Avista Corp (AVA) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2007 Avista Corporation earnings conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Jason Lang, Investor Relations Manager.

Thank you. Good morning, everyone. Welcome to Avista's third quarter 2007 earnings conference call. Our earnings were released pre-market this morning, and the release is available on our Web site at Avistacorp.com. Joining me this morning are Avista Corp. Chairman of the Board and CEO Gary Ely, President and COO Scott Morris, Executive Vice President and CFO Malyn Malquist, Vice President State and Federal Regulation Kelly Norwood, and Vice President, Controller and Principal Accounting Officer Christy Burmeister-Smith.

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 Form 10-K for 2006 and Form 10-Q for the quarter ended June 30, 2007, which are available on our Web site.

To begin this presentation, I would like to briefly recap the financial results presented in today's press release. Our consolidated results for the third quarter of 2007 were a net loss of $0.07 per diluted share, compared with earnings of $0.20 per diluted share for the third quarter of 2006. On a year-to-date basis through September 30 our consolidated earnings were $0.45 per diluted share compared with $1.11 per diluted share for the nine months ended September 30, 2006.

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

Thanks, Jason. Good morning, everyone. It is good to be with you.

As I announced back in February, I am retiring from the Company and resigning my position as Chairman of the Board effective December 31 of this year. Since this is probably the last time I will be able to address you, I wanted to thank you, our investors, for your patience and support over the past several years. We have come a long way since the energy crisis of 2000 and 2001, and we are proud of our progress. We have divested several businesses that did not fit with our long-term strategy, including Avista Communications, Avista Labs and Avista Energy.

We have ensured that we have adequate resources to meet our customers' needs. The most significant resource acquisition in recent years has been the natural gas-fired Coyote Springs 2 generation project. We are now well-positioned such that we will not need to add any major resources until 2014.

We have worked hard to restore Avista's financial health, repaying down and refinancing debt, the issuance of common stock and the recovery of a significant power cost incurred to serve our customers during the energy crisis. In addition, we have been able to increase the dividend six times in the last four years, further attesting to the progress that we have made.

But most importantly, and it is with a great deal of affection and pride for our employees that I look back over the achievements of the Company during my 40-plus years of employment, and especially over the last seven. In particular, I am grateful for the opportunity to lead them since late 2000 and helping Avista through perhaps the most challenging period in the Company's history. We would not have been successful without the dedication of our executive team and the support of our valued employees, who truly make Avista a special place.

I will be leaving the Company in the hands of an executive team that is well-qualified to continue taking Avista forward to meet our strategic objectives. As I have said before, Scott Morris, with his depth of operational knowledge in all aspects of the Company, 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's ability to take over the leadership of Avista.

Now I will say good bye and thank you, and turn this presentation over to Scott.

Thank you, Gary. Good morning, everyone. As we mentioned earlier in the year, 2007 is a year of repositioning our company, with a focus on the future of our utility operations. A significant event this year has been the completion of the sale of substantially all of Avista Energy's contracts and ongoing operations to Coral Energy Holding, a subsidiary of Shell. This transaction was completed on June 30th. It lowers our corporate risk profile and should improve the stability of our earnings.

In September of 2007, Avista Energy paid a cash dividend of $169 million to Avista Capital, representing the cash consideration for the net assets that were sold to Coral, and liquidation of the net assets -- net current assets of Avista Energy that were not sold to Coral. Avista Capital then paid a cash dividend of $155 million to Avista Corp. The remaining funds were utilized by Avista Capital to repay outstanding borrowings due to Avista Corp. and the extension of an intercompany loan to Avista Corporation.

This has been a challenging year for us, and we are not pleased with our results. Our consolidated earnings for the full year of 2007 will be lower than we originally planned, due to both the performance of Avista Energy during the first half of the year and certain variables that have worked against us at the utility. The most significant was the Washington Commission's decision in late 2006 to deny our request for more timely recovery of transmission and generation investments. This presented a significant challenge for us to replace the rate relief we had originally anticipated.

We have also experienced lower-than-expected loads this year, which have been largely weather-related. Our challenge was compounded by below-normal hydro generation during the second and third quarters. This has caused us to absorb higher electric resource costs under the Energy Recovery Mechanism in Washington.

However, we are focused on the future, and I believe we are well-positioned for 2008 and beyond. Just this week we reached an all-party settlement in our Washington general rate case that will provide some much-needed rate relief effective January 1, 2008. This was a very important rate case for us and it removes a significant uncertainty from our forecasted results for 2008, and should allow us to bounce back from a disappointing year in 2007.

Now I would like to turn this presentation over to Kelly Norwood for further details on the rate case settlement.

Thanks, Scott. Good morning. Overall we are pleased with the settlement, which must still be approved by the Washington Commission. As agreed to in the settlement, electric rates for our Washington customers will increase by an average of 9.4%, which is intended to increase annual revenues by $30.2 million. As part of this general rate increase, the base level of power supply costs used in the Energy Recovery Mechanism calculations will also be updated.

Natural gas rates will increase by an average of 1.7%, which is intended to increase annual revenues by $3.3 million. Approximately one-half of the increase in natural gas rates is related to a transfer of storage-related revenues from base rates to the purchased gas adjustment mechanism and will not increase net income.

Our original request filed with the Washington Commission on April 26 of this year was designed to increase annual electric revenues by $51 million and annual natural gas revenues by $4.5 million. The settlement is based on a rate of return of 8.2%, with a common equity ratio of 46% and a 10.2% return on equity. Our original request was based on a rate of return of 9.39%, with a common equity ratio of 47.8% and an 11.3% return on equity. We will not establish a Power Cost Only Rate Case mechanism at this time, as we had originally requested, but the parties have agreed to meet and further discuss a PCORC prior to our next general rate case filing.

In addition, we have agreed to write off $3.8 million of unamortized debt cost effective September 30, 2007. These costs were for premiums paid for repurchased higher coupon debt prior to its scheduled maturity in an effort to reduce interest expense. Although we believe these costs were prudently incurred, we agreed to this concession as part of the overall settlement. The settlement process involves trade-offs to reach a compromise.

We are pleased, however, that new rates will be implemented on January 1, as compared to the normal statutory period that would have run until April 1, 2008. This will allow us to capture higher revenues during a major portion of the winter heating season. We believe this settlement strikes a fair balance between the interests of all parties and provides a reasonable outcome for our customers and our shareholders.

Also in October 2007 we filed a natural gas general rate case in Oregon. In this general rate case, we have requested to increase natural gas rates for our Oregon customers by an average of 2.3%, which is designed to increase annual revenues by $3 million. Our request is based on a proposed rate of return of 8.98%, with a common equity ratio of 51.2% and an 11% return on equity. The OPUC has up to 10 months after the filing to rule on our request.

Concurrent with a general rate case, we also filed a petition to revise our book depreciation rates, which would reduce depreciation expense in Oregon by $3.1 million, and requested that the change be implemented at the same time as the effective date of the new general rates. The net effect of the reduction in depreciation rates is included in the general rate request.

We will continue to request rate adjustments as necessary in future periods to recover our capital and operating costs and to align earned returns with those authorized by our regulators.

Now I will turn this presentation back to Scott Morris.

Thanks, Kelly. I would like to say how much we appreciate the efforts of you, your team and the external parties who worked hard to get this case settled.

Over the next few years we are planning for significant growth in our utility infrastructure. For 2007 our capital expenditures should total approximately $194 million, plus $8 million for the advanced meter reading project in Idaho. These projects are necessary to provide reliable, safe service to existing customers and to serve new customers in our service territory.

For 2008, our capital budget will be between $190 and $200 million, and we are expecting our capital budgets to exceed $200 million in 2009 and 2010. The future investments we will be making are in traditional utility plants, and we believe they are not contentious and not likely to be disallowed by regulators.

We anticipate performing upgrades on some of our hydro projects, and we will continue to reinforce and expand our natural gas and electric distribution systems. We hope to resolve the relicensing of the Spokane River hydro projects and our long-standing dispute over the use of Lake Coeur d'Alene, both of which may require capital expenditures.

With a beginning rate base of about $1.6 billion, and 2007 depreciation expense of $85 million, our rate base is growing by about 5% in 2007. And we expect our rate base to grow by about 5% to 7% per year in 2008, 2009 and 2010.

With respect to our long-term resource planning, we filed our electric Integrated Resource Plan with the Washington and Idaho commissions in September 2007. The IRP outlines a preferred resource strategy that calls for 350 megawatts of natural gas generation, 300 megawatts of wind generation, 87 megawatts of conservation, 38 megawatts of hydroelectric generation plant upgrades, and 34 megawatts of other renewables by 2017. The IRP also eliminates coal-based generation as a new resource.

Our IRP includes the acquisition of additional renewable resources such that if the IRP is implemented, we would be compliant with the Washington renewable energy resource requirements by the various milestone dates. In the IRP we do not anticipate adding a major generation project until 2014. However, we are looking to add resources in the near future and secure prime wind generation sites that will complement our existing renewable resource base into the future.

In October 2007 we settled a lawsuit that the state of Montana had filed against us demanding lease payments for riverbeds underlying our hydroelectric projects on the Clark Fork River. We have agreed to pay Montana $4 million per year for the next 10 years, and these payments will be adjusted annually for inflation. After the tenth year, the payments will be recalculated through an arbitration process for the remainder of our FERC license term, which ends in 2046. Although we do not agree with the underlying merits of this case, we are satisfied with the settlement. Legal rulings in this case had been working against us, and the settlement avoids a potential costly trial and appeals process. The state of Montana was demanding past damages totaling about $200 million and annual lease payments of over twice the amount that we settled for. Under the terms of the settlement we will not pay any past lease payments. We will file with our commissions a request for an accounting order to defer this expense until we file our next general rate case.

Now I would like to turn this presentation over to Malyn Malquist for an update on the financial results for each segment of our business, our financing activities and our earnings guidance.

Thanks, Scott. Good morning, everyone. Avista Utilities had a net loss of $0.11 per diluted share for the third quarter of 2007, compared to earnings of $0.01 per diluted share for the third quarter of last year. I would like to remind you that the third quarter is always our poorest quarter. As is typical with companies who operate a gas business, we do not sell enough gas in the summertime to cover our fixed cost of the gas business. But, we do normally expect to be close to breakeven.

Our $0.11 utility loss reflects the $3.8 million disallowance of unamortized debt repurchase cost in our Washington general rate case settlement, and an increase in other operating expenses. The increase in other operating expenses includes a pre-tax charge of $2.3 million to write down the carrying value of a turbine to its estimated fair value. We originally planned to use this turbine in our utility operations.

Depreciation and amortization increased as compared to the prior year due to our investment in a utility plant that is not yet covered in rates. Our utility plant in service has increased $149 million from September 30, 2006 to September 30, 2007.

On a year-to-date basis in 2007, our utility operation contributed $0.59 per diluted share, compared to a contribution of $0.88 per diluted share for the same period a year ago. The decline in our results for the first nine months of 2007 as compared to the prior year was primarily due to a decrease in electric gross margin. The decrease was also due to the disallowance of unamortized debt repurchase cost in the Washington general rate case, and an increase in other operating expenses, as well as depreciation and amortization.

Electric resource costs were higher than the amount included in base rates for the first nine months of 2007. This was largely driven by higher fuel costs and greater use of our thermal generating resources to meet demand in January and February. Also, hydro generation was well below normal for the second and third quarters, and we experienced some unexpected outages at our generating plants in the second quarter.

We recognized $7.6 million of expense under the ERM during the first nine months of 2007, as compared to a $3.4 million benefit recognized during the first nine months of 2006. This change from the prior year reduced our earnings by $0.14 per diluted share. We are expecting to absorb approximately $8 million of electric resource costs under the ERM for the full year 2007.

In addition to the effect of the ERM, our electric and natural gas loads were below our expectation. This is due to warmer-than-normal weather during the heating season, lower-than-expected customer growth, and customer response to price increases, particularly with respect to natural gas.

Also contributing to the year-to-date decline in utility earnings was an increase in other operating expenses. A variety of factors contributed to this increase, most notably the impairment of the turbine in the third quarter, increased regulatory commission fees, as well as the settlement of shareholder -- of the shareholder litigation case.

The decrease in electric gross margin and the increase in other operating expenses for year-to-date 2007 were somewhat offset by a reduction in interest expense. This is due to our issuance in the fourth quarter of 2006 of fixed-rate long-term debt that replaced maturing debt with higher interest rates, and due to a decrease in interest expense on short-term borrowings under our committed line of credit. This decrease in short-term borrowing was due in part to the availability of funds from the Avista Energy transaction.

The Energy Marketing and Resource Management segment, which was substantially comprised of Avista Energy, had a net loss of $0.22 per diluted share on a year-to-date basis, the same as the first six months we reported, compared to a contribution of $0.18 per diluted share for the first nine months of 2006.

Turning to Advantage IQ, the Company's net income for the third quarter and year-to-date 2007 was slightly higher than the respective period in 2006, due to an increase in operating revenues as a result of customer growth and an increase in interest earnings on funds held for customers. This was partially offset by increased operating costs, which included onetime expenses for consulting services related to long-term strategic planning for the business incurred during the second and third quarters.

As mentioned in the second-quarter call, we brought in some help to examine current and future markets and the best way to grow the business to maximize our shareholder value. This additional work cost us about $0.01 per diluted share, but is designed to enhance the long-term profit potential of Advantage IQ. And we expect greater earnings growth next year.

In our Other businesses, our results improved over the prior year as measured on both a quarterly and year-to-date basis. This was primarily due to net gains on certain long-term or legacy venture fund investments in 2007 compared to net losses in 2006, as well as certain tax adjustments recorded in the third quarter of 2006. Over time, as opportunities arise, we plan to dispose of assets and phase out operations which do not fit with our overall corporate strategy. However, we may invest incremental funds to protect our existing investments and invest in new businesses that fit with our overall corporate strategy.

With respect to cash flows during the nine months ended September 30, 2007, positive cash flows from operating activities and proceeds from the Avista Energy transaction were used to fund our cash requirements. These cash requirements included utility property capital expenditures of $149 million, mandatory preferred stock redemptions of $26.3 million, debt maturities of $12.6 million, and dividends of $23.5 million.

For the fourth quarter of 2007, we expect net cash flows from operating activities, proceeds from the Avista Energy transaction, and our committed line of credit to provide adequate resources to fund capital expenditures, maturing long-term debt, dividends, and other contractual commitments.

We have long-term debt maturities of $14 million in the fourth quarter of 2007 and $318 million in 2008. This includes over $270 million of 9.75% notes that mature on June 1, 2008. While proceeds from the Avista Energy transaction should reduce our needs, our forecasts indicate a need to issue new securities to fund a portion of these requirements in 2008.

We continue to make progress in strengthening our financial health. When the Company is able to restore its investment-grade credit rating, management intends to recommend that the Board consider gradually increasing our dividend payout ratio to become more in line with the average payout ratio for the utility industry, which is currently approximately 60% to 70% of utility earnings. The Board considers the level of dividends on a regular basis, taking into account numerous factors, including financial results, business strategies and economic and competitive conditions. The declaration of dividends is within the sole discretion of the Board.

We continue to make progress in getting back to an investment-grade credit rating. In August 2007 our credit ratings were upgraded by Fitch. Also, in September 2007, our senior secured debt credit rating was upgraded to BBB+ from BBB- by Standard & Poor's.

At this time we are revising our guidance for 2007 consolidated earnings to a range of $0.73 to $0.83 per diluted share. This revision in our guidance reflects the write-offs recorded in the third quarter and further deterioration of hydro conditions, which we are now forecasting to be 96% of normal.

Our guidance for Avista Utilities has been revised to a range of $0.85 to $0.95 per diluted share for 2007. The outlook for Avista Utilities assumes that during the fourth quarter of 2007, we will have, among other variables, normal precipitation, temperatures and hydroelectric generation.

The 2007 outlook for our Energy Marketing and Resource Management segment is a loss of $0.22 per diluted share. The loss from this segment reflects the operating loss for the nine months ended September 30, 2007, and the loss on the sale of substantially all of Avista Energy contracts and ongoing operations as we've closed that business down.

Our guidance for Advantage IQ is a contribution range of $0.11 to $0.13 per diluted share. We expect the Other business segment to lose $0.02 per diluted share.

The rate case settlement has removed a significant variable from our earnings forecast for 2008. As such, we are confirming guidance for consolidated earnings for 2008 to be in the range of $1.35 to $1.55 per diluted share. The Company expects Avista Utilities to contribute in the range of $1.20 to $1.40 per diluted share for 2008. The outlook for the utility assumes, among other variables, the implementation of a revenue increase from the Washington general rate case, as designed in the settlement agreement, effective January 1, 2008, as well as normal precipitation, temperatures and hydroelectric generation.

We recognize that the utility guidance range is broader than you and we would like, as we move through fall and into winter, we hope to be able to tighten that range as we see what kind of winter and snow pack we will have.

We expect Advantage IQ to contribute in the range of $0.13 to $0.15 per diluted share, and the Other business segment to be between breakeven and a loss of $0.03 per diluted share.

As I stated earlier, our 2007 guidance for Avista Utilities has been revised downward to a range of $0.85 to $0.95 per share. At a very high level, I want to lead you through the changes in earnings levels we anticipate from 2007 to 2008 that are allowing us to reaffirm our guidance for Avista Utilities for 2008 to be in the range of $1.20 to $1.40. It's important to note that these are rough, broad estimates that allow us to confirm our guidance is in the appropriate range. But of course, things can happen that cause variation -- variances, either up or down, in all of these categories.

Let's assume that we end 2007 in the middle of the utility guidance range at $0.90 per share. Start by adding back $0.08 for the combined write-down of the turbine and the disallowance of the debt repurchase costs. Next, we are expecting approximately a $0.45 increase at the gross margin level in 2008. This increase is driven by a number of items, including the assumption of normal hydro, resetting the level of power supply authorized costs, and increases in rates to cover increased O&M and capital additions, as well as a year-over-year increase in loads. Remember, in 2007 we are expecting to absorb $8 million in the deadband which is about $0.10 a share after-tax. With normal hydro and resetting of the authorized power supply cost in 2008, we will not have that expense.

Additionally we're assuming a decrease in interest expense of approximately $0.12 in 2008, based on the retirement of high-cost debt. Finally, we are expecting approximately $0.25 of increased operating and maintenance costs, including depreciation and revenue taxes. The final result of all the pluses and minuses leads us to $1.30, which is the midpoint of the range for our earnings guidance for 2008.

With that I'll turn the call back to Jason.

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

(OPERATOR INSTRUCTIONS). Paul Ridzon, KeyBanc.

Congratulations, Gary. Enjoy.

I will.

In Oregon, can you just review the cash impact on customers, and the cash and, I guess, earnings impact on the utility? Is the depreciation study going to offset the need for the relief? You lost me on that.

Actually they are additive. What will happen is we'll have a decrease in depreciation expense going forward. But in addition to that, we're also seeking rate relief of $3 million. So you would add the two.

So it's almost like you ask for $6 million, but you're funding $3 of it with depreciation.

That's correct.

Just a clarification. Malyn, you talked about $0.45 in gross margin. That is adding back what you ate in the ERM in that $0.45 in '07?

It includes that piece of it. Yes.

And that was about $0.10?

Yes.

When do you expect discussions on the PCORC?

Let me give you some color around the PCORC. We are planning to file again in Washington in the first half of 2008. But in terms of the PCORC itself, I'll give you some color around some of the considerations that we had as we talked about that.

First of all, in this current case, with the settlement agreement the case was turned around in eight months, which is much improved from an 11-month process. Also it allows us to reset our base for all of 2008 to reflect all of our power supply costs. So our base power supply costs for '08 now are in good shape. And we have the opportunity then to reset our base for 2009 going forward.

Puget right now is in the middle of a collaborative, where the parties are discussing the PCORC mechanism. And so, that was part of the reason that staff and intervenors would rather not have a PCORC for us now, because they are in the middle of that collaborative process. There's also some other approaches to addressing updating the base going forward. So, based on all of that, the PCORC was less of an issue this time around, given that we were able to update our base in a timely manner.

Did the settlement contemplate any grab at interest savings?

Yes, it did. In our original filing, we had put in the full amount of the 9.75% interest costs. And through the negotiating process, we did reduce the amount of interest expense included in base rates.

Lastly, I think you said you need to access securities markets. Can you kind of characterize how you plan to do that in '08?

Sure. We have the $273 million, I think, outstanding on the 9.75% notes. And we plan to sell debts some time in advance of the June 1st date, most likely in May, unless markets are attractive. We might go a little bit earlier than that. And I think we're looking at an issuance size, clearly, not $270, but it might be in the $150 to $200 million range, depending on what our cash requirements are at that time.

You might remind them, Malyn, that we also hedged part of that forward.

We did hedge $125 million of the interest rate risk. Interest rates continue to look pretty attractive, so we're probably looking at something in the 10 to 30-year maturity range.

You weren't implying that you need equity when you made that comment?

I was not implying that I need equity. No.

You've got plenty of headroom for awhile just given the proceeds from trading?

We do. And we are getting a little higher equity ratio than, I think, our initial thoughts might be, and we're happy about that. But I think our forecasts show that we grow into that during 2008, just from retained earnings. We expect to be at about 45% in the utility at the end of this year. And we should grow into that with just the retained earnings that we have, and not have to issue equity.

How should we think about the fact you didn't get the 48% equity layer you asked for versus prior comments that if you did not get that, there could be an opportunity to return equity to shareholders?

I think that --

Split the baby?

You take steps. You take incremental steps here. I would continue to like to think that we could get a higher equity ratio, but we need to demonstrate to the Commission that we have it in the utility. And we don't have all of that in the utility yet. So, I hope to be able to grow into that, basically through our retained earnings.

I would just mention, remember that we plan on, as Kelly mentioned, filing a case sometime in Washington next year, as well as probably a case in Idaho. So we still have some work to do.

Thank you, and congratulations on the settlement.

Doug Fischer, Wachovia.

Congratulations, Gary. I hope to see you in Florida. And also congratulations on the rate settlement. The earnings range that you are expecting in '08 for Avista Utilities, what kind of GAAP ROE does that imply roughly? And is there a material adjustment to the regulatory ROE? I would assume it's going to -- it might fall a little bit short of the 10.4%, given some of the issues we've discussed in the past. But maybe you could fill me in on that.

Happy to do that. We do have some expenses that we incur that the Commission does not allow us to recover. So we -- let me back up and just tell you where we are, I think, in the jurisdictions that we have. We're clearly significantly underearning in Idaho, and that's why we filed -- I'm sorry; I meant to say Oregon, actually. Mixing up my states here. We're significantly underearning in Oregon, and that has driven the filing.

In Washington we are underearning. And even with this rate case, because of regulatory lag and some things that we are not allowed to recover, I think that we're probably looking at an ROE that we're going to earn somewhere in the 8.5% to 9% range in reality. And that's why we're likely going to turn around and file another case in the second half -- or in the first half of the year.

In Idaho we're underearning a bit on gas. We're actually earning our authorized return in the electric at this point in time. So when we put all of those things together, I would expect next year we're still looking at a return somewhere in the mid-8 range, as what I would expect our ROE to be. That's partially because we are really ramping up our CapEx, and we're going to continue to have regulatory lag. And that's an issue that we're trying to have discussions with our regulators about, because we really need to be spending these dollars on behalf of our customers. And it's -- I know I'm preaching to the choir here, but it's really a bit unfair that we're going to have a hard time earning authorized returns as a result of making these investments.

Is there an understanding on the part of the staff and the Commission that, on a consistent basis, you all are earning one of the lower ROEs in the country on regulated utility properties? Do they appreciate that?

I think there's still some education that needs to be done there.

I find it quite frustrating that they have been going on for so long, despite your efforts. What level of gas prices -- or how can you talk to us about whether you expect to fully recover in a normal hydro year your fuel and purchase power costs, given the rate level set in the settlement?

When we entered into the settlement agreement, we did model the level of power supply costs that we had negotiated in the settlement agreement. And we compared our preliminary '08 forecast to the new base power supply costs in the settlement agreement. And what it showed us at the time that we modeled it was that we actually would be a little bit positive with the settlement agreement that we had. So we've reset base rates, base power supply costs, at a positive level.

James Bellessa, D.A. Davidson & Co.

Given the underearning of your ROE, allowed ROE, would you be tempted to be taken over by, as Puget Energy has agreed to, perhaps 25% premium, say $27 a share stock price?

We've currently gone through a strategic planning process, and we're quite satisfied with the direction that we think that we can outline over the next three to five years. So while Puget has their strategy, we feel we've got a very good strategy going forward.

The other thing I would also say is you know we don't talk about those things anyhow.

But I'm just saying would you be tempted. I didn't say you'd accept it; I'm just asking.

Good try.

Why would the intervenors, the parties in this case, pick off the unamortized debt repurchase cost (inaudible)?

That was part of a negotiated agreement. Staff took the position that back when we started repurchasing the debt in 2002, that they had concerns about the way we accounted for it. So there was clearly a difference of opinion there. And in this settlement agreement we weighed a number of things. One was the settlement allowed us to pick up quite a few dollars earlier than litigating the case. If we had litigated, there's uncertainty about how the Commission would come down on the amortization of those debt costs. So this was an opportunity for us to actually manage and know the outcome versus taking the risk on what the Commission might do on those costs.

You're implying that your ERM in the fourth quarter is going to be $400,000. What was it fourth quarter of '06?

We're going to see if we can pull that up here. I'm not sure we have that at our fingertips.

We might have to call you back with that.

One thing to keep in mind on that is that we're in the 90/10 sharing piece at this point in time. So to the extent that costs are higher than the authorized, we would eat 10% of that.

So really what we're saying is we're expecting our costs to be $4 million higher than what we have in rates, and the shareholders will pick up $400,000 of that. We're -- we don't have that number with us. I'm going to ask Jason to call you with that number.

Okay. Good. When I read the narrative about CapEx guidance, and then heard the verbal explanation, I think I was hearing 194 million in CapEx this year, plus 8 million for advanced meter reading.

Remember, we got a regulatory order in Idaho that allowed us to defer those costs and not have to pay depreciation on that. So the regular CapEx budget is about 194 for 2007.

Plus add the AMR on top of that. We're treating it separately. As Scott said, we get to earn AFUDC on it, as well as we're capturing some savings, frankly, on it. So it's an incentive for us (technical difficulty)

Your 2007 guidance is down in the range of $0.12 to $0.17 from where it was. And so, in the most recent quarter, are you laying the whole blame on the third quarter, or are you saying the fourth quarter will be a little less than you expected heretofore?

I will tell you probably something that you know, and that is we continue to be fairly dry, and our temperatures have been fairly mild. So I know our gas use is continuing to run a bit under budget. We tried to capture all of those things. And frankly, we wanted to make sure we had a range here that we were going to hit.

As you know, we have the La Nina that has been forecasted for the region. But we also know that even though it's been forecasted, we don't put all our eggs in that basket. So we want to see the precipitation show up.

(multiple speakers)

The other thing I would add to that is our customer growth is just slightly below where we had anticipated, which will carry through the fourth quarter.

In the third quarter you reported a loss of $0.11, and you say that was below expectation. Now that it's out of the bag and actually reported, can you tell us what your expectations actually were for the third quarter so that we can see how much variance there was from your anticipation?

Our expectations were right at breakeven.

So that's most of the explanation for the reduced guidance then?

Yes.

You're talking about '08, and you went through the broad estimate changes that could occur. I don't know if I missed one or not. But was the last one a minus sign of $0.25?

Yes.

So if it was a minus sign of $0.25, I must have missed one. The first one I started here -- wrote down was $0.90 base, and then recouping the write-down that you just incurred of $0.08 in the most recent quarter. Can you go from there on down?

I kind of gave a pretty broad significance up, which is a $0.45 increase in gross margin.

I heard that it was 45%. I didn't hear the cents. Okay. I thought you were just describing it. That does it. Thank you very much.

(OPERATOR INSTRUCTIONS). Steve Gambuzza, Longbow Capital.

Just a quick question on the guidance. The utility guidance for '08 hasn't changed since you last issued it in Q2. And I believe at that point it was contemplating a fully litigated outcome, so relief effective in April. I'm just curious, given that you're going to capture two months of kind of peak usage now, was it that the amount of aggregate rate relief that was captured in the settlement was less than what you were forecasting originally? Or did something else in your outlook change with respect to load growth or the level of offering cost creep that has offset the benefit from two months of quicker rate relief?

I'll take that one. Really good question. When we put our guidance out, I think we were assuming that we would have rate relief March 1, because that was the schedule that had been adopted for a decision. You're right; we're getting revenue two months earlier than we anticipated. And that, clearly, was a positive, and one of the reasons we were willing to settle.

I will tell you that our estimate of what we were thinking we were going to come out of the case with was a little bit of a higher annual increase. We wouldn't have gotten as much in 2008, granted. So I hope you're following me there. You make trade-offs when you settle. So we had originally thought we might come out of the case slightly higher than we did come out of the case. I'm guessing that's why other parties were willing to settle, too, because they were looking at all of those things.

But in addition to that, we have had a poorer year in 2007 than we were counting on. And we are going to finish the year with a lower cash position than we expected we were going to finish. So that's driving some additional interest cost next year versus our original plan.

And finally, because of the Avista Energy sale, we have increased our capital budget. And so this year we authorized our folks to go ahead and spend almost $10 million of additional CapEx that wasn't in our plan when we gave guidance last. So we've ramped some spending up, and we've grown our capital budget for next year beyond what we were expecting. That's, I think, really good news for the long-term, because it will continue to allow us to serve our customers well, as well as produce additional rate base and earnings growth, in the long-term. But it creates more regulatory lag next year, and so some dollars we won't recover until we file and have 2009 case. So the combination of those things has caused us to continue to put the guidance where it is, offsetting some of that move-up of rate relief that we got by having a January 1 rate case.

A question for Scott, just in terms of the point about you all having a strategic plan, which you think will create superior value over time. And based on that plan, you're not really inclined to entertain transactions at these depressed levels. What level of improvement in your earned returns does that strategic plan contemplate? Do you think you can continue -- do you think that strategic plan will deliver superior value at the current earned returns that you're putting forward?

I think there's a combination of things that we're focusing on. And again, I'd like to point you to growing rate base by 5% to 7% over the next three to four years, as well as our dividend policy that we plan on paying at least at industry levels, and we'll do that -- as in a board discussion, we'll see how we want to do that. But my guess is that we won't do it all in one shot; we'll do it over the next two or three years. When you combine that, we think that we're going to be able to provide some superior returns to the future, given the fact that we're going to have some regulatory lag. But we do have outstanding relationships in the states that we serve. And while we know that we'd like to have some trackers and some things to take the lag out of that, we think at the end of the day, when all is said and done, we will deliver the results.

Paul Ridzon, KeyBanc.

How long could it take before you get the accounting order?

We will ask for the Commission to rule on it by the end of this year.

And your guidance for '08 assumes you get it, or is that just part of the range?

It assumes that we do receive the accounting order.

At this time there are no questions in queue. I would now like to turn the call back over to Jason Lang for closing remarks.

I want to thank you all for joining us today. We certainly appreciate your interest in our company. Have a great day. Thank you.

Thank you for your participation in today's conference. This concludes your presentation.