Avista Corp (AVA) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter Avista Corporation's Earnings Conference Call. My name is Alexis, and I will be your coordinator for today. [OPERATOR INSTRUCTIONS] I would now like to turn the presentation over to your host for today's call, Mr. Jason Lang, Investor Relations Manager. You may proceed, sir.

Thanks, Alexis. Good morning, everyone. Welcome to Avista's First Quarter 2006 Earnings Conference Call and Webcast. Avista's earnings were released premarket this morning, and the release is available on our website at avistacorp.com. Joining me this morning are Avista Corp's Chairman of the Board, President and CEO, Gary Ely; Senior Vice President and CFO, Malyn Malquist; the President of Avista Utilities, Scott Morris; the President of Avista Energy, Dennis Vermillion; and Avista Corp Vice President and Controller, Ann Wilson.

As a note to those of you on the webcast. in a change from past webcasts the slides will now advance automatically during the course of the presentation. The slides will be available for downloading on our website at avistacorp.com following this presentation. There will also be a replay of this webcast available on our website later today. Before we again, I would like to remind you that some of the statements that will be made today are forward-looking statements that involve risk and uncertainties which are subject to change. For reference to the various factors which could cause actual results to differ materially from those discussed in today's call, I will direct you to Avista's 2005 form 10-K, which is available on our website. Now I would like to turn this over to Avista's Chairman of the Board, President and Chief Executive Officer, Gary Ely.

Thanks, Jason. And good morning, everyone. I'm pleased to report that this quarter all of our businesses performed on target, and each business segment improved as compared to the first quarter of last year. Our utility operation had a strong first quarter due, in part, to the benefit of lower electric resource costs and the positive effect under the Washington Energy Recovery Mechanism, or ERM. We have made a filing with the Washington Commission requesting that the deadband portion of the ERM be eliminated. Scott Morris will further discuss this in a couple of minutes. Also contributing to the increase in earnings for Avista Utilities was the sale of claims we had against Enron corporation and certain of its affiliates related to the construction of the Coyote Springs 2 generating facility. Malyn Malquist will provide more details later on this in the presentation. Another contributor to our earnings this quarter was the performance of Avista Advantage. This company has continued its trend of positive earnings growth, and is on track to meet its targets for the year.

After a difficult 2005, Avista Energy has taken steps to improve its performance and we are pleased with the results from this business during the first quarter. Dennis Vermillion will have further explanation on the results of Avista Energy later in this call. In February 2006, the Company's Board of Directors made the decision to ask shareholders to approve a change in the Company's organization, which would result in the formation of a holding company. The proposed holding company would become the parent of Avista Utilities and Avista Capital. By forming a holding company, we position the Company to better respond to the opportunities and risks arising from the utility industries changing business and regulatory environment in a manner that best serves the interests of our shareholders and our customers. We also believe that the new structure would permit investors, analysts and rating agencies to more easily analyze and value your individual lines of business. The proposal is included in the proxy statement and will be voted on by our shareholders at our annual meeting next week.

In a brief look ahead at the remainder of 2006. We expect that a portion of our earnings generated during the first quarter could be reversed during the remainder of the year. This is related to the ERM deadband at Avista Utilities and the difference with respect to recognition of earnings on an economic and accounting basis at Avista Energy. Malyn will provide more specific earnings guidance later in this call. On a positive note, runoff has been good and with a cool spring it has been coming off at a reasonable rate, allowing us to capture much of it for generation. Overall, I am encouraged on how this year is shaping up. Now I'd like to turn this call over to Scott Morris for his report. Scott?

Thanks, Gary. And good morning. As we reported in our news release this morning, Avista Utilities contributed $0.53 per diluted share for the first quarter of 2006, compared to $0.39 per diluted share for the first quarter of last year. The increase in our first quarter results was partially due to our electric resource costs being lower than the amount included in base retail rates. This was due, in part, to improved hydro generation from higher than normal precipitation and warmer than normal temperatures. As a result of warmer temperatures and lower retail loads, we were able to sell excess generation in the wholesale market at relatively high prices which reduced our electric resource costs as compared to the amount included in base rates. Fuel costs were also lower than expected, and we optimized our available resources through sales of fuel and power in the wholesale market. And as a result, we recognized the benefit of $5.2 million, or $0.07 per diluted share, on a net of tax basis in the ERM deadband during the first quarter of 2006, as compared to absorbing $200,000 of the deadband in the first quarter of 2005.

In January, we made a filing with the WUTC to request the continuation of the ERM and the elimination of the $9 million deadband. If the deadband is eliminated or changed later in 2006, we could reverse a portion of the benefit received. Also, even if the deadband were not changed, this benefit could be reduced later in the year if power supply costs are higher than the amount included in base retail rates. At this time, we cannot predict the outcome of the ERM proceedings. It's important to remember that there can be significant volatility in our actual resource costs, depending on hydro conditions as well as fuel and wholesale power market prices. As such, our estimated of where we will end each reporting period with respect to the deadband can be difficult to predict. That is the primary reason why we have requested the deadband to be eliminated, to reduce the volatility of Avista Utility earnings.

We're forecasting hydro generation to be 104% of normal in 2006. This is encouraging, as our hydro generation has been below normal in five of the past six years. And, of course, conditions can change substantially throughout the year and our forecast may change based on precipitation, temperatures or other variables. For the first quarter of 2006, we had net growth of approximately 1000 retail electric customers and 1500 retail natural gas customers. We continue to be comfortable with our forecasted customer growth of 2.3% for electric and 4% for natural gas for this year. This is due to conditions in the economy of our service territory, including residential construction activity. In fact, developers have asked us to design service lines for more lots in the first quarter than we designed during the entire year of 2005 in Spokane, Coeur d Alene, Sandpoint and Medford. Customer growth was consistent with your expectations, as well as the general rate increase implemented in Washington January 1 also contributed to the increase in gross margin and net income.

We have established a 2006 utility capital budget of approximately $160 million, of which we spent approximately $30 million during the first quarter. Significant investments for the year include the continuation -- or the continued enhancement of our transmission system, ongoing installation of advanced meter-reading technology and upgrades to our hydro generation facilities. As planned in Avista's 2005 electric integrated resource plan, Avista forecasts that electric deficits will begin in certain quarters of 2007, and annual energy deficits will begin in 2010. In order to meet these increased demands our preferred resource plan, which is part of the IRP, includes 400 megawatts of wind, 250 megawatts of coal, 80 megawatts of other renewable resources, 52 megawatts of generation plant upgrades and 69 megawatts of conservation, all by 2016.

In January 2006, we issued a request for proposal to consider adding approximately 100 megawatts of capacity of long-term renewable energy supplies. It is expected that deliveries of any energy supplies from this RFP would begin in the fourth quarter of 2007. In early 2006, we also entered into an agreement with Idaho power to jointly investigate possible future coal-based generation resources and other technologies. And in March 2006, we issued a request for information to assist the Company in identifying potential new energy conservative savings. In summary, we continue to be committed to investing in our generation, transmission, and distribution systems in order to meet our load growth needs and to continue to provide reliable service to our customers. With that, I'll turn the call over to Dennis Vermillion who will report on Avista Energy.

Thanks, Scott. Good morning. As discussed in our February conference call, we are expecting a profitable year in 2006. The energy marketing and resource management business segment, which primarily consists of Avista Energy, had net income of $0.10 per diluted share for the first quarter 2006 compared to a net loss of $0.17 per diluted share for the first quarter of last year. The improved results were primarily due to Avista Energy's asset management activities and positive results from our natural gas end-use business and natural gas trading. The operations of Avista Energy are managed on an economic basis,reflecting contracts and assets under management at estimated market value consistent with industry practices. It is important to note that $2.6 million, or $0.05 per diluted share, of Avista Energy's net income for the first quarter of 2006 was due to the difference between the economic management and the required accounting for certain contracts and physical assets under management.

A significant portion of the $2.6 million is expected to reverse in future periods when the contracts are settled or realized. This difference could also increase or decrease due to changes in forward market prices. These differences primarily relate to our management of natural gas inventory, our control of natural gas fired generation through a power purchase agreement, as well as certain other agreement. Part of the reversal of the $2.6 million is expected to occur during the second quarter of 2006, and is expected to reduce earnings in what is typically a weak earnings quarter for Avista Energy. During the first quarter, we decided to sell our natural gas inventory forward for delivery in the first quarter of 2007, which allowed us to capture economic value.

This forward sale is market to market and has resulted in earnings volatility during the first quarter of 2006, and will continue to result in earnings volatility until the natural gas is withdrawn from storage. This decision is part of the prudent economic management of our assets. In February, we began taking limited positions in the western natural gas markets and these positions resulted in a positive contribution to our first quarter results. We also continued to seek opportunities to expand our capacity for asset management, which capitalizes on our knowledge of operating and optimizing generating facilities. Avista Energy recently renewed its contract with Chelan County Public Utility District for an additional three years, and we have also been pleased with the performance of our natural gas end-use business in British Columbia and our recently opened office in Montana. Based on our first quarter performance and expected opportunities for the balance of 2006, we are on target to meet our earnings forecast for the year. Now I'll turn it over to Malyn Malquist.

Thanks, Dennis. And good morning, everyone. Avista Corp. reported net income of $31.6 million, or $0.64 per diluted share, for the first quarter of 2006 compared to $10.2 million, or $0.21 per diluted share, for the first quarter of 2005. As Gary previously mentioned, we showed improvement in each of our business segments. I'd like to take a couple of minutes to provide an overview of financing activities, cash flows, the performance of Avista Advantage and the Other business segment, as well as our earnings forecast. Our total debt outstanding decreased approximately $40 million in the first quarter of 2006, primarily due to operating cash flows in excess of utility capital expenditures, dividends and other funding requirements. For the remainder of the year, we expect net cash flows from operating activities and our committed line of credit to provide adequate resources to fund capital expenditures, maturing long-term debt, dividends and other contractual commitments. However, we currently expect to issue long-term debt in the fourth quarter of this year primarily to fund debt that matures in the first quarter of 2007. In early April, we amended the Company's committed line of credit in order to capture lower bank fees and borrowing costs. Due to forecasted liquidity needs, we elected to reduce the total amount of the facility to $320 million from $350 million, even though we had commitments of over $400 million.

We also extended the expiration date of the facile to April 2011 from December of 2009. The renegotiated lower borrowing rate on our credit line, together with the lower commitment, should result in annual savings of about $400,000. Also in March, we renewed our $85 million accounts receivable sales financing facility for an additional year. As previously reported, we agreed to increase the utility equity component to 35% by the end of 2007 and to 38% by the end of 2008 in our Washington general rate case settlement. Failure by the Company to meet those targets could result in a reduction in base rates of 2% for each target. The utility equity component was approximately 33% as of March 31, an increase from 31% at year-end 2005. Beyond expected earnings, we continue to evaluate and implement measures to increase our utility equity ratio. During the first quarter of 2006, we began delivering original issue shares under our equity compensation plans. During the first quarter of 2006, we made the decision to sell claims that we had against certain Enron-related entities. These claims flowed from damages that we suffered as a result of the breech of a construction agreement for the Coyote Springs 2 generation plant.

We received approximately $8.5 million from the sale of these claims, of which $5.5 million was applied to reduce the capitalized cost of the plant, and the remaining $3 million was recorded as operating revenue based on the lost margin opportunities from construction delays. This had a positive impact on first quarter earnings of $0.04 per share. With respect to other cash flows, we reduced deferred power and natural gas costs by $17.5 million during the quarter through recovery from customers. This was significant improvement and is indicative of rates that are now more closely reflective of market costs of fuel and purchase power. As of March 31, 2006, our total deferral balances were approximately $130 million. We also received $6.8 million from the sale of the last remaining LM 6000 turbine at Avista Power. Because of the growth in Avista Utilities service territory and continued investment in our generation, distribution, and transmission assets, our capital budget continues to grow at a rate faster than our depreciation budget. We're going to need to spend more than $160 million in utility capital expenditures this year, and even a bit more next year. If we back out our depreciation expense, our rate base should be growing net around $80 million per year, or about 5%, on a rate base of $1.5 billion.

I'm pleased to report that Avista Advantage continues its trend of positive earnings growth. Advantage contributed $0.03 per diluted share to earnings in the first quarter of 2006. Avista Advantage's revenues increase by 25% for the first quarter of 2006 as compared to the first quarter of 2005, while the average cost of processing a bill decreased by 2% for the same period. The number of billed sites increased by approximately 23,000, or 14%, during the 12-month period ended March 31, 2006. Avista Advantage is considering certain strategic investments aimed at creating long-term cost savings that may increase costs in the short-term through up front expenditures. This could limit earnings growth during the remainder of 2006, while enhancing Advantage's long-term profitability. As such, even though it looks like Advantage is ahead of its earnings target for the year, our guidance for Avista Advantage remains the same at $0.10 to $0.12 per diluted share. In the Other business segment, results improved slightly as Advanced Manufacturing and Development, which does business as Metal FX, had positive earnings for the first quarter of 2006. This is a significant improvement from a net loss of $0.5 million for the first quarter of 2005. This improved performance at Metal FX was partially offset by increased losses in certain other investments of the segment.

Looking at our 2006 guidance. W are confirming our outlook for Avista Corp. consolidated earnings in a range of $1.30 to $1.45 per diluted share. We expect Avista Utilities to contribute in the range of $1.00 to $1.15 per diluted share. The outlook for the utility assumes, among other variables, near normal weather temperatures and hydro generation for the year. The outlook for the Energy Marketing and Resource Management segment is a range of $0.20 to $0.30 per diluted share, excluding any positive or negative effects related to the required accounting for certain contracts and physical assets under management. We expect Avista Advantage to contribute in the range of $0.10 to $0.12 per diluted share, and the Other business segment to lose about $0.05 per diluted share for 2006. Now I'll turn the presentation back to Jason.

Thanks, Malyn. At this time, we would like to open this call up for questions.

[OPERATOR INSTRUCTIONS] Yours first question comes from the line of Doug Fischer with A.G. Edwards. You may proceed.

Thank you and good morning, and congratulations on the quarter.

Thanks, Doug.

Could you remind me when you think you might have a decision on the ERM and how things look there? And then also you have talked in the past about possibly asking in Idaho for some kind of infrastructure type track -- or anything to update there?

Doug, let me begin with the ERM. At this point in time right now, we did have a settlement conference last week. but right now we are on track to file rebuttal and cross testimony on May 19. The hearing will be in Olympia on June 13 through 15, and we expect an order sometime in late July or August. And at this point, again, it's just too difficult for us to predict the outcome. So I just really can't prognosticate on that. As far as infrastructure trackers and other issues in regards to Idaho or our jurisdictions, we continue to look at those. At this point we don't plan on filing anything in Idaho at this point, but that's not to say in future periods we might consider that. We are looking aggressively at asset management and other things to see if there's ways for us to put those mechanisms in place in our jurisdictions.

What do you -- Elaborate on what you mean by asset management.

Just -- Again, as most utilities continue to look at way ways to invest in plant and do the right thing around reliability and customer service, we continue to look at opportunities to make those investments, make wise long-term investments and see if there's ways to take out regulatory lag as we make those investments.

Okay. And then is it still your expectation that -- Minus the impact of the ERM, what's sort of your expectation as to how fuel costs might compare versus the level in rates? Energy resource -- electric resource costs versus the level in rates?

Doug, I think -- It looks like we're going to have a very good hydro year, but we don't know what gas prices are going to do. And that's the big question around our resource costs in the future, because if they run like they did last year it will certainly have a negative impact. If they hold pretty constant, we should be in pretty good shape.

Because of the unpredictability of hydro, are you not able to hedge out those gas costs for the year?

Doug, this is Malyn. Even with our excellent hydro, our gas facilities aren't going to run much in the second quarter. But the hydro will basically really ramp down sometime in the third quarter. So the last bit of the third quarter and all of the fourth quarter, we'll have to be running our natural gas plants. And while short-term gas prices look more reasonable than they have recently, the longer term prices - and I'm talk just even out six months - remain pretty expensive. And they are at rates above what is basically built into our cost of service now.

Okay. Thanks, Malyn. That's helpful.

Your next question comes from the line of James Bellessa with D.A. Davidson & Company. You may proceed, sir.

Good morning.

Good morning, Jim.

The Washing Energy mechanism deadband benefit of 5.2 million. That's not after tax?

No, it's not.

But -- then I heard on the discussion that it was $0.07 per share. Was that what I heard?

Yes, that's correct.

And so $0.07 per share would equate to what after-tax on a dollar -- million dollar basis?

Ann, do you have that?

Yes. It's roughly $3.5 million.

Did you catch that Jim?

No, I didn't hear that. Roughly $3.5 million after tax. Okay. Your natural gas portfolio at Avista Energy. Last time I heard it was 2.7 billion cubic feet. Is that the same?

Jim, this is Dennis. I think you're referring to the storage capability that we have, or capacity, in our Jackson Prairie storage facility and that is still correct. We have 2.7 BCF in storage there.

And marking that to market, that's how you got the benefit of $0.05 a share, I think it was?

That contributed to that. There's also other components, as we mentioned earlier. You have the power agreement with Lancaster that drives that, and also there's some other agreements such as transportation -- natural gas transportation. Those combined make that $0.05.

For the 2.6 million after tax positive effect that you cite, is that one and the same?

That's correct.

And then I think it was 5 months ago that you established 2006 earnings guidance. Did you anticipate all of the benefits that you received in the first quarter at that time? Or was the result better than you expected? Were the hydro conditions better?

Well I think -- I think, Jim, the hydro conditions are better because we've a got of good snow pack. And then the second thing, as you also are aware of, is that we've had fairly cold nights. So the water has come off really well. I mean, this spring has been cool so it hasn't come off all once, which allows us to that use that hydro in a more reasonable fashion. Some years we'll have good snow packs and it will all come off in 2 weeks and it all goes down the river. But this year -- I mean, this morning it was 31 degrees here. So you know that really shores up or freezes up those small streams up in the mountains and keeps it from melting off in a hurry. And as we continue to do that, we'll have water that will carry on further into the year than what we normally have.

And to add, Jim, we had a very good April around precipitation. So that, of course, helped a lot.

And your guidance five months ago, and still today, is $1.00 to $1.15 for the utility. Yet you had a better than expected first quarter, albeit some of it will reverse out possibly if the deadband agreement is accepted.

Jim, let me just take a stab at that. And I think maybe this will a dress little bit of Doug's question earlier a little more specifically also. Recall on the first quarter call, we talked about the fact that we thought we were going to have a settlement adopted from the Washington Commission that would set the deadband at $3 million. And that -- when guidance was set, initially that was done on the November call reporting for the third quarter, when we thought we had a settlement that was going to be adopted. It wasn't adopted, and on the first quarter call we talked about the fact that if the deadband stayed at $9 million, we were anticipating that we would be at the lower end of our guidance in the utility. Because we expected, actually to eat more than the $3 million deadband -- not eat the whole $9 million, but I think we talked about roughly $6 million that we were going to eat on that call. Now we look closer to being -- by the end of the year, closer to being around 0 based on our current forecast. So whether the -- our proposal to eliminate the deadband is adopted or even if it stays in place, our best guess is we're going to be somewhere close to 0 on that deadband. And therefore, we're back a lot closer to where we thought we were going to be when we originally gave guidance. Maybe -- you know, maybe a little better based on the strong first quarter that we've had. So maybe it's closer to the upper end of the range, but that's why we haven't changed our guidance. I hope that's a little clearer for you. .

The Enron settlement. Is that a utility benefit? And had you anticipated that five months ago?

The Enron settlement is a utility benefit, and we did expect that we would get part of that in 2006. By selling it forward, we were able to capitalize -- basically get all of it. We are thought we would get some of it -- most of it in 2006 and a piece of it remaining in 2007.

Thank you very much.

Thanks, Jim.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of Steven Gambuzza with Longbow Capital. You may proceed.

Good morning.

Good morning, Steve.

I was wondering if you could please provide what your consolidated equity balance was at the quarter end? And then if you could break that out between the Utility,Avista Energy and any other parts Avista Capital.

Steve, this is Malyn. I'm going to ask Ann Wilson, our controller, to give you that information.

Okay. Hang on just one second. Well, first of all, our consolidated equity is 806 -- 806,904 million.

Okay.

And then you also wanted the Avista Energy piece. Is what that what you said?

Yes. That was consolidated. And then just kind of how that breaks out between the Utility, Avista Energy and then the other parts of Avista Capital.

Okay. The Avista Capital piece is combined at $244,846,000.

Okay.

So the difference between those is the Utility.

Is the Utility? And how much of the Avista Capital is Avista Energy?

The Avista Energy is 209 million.

Okay. And were there any dividends paid between Avista Capital and the Utility during the quarter?

No, there were none.

Okay. And then my second question just relates to fuel costs. I think I heard you say that, based on the current good hydro conditions that you are experiencing and kind of the nature of your mechanisms that you have in place, that you now expect to roughly break even during -- you know, for the full year 2006 on fuel and purchase power. Is that correct?

Yes, we expect our fuel and purchase power cost to be roughly what is in rates for the year.

Okay. And is that -- When you make that forecast now, is that basically looking out and using current forward pricing for gas in the third and fourth quarter where you buy gas from?

Yes, it is.

Okay. Great. Thank you very much for your time.

You bet.

Thanks, Steve.

Your next question comes from the line of Paul Ridzon with KeyBanc. You may proceed.

Good morning, how are you?

Good morning, Paul.

I had a question on this turbine sale. Did you experience a loss or a gain from that?

We actually sold it at cost, basically.

I think you are one of the people who can sell those things at cost.

Well, we have written it down a couple of times, Paul, in the past couple of years. So we had already taken that into account.

And then -- I know I ask this question frequently, but just any update on plans for Advantage in the longer term?

I think -- You know, Paul, as we've said before, that business is doing very well. It's growing well as you saw from the quarter results. We're going to do a little bit of additional investment to actually make it even more cost effective and have better growth opportunity to the future this year. We're still targeting our announced earnings targets for it. But as it continues to grow and develop, you know, we would expect that we will look at other opportunities with it to the future. But right now it's a good piece of the portfolio and we plan on continuing with that.

Is -- Does that business have a critical mass that you would want to see before you pursued strategic alternatives?

Yes, it really does and it's about -- somewhere between a third and half the way there.

And growing that -- What is the K grow on that business? 25, 30%?

Yes.

And then if you could just give some detail -- Your kind of 5.2 million in the black on the ERM, and you think that gets worked down to 0 by year-end. Just kind of some expectations, by quarter, of how that happens?

Well, you know, I think it really flows a lot from our hydro. We will see probably second quarter pretty favorable or at least break even, I would expect, because of strong hydro conditions that we expect to have. Sometime in the third quarter we'll start to eat into that, likely, because we'll start to burn our natural gas plants to meet peek demand. And in the fourth quarter we'll probably run those natural gas plants, I would assume, at least Coyote pretty much all of the quarter. So the large majority of it would be reversed in the fourth quarter. Now, you know -- Hopefully, if we continue to have real strong hydro and the snow melt comes off just perfectly, then we'll do even better in the second quarter than we might otherwise do and we may build up enough of a bank that we don't give it all back. But if natural gas prices in the fourth quarter end up being at $12 or $13 again, then we could seriously turn it the other direction. So it's really-- Paul, it's still kind of a big open question. And that's why we're asking the commission to lower the deadband because it just is too big a swing for us right now.

And then just any flavor on your confidence with the kind of position fading on the gas book? What measures have you taken to kind of make sure we don't get any repeats of what happened last year?

This is Dennis. I talked a little bit about this on the last call. We made some changes internally. We, at least temporarily, have reduced some of our position limits and tenor limits. So what we're trying to do is, you know, kind of scale back at least in the short run until we build up a pretty good track record which is what we're doing, as evidenced by our results in Q1. I also talked last time about the success of our trading activities over the last five years, and if you look at our performance over the that time period we have done very well, both in gas and in power train. So you know I still have a lot of confidence in our people. They are very good at what they do. And we have taken some steps as I outlined and, as I said earlier, we're on the path to get back where we were.

And then just lastly. As you look at your alternatives to hit the target equity ratios kind of forced upon you, how should we think about getting there? I mean, would you access capital markets? Would you -- I know there's the executive comp. But you'vegot quite a bit of equity in the trading book and obviously Avista Advantage has a considerable amount of value. Kind of -- Any preferred path?

Paul, we're looking about couple of ways. Clearly the first thing we'd like to do is have strong enough earnings that we just get there normally. And frankly, we can hit those targets if we have normal hydro conditions over the next couple of years. We have put in place a periodic offering plan, a dribble plan - I think we have talked about that in the past of a couple - of a couple of million shares. We've actually asked our commission to allow us to do even a bit more than that -- should we need to do that, that we have that available to do. We also are looking at Avista Energy in terms of ways that we can bring some additional equity out of that business and back into the Utilities. So we have, I think, a whole array of things that we would like to do to help us get there. And we have tried to be conservative about that so that we have the ability to tap the equity market should we need to do that. But that, obviously, is something that we would prefer not to do if there are other means to get us there. But I do want to make it clear that we will get there over time. We will meet those goals that the commission has set. I'm really feeling pretty good about the progress we made just in the first quarter. I mean, going from 31 to 33% is a big chunk in just one quarter. So --

And you've got another seven quarters to get the other --

Yes. I'm pretty heartened by the progress that we have made.

Okay. Thank you very much, and congratulations on a good quarter.

Thank you.

Thanks, Paul.

Your next question comes from the line of Neil Stein with BKS Asset Management. You may proceed.

Yes. Most of my questions were answered. I just wanted to check. Do you have an S-3 registration statement on file? Or would that be something we should expect to be file in the near term?

We do have a shelf that is currently pending. I believe there's a little over $100 million left on the shelf. We, as part of our holding company process that we're going through, are actually planning to update that, looking ahead to the bond issuance that we will essentially need to refinance late this year as well as 2008. We've got $280 million of nine and three quarters notes that roll off that, some of which we've hedged the interest rate on. We've got $280 million of nine and three quarters notes that roll off that, some of which we've hedged the interest rate on. But we're going to go ahead, before the holding company is formed later this year, and redo a universal shelf registration looking out at our needs through 2008.

For any of the dribble programs you have or any other equity issuance you might do, would you need to have that shelf refreshed?

The dribble plan already is incorporated in the shelf that's outstanding.

Okay. Thank you very much.

You bet.

Thanks, Neil.

Your next question is a follow up from the line of Doug Fischer with A.G. Edwards. You may proceed.

Thank you. The investment you are talking about at Advantage. Is -- Can you talk a little bit about size, whether that is something that would be expensed or capitalized? And what is it for?

Doug, the answer is yes. It will be both expensed and capitalized, and we -- It's really to take and improve some of our systems and infrastructure. We are going to a next gen system. We've had very good success with our proprietary system, but it's time -- With the size and the growth rates we're having, we need to update it to the next system. But even so, we expect to do that all within the cash flows and the expenses we have in there. And that's why we're saying don't get ahead of yourself on what we're projecting for that business to earn this year. Those earning targets should be right on, because we will be using any excess that we would generate to take and further these systems which would give us, you know, a future shelf-life and a much more robust opportunity to grow that business to the future.

Can you comment at all on the magnitude of the capitalized and expensed portion?

No. We only have preliminary estimates on that. That's part of what we're doing. We hadn't planned, really on doing this until next year and decided that because some requests from our customers and other things of things like would like to see us do in addition to what we're currently doing, we were moving ahead with some of that development this year versus next.

Doug, all of it is being done with Avista Advantage's cash flow. There's no cash that needs to go from Avista Corp. to Avista Advantage to do it. So it -- That should give you an indication it's a fairly small magnitude in the scheme of things.

Okay. Thank you, Malyn.

Yes.

Your next question comes from the line of Bob Fetch with Lord Abbett. You may proceed.

Good morning, gentlemen.

Good morning, Bob.

In terms of your customer count, how did that change? I may have missed it.

We added about 1000 electric and 1500 gas customers in the first quarter. We expect about 2.3% growth on the electric side, and about 4% on the gas side for the year. And we feel real confident in those targets because residential construction has continued to be quite robust in our service territory, and we already have developments kind of already drawn up on the books that tell us we're going to meet those targets.

And are those rates of growth -- Are they similar to the last, say, three to five years? Or somewhat better?

They're -- actually have expanded, Bob. Last year -- They are more in line with last year, but the previous years we used to figure somewhere between 1% and 1.5% on the electric side and maybe between 2% and 3% on the gas side. And we're looking at going out into the future both this year, some of last year and into future years. Of course that depends on the economy, to an extent. But the way things are looking at -- Right now we're looking at in excess of 2% on the electric side and excess of 4% on the gas side.

We're unfortunate our service territory between southern Oregon and then the Spokane, Coeur d Alene area and then the Sandpoint, norther Idaho area. It's very robust in economic growth right now, and it has been and continues to be we think into the future.

Can you bring us up to date on labor issues, both in terms of qualified and the supply of labor, as well as to what rate wage costs are rising?

Maybe Scott can talk to this a little bit, but just in general -- You know even when we were in financial difficulty over the past few years, we have maintained our apprenticeship programs for our trade side of the business and, in fact, we run a school that actually draws from all of the west coast as far as training journeymen linemen or apprentice linemen and such. With that in mind, we feel pretty good on the labor side. And we're doing a lot of work with the universities and such as far as on the professional side. So Scott, I don't know if you --

Just internally our labor contracts here aren't up until next year, so we have a fairly stable, you know, rate. As far as the regional economy is concerned, there's still considerable labor available for economic development growth, especially in the Spokane region. It's little bit tighter in northern Idaho in the Coeur d Alene area, but we still see ample opportunity to continue to expand the economy here. And wage rates have not necessarily been outlandish. They have kind of kept up with, I would say, the rest of the country.

And where does that put it? 3 to 4? Or --

Yes. Roughly it's the 3 to 4% range.

Okay. In regards to the hydro and the water situation, where are the reservoirs compared to, you know, maximum levels?

Well most of the reservoirs right now are drawn down because we haven't had the runoff. That's one of the things we always do in the springtime. Late fall is draw down the reservoir so there's space in the reservoir to hold the runoff. I think Grand Cooly, which is not one of our reservoirs, but I think it's almost at its low point and probably starting to refill now. Maybe it's still drawing down a little bit, but it's-- You know, we have plenty of room in our reservoirs. We expect them to fill and, in fact, we had have had to be spilling water lately, which is the first time we've done that in quite a while.

And this would be the first time they would be filled in some time, right?

Well actually we tend to fill ours every year, but like Hungry Horse and a number of the other reservoirs, it's been a while since they've been filled. Yes.

Because I understood, in talking to some peers who live in northern California, I mean they are really worried and levees right now. And things are filled and they've still have got that snow melt yet to come. They are basically just finding ways to dump water. Unfortunately it's going to right in the ocean and not being used in areas that really could use it.

Yes. And in fact, California has had two years of really wet precip.. They had a lot last year and then they got additional this year even, so --

Okay. And then lastly, on your CapEx. Any significant kind of one-time programs that you'll be looking at over the next two, three years?

Well we've talked about this major transmission line that is going to be completed in 2007, and so that's been one of our major efforts there. We have been retrofitting our system for automated meter reading, and we have -- we're in the last year, basically, of doing that in Idaho. We still have Washington to do. So that will be an ongoing project for us. I would characterize our capital budget right now as probably at a fairly normal level for us on an ongoing basis, and then we would need to layer on that what we are going to do to meet our generation shortfall that we expect to start happening in 2010. And that may layer on some additional capital expenditures. It that will layer on above the current level, probably starting in 2008.

Okay.

But no other programs, say, somewhat less related to the transmission systems --

We have -- Bob, we have all of the hydro upgrades that I think we've mentioned before. We're going to do a unit a year, basically, for the next five to seven years. So, you know, that's a piece of upgrading our hydro system that we'll be continuing.

Okay. Thank you.

Thanks, Bob.

Your next question comes from the line of Paul Debbas with Value Line. You may proceed.

Hi. I have a few questions for Malyn.

Hi, Paul.

Hi, Paul.

Hi. How much did you say you were going to raise -- or you are expected to raise each year from the dribble program?

Paul, what we have current authority to do is 2 million shares over the next two years. And so it's a pretty modest program. You know, at today's prices, that will generate about $40 million. Whether we do that or not, though, really to some extent depends on our hydro conditions. It depends on how much equity we can pull out of Avista Energy. And so, you know, I think a conservative estimate in looking at us would be to probably assume that we're going to do that. But I'm telling you that there is flux about that right now just based on where we're at.

Okay. And the debt you are issuing at the end of this year. Is that just 150 million for the first mortgage bonds that are due in '07 and there's no new money in there?

That's correct.

Okay. And are there any significant non-utility CapEx that we should add on to that 160 million for the utility?

No, there's not.

And should we assume a 37% tax rate as you used in the first quarter?

That's about right for us, Paul.

That's all I have. Thank you.

Okay. Thank you.

Thanks, Paul.

Your final question comes from the line of Steve McBoyle from Lord Abbett. You may proceed, sir.

Yes. A good number of my questions have been asked, but maybe just some clarifying questions here.

Of course, Steve.

Had you mentioned that developers, in terms of your line growth expectations this year, that developers have asked you for line growth in -- or you saw line growth in the quarter that which equalled all of 2005?

Yes. Let me clarify that. What we know is that we've been working with your developers. So we know they have enough development work or enough new lots on the book that we perceive that will be built over the -- over 2006 that will be as great or more than last year. So we're not going to build them all in the first quarter, but we -- by working with our developers we know what is in the pipeline, if you will. So we already know what our -- a lot of our residential construction will be for the year.

Okay. That's obviously factored into the guidance you have given?

Yes.

And just curious -- The line growth split in any given year in terms of new community developer driven versus just fill in?

I would say, you know, we have a high degree of penetration in our natural gas system already.

Okay.

So a majority of that has been in, for gas especially, new construction. But there are still fill in opportunities and, of course, for electric it's primarily all new construction.

All new, yes.

Steve just a point of clarification so you understand the system a little bit. We have rural electric associations and -- in our service territory. So where our electric and gas is usually combo, we have areas where we don't have the electric, but do have the gas. And that's one reason why the gas is running higher than the electric on a percentage growth rate.

Right. And the Utilities guidance for the year, $1.00 to $1.15, again that is predicated on normal weather and normal hydro generation. Yet on both accounts you are seeing above normal conditions. Is that correct?

That's correct.

And the $3 million number that you referenced with regards to the discussion around the Utilities guidance for the year in terms of the your original thought as to where that settlement may come in and now may come closer to zero - Is that a pre-tax or an after tax number?

That's a pre-tax number.

Great. Thank you very much.

You bet. Thank you.

Well I want to thank everyone for joining us today. We certainly appreciate your interest in our Company. As always, if you have any follow up questions please feel free to contact me at 509-495-2930. Again, thank you for joining us and have a great day.

Ladies and gentlemen, I would like to thank you for your participation in today's presentation. This now concludes the conference. You may all disconnect. And have a wonderful day.