Avista Corp (AVA) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to your second quarter 2004 Avista Corporation earnings conference call. My name is Liz [ph] and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will, however, be facilitating a question-and-answer session towards the end of the conference.

If at any time during the call you require assistance, please key star followed by zero and an operator will be happy to assist you. As a reminder, this conference is being recorded today, Wednesday, July 28, 2004, for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Ms. Angela Teed, Investor Relations Manager. Please go ahead, ma'am.

Good morning and welcome to Avista's second quarter 2004 earnings conference call and webcast. Avista's earnings were released pre-market this morning and the release is available on our website.

With me today in our offices in Spokane, Washington, are Avista Corp. Chairman of the Board, President and CEO Gary Ely; SVP, CFO and Treasurer Malyn Malquist; the President of Avista Utilities, Scott Morris; and VP and Controller Christy Burmeister-Smith.

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 2003 Form 10-K and the company's quarterly reports on Form 10-Q for the quarter ended March 31, 2004, which are filed with the SEC and are also available on our website, 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.

We're using some slides as part of today's presentation. These are available on the Avista website in the investors' section. To follow along with the webcast, simply click the forward arrow to advance the slide. The slides are also available to be downloaded and printed at your convenience.

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

Thanks, Angie, and good morning, everyone. I'll start our report to you this morning by telling you that our earnings for the second quarter of 2004 reflect a continuation of solid financial performance for our company. However, the results are somewhat lower than we budgeted. This was driven primarily by the under performance of the energy marketing and resource management business segment. You'll more about that in a minute.

First, I'd like to say a few words about two recent events which are in part of our efforts to rebuild the value and to focus on strengthening and building our business here in the Northwest. As was announced in a news release last Wednesday, we have reached an agreement with Southwest Gas Corporation to purchase the South Lake Tahoe natural gas distribution properties. The cash purchase price for the properties is $15m and the sale is subject to the customary closing conditions and regulatory review, including approval by the California Public Utilities Commission. Scott Morris will talk more about this later.

The other event I'd like to mention to you is a non-binding letter of intent we have signed with Mirant Corporation for Avista to purchase their half interest in the Coyote Springs 2 generating facility. We have thoroughly reviewed the opportunity to repurchase the balance of the plant and the additional 140 megawatts of energy it produces. Our decision to seek to acquire full ownership of the plant is driven by a potentially attractive price, together with Avista's familiarity and experience with the facility. Together, these factors outweigh other considerations, such as the concentration of more energy coming from a single generating resource.

In addition, full ownership of the plant will give us control of a generating asset that will fit our long-range resource plans. Those plans call for adding generating capacity to our native loads, beginning in 2008 or so. The balance between the cost of permitting, financing and construction of a new natural-gas generating plan, weighed against the cost of acquiring the other half of Coyote Springs 2, also tip the scales strongly in favor of the purchase opportunity.

We have agreed with Mirant to keep the specifics of the negotiations confidential until the purchase agreement is finalized. Any agreement would require approval by Mirant's bankruptcy court and the Federal Energy Regulatory Commission and that could be later this year or early in 2005. We'll keep you informed of our progress in acquiring this asset.

At this time, I'd like to turn this call over to Scott Morris, the President of Avista Utilities, to give you an overview of the utility during the second quarter. After that, our CFO, Malyn Malquist will provide a summary of the business unit activities and our financial performance. Scott?

Thanks, Gary, and good morning. As Gary told you, we have reached agreement with Southwest Gas Corporation to sell Avista's South Lake Tahoe properties to them. We acquired the natural gas distribution properties in 1991 as part of our acquisition of certain Oregon and California natural gas assets of CP National Corporation.

As we continue our focus on our core business and on building our business in the Northwest, this transaction makes sense. The South Lake Tahoe properties are isolated from the rest of our system and it's the only area we serve in California. This will eliminate our service under California jurisdiction. Southwest Gas will serve the 18,000 customers in South Lake Tahoe as part of their service to their Northern Nevada Division customers.

On another note, as you know, we filed a natural gas and electric general rate case in Idaho last February. The case is progressing according to the timeline established by the Idaho Public Utility Commission. The public hearings have been held and we were in Boise just last week for evidentiary hearings. After reviewing the IPUC staff recommendations, we have revised our annual revenue requirement for electric rates downward to $31.1m or a 21% increase, compared to the original $35.2m, which would have been a 24% rate increase.

You will recall that as part of our request, we offered to lower our power cost adjustment rate, spreading out the recovery of the deferred balance from one year to two years. This reduced the company's request down to an overall rate change of 8.6%.

On the natural gas side, the annual revenue requirement has been lowered to $4.1m or 7.8% compared to our original request of $4.8m or 9.2%. The IPUC staff recently proposed an increase of $23.1m in electric revenue and a $3.1m increase in natural gas revenues.

Also in Idaho, we filed a purchased gas cost adjustment with the IPUC last Friday. It requests an increase of 14.2% or $7.8m in annual revenues. This reflects higher wholesale natural gas prices during 2004 as compared to 2003.

We expect a decision on both the general rate case and the PGA filing by mid-September. We anticipate filing PGA requests in Washington and Oregon in the next few weeks.

It's a pleasure to tell you that the economies of the communities in our service territory seem to be on the rebound. We're experiencing natural gas and electric hookups that are ahead of schedule for the year and, as we indicated in previous reports, we expect 2% electric customer growth and 3% gas customer growth in 2004.

As far as our hydro generation and stream flows are concerned, we told you earlier this year that we were forecasting below-normal numbers in both areas and conditions haven't changed much. Our current projections call for calendar year hydro generation to be 483 average megawatts or approximately 88% of normal. Stream flows for our system are forecasted to be about 82% of normal.

And finally, as an update on the Coyote Springs 2 transformer, I am very pleased to tell you that repairs have been completed and the transformer arrived in Houston just this morning. It will be loaded onto a rail car for transport to the facility in Boardman, Oregon, and we expect the plant to be on line by the end of September. A new backup transformer is being manufactured by a different vendor and we will be-- and it will be delivered to the facility later this year.

And with that, I'll turn it over to Malyn.

Thanks, Scott, and good morning, everyone. As Gary told you at the beginning of this call, we are continuing our progress in achieving our financial goals, however we are disappointed in the performance of one business segment for this quarter.

Our net income available for common stock for the second quarter of 2004 increased to $10.1m as compared to $8.4m in the second quarter of 2003. We had earnings of 21 cents per diluted share this quarter, which is 4 cents per share more than we earned during the same quarter in 2003.

As we noted in this morning's release, the earnings contribution from the energy marketing and resource management business sector for this quarter was 3 cents per share, 4 cents less than the same period last year. The second quarter is historically a low earnings quarter for Avista Energy. In addition, some thermal-generating assets were idle due to the availability of lower-cost hydroelectric generation.

For example, our Lancaster plant did not run enough to cover its entire quarterly demand charge, due to the availability of other lower-cost resources. In addition, the assets we manage for other entities are less valuable when hydro runoff is strong.

We expect that the third and fourth quarters of this year will see a return to more normal generation. In fact, we have already sold enough output from the Lancaster plan in the third and fourth quarters to entirely cover the demand charge.

Year-to-date, earnings for this business segment were 10 cents per share or 24 cents per share less than the same period in 2003. The majority of the year-to-date 2003 earnings in this segment related to the settlement of positions with certain Enron affiliates and the positive effects of accounting for trading activities under SFAS number 133.

Avista Energy continues to contribute positively to earnings as it has every quarter for the past four years and we continue to have confidence in this business. In fact, just last week we successfully renewed Avista Energy's $110m committed line of credit. We believe this demonstrates the bank's recognition that Avista Energy continues to be a strong, focused performer in Western Energy markets. The renewed credit facility will provide financial flexibility going forward, as well as reinforce our strong relationships with our banking partners.

A major difference between results for the second quarter of 2004 and 2003 were subsidiary losses booked in 2003, which show up in the ``other'' segment and as a special line item associated with the sale of Avista Labs. We are very pleased to report no losses in the ``other'' segment in the most recent quarter.

At Avista Advantage, second quarter earnings, the loss of a penny, were primarily the result of the settlement of an employment agreement. Earnings for the quarter would have been positive but for this settlement.

Overall, this business segment continues to show positive trends in results due to improved focus on client retention, new services for current clients and new client growth. In fact, we saw an 8.2% increase in billed sites during the second quarter of 2004 as compared to the same period last year and we added 17 new customers in the first six months of this year.

Last but not least, the performance of our utility with our internal targets. While we continue to earn below our authorized utility returns, we are making progress and taking appropriate steps to move closer to our authorized return on equity levels.

We have successfully completed the renewal of our corporate line of credit. The new $350m committed credit facility is a successful syndication of our current eight banks, along with seven new banks. This increase in our credit facility is the second in as many years and it provides continued financial flexibility going forward.

As you know, one of our key strategies is to lower interest costs by repurchasing high-cost debt. We continue to make progress on this. In the first six months of 2004 we repurchased $16.2m of high-cost debt and just this month we repurchased an additional $12.7m of high-cost debt. We now have repurchased just under $29m of high-coupon debt in 2004 and we are over halfway to achieving our goal of repurchasing $50m in debt this year.

We believe that we are on track to meet our expectations and we are reaffirming the earnings outlook for the year of between $1 and $1.20 per diluted share with Avista Utilities' contribution to be in the range of 75 to 90 cents per share. It is anticipated that Avista Advantage will break even to have slightly positive earnings for the second half of 2004 and we anticipate the contribution from the energy marketing and resource management business segment to fall within the 25 to 35 cents per share range that we previously reported to you. We will share with you our 2005 earnings guidance during the third quarter conference call on October 21st.

As we head into the second half of 2004, we will continue on course with our operations and business strategies, which we believe are making good, solid progress for our company. Now I'll turn this 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 Jessie Wuerst at 509-495-8578.

We're now ready for our first question.

Ladies and gentlemen, at this time we will conduct a question-and-answer session. If you wish to ask a question or make a comment on today's presentation, please key star, followed by one on your Touch-Tone telephone. If your question has been answered and you wish to withdraw your registration, please key star followed by two.

Your first question comes from the line of Sam Brothwell, Merrill Lynch. Please go ahead.

Hi, good morning, everyone.

Good morning, Sam.

A couple questions. Malyn, you alluded to still under-earning your allowed ROE at the utility. I wondered if you could give us any more color on that, kind of the magnitude, where you are versus, you know, your allowed level? And secondly, with respect to Coyote Springs, I assume the plan there, if this transaction is consummated, the plan would be to add that to the utility's resource mix. Would you have to go in for a general rate case to do that or could you do a separate proceeding along the lines of what your friends out in Belleview did?

Sam, the utility earned about 7.6% on average for the 12 months ended in the second quarter and so that's well below average authorized ROE, which is about 11%. Of course, the biggest piece of the under-earning is in the Idaho jurisdiction and Scott talked about the revenue relief that we've asked for there. That will go quite a ways towards getting us back to earning our authorized return. It's not-- it's not going to get us all the way, but it'll be a big step in that process.

And if I heard you right on that, staff recommendation there was for a $23.1m increase in electric and $3.1m in gas?

That's correct.

OK.

Now the second question regarding Coyote, we have-- have had very preliminary discussions at the staff level around what we do with Coyote. There actually are some benefits to having that second piece of Coyote that will come to us and basically accrue as a result of the ability to sell that into the market place. However, having said that, we really have not put together our regulatory strategy for how we might put that into rate base and that's something we'll have to work with the commissions on.

Just to be clear, you are-- your intent in pursuing those discussions with Mirant are aimed at putting that additional share of Coyote into the utility as opposed to, you know, holding it as a merchant plant. Is that right?

That's correct, Sam.

OK. Thank you very much.

Thank you.

Thanks, Sam.

And your next question comes from the line of Chris Potter of Citigroup Investments.

Hi. I was wondering, the Avista Energy loan or bank line, does it have-- is it connected to the Avista Corp. in, like, credit, I mean, cross-default or anything like that?

Chris, no it's not. It's strictly a stand-alone line of credit.

OK. Thank you.

Um-hmm [affirmative].

And your next question comes from the line of Paul Devas [ph] of Value Line. Please go ahead.

Hi. This is Paul Devas. I have a few questions for Scott. First, could you please repeat what the revised gas request is?

Sure, Paul, I'll be happy to do that. Let me find that for you. The-- are you talking about the company's revised gas request?

Yes.

Our natural gas request was lowered to $4.1m or 7.8%, compared to the original request of $4.8m or 9.2%.

OK. And is there any change in the allowed ROE that you're asking for? And what does the staff recommend for ROE?

The staff recommended 10.4%. We did not revise our request of 11.5%.

OK. And was that property that you've sold in Lake Tahoe, is that contributing anything to earnings?

It was contributing something to earnings, Paul. The rate base amount is on the order of about $11m and it was declining over time and so, you know, we obviously will need to reinvest the $15m proceeds.

OK. Thank you.

Your next question comes from the line of Doug Fischer of A.G. Edwards. Please go ahead, sir.

Good morning.

Good morning, Doug.

Good morning, Gary. A couple of questions. First, any expected gain or loss on the sale of the South Lake Tahoe property?

Doug, this is Malyn. Good morning. We are selling it at a slight gain, but, as you know, there will be regulatory proceedings and potentially adjustments to that as we work through that with the California commission.

So at this point you would expect the book impact to be-- on the balance sheet to be relatively modest, is that what you're saying?

Yes, thank you.

OK. The-- with regard to hydro conditions, I'm a little bit confused because you talk about energy and marketing falling short due to availability of hydro, in part, and then you talk about hydro being below normal. Maybe it's a timing issue as to when the hydro is available, but maybe you could elaborate on how those two co-exist?

I think, Doug, if you think about, Avista Energy covers the WACC or the western 11 states, British Columbia and Alberta and we're just talking about runoff on our drainage system, which is basically the Clark Fork and a little bit on the Spokane River. So that's how you get that mismatch.

OK. That's helpful.

And I would, also, just that we're giving you an annual average number, so, again, the 88% is for the year as opposed to the majority of the runoff is coming still in the second quarter, Doug, as you know.

OK. So it's a little bit of both. The runoff came and-- Did the runoff come sooner than normal?

No, actually, you know, we started out the year very good in snow pack and then we basically didn't have any precip in our drainage areas from February through about April and then what did come off came off fairly quickly. What helped, though, is we had a lot of precip during the end of May and into June that kept the averages up. So we actually, I think, in our last quarter if you go back and look, I think we said 86% of normal generation and we've actually gained a couple of percent between last quarter and this quarter.

Maybe the more relevant question is for energy and marketing, do you-- have the results of the second quarter lowered your expectation for the year within that range?

No, it really hasn't, I don't believe, lowered our expectation within the range. As you remember -- and we've talked about this before -- our external target for them is different than our internal target for them and we have lowered our internal target, but our external target, that's why we're confident that they will be within the range.

OK. And then lastly, remind us who Mirant was-- does Mirant have its interest of Coyote Springs 2 under contract and if so, to whom under what kind of rough terms? Just any kind of color there?

Doug, as far as I know and our understand is, they do not have it under contract. It's strictly a merchant plant and has no signed off-takers.

OK. And do you have a need for that capacity at this point in the utility?

Well, I could let Scott talk to that, but the fact of the matter is, during certain quarters we certainly do have a need for that generation, even today, because usually, you know, third quarter's a short quarter for us, so we go out and buy that. This will allow us to take and run the unit.

And as we move forward, our IRP, our integrated resource plan, our next resource was additional natural gas generation and so this fits in very well to make the plan. We're just doing it a little bit earlier than we would otherwise.

When did the IRP call for new capacity?

I think it was around 2008 was the date that it actually called for additional generation.

OK. Thank you. That's helpful.

Thanks, Doug.

And your next question comes from the line of James Bellessa of D.A. Davidson & Company. Please go ahead, sir.

Good morning.

Good morning, Jim.

Do you expect the purchase from Mirant to be rate base immediately or do you have to wait for a few years before that gets rate based?

Well, our plan right now, Jim, would be to-- Again, I think Malyn said we'll discuss it, but in Washington we will perhaps make a decision on whether we make a rate filing this year or next. I would say that's probably our plan at this point in time. Idaho we'll just have to take a look at it later.

Is the startup of Coyote Springs 2 a little later than you had hoped for?

It's probably-- you know, we were a little concerned that the boat got lost in the Bermuda Triangle because it was actually due into the Houston port about six days ago, but it's there this morning and they're getting ready to unload the transformer. So that's put us back at least a week and then we'll just how to see how we go, going forward.

We've been conservative in when we'll bring that unit online, by the end of September. We actually-- the transformer should be there sooner and we've already started some of the preliminary run-throughs on the various equipment, making sure everything's ready to go. So it may be up quite a bit earlier than the end of September, but that's our conservative estimate.

As you might remember, what we did on that, Jim, is we went out and purchased power to cover all of our loads because we didn't-- we didn't want to take the chance of not having it available to us. So as we bring that unit on line, we may have resources that we can sell into the market.

Can you give some color about the settlement costs for an employment agreement, what that was all about?

Well, basically we don't talk about those things as far as human resources, but it was just time to make a change in the leadership there. We did so and, as part of that, there was an employment agreement that we felt good about addressing and part of that required a payment of funds.

Do you have a new chief yet?

Actually, we should be finding out in the next few days. We have an offer out.

And can you go through the IPUC staff's recommended revenue requirements.

I'll let Scott do that. He testified for us.

Well, Jim, I'm not sure I know your question. I know a couple of things. Are you speaking about why we reduced our overall request from $35m to $31m?

No, I understand that one. What is the recommendation by the staff at this point?

Oh, their staff is $23m on the electric and $3.1m in gas and that's their-- that was their staff recommendation at this point in time.

Thank you very much.

As a reminder, ladies and gentlemen, it is star-one to ask a question. And your next question comes from the line of Doug-- John Hansen [ph] of Imperium [ph]. Please go ahead, sir.

Yes, good morning.

Good morning, John.

Just a clarification on one item before I ask another question is, the Coyote Springs purchase, is that-- do you have an agreement or a term that allows you to not go through if it doesn't get favorable rate treatment in Washington?

No, we don't.

OK. All right. The next question I have, though, kind of following up on that for Washington rate case, would that be the major deciding factor in terms of a Washington rate case or do you think that the atmosphere is there for a Washington rate case any time without that?

What I would tell you is, first of all, we consistently evaluate our requirements in all the states that we serve. You know we did Oregon a year ago. We're in the middle of an Idaho case. What I can tell you about Washington is that we've continued to do evaluations there and, obviously, if we do consummate the purchase of Coyote Springs it would probably dictate us taking a real hard look at whether or not we would file a case in Washington.

Just quickly on Idaho, the hearings are now over in terms of the public hearings?

We did the evidentiary hearings last week. We had some public hearings this week, so--

OK.

--at this point, the order should be out some time in mid-September.

OK. And then lastly, just in terms of the marketing part of the business, what conditions should we be looking for in a future quarter that would be-- would look for an improvement for that business?

Well, I think-- I think, John, from our standpoint, the big issues in the second quarter was, we just plain didn't run Coyote-- or, excuse me, Lancaster enough to cover the demand charges on it. They've already, as Malyn said, sold it out in the third and fourth quarters, so those demand charges are already covered. So with the assets we manage and any volatility in the market, it will allow us to increase and get back on track there. So we fully expect the third and fourth quarter to be on budget.

OK. Thank you.

And your final question is a follow-up from Doug Fischer from A.G. Edwards. Please go ahead.

Thank you. Scott, I missed what you said with regard to the Idaho electric amount. You reduced your request because you're spreading the fuel and purchase power recovery over more years? Repeat that.

Yeah. OK, well, we lowered our request from $35m to $31m and that was driven by a couple of issues. We did some things with our depreciation rates in Idaho to really match them with Washington's. We levelized some revenue requirement on Coyote Springs for the first 10 years and that really drove the majority of the balance from $35m to $31m.

What I meant about the 8.6%, Doug, remember we went ahead and were lowering our purchase cap-- purchase cost adjustment mechanism and we're spreading out the deferred balances for a couple of years? So we're really-- we're lowering the PGA and we're adding to base rates, just like we did in Washington. So the overall impact to customers in Idaho is 8.6%, if that makes--

You weren't talking about any change there. That--

No.

That's still the original--

That's still the-- Yes, $35m to $31m, so the overall impact to customers, 8.6%, in comparison to the 31% that we revised our increase request in Idaho.

Doug, if you remember, we were collecting a surcharge of about 19% from Idaho customers and had we continued that it would have run out mid-next-year. What we offered to do to decrease the impact to our customers was extend that out for another year. So our surcharge will drop, you know, fairly substantially and collect it over two years versus the balance of one year.

That took the general rate case, the original number -- I'll just use the original number of 24% -- down to 11% and since we reduced this other, it took it from 21% down to 8.6% is what the customer will actually see.

OK. And then clarification on this Lancaster issue. Have you sold out the capacity or you sold enough to cover the demand charges? I'm a little confused as to which you're saying there.

I probably misspoke, Doug. The answer is we've sold enough already to cover the demand charges for the third and fourth quarter, not sold out.

OK. Thank you so much.

Thank you.

Thank you.

There are no further questions in queue, gentlemen. I turn it back to you for your closing remarks.

Ladies and gentlemen, before we sign off today, I want to take the opportunity to tell you that I'm leaving Avista on August 20th and will be embarking on some new opportunities with my husband in Washington, D.C. It's been a pleasure working with all of you.

I'm pleased to introduce to you our new Investor Relations Manager, Jason Lang [ph], who begins his new position on August 2nd. Jason has been with Avista since 1998. Prior to joining our company he worked at the Sallie Mae Corporation.

I'd like to thank you all for joining us today. Analysts and investors may direct questions to me at 509-495-2930. I'll ask the media to direct their questions to Jessie Wuerst, Avista Communications Manager, at 509-495-8578. 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 webcast slides, is available on the Avista Corp. website at avistacorp.com.

Again, thank you for joining us and have a good day.

Ladies and gentlemen, that concludes your presentation for today. We thank you for your participation and have a great day.