9 million dead band. Before the 9010 cost recovery portion of the ERM is triggered.

We expensed $6.3 million of that amount for 2004 during the first quarter. So that leaves $2.7 million of additional cost to be incured this year before the sharing mechanism kicks in. Last year, we expensed the entire $9 million in the first quarter. And with, that I'll turn it over to Malyn.

Well, thanks, Scott. Good morning, everyone. Overall, Avista had a good first quarter 2004. Our net income available for common stock for the quarter decreased to $12.2 million. As compared to $15.6 million in the Q1 2003.

Due to a decrease in net income for the energy marketing and resource management segments. But increased income from the utility and decreased losses from Avista Advantage and our other business segment partially offset those decreases.

The energy marketing and resource management segment had net income of $3.5 million for Q1 2004, down from $13.1 million in Q1 of 2003. The change is the result of Avista Energy's earnings in Q1 2003 being positively impacted by the effects of accounting for energy contracts under SFAS #133 and a settlement with certain Enron affiliates.

The combined effect of these two items on net income was approximately $9.6 million or 20 cents per diluted share in that first quarter of 2003. For Q1, 2004, Avista energy had earnings of 7 cents per diluted share. Another positive quarter for this business and in line with our expectations.

Slide number six illustrates that Avista Energy's business model and risk management policies have consistently produced earnings under varying market conditions. The top part of the graph shows the [Summis] daily gas prices and the daily prices at midColumbia beginning in Q1 of 2002 and ending in Q1 of 2004.

The lower portion of the slide shows earnings per share for the energy marketing and resource management business segment during the same period of time. And looking at the two pieces together, you can see that Avista energy has been profitable under varying market conditions.

I'm pleased to report that Avista Energy recently signed a settlement with the Washington State -- to resolve a dispute regarding a business and occupation tax assessment on receipts for the period of 1997 through mid 2000. There is no impact from this in our 2004 results.

On another note, Avista Energy is in negotiations to renew its line of credit which will expire in July. Based on preliminary conversations with the banks, we believe that the committed line should be renewed for another year. Avista Advantage continues on track to become earnings positive by midyear this year.

Their Q1 results improved to break even compared to a net loss of $600,000 in Q1 of 2003. After two years of overseeing the steady performance improvement of Avista Advantage, Harry Stevens who headed up the company has left. Harry was brought in as a turnaround expert in January of 2002 for an initial two-year period to improve efficiencies and the financials of Advantage.

He has completed his work. A search has begun for a new president who will continue Advantage's focus on delivering customer value and driving continued strong customer growth to take Avista Advantage to the next level. Also in this quarter, our other business segment incurred a net loss of $1.6 million.

Excluding the accumulative effect of accounting changes. This is the decrease in the loss as compared to the loss in Q1 of 2003. In addition, we experienced smaller losses on certain investments of Avista ventures.

We continue to make progress in reducing our interest expense. Earlier this month, we issued $61.9 million in trust preferred securities and used the proceeds to redeem $61.9 million in higher cost, trust preferred securities. This should reduce interest expenses going forward.

We're pleased to note that Moody's has joined Standard & Poors and Fitch in changing our credit rating outlook to stable from negative. As you know, one of our goals for returning to financial health is to get back to investment grade credit ratings. We have certainly made steps in that direction and we continue to have regular discussions with our rating agencies about expediting this process.

Another positive note is that we are near closing on the renewal of our corporate credit facility. Our banks have been supportive of our progress in achieving our financial goals and have agreed to raise the credit line to $350 million, up from the current $245 million.

The increase will facilitate the seasonal credit requirements anticipated as the natural gas procurement functions are moved from Avista Energy back to Avista Utilities. I think you can see from what we presented today that the information we've presented to you every quarter for the past three years, that we are performing according to our plan and we are regaining our financial health.

We've continued to work through the challenges both financial and operational that have impacted the company since 2000 and 2001. We are making steady and consistent progress in decreasing interest costs, improving regulatory cost recovery, bringing closure to overhanging legal and regulatory issues and investing in our core business, our utilities.

We believe these accomplishments will continue to lead to less variability in earnings and more certainty for our investors. Our results for the first quarter of 2004 met our expectations. And support a firming the earnings outlook for the year of between $1 and $1.20 per diluted share.

Now, I'll turn the presentation back to Angie.

Thanks, Malyn. We'll now open this call up for questions from analysts and investors. I would like to remind any members of the media who may have questions to please contact Jesse Wuerst at 509-495-8578. We're now ready for our first question.

Thank you ma'am. Ladies and gentlemen, if you wish to ask a question at this time, please press star one and your touch tone telephone. If your question has been answered or if you wish to withdraw your registration, press star two. Once again star one for any questions at this time. One moment, please. The first question is from Sara [Nindava] with Merrill Lynch.

Hi, it is Sam Brothwell.

Good morning, Sam.

Looking at your earnings guidance of $1 to $1.20 for the year and just trying to stack that up against how the quarters are likely to shake out, I guess from our vantage point, we might have been looking for a little bit stronger Q1 maybe at the utility and with the -- some of the historical earnings drags going away. But if I plug in 25 and just kind of look at the rest of the year, it leads me to kind of focus on the lower end of that $1 to $1.20 earnings guidance, absent of stronger performance in the middle of the year which is not typical for you guys.

Sam, this is Malyn. It is true that our best quarters are normally the first and fourth quarter. Usually the fourth quarter is the best quarter.

The first quarter, because of the ERM, has historically -- the last couple of years,let me put it this way, we haven't done as well in the first quarter as we historically have done in the first quarter because we're -- we eat the large piece of the $9 million of the dead band. And so that -- in fact, as Scott said, we did eat most of that in the first quarter of this year which had a bit of a depressing impact on our utilities. But you know, nevertheless, we're right on-line with where we thought we would be from an internal budgeting point of view. And therefore, I wouldn't draw the conclusion that we're going to be at the lower end of the guidance that we've given.

I still -- I still believe that we've got a good opportunity to be clearly within that range and I am not -- I am not feeling that we're struggling to make it. Let me put it to you that way. Our fourth quarter clearly is the quarter that is the key for us. But even the second quarter should be a fairly good quarter for us.

Ok. That's very helpful. Thanks.

You bet.

Our next question is from Jim Bellessa with D.A. Davidson.

Good morning. Snowing over in Montana.

That's great.

Hope you get the moisture downstream.

Yep. We'll be anxiously awaiting!

The transformer at Coyote 2, you're saying it's going to be shipped back in the next few weeks but then you're saying that you bring up the plant and make -- bring it on-line in the third quarter. Do you expect that that will be the first part of the third quarter to the latter part of the third quarter?

Jim, if you remember, in our January call, we said that the plant wasn't even scheduled to come on until -- in August. So, you know, that's mid third quarter. So, even if the transformer is here, we wouldn't bring it on until we anticipate needing it. A little bit of that will depend on what runoff and stuff is. And so we'll just have to wait and see how that plays out over the summer.

How much time do you operate Coyote 2? If it is just August? And September? Or do you use it more than that?

It depends on the resource mix. It depends on the natural gas prices and what the spark spread is and so there is a number of factors, Jim, that go into that. You know, during -- if gas prices were really low, we would operate it a lot more. If gas prices are really high, it depends on what the power prices are but we might take and use other resources and or buy off the market depending. We do the most economic thing for our customers.

The dead band of $9 million, I was a little surprised that you didn't eat it all up in the first quarter. What prevented you from reaching that goal?

Well, we didn't anticipate eating it in the first quarter, although we did last year. But our budget suggested it was going to take us through the second quarter to eat the entire amount. What's happened is we actually had some fairly good stream flow conditions in the first quarter because it was getting warm in March.

And you know, so we were able to generate more Hydro in March than we would have anticipated for that particular Month. We also had some offsystem sales, I think, during the first quarter of that benefitted and gas costs were historically driving.

I guess I just -- maybe Malyn just jump in here on our gas costs that we had in those high price gas contracts, they're no longer high-priced, I mean, in a sense. Gas prices held above $5 and in fact, hit $6 at one point during the first quarter. And that's in line with where those -- what we used to call high price gas contracts work. So, you don't have the losses on them at that point. We just the gas that's near market. So, much less a write-off in that sense.

Talking about these gas contracts, some of them expire later this year, is that correct? And if so, what are you going to do for a replacement if gas prices are still high?

Well, first off, the contracts we're talking about were contracts. They end in October of this year. And we've already set out to provide a portfolio gas arrangements going forward. We're just continuing to manage gas supply. So, you know, there were gas prices down in the 4.50 range and some late last year and we continue to manage that going forward.

Is there a chance that you will be locking in again, a price that retrospectively in the next five years or three years or whatever the term is, will turn out to be high?

Well, that's always a chance, Jim. But what you do is you try to manage that on a portfolio basis. So, we won't lock in contracts that cover the full amount. We'll take them and do various pieces and various hedging to take and ensure we don't get that in position again.

And your PCA allows you to pass through the costs no matter what you lock in at.

I wouldn't say no matter what. We have to be prudent in what we do. And as long as we're prudent, then we believe we are in buying for various basins and looking at -- doing the analysis on that. Then, yes, they are pass through.

Thank you very much.

Hmm mmm, Jim.

Our next question is from Paul Debbas with Value Line.

This is Paul Debbas.

Hi, Paul.

Hi. Couple of questions regarding the transmission investments that you're making. How and when do you plan to seek recovery of those?

Actually, in the Idaho case that Scott talked about that we already filed, we have included phase one of that in the Idaho request. And we will be looking at when the appropriate time is to -- to file in the State of Washington for those costs. That's a five-year project. So, we'll be continuing as we complete projects to take and seek recovery of those costs.

Will there be anything you would need to file with FERC?

No. We do not have to file anything with FERC. They're not under FERC's jurisdiction.

Ok. And just one question on the Idaho case. When do you expect an order?

I think we would anticipate it being sometime during mid September.

And Malyn, are you doing any other financing moves or refinancing? Anything planned over the remainder of the year?

Paul, we have, in our forecast, repurchase of $50 million this year of high-cost debt that we would plan to --. And we can finance that out of cash flow. To the extent that opportunities arise to lock in more low-interest rates, if we can economically repurchase some of the high-cost debt, we'll do more than the $50 million.

Ok. And there's no equity offering contemplated at this time?

No, there's not.

Ok. Thank you.

Our next question is from Doug Fischer with A.G. Edwards.

Good morning, Doug.

Good morning. Questions about fuel cost recovery and just the whole issue of earning your allowed return. What kind of -- what kind of ROE does your guidance provide at the high and the low end in say Washington State roughly speaking for '04? And if that is low, versus what you might expect, due to underrecovery of fuel and purchase power, what kind of plans would you have to visit the regulators to address that issue for the long-term?

Well, Doug, the current level of ROE at the end of the first quarter was in the high 7% range. And so we're clearly below our authorized which, on average, in our jurisdictions is 11%. We've been seeing that improving over time because we got rate relief from Oregon last year.

Of course, we expect to get rate relief from Idaho this year. And we are considering whether to do something in Washington thereafter. But we would expect the year, likely still to end somewhere in that right around 8% range. So, we're still fairly significantly short of where we think we should be.

Now, once you get a full year impact of the Idaho case, once the high-priced natural gas contracts fall out, and if we can replace them with lower price, then I think that's a fairly significant if at this point. Then, we would expect to close the gap some more to the extent we can buy back high cost debt on an economic basis.

We would expect to close the gap additionally. Do I think we're going to be there in 2005 completely? I don't think we will be there completely. But I expect to make fairly significant progress. In 2005 versus where I think we'll be in 2004.

And the driver of that is just lower gas costs?

And the Idaho case, it will be --

Yeah, in the Idaho case.

The two of those will be fairly significant. I do think we'll get some additional interest expense. I don't think we'll eat that whole $9 million of dead band next year. I would be really surprised if we did.

I hope it is close to zero but I think with gas prices where they are today, we'll probably still be eating some of the dead band. And at some point, you may -- that may become part of a Washington case that we would file. Where we need to just say look, gas prices are going to stay high.

And they're not going to return to that $4 to $4.50 level that was assumed when we set the dead band. We need some relief on that.

What price of gas is your mix, you know in Washington, your mix of what you have under contract for the year roughly. What is that and what levels in rates?

In rates, it is about $4.50. Perhaps just a little less than that. A little closer to somewhere between $4.25 and $4.50 is what's in rates. And looking at what we're paying today, the mix is a bit over $5. It is in the $5 to $5.25 range is what we look to be paying for most of the year for what we've locked in.

And what is market right now say 12 months forward or something like that? In your region?

Well, if we look out, Doug, for May of '05, it depends on which hub you're taking out of but it is in around the $4.80 to $4.90 range. So, it is coming off anticipated a little bit but it is still higher than what we have in rates. The other thing that impacts a certain amount is of course this also goes into the dead band or the PCAs are the fact that our stream flows are off this spring.

Much more than what we had hoped. In January, when we had the conference call, we were at or above 100% or very close to it. And we were pretty pleased that we might have a very good year and you know, with the deterioration in stream flows and snow pack and then the warmer weather that brought it off the mountain sooner than what we would have liked have come off.

You know, we probably -- it will have an impact -- you know, on us, going forward. But still certainly within the ranges that Malyn talked about earlier.

If that is less than expectations, just last question, just going back to Sam's original question, there must be some things that are coming out more favorably than expected. Is it -- what kinds of things are helping you offset the below-average Hydro conditions?

Let me put it to you this way, Doug. If we -- we assumed in our budget that we were going to eat the whole $9 million of the dead band. As I said earlier.

The impact of having Hydro conditions at about 86% of normal for the hydrogeneration is somewhere in the $25 to $30 million range is what we estimate that will cost us from a cash flow perspective. 10% of that. It will hit the bottom line and 90% of that will flow through the energy recovery mechanism.

And so we're looking at $2.5 to $3 million of earnings shortfall before tax that we'll need to make up. That certainly is significant but it is a fairly small piece of the range that guidance that we've given. And so we will look to tighten our belts in some other areas to try to offset some of that and hit the targets that we've set and I'm reasonably confident that we'll be able to do that.

That's very helpful. Thank you, Malyn.

You bet, Doug.

Sir, our next question is from John Hansen with Imperium.

Yes, good morning.

Good morning, John.

Pretty well got my questions answered. But just wanted to follow up on the Idaho rate case. In terms of the tenor of that case, how is that going? Have you had any kind of discussions with you know, possible settlement with any parties or anything along those lines?

Well, at this point, no, we have not had any settlement. It is just in the discovery request phase where you know, we're answering various record requisitions and such. The schedule really calls for us to take and have public workshops in late May, in various areas of [Serus] territory for the public.

The staff and [intervenue's] testimony isn't due until almost the end of June. I think the 21st of June or thereabouts. And then we'll do our rebuttals. And then the hearings aren't until the late July and so at some point in there, assuming we aren't real far apart, I'm sure we'll sit dow and have some discussions. But it is just too early to start those discussions yet.

Any read on April's weather so far here at all? Any kind of preliminary on that?

Well, it has been hot and dry.

Ok.

We have got a little bit of precip but not nearly what we would like to see. It is probably it's less than normal but it is better than the zeroes that we got during February and March.

Ok. Best of luck to you.

Thanks, John.

Sir, we have a follow-up from Jim Bellessa with D.A. Davidson.

On the Idaho case, would you discuss briefly the staff's recommendation that you be disallowed gas costs for Coyote's- Coyote Springs 2?

Yeah, Jim, in Idaho on those high cost gas costs, during the PCA, they had suggested that there were -- I can't remember the number, something like $6 million, $5.9 million I think or something like that. They just questioned whether or not it should be included.

And wanted to have a further discussion and felt like passing it through and the PCA was not the place to do it. We agreed and said let's bind it over to the general case. When we did so, the commissioners said well, rather than pick and choose contracts, what we ought to do is just roll all of the contracts that are for the Coyote Springs over into the general case and we'll just review them all at once.

So that's what it is. I think it was $11 or $12 million, they have not recommended that be disallowed. They had a concern about the $5.9 and that was really the piece the staff wanted to look at. And but we rolled them all into the general case and we'll be addressing those.

Thank you.

Sir, we have no further questions at this time. I would like to hand it back to Angela Teed.

Ladies and gentlemen, thank you for joining us today. Analysts and investors may direct questions to me at 509-495-2930. A replay of this conference call will be available today beginning at 12:30 p.m. Eastern Time. The contact information for the teleconference replay as well as for the web cast and slides is available on the Avista Corp web site at www.avistacorp.com. Again, thank you for joining us today. And have a good day.

Ladies and gentlemen, we thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect. Good day.