Avista Corp (AVA) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to your Q4 and Year-End 2004 Avista Corp. Earnings Conference Call. (Caller Instructions)

At this time, we’ll turn the call over to your host, Mr. Jason Lang.

Good morning and welcome to Avista’s fourth quarter 2004 earnings conference call and webcast.

Avista’s earnings were released premarket this morning and the release is available on our website at avistacorp.com.

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, and President of Avista Utilities Scott Morris, Dennis Vermillion, President of Avista Energy, 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’ll 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 Report on Form 10-Q for the quarter ended September 30, 2004, which are filed with the SEC and also are available on our website for reference to the various factors which could cause actual results to differ materially from those contemplated to the extent that these factors are not discussed on this call.

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

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

Thanks, Jason, and good morning, everyone.

Reviewing our results for the fourth quarter in the year-end of 2004, we note that Avista made progress in improving the financial health of the Company in spite of the challenges that arose, including a regulatory disallowance, warmer than normal winter weather in the fourth quarter and below normal hydro conditions.

As you can see, in slide number 3, our strategic business foundation is solid. We continue to be focused on achieving our goals. Our accomplishments in 2004 are important.

We completed the purchase of Mirant’s 50% share of Coyote Springs 2 thermal generating plant, strengthening our position in owning and/or controlling sufficient resources to meet our native load, under a broad range of operating conditions.

We have completed work on upgrading and constructing a major new transmission line and a vital switching station, as well as other key components of our multiyear investment in our infrastructure. This is all part of enhancing reliability for our customers and our region.

And as the economy in our service territory is beginning to improve, we are connected an increasing number of new electric and natural gas customers. Scott Morris will tell you more about all of that in a few minutes.

The utility had its share of challenges during 2004, including warmer weather than the previous year. In fact, we understand that 2004 was the seventh warmest of the last 110 years in Washington, Idaho, and Oregon. In the summer that’s good news for us. But it’s not such good news during the first and last quarters of each year when we receive over one-half of all of our revenues for the year.

Three years ago we set our goals for returning to financial health and since that time, we have reached a number of milestones along the way, including --

* Paying down higher cost debt, almost $300 million, and thus decreasing our interest costs.

* In addition, we have renegotiated our corporate line of credit and extended it from a 364-day facility to a 5-year committed $350 million facility. We see this as a demonstration of our bank’s recognition of the progress we’ve made in returning to financial strength.

* Avista Energy and Avista Advantage both have positive fourth quarter and year-end results. However, in the other business segment we recorded a significant loss, including an impairment to goodwill. Malyn Malquist will have more specific information about this and our quarterly and year financial performance for you later in this report.

The challenge of 2004 led to results that were disappointing to me and that were lower than what our shareholders expected of us. That being said, I am optimistic about the year ahead. We are focused on the activities we must accomplish to meet our earnings guidance and bring value to our shareholders.

Our current snow pack would suggest that we may have below normal stream flows for 2005. But we do have sufficient power generation to meet our loads and we are being successful in implementing a series of productivity measures that are not only cutting costs, they are helping us work smarter and more efficiently.

We are implementing technology such as automated meter reading and GPS outage management to help us make the best use of all of our resources. That said, we will continue doing the things we do well, namely bringing energy and energy-related products and services to our customers and value to our shareholders.

As we reported on January 10th, we have hired Stu Stiles to be the President of Avista Advantage. We’re very pleased to have Stu join the Company on February 7th. He has an excellent track record in executive management and business development, as well as marketing and sales and we expect that his skills will help move Avista Advantage to the next level of performance and contribution.

With that, I’ll turn this call over to Scott for his report. Scott?

Thanks, Gary, and good morning.

As noted in the new release earlier this morning and in slide number 5, Avista Utilities contributed $0.41 per diluted share in the fourth quarter of 2004 and $0.67 per diluted share for the year. Our earnings were negatively impacted, primarily by a write-off of $9.4 million net of tax and cost disallowances by the Idaho Public Utilities Commission (IPUC) in our 2004 electric and natural gas general rate case.

In October we submitted a request for a reconsideration of a portion of the disallowances and in November, the IPUC reaffirmed their decision with minor adjustments. Accounting for minor changes in the disallowance after reconsideration, the loss associated with the IPUC ordered decrease from the $0.20 per diluted share we reported in the third quarter of 2004 to a loss of $0.19 per diluted share we reported in our release this morning.

However, looking forward, the outcome of the Idaho rate case overall is positive for Avista. The Commission approved a $24.7 million or 16.9% increase in electric base rates and a $3.3 million or 6.4% increase in natural gas base rates. The order provides an overall rate of return of 9.25%. These revenues are an important contribution towards our goal of earning allowed rates of return in all the states we serve.

In August, Avista filed a natural gas general rate increase request of $8.6 million or 6.2% with the Washington Utilities and Transportation Commission (WUTC). The Commission approved a $5.4 million or 3.9% increase on a temporary basis in early November, resulting from a settlement agreement. The Commission provided the non-settling parties the opportunity for further review of our filing. The WUTC issued its final order in the case in January, confirming the increase in rates.

An additional step in owning or controlling sufficient resources to meet customers’ needs has been the acquisition of Mirant’s 50% share of the Coyote Springs 2 thermal generating facility in Boardman, Oregon. We completed that $62.5 million transaction earlier this month. With the acquisition, we added approximately 140-megawatts of generating capacity to our power resource mix, to serve our customers’ future energy needs.

On a cost-per-kilowatt basis, this is one of the least expensive natural gas asset acquisitions we’ve seen in the Northwest. We are pleased to report that excluding the time during the transformer outage, Coyote Springs 2 has had an availability rate of nearly 98%. And during January of this year, the plant output has exceeded expectations, with net generation of nearly 300-megawatts, compared to its rated capacity of 280-megawatts. Additionally, when we viewed it in terms of the plant’s favorable heat rate, it is a valuable and needed addition to our resource portfolio.

We recently filed a request with Idaho regulators to include the newly acquired portion of the Coyote Springs 2 plant in base electric rates. Avista is requesting a 1.9% increase in base rates, or $3.2 million.

To mitigate the impact of this rate request on our customers, we have asked the Idaho Commission to approve a 1.9% reduction in the Company’s current power cost adjustment surcharge. This would result in a zero net change to customers’ current rates. We also asked the IPUC for expedited treatment of this request and we are currently considering options for proposed rate treatment in Washington.

As Gary mentioned at the beginning of this report, lack of precipitation was a factor in our earnings in 2004. The year ended with annual stream flows of approximately 94% of normal and hydro production of approximately 523 average megawatts or 95% of normal. This resulted in a $10 million reduction in cash flow.

We started 2005 with snow on the mountains but, as you know, the Pineapple Express bringing much warmer than normal temperatures from the Pacific has blown through the region and our snow pack is currently below normal. The below normal snow pack, combined with a forecast of normal precipitation in future months, would indicate that calendar year 2005 stream flows may be at 85% of normal.

It’s still January and it’s simply too early to adjust our forecast based on early season conditions. But I would like to remind you that we were in a similar position last year at this time.

We have a power cost adjustment (PCA) mechanism in both Idaho and Washington that will mitigate much of the impact of lower than normal stream flows. Of note here is that, in 2005, we still expect to expense the entire $9.0 million debt band in the Washington energy recovery mechanism.

So, in Washington, to the extent that hydro generation is below normal, the impact would flow through our balancing account mechanisms, with shareholders absorbing 10% of the impact. In Idaho, the impact would flow through our PCA balancing account mechanism, with shareholders absorbing 10% of the impact.

One of the indicators of growth for our Company has been the state of the economy in the Pacific Northwest and we’re starting to see a positive turnaround in the communities we serve. Population growth and non-farm employment are both improving in most regions of our service territory and we’re seeing that improvement reflected in the continued customer growth in both the electric and natural gas numbers.

And finally, to bring you up to date on two ongoing activities, I could tell you that --

* The sale of our South Lake Tahoe natural gas distribution properties to Southwest Gas has been filed with the California Public Utility Commission and the regulatory approval process is continuing. That transaction is expected to be completed some time this year.

* Also, our 6-year investment program in transmission infrastructure is continuing. We previously reported that the Beacon-Rathdrum 230-Kb line project was completed in the second quarter of 2004. And in late 2004, phase one of the Dry Creek substation project was completed in Lewiston, Idaho.

These major milestones will help us meet our goal of increasing reliability for customers throughout out service territory.

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

Well, thanks, Scott and good morning, everyone.

As you saw in our news release this morning and as you can see in slide 7, Avista Corp. reported consolidated net income available for common stock of $35.2 million or $0.72 per diluted share for the year.

As Scott told you, our earnings took quite a hit from the disallowance by the IPUC in our electric and natural gas general rate cases last fall, resulting in a loss of $0.19 per diluted share. However, this loss was partially offset by increased earnings associated with having a full year’s revenue from the 2003 Oregon natural gas general rate case and a partial year’s revenue from the Idaho electric and natural gas rate increases and the Washington natural gas rate increase.

For the fourth quarter of 2004, Avista Corp. earned $0.46 per diluted share, compared to $0.31 per diluted share for the same period in 2003.

Gary and Scott have already outlined many of the impacts on last quarter’s earnings. I’d like to note that earnings were positively impacted by the performance of Avista Energy and Avista Advantage in the fourth quarter.

The fourth quarter is historically a high earnings period for our Company. However, temperatures in the fourth quarter were warmer than normal and were warmer than 2003 and this negatively impacted electric and natural gas revenues.

By year-end, stream flows improved from the 90% levels we were forecasting to 94%, due to above normal precipitation in September through December. We had previously forecasted a $30 million reduction in cash flows from the lower levels of runoff.

However, rains in September and October made up for some of the stream flow shortfall. And we were able to sell excess power into the market in the fourth quarter, a time of higher market prices, allowing us to mitigate the $30 million previous estimate down to a $10 million decrease in cash flow.

Avista continues to focus on reducing interest costs and improving its balance sheet. In November, we issued $90 million of 15-year first mortgage bonds with a favorable coupon rate of 5.45%. The proceeds from these bonds were used to repay short-term bank debt.

In 2004, we repurchased $36.6 million in outstanding debt and just last week we redeemed another $16 million of debt with a further $10 million in redemptions planned for February.

We’ve talked with you before about some of our long-term debt that will mature in 2007 and 2008. In December, we entered into the third of three forward-starting interest rate swap agreements that total $200 million.

These agreements will help us manage the risk that changes in interest rates may have on refinancing debt with scheduled maturities in 2007 and 2008. In fact, we’ve locked in lower interest expense for this $200 million of debt beginning in 2007.

In addition, we were pleased to have renegotiated our previous 364-day line of credit with our bankers and in December entered into a $350 million, 5-year committed credit facility. We believe that this will give us continued financial flexibility going forward and it will reinforce our strong relationships with our banking partners.

Looking ahead into 2005, we expect cash flows from utility operations to fund the estimated $135 million budget for CapEx, excluding the Coyote Springs 2 purchase. Coyote is being funded by our bank line, a portion of which will be repaid when we close the sale of our South Lake Tahoe property.

Now, looking at our business segments, the Energy Marketing and Resource Management segment contributed $0.12 per diluted share for the fourth quarter of 2004.

Earnings were favorably impacted by a portfolio valuation adjustment, resulting primarily from increases in market liquidity in the Western power markets. Avista Energy’s commodity portfolio has historically been valued by looking at third party broker market quotes for the first 2 years and then relying on a model for the longer-term portion of the portfolio.

Increased market liquidity has resulted in the availability of reliable and transparent market prices for a longer time period than had been previously available. Based on this change in market liquidity, Avista Energy began utilizing market price quotes for the first 3 years of the portfolio, beginning in the fourth quarter. Avista Energy continues to use a model to estimate forward price curves for the longer-term portion of the portfolio.

We believe that this change in valuation methodology represents the most accurate valuation of the portfolio. This change resulted in a positive contribution of $0.04 per diluted share in this segment in the fourth quarter.

Slide 8 shows the maturity of our maturity of our trading book. As you can see, the majority of the book is front-loaded and with the improved liquidity in the market we can now get the most accurate valuation for the portfolio.

Avista Energy also benefited from an overall decrease in natural gas prices, which was favorable for some short-term positions it held. The markets seemed to be improving with more liquidity and more players participating.

For the year, the Energy Marketing, and Resource Management segment contributed $0.20 per diluted share, compared to a contribution of $0.43 per diluted share in 2003. The decrease in annual earnings is partially attributed to positive affects of accounting for contracts under SFAS 133 in 2003. I will remind you that Avista Power booked a $0.07 asset impairment in the third quarter of 2004, which is reflected in this business segment.

At Avista Advantage, the Company completed its second consecutive quarter of positive earnings, contributing $0.01 per diluted share to earnings in the fourth quarter and $0.01 per diluted share for the year. If you look at slide number 9, the Company’s historical progress is depicted from January 2002 through December of 2004. You have to like that trend line. Don’t you?

We’ve included slide number 10 to show you some operating statistics for Avista Advantage. We believe they further depict the significant growth this business is experiencing. We’re pleased with the performance of the Company. Its revenues increased 18% over 2003 and the costs of processing a bill declined by 11% in the same time frame.

The positive earnings impact is the result of customer growth and a focus on controlling operating costs. We signed 3 major new customers in the fourth quarter, representing approximately 25,000 new bills that we will process monthly. The growth from these new customers will contribute strongly to 2005 results. And as Gary told you, we’re looking forward to the talents and skills that Stu Stiles will bring to the Company.

I must tell you that we are disappointed in our results in the other business segments. We reported a loss of $0.08 per diluted share for the fourth quarter of 2004. There were three primary drivers of the loss --

* First, we took an impairment amounting to a loss of $0.02 per diluted share for a portion of the goodwill at a former Pentzer subsidiary, Metal FX. This subsidiary has made some improvements in its financial results, but in 2004 the business still was not profitable. Our long-range goal is to make the business profitable and revenue opportunities to monetize it.

* Also impacting this other business segment is a $0.02 per diluted share write-off of Avista’s portion of a natural gas storage project partnership.

* During the fourth quarter, Avista Capital elected to buy out two holders of Avista Advantage preferred stock. This transaction resulted in a loss of $0.02 per diluted share for the other business segment. This was a strategic decision on our part. We believe that Avista Advantage can be worth much more in the long-term than the cost of currently buying out these two preferred holders. These two holders held the rights to up to 9.0% of Avista Advantage.

We are reaffirming our consolidated earnings guidance for 2005 to be in the range of $1.20 to $1.35 per diluted share. This would exclude regulatory disallowances, if any. We expect Avista Utilities to contribute between $0.95 and $1.10 per diluted share, assuming normal precipitation and normal temperatures for the balance of the year.

The contribution to the earnings outlook for the Energy Marketing and Resource Management segment is in the range of $0.20 to $0.30 per diluted share. For Avista Advantage, about $0.05 per diluted share and we anticipate the other business segment will lose $0.05 per diluted share.

Although the challenges in 2004 led to some disappointing results, we are well positioned for the coming year and we look forward to earning returns that are more in line with those authorized by the regulators.

Now I’ll turn the presentation back to Jason.

Thanks, Malyn. We’ll now open this call up to 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 are now ready for our first question.

Thank you, sir. (Caller Instructions) David Daykins (ph) of [indiscernible].

Good morning, gentlemen.

Good morning, David.

Hi David.

Good morning, David.

A question for you. You’ve talked about this year eating fully into the $9.0 million debt band before we even take a look at hydro, due to the gas contracts. Can you remind us, does the impact from those gas contracts go away completely as we look forward to ‘06?

David, you know we’ve talked a lot about those high-priced gas contracts. They all ran out in the fourth quarter of 2004 and in fact, they’re not so high-priced any more.

No they aren’t.

They’re actually pretty close to what the market is today and the result of that is until we go in for a general rate case in Washington and reset the midpoint of the debt band, with these higher gas prices, even with normal hydro conditions we’re going to eat the $9.0 million.

We’re close, but we’re right at that level of eating into. If we had some positive hydro, we’d probably be back into not sharing, but actually having the benefit going directly to shareholders. That’s right about where we are, so hopefully that gives you a little better understanding of that.

Okay and the other question I have is can you tell us, on a consolidated basis, what kind of ROE band your guidance for the regulated properties represents?

Well, I can tell you that in Idaho we are expecting to be fairly close to our authorized ROR, which is about 9.25%. We’ll probably be a little bit below that, because we have Coyote coming in and there’s going to be some lag on recovery of Coyote. And so that would be both the electric and the gas in Idaho.

I also believe, in Oregon, that we’re going to be pretty close to our authorized rate of return there, which is in the same ballpark, roughly. In Washington we’re under-earning. The largest under-earning is in the gas side, still, even with the rate increase that we had and I’m just looking for my notes here on where we are at this point in time. So we ended the year at about a 6.0% return on equity.

On the gas side?

On both the gas and the electric side. I’m looking at -- actually, this is total for all the companies. But that should improve pretty dramatically on the Idaho side, because of the rate increase that we had. And so, unless we do something in Washington, I think the gas, as I recall, in Washington was probably going to be in the 5.0 to 6.0% range and the electric is probably in the 7.0 to 8.0% range.

Other than just taking the bite on the PCA from the higher gas costs and either getting that reset or seeing power costs move in your favor, what else can you do? And how long do think it’ll take to kind of work out those issues and get you up closer to your allowed returns in Washington?

Well, I would hope that in 2005 we could get resolution of Coyote in both states and have our electric and gas rates trued up to roughly be able to earn our authorized rate of return in 2006. So we’re looking at 2005 as still transitioning, getting to where we need to be.

We clearly need to get back to an equal footing on that $9.0 million debt band so we’re not having a $9.0 million hit right off the top every year. That hurts and we’ve got to get a true up of our rate days and our expenses in the Washington jurisdiction still and once we do that, I think 2006 we’re positioned to earn those authorized returns.

Even without making additional steps in terms of the balance sheet? I mean, I realize that’s an ongoing process.

Well, I think the next big issue for us is when the high cost debt rolls off in ‘07 and ’08.

Okay.

But having said that, I think that that probably gets factored into some future regulatory filings that get made. So I think that the issue is getting up to earning our rate of return and I think we should be able to be there in ‘06. I know that’s a little later than we hoped. I was really hoping to be closer in ’05, but with these high gas prices, we’re just not going to be there without a true up in Washington.

All right. Thank you.

You bet.

Sam Brothwell, Merrill Lynch.

Hi, good morning.

Hi Sam.

I think David covered most of what I was going to ask, but just to clarify your ‘05 guidance. We’re still assuming a full impact of the $9.0 million debt band in there. Is that correct?

Yes, Sam, that’s correct.

Okay and just running through this very quickly. If we true that up we get your rates set to reflect current market conditions, roll in Coyote and everything, I’m thinking that the utility earning power kind of moves up into the $1.20/$1.25 area. Is that roughly kind of a fair way to think about it?

Yes, Sam, that is correct.

Okay and then one other thing I missed. You talked about something with respect to Advantage having taking out some other owners there. I had to tune out there for a second, so if you wouldn’t mind just running through that again real quick?

Sure. We had three preferred shareholders, two of which were wanting really to try to monetize their investment sooner than we wanted to monetize their investment. And with our decision, really, to try to continue to grow the business and the progress that we’re making. We believe that buying the preferred now would result in benefits for us in the long-term. And so we opted to buy them out. They controlled about 9.0% of the Company, including some warrants that they had associated with the preferred stock and so we bought them out of the premium and we had to book that at Avista Capital as a loss of about $0.02.

Okay. But prospectively, you should be keeping all of those -- oh, the profits are a disadvantage?

That’s right. There is still one very small preferred holder who simply said, “You know, I really like where this is headed and I want to stay with this”, and so they elected not to be bought out. But they would own less than 1.0% of the Company.

Okay. Well, thanks a lot.

Yes.

Thanks, Sam.

Doug Fischer, A.G. Edwards & Sons.

Thank you, good morning, all.

Hi Doug.

Hi Doug.

Hi there. Could you talk to us a little bit about your strategy for truing up rates in Washington State on the -- looks like you need something on the gas side as well as the electric side? And when might we look for you to file and when might there be an expectation of a decision?

Doug, this is Scott. We’re currently just finishing up the numbers and we expect to have a decision some time, I would say, about our process, in February. So that’s really where we are. We don’t have final numbers, but we expect to be able to make that decision in February.

Is it fair to say this is going to take the form of a general case on the electric side?

Probably. I would say yes, that the plan would be to file both a general case on electric on gas in Washington is where the numbers are leading us to, without having the final numbers right in front of me.

Okay and then how much of an impact do you believe weather was, if you can parse that out, abnormal weather? How much of a drag was that for the year, if in fact it was, for the full year?

I think, for the fourth quarter, Doug, it was in the $0.05 to $0.10 range for us. We had a little warmer than normal temperatures in the third quarter, so we had a little bit of benefit there and I think first and second quarter were fairly close to normal. So that probably is also the impact for the year, something in the $0.05 to $0.10 per share range.

Okay and what kind of -- when do you expect that you will be in a position to make a strong case for investment grade credit ratings?

I believe that we’ll have the numbers that would justify it in the fourth quarter of 2005. Now, you know that having the numbers and actually getting the upgrades may not be synonymous and we haven’t seen a positive outlook yet, which usually comes 12 to 18 months ahead. So, realistically, we’re probably looking at 2006 before we can get that upgrade that we’d like to have. That’s my (multiple speakers) --

Then one last question. What’s the long-term outlook for Avista Advantage, from a strategy standpoint? Is it your goal to maintain ownership or to monetize that business?

Doug, for a number of years I said we would take and get that business up to the point where it was profitable and then sell it. But we’re in the business. It is an industry leader. We brought on Stu Stiles now whom I think can probably take it to the next level of contribution. We believe that by 2007 or thereabouts it should have a significant contribution to the bottom line of the Company and therefore we’ll continue to operate it and look at what the future holds.

If we were going to take -- the screens we use, as far as going into new businesses, as we do our strategic planning, it would probably not meet the screens today if we were going to look at it as a brand new business to enter. But, in fact, we’re in it. We are the leaders. We have the people. It’s here in Spokane and so we intend to stay with it, at least for the near future and then we’ll see where it goes from there.

I’d add one thing, Gary, to that and just point out, Doug, it’s not costing us anything. There’re no capital requirements there and so to some extent, it’s a bit of a free option for us. With the growth trajectory it’s on, we want to see how it can do.

If it can continue to grow like this and add earnings for us, then I think it’s pretty valuable to keep it. I think, if we started to see things leveling off or them starting to lose some of their competitive advantage, then strategically there might be other options that would be better for us.

And then maybe, if I can squeak in one longer-term question? Is the profitability of Avista Energy something that we should view as being fairly stable going forward? Is it declining? It’s roughly been declining in recent years. There’s been some choppiness, due to onetime events. But how should we think about that beyond ‘05?

I think that’s a very good question, Doug. But what I would suggest to you is, is that our $0.20 to $0.30, I think, is what we consider kind of the floor on that business and that it should have upside from that position. If it didn’t, I would have to take and look very seriously at whether we wanted to stay with the business long-term, because we do have a fair amount of capital tied up in the business.

Thank you. Thank you, Gary.

James Bellessa, D.A. Davidson & Co.

Good morning. This $9.0 million debt band that created, I think, as a part of the mechanism in 2002 as a part of the settlement agreement, when does it expire?

In 2006.

And so can you get out from underneath the debt band before then or is there another settlement agreement?

What I would just say is that we’re exploring all of our options as we look at the 2005 case, that perhaps we will file in Washington and obviously that might be something that would be on the table as part of the strategy. We might go after something in the debt band earlier than 2006. In 2006, it simply -- it ended, but it didn’t mean that necessarily would go away. It was just a chance for the Washington commission to review the debt band at that point. But it sure didn’t exclude us from coming in earlier and making recommendations for the debt band before 2006.

The Metal FX impairment, do you see anymore of these little things digging at your results in the future or are you about out from underneath the various charges, writedowns, or whatever it is?

Jim, we still have a few things. We have a few entities like debentures, this debentures group where we had investments. The positive news there is that it looks like, preliminarily, they may have their first positive year. We don’t know for sure yet, but it’s at least looking better than it has in the year past.

Metal FX, it’s a good company. They worked very hard to get to where they’re at. They’re basically at break-even, but as we assess the markets and getting prepared that they can sell that, the market for that particular business isn’t where we would like it to be. So we took an impairment to get it closer to market. We would hope to take and look and selling that over the next 12 to 18 months.

And this natural gas storage project writedown, can you elaborate?

Yes. We started exploring a natural gas storage field, which was ideally located with another, well, it was actually with a pipeline company. That pipeline company got into trouble. We stopped development on it. They’ve been bought out and you can probably guess who it was. But the new pipeline company decided not to pursue that.

There was some question on whether or not there were all of the right of ways necessary to build that storage field and with that, we both decided it was time just to take and pull the plug on that project. We started it back and I think, about - I’m going to guess here without looking - but I think it was back in about ’98 or thereabouts. It’s been a long time. It might even have been prior to ’98, but it was around 1998 or thereabouts.

So it’s sat dormant now for probably the last 3 years at least, no investment in it whatever. But we had drilled several test holes, had proven continuity and had looked at the porosity of the field and then there became an issue with one of the landowners as far as the rights to get into it. We stopped that, looked at all of our legal aspects on that, and then the other company got into difficulty and so we waited. They finally, like I say, were bought by someone else and both parties decided, at that point, we just wouldn’t pursue it, so we wrote it off.

Your 2005 EPS earnings guidance is $1.20 to $1.35. Would the last year’s pattern of results, quarterly pattern, be similar?

Yes.

Yes. That’s probably a good estimate, Jim.

And let’s assume that you are able to get your true up of rates in Washington and so forth and you’re hopeful of that by your comments. How much incrementally might there be in earnings for 2006?

Well, I think when we were talking on one of the previous questions, the point was made that if we earn our authorized return we probably be at the utility somewhere in the $1.20 to $1.25 range and I think that’s a fair estimate for the utility.

The sale of the South Lake Tahoe property is saying it’s going to be closed in your expectation sometime later in 2005. Have there been delays? I’d suppose that maybe it would be an early 2005 event, but the way you’ve stated it in the press release it sounds like it could be later.

I think, Jim, we’re just being conservative on that. The hearings have been held. The ALJ (Administrative Law Judge) has heard the case and has to write his order and then, from there, it will go to the commission and we don’t want to -- it was actually a settlement.

So, in our minds, it’s all done, but it just has to go through the process and we didn’t want to prejudge how long the commissioners might take to redo it. And you know in California there’re just a lot of things going on with discussions around replacement of various commissioners and etc.

So we did not want to take and prejudge that it would be done in any particular time. But as far as we’re concerned, it’s completed. We’re just waiting to get our money.

I think Malyn went through the explanation that there were better fourth quarter precipitation and therefore better stream flows and you were able to have better cash flow. Would you go through that explanation? You went out and sold additional power on the wholesale markets?

Maybe I’ll give you just a little bit deeper explanation there, but it is a complicated deal. You know you go, okay, you were expecting $30 million in negative cash flow for 90% hydro and then you got 95% and it was only $10 million, what’s the difference. Well, when we (inaudible - background noise) the 90% we were expecting that the shortfall would largely occur doing the second quarter, when energy prices are fairly inexpensive.

What ended up happening, we got 5.0% back in the fourth quarter, when we could turn around and sell that energy into the marketplace and be the beneficiary of those higher prices and so that 5.0% made up for $20 million of shortfall we thought we were going to have. So the bottom line was instead of $30 million it was only $10 million.

Now that you’re facing, maybe in midyear, some stream flows that aren’t going to be so robust, can you go in the opposite direction?

Well, the good news is we have the balancing accounts in place and so while we could take a fairly significant cash flow hit, the fact that we’re already eating all of the debt band says that only 10% of that hits the bottom line. So, again, if we were at 90% and I would guess, at this point, that would cost us $30 million again, then you’d have about $3.0 million of that that would hit the bottom line.

And so we’re reluctant to change our forecast, because we’ve seen periods where you have a couple of months that it’s really dry and then you can have a couple of months that are also really wet. Right now, our hydro generation is above average, because we’re still seeing runoff of the snow right now, because it’s too warm.

But we’re also -- the fall conditions and all the rain we got, I think, really has saturated the ground and so our hydro guys are saying we could experience 125 to 150% of normal stream flow conditions in the first quarter and none of that gets spilled. It all gets generated through our very most efficient hydro units.

And so even though springtime is looking like we’re going to be well below normal, that’s when it costs us the least to go out and replace that power and we do have Coyote, to the extent that we need Coyote, that would help us there. So I’m --

The other thing, I think, too, Jim, just as a point there, California has had an abnormal amount of high snow pack and that usually runs off all in the spring fairly early. So it could fit in very nicely. It should cause power prices to be lower and also allow us to bring power north, if we needed it.

That’s in the middle of the year or in the spring?

In the spring.

Thank you very much.

Paul Richmond, [indiscernible].

Good morning. I was wondering if you had any estimate of what the below normal hydro costs on a cents-per-share basis?

Good morning, Paul.

Good morning.

Well, again, if we are in the position where we’re eating all of the debt band in Washington, which we believe that we are for 2005, then essentially you would take 10% of the difference in replacement power costs and flow that to the bottom line. And historically, a 10% difference has cost us about $30 million. I think in a normal kind of year that’s a pretty good rule of thumb and so you would expect that that would cost you $0.04 to $0.05 a share.

10% below normal is $0.45?

Right, because it’s about $3.0 million and on after-tax basis that’s about $0.04.

How should we look at the potential for you to take down some more of that 9.75% debt and is that callable? What kind of premium is associated with that?

It is callable, but there’s a may-call provision for the holders and it’s very expensive to do. So we likely -- what we’ve been doing is using some of our extra cash flow to the extent that we have that available and we have been buying back bits and pieces of it, if we see that it’s economically priced for us to do so. Recent prices have been in the $115 to $120 million range and it’s hard to justify economically doing that versus holding it for the next three years.

At Advantage, you said bill-pricing costs were down 11% per bill. Is that -- are you moving the numerator or denominator on that calculation or both?

Both.

Which is more powerful?

Probably the numerator is more powerful.

And then on buying out the holders of the Advantage preferred, what kind of -- was that more -- is there going to be a long-term payback to lower financing costs or was that opportunistic on you thinking there’s unrealized value in the business? Which decision drove that?

That was more opportunistic on our part.

Okay. Thank you very much.

Thanks, Paul.

Todd [indiscernible], John Hancock.

Hi, good morning, everyone.

Hi Todd.

Following up on what was just said about the hydroelectric conditions and the $30 million and the difference of replacement power, could you just comment on the general hydroelectric conditions in the Pacific Northwest, particularly how they’re shaping up in ‘05 relative to ‘04?

I think, overall, on the Pacific Northwest, especially on the west side of the state and in some of the other areas they’re substantially below normal, at least in the preliminary. If you remember, our early bird warning as far as snow pack, we don’t start measuring until January and then we measure it clear out through March and April. April, I think, is the last official snow forecast. So we have a lot of months left to come.

But the early initial for January snow pack would show that we’re well below normal, both in the Snake River, which feeds our sister utility to the south, on the west side, which has several of the municipalities that have hydro plants over there. But again, I would just suggest to you that it’s early and there’s a lot of precip that would normally come in the next couple of months.

Okay, great. Thank you very much.

Thanks, Todd.

John Hanson, Imperium Capital.

Good morning.

Hi John.

Morning, John.

Just a couple quick one here, as we’ve hit the hydro pretty well, but just to make sure I understand. You alluded to the fact that having Coyote Springs helps to offset the hydro situation. Does that also help the non-reg side of the business, having Coyote Springs in that situation?

No. They’re not tied at all. We do not -- Avista Energy has no tie or responsibility to any of the utility’s assets.

Okay. The hydro situation in terms of the marketing and trading business, that’s potentially creating some opportunities in terms of price volatility or not?

Yes, it sure does.

Okay.

They like that kind of thing.

Okay, good. Let me jump over quickly here to the Idaho case. That was interesting, with Coyote Springs, that you were able to, at least on the surface, file, but to have a very modest or netting effect on the overall customer rates.

Yes.

And that you were going to do that in a single issue case?

That is correct.

What’s the timing of that, then? That must be a little bit quicker than a regular case.

Well, yes. We’ve asked for expedited treatment and we in fact -- there’s a proposed schedule from the staff that they would have comments in by March 1st and reply comments by March 15th and the order to follow.

Wow.

So that is really quick and we appreciate the staff’s support of doing that. One thing that made that possible. We just had gone through the general case and so they had all the current numbers and since this is a single issue, it was adjusting the power supply costs as well as getting it into rate base, and so that’s what we filed for. And they’ve been very supportive of helping us move that forward.

Okay. Thanks and Malyn, I could answer you during your presentation, but I did like the look of that Avista Advantage (curve) (ph). Thank you very much.

Thanks, John.

Richard Greenberg, Donald Smith & Co.

Good morning. If memory serves me correctly, I think you have $200 million or about $4.00 a share of equity in the energy marketing area, so your $0.20 to $0.30 implies 5.0 to 7.0% return on equity, which is clearly below what you’d expect. Internally, you must set a higher goal. I know for our purposes you’re setting a low expectation and I would expect that you’d like to at least get a 10% return on that equity, which would imply $0.40 in earnings. Is the environment such with the higher volatility and increased liquidity, is it possible that you’ll achieve that and if not, are we at the point now where you should be taking out some more equity from that business? Or are you still uncomfortable that if you take out too much equity you’re going to really hamper your ability to stay in that business?

Richard, I think those are very good questions and very perceptive on your part. In fact, we do have higher returns on that. There are two issues. One is that you need a certain amount of capital in that business to make it successful, but the other thing is we do dividend up all the earnings or at least half of the earnings back to the Company, that comes out of Energy on a quarterly basis.

But that is an issue and as I said earlier, if we can’t get back to where I think that business should be for the earnings or for the capital that we have invested in it, then we’re going to have to look and see if that’s a business we continue to run long-term.

Okay, but you would not say -- I mean, if you had to take a best guess, over the next year, you don’t think you’re going to reduce the capital allocation to that business?

I don’t anticipate reducing capital allocation to that business in the near-term and to answer your other part of the question that I didn’t answer was I do expect, with the volatility and things, for improvement in that business. But we’ll see where we’re at. We’re being -- we think we’re at -- we think that what we’ve put out there is a floor and I would expect that internal objectives for Dennis, who’s sitting here in the room, are much higher as I look at him.

Okay. The second question is I just wanted to know -- and I don’t know if you guys have this at hand, but the amount of equity that you still have invested in the other businesses, in total, and then the amount of equity in Avista Advantage?

The amount of equity we have in the other businesses we don’t have in front of us. I don’t have that. But Advantage, do we know -- yeah, Advantage is only a couple of million bucks, so.

Okay and then finally, can you stick your neck out at all? I mean, this other business I’m sure is a little frustrating to shareholders and I’m sure more frustrating to you. Are you willing to say that ‘06 you would hope that that business would be back to break even and we wouldn’t be suffering these losses anymore?

Which business was that?

The other segment in total for ‘06.

Oh. Well, I’d like to believe that, but I can’t say that at this point, because we still have the investments in Avista Ventures, which is that investment fund and what have you. We don’t have much ability to take and control that and Metal FX, it will also depend.

If we’re going to sell that out in 12 to 18 months or thereabouts, within two years, that could fall into ‘06. And depending on what the market is when we sell it will depend on whether this additional either impairment or write-off if we’d sell it at that time. Or it could be a gain, too, for that matter. That’s what we’re hoping for, but I guess I’m kind of like you. I’ve been disappointed enough times that I’m being very conservative and a little bit cynical.

Thanks a lot, guys.

Thanks, Richard.

Laurie Woodland (ph) Schroeder Investment Management.

Good morning. My question is more fixed income related. I see the amount of restricted cash at the end of the year and what I’m wondering is, with stream flows relatively low, are you expecting that that number might increase if you have to purchase more power? Or are you feeling that with Coyote Springs you really don’t need to go to the market to purchase more power?

Laurie, good morning. I’m not sure we’re understanding your question of what you’re talking about, restricted cash.

Well, I see on the balance sheet a restricted cash number of looks like $32,875,000 at December 31st.

Oh. Yes.

That has to do with Avista Energy and their bank line.

Right.

And so it really shouldn’t have any impact on Avista Corp. and Avista Utility.

Can you give me an idea of where you think that number might be? Are you expecting it might have to rise over the course of the year? Are you going to see -- I’m presuming it’s pledged for your trading agreement?

That’s right and it really depends on the activity in that business. If there’s a lot of volatility in that business and we’re able to put positions in place that will generate earnings for us, then we could see that number grow.

Or go down.

Or go down. Also, if there’s significant price volatility, that number could grow some. But the bank line that they have and the equity that they have in the business should be sufficient to handle all of their needs without any additional requirements for Avista Corp. to make any investments there. So I don’t think it will impact the utility side of the business or the debt that’s there at all.

Yes. I might just remind you that Avista Energy has its own line of credit and it’s a committed line of credit, which is kind of unusual for that business, which I think the banks are well pleased with the work they’ve done and where they’re at. So we’re pretty proud of the job they’ve done.

Could you remind me of the size of that line?

$110 million.

I’m sorry, $110 million?

$110 million. Yes.

Okay, great, thank you.

You bet.

This concludes the conference call. I’ll turn the call back over to the presenters for closing remarks.

I’d like to thank everybody for joining us today. Analysts and investors may direct questions directly to me at 509-495-2930 and again I’ll ask the media to please direct their questions to Jessie Wuerst, the Avista communications manager at 509-495-8578. A replay of this conference call will be available today beginning at 12:30 PM Eastern Time. The contact information for the teleconference replay as well as for the webcast and slides is available on the Avista Corp. website at avistcorp.com.

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

Ladies and gentlemen, thank you for joining us on the conference. You may now disconnect.

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