Avista Corp (AVA) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the fourth-quarter 2006 Avista Corp. earnings conference call. My name is Sheryl and I will be your audio coordinator for today. At this time all participants are in listen-only mode. We will be conducting a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). I would now like to turn our presentation over to your host for today, Mr. Jason Lang, Manager of Investor Relations. Please proceed, sir.

Good morning, everyone. Welcome to Avista's fourth-quarter and year-end 2006 earnings conference call and Webcast. Our earnings were released pre-market 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 and CEO, Gary Ely; President and COO, Scott Morris; Executive Vice President and CFO, Malyn Malquist; Vice President and Controller, Ann Wilson; and the President of Avista Energy, Dennis Vermillion.

As a note to those of you on the Webcast, we will be advancing the slides automatically during the course of the presentation. Following the call the slides can be downloaded from our Website at avistacorp.com. There will also be a replay of today's Webcast available on our Website later today.

Before we begin I would like to remind you that some of the statements that will be made today are forward-looking statements that involve risks 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 would direct you to our 2005 Form 10-K and Form 10-Q for the quarter ended September 30, 2006. These are available on our Website.

To begin this presentation I would like to briefly recap the financial results presented in today's earnings press release.

Our fourth-quarter earnings report shows net income of $18 million or $0.36 per diluted share, a decrease from $25.4 million or $0.52 per diluted share for the fourth quarter of 2005. Our net income for 2006 was $73.1 million or $1.47 per diluted share, an increase from $45.2 million or $0.92 per diluted share for 2005.

Now I will turn the discussion over to Avista's Chairman of the Board and Chief Executive Officer, Gary Ely.

Thanks, Jason, and good morning, everyone. We are pleased with our results for 2006. Our major business segments, Avista Utilities, Avista Marketing and Research Management, and Advantage IQ, all improved over 2005. Scott Morris will provide an update on our utility operations which exceeded our earnings expectations for the year, in just a couple of minutes.

Results from Avista Energy for 2006 were consistent with our expectations. Given the significant changes in the energy marketplace over the past few years, the challenge before us is to now explore whether we should continue in this business over the long-term or if any strategic alternatives may be available that will allow Avista Energy to grow and reach its earnings potential. Dennis Vermillion will have further information on the results of Avista Energy in a few moments.

Another contributor to our improved earnings for 2006 was Advantage IQ. This business continues to meet its earning targets. Malyn Malquist will provide more details on the performance of this subsidiary later in the call.

In December we completed two significant financing transactions that will allow us to reduce our debt service cost and improve our capitalization ratios as part of the continuing process of improving our corporate financial health. We issued over 3 million shares of common stock and $150 million of first mortgage bonds. Malyn Malquist will provide further details on these transactions and other financing activities later in the call.

Now I will turn the call over to Scott Morris for his report.

Thanks, Gary, and good morning, everyone. Avista Utilities contributed $0.28 per diluted share to earnings for the fourth quarter of 2006 compared to $0.34 per diluted share for the fourth quarter of last year. The decline in our results was primarily due to a decrease in gross margin. In the fourth quarter use per customer decreased as compared to the prior year. In particular, we experienced a decrease in retail natural gas demand due to warmer weather. Also during the fourth quarter of 2006 we recorded a reserve for potential refunds to our Oregon customers. This is for taxes collected in rates from our customers under rules issued by the Oregon Commission related to Oregon Senate Bill 408 which was enacted into law in 2005. In comparison, our gross margin for the fourth quarter of 2005 was increased by income received for the settlement of a claim related to the construction of Coyote Springs 2, representing the recovery of lost margin.

For fiscal year 2006, Avista Utilities contributed $1.16 per diluted share to earnings, an increase from $1.07 for 2005. In 2006 unlike recent years our electric resource costs were lower than the amount included in base retail rates. We benefited from strong hydro-generation that was 104% of normal during 2006. And as a result we recognized a $2.6 million benefit under the Washington Energy Recovery Mechanism during 2006 as compared to a $9.5 million expense recognized in 2005. This is the first time we have been on the positive side of the ERM for an annual period since its implementation in 2002.

Our gross margin for 2006 also improved as compared to 2005 because of the Washington general rate increase implemented on January 1 of 2006 and customer growth.

In December the Washington Utilities and Transportation Commission dismissed our production and transmission update request to increase electric rates for Washington customers. The motion to dismiss our request was filed by the Industrial Customers of Northwest Utilities in the public counsel section of the Washington Attorney General's office in October. The WUTC concluded that our filing was by definition, a general rate case and it did not comply with applicable rules. We're disappointed with the Washington Commission's decision. We believe the request would have provided for timely review and cost recovery by resulting in smaller rate adjustments for our customers over time.

Our 2007 operating plan and earnings guidance provided in November assumed that we would receive rate relief during 2007. With the dismissal of our PT update, rate relief in 2007 now seems unlikely.

With regards to future filings, the assessment of our needs for rate relief and the development of rate case plans takes into consideration short-term and long-term needs as well as specific factors that can affect the timing of rate filings. Such factors include in-service dates of major infrastructure investments and the timing of changes in major revenue and expense items. We expect to refile for rate relief in Washington during the first half of this year. Fortunately, a decrease in projected fuel and purchased power costs since the time we made the PT update filing has lessened our need for rate relief in 2007. This change, coupled with our ongoing efforts to reduce operating expenses, will help us offset a portion of the lost revenues to meet our earnings targets for the year.

In 2006 we spent more than $160 million on utility capital projects. For 2007 we are budgeting utility capital expenditures of $170 million plus an additional $10 million for advanced meter reading. Significant investments include the continued enhancement of our transmission system and upgrades to our hydro generation facility.

On February 1 we received approval from the WUTC to implement a natural gas de-coupling mechanism. We are pleased with the Commission's decision. Decoupling separates the direct link between natural gas sales volume and the recovery of the fixed costs of providing reliable distribution service or margin, which does not include the cost of natural gas itself. Because our rate structure provides for recovery of the majority of our fixed costs on a per therm basis, energy efficiency and conservation objectives have been directly at odds with the recovery of fixed costs.

Our decoupling mechanism should allow us to recover lost margin resulting from lower customer usage due to conservation and price elasticity. However, it will not provide rate adjustments related to abnormal weather. The new decoupling mechanism is a three-year pilot. The rate adjustments in any one year will be limited to no more than 2%.

With regulatory approval we increased natural gas rates 1.3% in Washington, 6.9% in Oregon, effective November 1. Rates for our Idaho natural gas customers decreased 3.4% effective November 1. These natural gas rate increases and decreases are designed to pass through changes in purchased natural gas costs to customers with no change in our gross margin or net income. The increase in Oregon is subject to refund pending further review of our natural gas purchasing and hedging strategies by the Oregon Commission. A settlement agreement between Avista, the OPUC and the North West industrial gas users related to this review was filed with the OPUC on February 9.

I would like to provide an update on our re-licensing of our Spokane River hydro facilities. The current license expires on August 1, 2007 and we have submitted applications to the FERC to issue two licenses -- one for Post Falls and the other one for our four hydro plants on the Spokane River. We have been engaged in a multi-year collaborative process with stakeholders to develop reasonable terms and conditions for the new licenses. In July, various parties filed comments, recommendations, terms and conditions regarding our license application with the FERC. In addition, the United States Department of Interior filed proposed mandatory conditions for the Post Falls facility. We believe that the Department of Interior's proposed conditions for Post Falls are unreasonable and the costs would be unnecessarily burdensome for our customers. As a result, we requested a trial-type hearing process with the Department of Interior with respect to Interior's proposed conditions.

In January of 2007 a Department of Interior administrative law judge issued his ruling regarding our challenge of the facts that were used by the Interior to formulate the proposed mandatory conditions for Post Falls. We believe that the judge's factual findings support in several key areas our analysis of the facts at hand. This, we hope, should set the stage for reasonable resolution of issues remaining in the Post Falls relicensing process.

The Bureau of Indian Affairs, which is part of the Department of Interior, and is charged with protecting project-related resources on the Coeur d'Alene Indian reservation, has authority to set conditions for a license, is now expected to use the judge's findings to formulate final mandatory conditions for the operation of Post Falls.

The broader licensing process continues under the jurisdiction of the FERC. The FERC issued a draft environmental impact statement that is open for public review and comment until March 6. The document includes the FERC's initial analysis of our application, along with analysis of proposed, recommended and mandatory terms and conditions. While the FERC's analysis leads us to believe the ultimate cost of our licensing may be less than our earlier projections we are unable to base specific new cost estimates on it.

Following the comment period, the FERC will request final terms and conditions from agencies, tribes and others. And at that time the FERC would issue a final environmental impact statement and ultimately license orders on Post Falls and the Spokane River project.

In addition, we must receive Clean Water Act certifications from the states of Idaho and Washington for the project. Applications for such certifications were filed last July with each state. FERC is precluded from issuing a license order until such certification has been issued or waived by the states. We cannot predict the schedule for these final phases of our licensing.

With that, now I will turn the call over to Dennis Vermillion for a report on Avista Energy.

Thanks, Scott. Good morning. The Energy Marketing and Resource Management business, which primarily consists of Avista Energy, had net income of $0.05 per diluted share for the fourth quarter of 2006 compared to $0.17 per diluted share for the fourth quarter of last year. For the full year of 2006 the segment contributed $0.23 per diluted share compared to a net loss of $0.18 per diluted share for 2005. The decrease in our net income for the fourth quarter of 2006 as compared to the same period in 2005 was primarily due to the required accounting treatment for the management of natural gas inventory and recovery of unrealized losses in the fourth quarter of 2005.

The increase in our annual net income was primarily due to the improved results from natural gas trading activities and the continued execution of profitable transactions in power trading and other asset management and optimization activities. We manage our business on an economic basis, reflecting contracts and assets under management at the estimated market value consistent with industry practices. This is different from the required accounting for certain contracts and physical assets under management, particularly our management of natural gas inventory and the control of the energy produced by a natural gas-fired generation plant through a power purchase agreement, as well as certain other agreements, including natural gas pipeline transportation agreements.

As such, our earnings are subject to variability caused by the difference between the estimated market value and the required accounting for these assets and contracts.

These differences had an estimated $1.5 million after tax positive effect on results for the fourth quarter 2006 compared to an estimated $12 million after tax positive effect on results for the fourth quarter of 2005. For 2006 these differences reduced net income by an estimated $2.2 million as compared to an estimated $0.4 million positive effect for 2005.

In December we expanded our asset management agreement with Clark County Public Utility District for fuel power and heat rate optimization services. We should begin to see benefits under this agreement in the fourth quarter of 2007. This is part of our successful business of optimizing generation assets owned by other entities.

Overall, I am pleased with our results for 2006. We believe in the success of our business model and we are looking forward to 2007.

At this point I will turn this call over to Malyn Malquist.

Thanks, Dennis and good morning, everyone. I will provide an overview of financing activities, the performance of Advantage IQ and the Other business segment, as well as our earnings guidance.

In December we completed two significant financing transactions as part of our process of improving our corporate financial health. First, we issued 3,162,500 shares of common stock through an underwriter and received net proceeds of $77.7 million. Our use of the proceeds includes funding capital expenditures, paying off debt and other corporate purposes.

Second, we issued $150 million of first mortgage bonds to legally defease $150 million of debt that was scheduled to mature on January 1st, 2007. This will reduce our interest expense going forward by about $4 million per year. As a result of these transactions and operating cash flows in excess of other funding requirements, our total debt outstanding decreased $112 million in 2006. Our debt to capitalization ratio has decreased from 60.2% at the end of 2005 to 53.7% at the end of 2006.

For 2007 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, preferred stock, dividends, and other contractual commitments. However, we currently expect to issue long-term debt in 2008 as we have long-term debt maturities of $318 million in that year. The majority of the maturing debt is attributable to the 9.75% notes that we issued in 2001.

Even though we have reduced debt levels and expect interest expense to decrease in future years, our interest expense increased $3.5 million for 2006 as compared to 2005. This was primarily due to two factors -- first, an increase in interest rates has affected our variable-rate long-term debt to affiliated trusts. Second, during 2005, we carried higher levels of short-term borrowings under our committed line of credit at relatively low variable rates of around 4.5%. During the fourth quarter of 2005 we essentially refinanced these borrowings on a long-term basis at a fixed rate of 6.25%. Although this was a prudent long-term financing decision, it resulted in an increase in interest expense for 2006 as compared to 2005.

In the Washington general rate case settlement and in an agreement with Idaho regulators related to the holding company formation, Avista has agreed to increase the utility equity component to 35% by the end of 2007 and 38% by the end of 2008. Failure by the Company to meet those targets could result in a reduction in base rate of 2% for each target in each of Washington and Idaho.

We have also entered into a settlement agreement with the Washington staff with respect to our proposed holding company formation, which is contingent upon approval by the WUTC. In this settlement agreement we have committed to increase our utility equity component to 40% by June 30, 2008. However, the provision to reduce base rates by 2% does not apply if we fail to meet this target.

The utility equity component was 38% as of December 31, 2006, an increase from 31% at year end 2005. This significant progress during the year was primarily due to earnings and the December issuance of common stock.

To further improve our capital ratios in future periods we entered into a sales agency agreement with the sales agent in December to issue up to 2 million shares of common stock from time to time. To date we have not issued any shares under the sales agency agreement. We plan to issue these shares over the next two years beginning later this year.

With respect to other cash flows, deferred power and natural gas costs were reduced by about $50 million during 2006, primarily through recovery from customers. As of December 31, 2006 our deferral balances totaled $98 million.

As I have mentioned before, because of 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. We are planning to spend over $170 million in utility capital expenditures in 2007 and even a bit more next year. Our depreciation expense is around $85 million annually, which means that our rate base should be growing net around $85 million per year or 5% on a rate base of just over $1.6 billion.

Advantage IQ continues to meet its earnings targets. The Company contributed $0.03 per diluted share to earnings in the fourth quarter of 2006 and $0.13 per diluted share on an annual basis. Advantage's revenues increased by 25% for 2006 over 2005. Advantage processed bills totaling $10.8 billion in 2006, an increase of $1.5 billion or 16% as compared to 2005.

The number of billed sites increased by about 25,000 or 14% during 2006. Advantage's interest earnings on funds held for customers also increased.

As we mentioned last quarter, Advantage is implementing certain strategic investments aimed at reducing the cost per bill process and aimed at keeping Advantage as an industry leader. These investments should create long-term savings but will increase operating and capitalized costs in the short term. This could limit earnings growth for 2007 while enhancing Advantage IQ's long-term profit potential.

In the Other business segment the net loss decreased in the fourth quarter, primarily due to the improve performance of Advanced Manufacturing and Development, which does business as METALfx. METALfx had positive earnings in each month of 2006 and total net income of $300,000 for the year. This is a significant improvement from last year's results of a net loss of $800,000. I will remind you that our Other segment absorbs some corporate overhead costs and will likely always experience a small loss.

For 2007 we are confirming our guidance for consolidated earnings to be in the range of $1.40 to $1.55 per diluted share. We expect Avista Utilities to contribute in the range of $1.10 to $1.20 per diluted share for 2007.

The outlook for our utility assumes, among other variables, normal precipitation, temperatures and hydroelectric generation. Our original consolidated and utility guidance issued in November of 2006 assumed that the utility would receive a Washington rate increase in 2007. As our request for rate relief was dismissed in December, we're not expecting to receive any significant rate adjustments in 2007. We also expect to absorb costs under the ERM deadband in 2007. As Scott discussed, we are reducing expenses to partially offset these items. And as such, we're now expecting to be at the lower end of the guidance range for utility and consolidated earnings.

The 2007 outlook for the Energy Marketing and Resource Management segment is a contribution ranging from $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 Advantage IQ to contribute in a range of $0.13 to $0.14 per diluted share and the Other business segment to lose less than $0.05 per diluted share.

Now I will turn the call back to Gary for some closing remarks.

Thanks, Malyn. As most of you know, last Friday I informed Avista's Board of Directors of my decision to retire from the Company and resign my position as Chairman of the Board effective the end of this year, December 31.

I have been employed for Avista for over 40 years and it is with a great deal of pride and love for our employees that I look back over the achievements of the Company and the opportunity I was given to assist them in helping Avista become what it is today. I have seen many changes in technology and the way we operate but the one thing that has never changed is the dedication of our employees and their commitment to reliably serve our customers and bring value to our shareholders.

We have worked hard to make sure that we would have the executive team in place to make my retirement as seamless as possible. I will be leaving Avista in the hands of an excellent executive team that is well qualified and well positioned to continue taking Avista forward to meet our strategic objectives.

Scott Morris, with his depth of operational knowledge in all aspects of the business, his extensive industry knowledge and his commitment to the communities we serve, is the perfect choice to lead Avista. I have every confidence in Scott Morris's ability to take on the leadership mantle at the end of this year.

Lastly, I want to thank each of you, our shareholders and analysts, for your support through some very difficult times.

Now, with that, I will turn the presentation back to Jason.

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

(OPERATOR INSTRUCTIONS). Paul Ridzon, KeyBanc.

I had a few questions. What was the impact of the ERM in the fourth quarter this year and last?

This is Ann. For the fourth quarter of 2006 the impact was a charge of $805,000 for Washington. And for the fourth quarter of 2005, it was a charge of $1.5 million.

Of how much?

$1.5 million.

And what was the magnitude of the tax reserve for Oregon?

It was about $0.02 per share.

And what was the impact last year of -- you had the unusual item -- the Coyote Springs settlement?

That was also just a little -- a strong $0.02 a share.

And from a rate case strategy, when do you anticipate filing? When could we get the order? And what will be the test year in that rate case? And how should we think about that with your current efforts of reducing costs?

Paul, this is Scott. We are currently evaluating when we will file the case. It will be a 2006 test year. And that is why we're saying it is going to be sometime later in the first half of this year. So with that filing we'll ask for expedited treatment and try to get it as quickly as we can. But that being said, we expect it to probably be finalized sometime in 2008 by the Washington Commission.

Should we still be thinking that time spent on the PT is kind of credited against the 11-month statutory?

What I would say is this -- I think the fact that we filed a rate case and had it go into effect in January of 2006, we have done a significant amount of updating because of that. So we will put the 2006 test year in. We've had discussions with our utility commissioners and we feel that while I don't think they are going to give us full credit for the PT update schedule, they will give us some credit. So depending on when we file it, we're hopeful that will not take the full 11 months but it is hard for me to predict how long it will be.

Doug Fischer, A.G. Edwards.

Just a couple of questions. Any kind of guidance on the rate base amounts by jurisdiction? And what on a Washington state basis your guidance remind us for this year -- the low end of the range for the utility assumes for Washington state -- what kind of financial and regulatory ROE are you assuming in your guidance that you will achieve?

Doug, this is Malyn. Roughly our electric rate base is split roughly two-thirds Washington, one-third electric -- one-third Idaho. And so clearly we are going to under-earn a bit, but it is not of the magnitude that we have had in the past. We still have made very good progress. But I would guess that the ROE is probably going to be somewhere in the 8% range.

On the electric side or on an electric and gas side?

On the electric side. Gas is probably going to be a little closer to authorized; authorized is 10.4% right now in Washington.

And what was the equity ratio of the Utility at the end of the year?

Well, the authorized ratio in Washington is 40%.

Okay, and what were the actual --?

The actual is about 38%.

So with that the equity issued it is 38%?

That is right.

That's a GAAP basis? And does their calculation vary materially from GAAP?

It's a GAAP basis, and remember, that's the utility only. We have tried to make the case with the Commission that the rating agencies are really looking on a consolidated basis and that our equity ratio is now actually well above the 40% range on a consolidated basis. But, the Commission has really wanted us and given us a strong signal that they want the utility equity ratio to grow. So we're not quite at the 40% yet, but I think we will definitely be close by the end of this year.

And once again you have the agreement with the staff is that you would be there by the end of '08? And you think you will be there by the end of '07? Is that what you are saying?

The latest agreement, and this is part of the holding company negotiations we have had with all of the parties, is to get it to 40% by the middle of 2008, June of 2008. And I expect that we will make that. I think we likely will be there by the end of this year.

And why the expected under-recovery of the ERM this year? Is that natural gas prices, purchased power prices?

Both of those. And really that's part of what we were trying to get in the PT update was a true-up of fuel and purchased power expenses. In fact that was a fairly significant component. And we are fortunate that prices have come down a bit since we made that filing. So that is how we are able to partially offset -- or at least we have less of a need, let's put it that way, for what we had asked for there. But clearly we are also being hurt by the fact that we've spend a lot of capital and we're not going to be able to earn a return on that this year.

And when you file using an '06 test year, how far into '07 will you be able to update those numbers as you go through the Washington case?

Well, we look at all of the major infrastructure, Doug. So we fully expect to include things like our transmission and hydro upgrades. And anything that is known and measurable we'll certainly include. We will do some end of the year pro forma adjustments as far as our CapEx. So we feel good that we can pick up a majority of the capital expenses that we have projected for '07.

There is not like a cutoff date -- so many months after the filing of the case?

I think you need to be able to say to the Commission that you are going to have those projects done and used and useful for the period in which rates will be in effect. So if we have -- clearly have a project that is going to be completed in 2007 and it is a major project we are going to pro forma that into the 2006 numbers.

James Bellessa, D.A. Davidson.

Several of my questions were asked, but here are a few of additional ones. On these deferrals -- you are at $98 million in deferrals. Do some of those still go back to the energy crisis of 2000/2001?

Yes, they do, Jim.

And what is the expectation? How many years -- does it take a whole decade to recover --?

Jim, that is the really good question. When we reached agreement with the Washington Commission in particular on that, I think our target was to have about -- have that paid off over roughly a five-year period. But remember that we've had five of the last seven years before hydro years. And that really has dragged things out. We are set up to essentially recover roughly $34 million a year through the surcharge that is in place. And in normal hydro, that is what you would get. But we had a couple of years where actually we didn't get -- we basically stayed flat for those years. And so it has taken longer than any of us hoped it would take.

You've done a year-end financing with some debt -- $150 million. But I am not seeing -- how is the defeased bonds showing up on your balance sheet?

Well, we actually did the defeasal so that we wouldn't show the $150 million twice essentially. And so what you should see is the $150 that is outstanding. Ann, can you add to that for me?

Yes. If we haven't done the defeasal, the debt on the balance sheet would be $150 million.

So it's really taking into account the fact that the maturity happened on January 1. We simply did not want to show both pieces of long-term debt.

Your guidance of earnings and being at the lower end of the range -- why didn't you change your range?

Well I think it goes to our philosophy of we've tried really hard to meet the commitments that we make. And we made a commitment to try to produce that earnings guidance that we gave on last quarter's call. We were able to do some things. And our officers have stepped up to the plate to reduce their budgets for the year to offset a good chunk of the rate relief that we thought we were going to get. In addition, as I said, the fuel has helped to some extent in that we see lower natural gas prices and purchased power prices. And we believe we can still meet that range. And so we just philosophically said, we want to do our best to try to make that $1.10 to $1.20.

And unless -- until we see other significant changes that go against us like a poor hydro year, we are going to do our best to produce those results.

You have entered a sales agency agreement for additional issuance of shares. What is a reasonable expectation by quarter of how many shares you might issue?

I think roughly 0.25 million shares per quarter is probably what we would try to do. And you probably won't see that in the first quarter, it probably would start in the second quarter.

Our reserve that was taken in Oregon -- is this the last of SB 408 that will impact you? Or will you keep seeing this year after year?

Jim, right now what I will tell you is that we are working with all the utilities in the state of Oregon to try to pass legislation and to remove some of the onerous things that we don't feel are appropriate in the bill. Specifically, the double whammy that I think we have referred to in the past where our tax liability decreases because of the expenses are deductible for tax purposes, but under 408 customers don't have to pay for the increased expenses between rate cases. So they receive a tax benefit from the higher expenses but we don't get to include those in a rate case. So it is that as well as some other language around how we share tax credits across our three states.

(OPERATOR INSTRUCTIONS). Steve Gambuzza, Longbow Capital.

Just a question on the rate case in Washington. What has been the history there in terms of your ability to update a historical test year for known and measurable items or expected expenditures as they relate to transmission and distribution? Is this something you have done before? Or will you effectively be kind of blazing new ground so to speak in doing this in this case?

Steve, that is why we decided to find that general rate case. Because we did try to do it with the PT update. Again we did good due diligence. We looked at what Puget had, we looked at Pacific co-order, felt like we could do a limited scope case. We had discussions with the commission. And after that we just felt like the best thing to do is to file the general case.

So in that general case we are going to file for the ability for us to do a PT update to the future. We are going to ask for that specifically in the case so that we can get a ruling and perhaps file one of those to the future. So we just had our eyes looking forward and we're going to file the case and do it.

To answer your question though, that is a common practice in the jurisdictions in which we serve is to update in general rate case all the known and useful things during the time.

And given that you've entered into a settlement to achieve an equity ratio of 40% by 2008, is that kind of what you would expect the capital structure to be when you file this case? Or might it look something different than that?

I think what we will do is we will likely again file on a consolidated basis and show the Commission both the consolidated structure as well as I am sure they will look at the Utility's structure. And I believe the Commission and the staff has been -- they have been working with us on this to let us get the equity ratio up over time to that 40% plus range. So I don't know exactly what we're going to file yet because we haven't put it together. But I would expect that we would be filing and asking for at least a 40% equity ratio.

And with respect to the cost of debt that would be embedded in this case -- is it -- the cost you have this large piece of the capital structure that is going to be maturing midway through the year the rates would be effective in? Would the cost of debt that you file with reflect what you would expect your cost of debt to be during the rate year or would it reflect the historical?

It will reflect our estimate of debt through December of 2007. In other words, I don't believe it will look forward into 2008 because it is beyond the start of when rates would likely be effective. And it's really an unknown how much or exactly what the interest savings is going to be associated with that. And so I think that's maybe a bit beyond what the Commission would try to do.

And then you obviously made enormous progress this year in terms of improving the consolidated equity ratio as well as that of the utility. You are very close to where you need to be to meet your 40% target range. And I guess I was just a little bit curious as to why you felt that you needed to issue more stock on top of what you have done already, given the expectation of future amortization of deferrals as well as a significant pool of capital sitting at Avista Energy that is earning a sub-par return. Can you just explain the thought process there?

A fair question, Steve. And I think we're really trying to look towards the future and recognize the fact that we have got a pretty hefty capital budget over the next few years. And we will have to do something probably starting 2008/2009 in terms of additional generation resources that may have to be brought online. I think we just want to be sure that we are healthy for that time period. And so having a little bit of extra equity -- I think it is actually being responsive to our regulators who have said -- we think your equity ratio is too thin. And I believe that they will support returns on equity ratios above the 40% level. We want a bit more cushion there. So I think it is a prudent thing for us to do.

Finally on that point, would you mind just sharing whatever comments you can on your future generation plans and how they have evolved with respect to renewables or other potential additions in the future?

We are currently in the process of completing our 2007 integrated resource plan. So that being said, I don't have specifics of what we're going to be looking to do.

But what I would tell you is given significant movement around greenhouse gas, global warming, currently bills in the Washington legislation are -- reflecting similar things that happened in California around performance standards in regards to greenhouse gas, I would be really surprised to see much coal in our integrated resource plan in 2007. The state of Washington is very much focused on gas and renewables, so I would expect that that is where our eyes will turn.

And when will that be filed?

Probably by May of 2007 -- May/June time frame, summer.

Nikki Edgecombe, JPMorgan.

A couple of questions. On the expense control side of the utility, given that rate relief is likely to be pushed out a little bit, can you give us a bit more detail about kind of how and where you're targeting expense control; and to the extent that these are kind of control mechanisms that could extend beyond 2007 -- just how are you thinking about it and where do you see some movement?

Well specifically, things that we looked at were around labor expenses that we knew that we could control. There are some certain programs that we went ahead and eliminated. We've got a significant focus on technology upgrades in the utility that is really helping us drive process improvement and the elimination of work. We currently have updated all of our mobile dispatching functions for our natural gas utility functions. We are moving into the electric side. So we've got a lot of good focus to the future around technology upgrades that will really help us streamline our operations.

I would just add, we asked every officer to really look hard at their budget and find ways to reduce costs this year so that we could meet that earnings guidance commitment. So it has come from a wide variety of reductions to expenses, some pretty small as training dollars, some not filling staff -- just a wide variety of things. So it is hard to identify specifics.

But I do want to emphasize, in no way did we compromise safety, did we compromise reliability and did we compromise customer service. So these are all things that we felt were discretionary and doable. At no time would we ever put those things on the table.

Can you guys give us an update on how things are looking out in the market as it relates to the marketing business in terms of discussions you have had, in terms of year strategic options? And also just given the settlement with the WUTC staff on the hold co. formation where you are as far as timing around that?

Well I think, Nikki, as far as the hold co., we are working with the Oregon Commission on that. We still have that to receive. My guess is that we are just having continuing discussions with them and that staff and [then our venue] testimony is due in March. We are still waiting for an order from the WUTC for their approval although we've had the settlement there; we haven't got that. So it probably the very earliest anything would happen would be later this year. And hearings in Oregon I don't think are scheduled even until the end of May. So that being said, it could be late this fall before we even hear anything out of Oregon.

As far as our trading company, we've got a great group of people there continuing to do their job. As Dennis talked about, we are adding new customers and growing that business. I feel very good about where they are at. And we are continuing to look at opportunities that arise as far as where there might be partners with that group that would be better able to take it to a level that we would not in our business. Because of that, we continue to have discussions with various people over time. And I am hopeful that at some point in the future we will be in a position that it will make sense both for our employees and our customers as well as the Company to put something together. And that is about all we can say at this point.

And just finally, can you talk a bit about conversations you have had with the credit rating agencies on your recent financings and your capital structure and your ratings?

I think that certainly all of the agencies were happy that we issued equity. So that is always a good thing in their perspective. I think they all acknowledge that we have made good progress in our financial recovery. I believe that one of the agencies has us on a positive outlook. I think that one of the rating agencies would like to see us making faster progress than we have made. And so it is a little bit of a mixed review in that regard. But we continue to focus on getting healthy and I think we're doing all that we can to do that.

John Hanson, Presidio Capital.

I apologize, I have been on part of the call here but I had to be away for a bit. On the guidance for '07 with regard to the marketing and trading -- is there any mark-to-market turnaround from '06 in that at all?

We do assume, John, that we will get roughly about $2 million of turnaround that should happen in the first half of 2007.

And the second thing I had was -- just in terms of the -- I did not get -- if you said anything about the Advantage IQ business. It looks like it has plateaued a bit. Did you make any other kind of general comments about the --?

I think what we said was it has plateaued a bit because we are making some -- we're doing some expenditures to try to bring some new technology into the business that we think will help us take costs out of the business long-term and provide even better service for our customers. And so we are spending some dollars that are causing the earnings to not grow as fast as it has the last couple of years. But still we expect revenues and we expect new customers to continue at roughly the pace we have seen in the past couple of years. So we will take a little bit of a flat year for more of an up year the following year.

Best of luck to you guys and Gary as well.

Paul Ridzon, KeyBanc.

A handful of follow-ups. What is the long-term target for the equity layer at the utility?

I would like to see it be around 45%.

And what kind of uptick do you expect from implementation of the experimental decoupling mechanism?

The rate adjustment is capped at 2%. But I think realistically we're talking somewhere between $500,000 and $750,000.

Have you done a back test on what it would have done to '06?

Actually, I think it would be roughly that amount.

And Malyn, in the past you have talked about maybe some moving outside the traditional footprint with IQ and maybe a European platform. Has that gone anywhere?

We're still taking a pretty hard look at that. We have a number of customers who are clearly wanting us to go that direction. We're trying to figure out the best way to do that. I think that is something that we are going to have to address and going to have to do in the next year or two. And so the question becomes, do you do that on a home-grown basis? Do you do it by acquiring somebody who has that specialty already? We are looking at a number of options about how we might pursue that.

What level of capital would the home-grown alternative require?

I think it feasibly could take a few million dollars to make that happen.

And then I think in November we got in Washington state a renewable mandate. How should that impact your IRP?

The impact is we need to have 15% of our generation be renewable by 2020. Hydro doesn't count and our current biomass doesn't count. So through our integrated resource plan we will continue to look at that. In our last IRP in '05, we met those standards. But as with, you would expect as their mandates go into effect we fully expect wind and renewable prices to increase. So we will have to continue to look at that.

I think the other thing we are going to look at again is currently the governor and the Washington state Senate has a bill around performance standards for greenhouse gases. So it is going to push our IRP; even though it was very green, it will continue to be green in nature. So it will be probably made up of gas, wind, biomass and other types of generation products as well as a renewed emphasis on demand/response conservation, line losses. We've got a number of initiatives across the board that we're focusing on.

I think you have answered this, but is there a timing as to a strategic decision with Energy or is there just, you've got to assess what opportunities arise?

We just have to assess what opportunities arise. I would prefer if we can put something together having it done certainly before we issue debt in 2008 because I think that will be the trigger that will get us back to investment-grade. So that is kind of my objective is to see that that happens before 2008.

And is $200 million still the right number to be thinking about with embedded equity there?

That is correct.

It is roughly right.

Doug Fischer, A.G. Edwards.

A quick follow-up. You are cutting expenses at the utility but you're going to have a rate case. Is that self-defeating, you are cutting those expenses and you might want to restore them? Or are these expenses that you think you can do without permanently?

Good question. Remember, we're doing an '06 test year. So it is for those expenses that we incurred this year, number one. The expenses that we are looking at for '07 -- they really are -- I would suggest some of them might be permanent, some of them are temporary. And I think we will kind of weigh those. I think as we drive efficiencies in the organization through technology, some of those labor savings would be permanent. That is our whole point and that is how we are paying for much of the technology upgrades that we are doing in the utility through focusing on a eliminating those costs forever. But there are others that are temporary. But again, this is an '06 test year, so this year's cuts will have no effect on the rate case.

I think the other thing too is that we are at the bottom -- we said we'd be near the bottom of the range based on where we are at, but that leaves a lot of upside if we have good weather and good precip and those sort of things. So I'm very comfortable that we will be well within the range going forward unless there is major changes.

James Bellessa, D.A. Davidson.

Two of the three follow-up questions that I had have been answered. The third one is -- how many incremental shares beyond the sales agreement of 250,000 a quarter might there be from DRIP and options? What is the ramp up of share count?

I don't know that right offhand. So we will have to get back to you with that. But I will tell you that all of that has been taken into account in the guidance that we have given.

Ladies and gentlemen, this concludes our question-and-answer session. I'd now like to return the floor back to management for closing remarks.

I want to thank everyone for joining us today. We certainly appreciate your interest in the 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, thank you for your participation in today's conference. This concludes our presentation. You may now disconnect. Good day.