Avista Corp (AVA) 2008 Q2 法說會逐字稿

Good day and welcome to the second-quarter 2008 Avista Corporation earnings conference call. My name is Candace, and I will be your coordinator for today. (OPERATOR INSTRUCTIONS). It is my pleasure to introduce your host for today's conference, Manager of Investor Relations Mr. Jason Lang. Sir, you may proceed.

Thank you. Good morning, everyone. Welcome to Avista's second-quarter 2008 earnings conference call. 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 Chairman of the Board, President and CEO Scott Morris; Executive Vice President and CFO Malyn Malquist; Vice President of Finance and Treasurer Ann Wilson; Vice President, State and Federal Regulations 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 we make 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-Q for 2007 and Form 10-Q for the quarter ended March 31, 2008 which are available on our website.

To begin this presentation, I would like to briefly recap the financial results presented in today's press release. Our consolidated results for the second quarter of 2008 were net income of $0.44 per diluted share compared with earnings of $0.26 per diluted share for the second quarter of 2007. On a year-to-date basis, our earnings were $0.91 per diluted share compared to $0.53 per diluted share for the first half of 2007.

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

Well, thank you, Jason, and good morning, everybody. Overall we are very pleased with our results for the second quarter and first half of 2008. The results for the first half of 2008 have positioned us well to meet our earnings targets for the year. The general rate increase in Washington implemented at the beginning of 2008 was the primary reason for the improvement on our utility results.

In addition to the improvement at the utility, our consolidated results increased as compared to 2007 due to the net loss of Avista Energy in the prior year. Unusual weather patterns resulted in both higher-than-expected resource costs and increased retail loads. The slight shortfall in earnings relative to our expectations for the second quarter and first half of 2008 was largely due to higher-than-expected electric resource costs. We absorbed $4 million of cost in the second quarter of 2008 and $7.4 million for the first half of 2008 under the energy recovery mechanism in Washington. This was primarily due to colder than normal weather and later than expected runoff. And while we had good snowpack conditions, the temperatures remained cool so that runoff through mid May was well below normal.

In addition to below normal hydroelectric generation, fuel and purchase power costs were higher-than-expected to meet increased demand. And although we had above normal hydro generation for mid May through July, it will most likely not be enough to make up the entire shortfall from earlier in the year. However, we should recover a portion of the $7.4 million of cost absorbed during the first half of the year under the ERM primarily due to above normal hydro generation for July. Actual hydroelectric generation will depend upon precipitation, temperatures and other variables during the remainder of the year.

It is important to note that the amounts recognized under the ERM can vary significantly from quarter to quarter due to a variety of factors, including the level of hydroelectric generation, as well as changes in purchase power and fuel costs.

Partially offsetting the negative effect of higher electric resource costs was higher-than-expected retail natural gas loads due to colder than normal weather.

We filed increases -- we filed request for increases in electric and natural gas general rates in Washington in March 2008 and in Idaho in April 2008. The filings are designed to recover increases in fuel and purchase power costs to meet growing customer demand, infrastructure investments to increase capacity and reliability for licensing costs for our Spokane River hydroelectric project and expanding the storage and delivery capacity at the Jackson Prairie natural gas storage project. Our request in Washington is for base rate increases averaging 10.3% for electric and 3.3% for natural gas. Combined this is designed to increase annual revenues by $43.2 million. This request is based on a proposed rate of return of 8.43% with a common equity ratio of 46.3% and a 10.8% return on equity.

On Monday we filed an update to our demonstrated need for electric rate relief in Washington, primarily to reflect an increase in natural gas fuel costs. And although the update justifies an electric revenue requirement of $47.4 million compared to our original request of $36.6 million, we are not revising our original revenue increase request.

Our request in Idaho is for the base rate increases averaging 16.7% for electric and 5.8% for natural gas. I would like to note that this is our first request to increase base rates in Idaho since 2004. Combined this is designed to increase annual revenue by $37 million. This request is based on a proposed rate of return of 8.74% with a common equity ratio of 47.9% and a 10.8% return on equity.

On Monday of this week, the Idaho Commission staff advised the Idaho Commission by letter that it had essentially completed its audit and discovery related to our electric and natural gas general rate cases and intends to engage in settlement negotiations. We're hopeful that the settlement discussions will be successful. The original procedural schedule established by the Idaho Commission provides for an order by November 2008.

Any rate adjustments if approved by the Washington or Idaho Commissions would most likely become effective in late 2008 or early 2009. We're becoming increasingly concerned about the price of natural gas and the impact on our customers' energy bills. And although prices have decreased in the past couple of weeks, we're still expecting an increase in natural gas rates for purchase gas adjustments to be implemented in the fourth quarter of 2008. Purchased gas adjustments are designed to pass through changes in natural gas costs to our customers with no change in gross margin or net income.

We continue to make and plan for significant capital investments in our utilities. For the first half of 2008, our capital expenditures were approximately $90 million. For the full year of 2008, our capital budget is approximately $200 million, and we are expecting our capital budgets to exceed $200 million in 2009 and 2010. We're planning to update certain hydro projects, and we will continue to enhance our natural gas and electric distribution systems.

In the second quarter of 2008, we completed the acquisition of a wind generation site. We expect to construct a 50 megawatt generation facility at a total estimated cost of over $125 million to be completed in 2011.

In June 2008 we filed petitions with the Washington and Idaho Commissions requesting that costs including land, turbine downpayments and other preliminary costs associated with the project be accounted for as construction work-in-progress. This would allow us for the accrual of AFUDC, and I'm pleased to report that the Idaho Commission approved our request on Monday. It is possible that we may need to make a downpayment on wind turbines before the end of 2008. This is not included on our estimated capital expenditures.

And finally, we're very pleased about Advantage IQ's acquisition of Cadence Network effective at the beginning of the third quarter of 2008. We believe that combining the resources and expertise that Cadence has developed with those of Advantage IQ will give us the ability to leverage growth in our subsidiary and drive additional values for its clients and our investors.

And now I will turn this presentation over to Malyn Malquist for an update on the financial results for each segment of our business, plans for Advantage IQ, our financing activities and our earnings guidance.

Well, thanks, Scott, and good morning, everyone. Avista Utilities contributed $0.41 per diluted share for the second quarter of 2008 compared to $0.32 per diluted share for the second quarter of last year. On a year-to-date basis, our utility operations contributed $0.85 per diluted share, an increase from $0.70 per diluted share in 2007.

As Scott mentioned, the improvement in results was primarily due to the Washington general rate case implementation. The positive effects of the general rate case increase were partially offset by expected increases in other operating expenses, depreciation and amortization and taxes other than income taxes.

For the second quarter, interest expense was higher than originally expected due to the timing of our debt issuance. In April of 2008, we issued $250 million of 5.95% first mortgage bonds to refinance $273 million of 9.75% senior notes, which matured on June 1, 2008. Although this will provide significant cost savings going forward, both issuances were outstanding during April and May. Due to the uncertainty and some lack of liquidity in the financial markets, we decided to issue these bonds earlier than we were planning, taking some risk off the table. In retrospect we are very pleased with the 5.95% interest rate.

Turning to Advantage IQ, the Company's net income for the second quarter and first half of 2008 was slightly higher than the comparable periods of 2007 due to an increase in operating revenues as a result of customer growth, partially offset by a decrease in interest revenue on funds held for customers and increased operating costs. On a year-to-date basis, total revenues increased 11% from service revenues, which increased 22%, partially offset by a 32% decrease in interest revenue.

As consideration for the acquisition transaction, the previous owners of Cadence Network received a 25% interest in Advantage IQ. While we anticipate an increase in annual revenue as a result of the acquisition, the transaction is expected to be slightly dilutive to our consolidated earnings in 2008 by $0.01 to $0.02 per share due to transaction costs and the decrease in our ownership of the subsidiary.

We believe the acquisition of Cadence will significantly enhance the long-term value of Advantage IQ, which was already a very attractive business. While we considered Cadence a major competitor, their products and service offerings are also very complementary to Advantage IQ's. Advantage IQ will be able to offer its customers and the Cadence customers a more complete, attractive package then either company could do on a stand-alone basis. For example, Advantage IQ offers telecom service, which Cadence does not offer. However, Cadence offers a more robust consulting service than Advantage IQ. Both companies have experienced very rapid growth with Cadence revenue growing over 40% last year. Integration activities are well underway.

We are planning to monetize at least a portion of our investment in Advantage IQ during the next to two to four years. The potential modification could be completed through an initial public offering or sale of the business depending on future market conditions, growth of the business and other factors. Under the transaction agreement, the previous owners of Cadence Network can exercise a right to redeem their shares of Advantage IQ stock during July 2011 or July 2012 if Advantage IQ is not monetized through either an initial public offering or sale of the business to a third-party. Their redemption rights expire on July 31, 2012.

The redemption price would be determined based on the fair market value of Advantage IQ at the time of the redemption election as determined by certain independent parties.

In our other businesses, our results improved over the prior year primarily because of the net loss from Avista Energy in 2007. The remaining activities of Avista Energy are no longer a reportable business segment and are included in other for segment reporting purposes.

Over time as opportunities arise, we plan to dispose of assets and phase out operations that 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.

During the first half of 2008, positive cash flows from operating activities were used to fund the majority of our cash requirements, excluding debt maturities. These cash requirements included utility capital expenditures of approximately $90 million, dividends of $17.6 million and the cash settlement of interest rate swaps of $16 million. We're currently planning to issue additional long-term debt during the second half of 2008 to fund other maturing debt, as well as to provide additional funding for capital expenditures and other corporate purposes.

We have a sales agency agreement to issue up to 2 million shares of common stock from time to time. We are planning to begin issuing common stock under this sales agency agreement during the second half of 2008. This should help us maintain our equity ratio at an appropriate level. The issuance of common stock should also help us maintain or improve upon certain financial metrics necessary to maintain or improve our credit ratings. Our 2008 earnings guidance assumes the issuance of common stock.

As we have indicated in past calls, management intends to recommend that the board consider gradually increasing the 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 earnings. As you will recall, the board raised the quarterly dividend by 10% from $0.15 to $0.165 per share in February. Management intends to recommend that the board further review our dividend level during the second half of 2008. 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 are confirming guidance for 2008 consolidated earnings 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 normal precipitation, temperatures and hydroelectric generation for the remainder of the year.

We are confirming our guidance for Advantage IQ in the range of $0.10 to $0.12 per diluted share. We expect the other businesses to be close to breakeven for the year. However, we're not changing our guidance between breakeven and a loss of $0.03 per diluted share at this time.

And now we would like to open the call for questions.

(OPERATOR INSTRUCTIONS). Brian Russo, Ladenburg Thalmann.

I was just curious I got on the call just a little bit late. I think you said that July hydro conditions, will that be enough to offset the total impact of the ERM in the first half of the year or not?

No, it will not.

It will fall short?

It will fall short. We are really pleased with the July hydro results, but it is not quite enough to make up for the poor conditions we suffered in primarily April of this year.

Okay. And so that I guess would imply say the middle of your guidance range is assuming normal hydro and then your ability to reach the high-end of your range would be really dependent on weather?

I think that there are still a lot of variables that can impact us. We assume normal hydro through the rest of the year. If we had a very wet fourth quarter, which we had two years ago, that would be very helpful to us and probably puts us back into the high-end of the range. We are working real hard to do our best to be somewhere in the middle there, if you will. But there's a lot of variables that happen between now and the end of the year. July is going to be very helpful, but we still are going to absorb some expenses under the ERM, and we know that and we are working to offset those in other areas.

Okay. And in terms of the debt issuances you plan in the second half of '08, can we -- is it going to be first mortgage bonds with similar rates as the recently issued debt?

Brian, it will be first mortgage bonds. Rates have moved up. And so if we were to issue today,they would be a bit higher depending on the maturity that we select,and we have not selected that yet. But I would expect that sometime between September and December you will see us in the market for probably around $100 million of first mortgage bonds, tenure to be yet determined, as well as the interest rate.

Okay. And just lastly, can you quantify the downpayment on the wind turbines?

You know, at this point it is really hard to estimate what that number is going to be. We know that the total price is going to be well over $125 million, and we know that the price of the turbines will be 50 to 75% of the total cost of the project. So it really depends on that, and usually they ask for anywhere from a 10% to 20% downpayment, so.

Paul Ridzon, KeyBanc.

What was the cost of the land for the wind farm?

Well, we have spent $2 million to date on land acquisition, and a majority of the cost really will be in leases for the property. So while land cost will not be a major expense for the wind turbines, again the majority of the cost is really going to be the price of the turbines itself, the construction, building the roads into the property, getting and making sure that you have got all of the different easements that you need to have and any adjustments that we need to make to things that are out in the properties themselves like are there radio towers, cellphone towers, and do we need to move some of that to make sure that we can get all of the generation we can out of the wind? So that is really where the majority of the cost will come.

There was quite a bit of work done on the front end by another party to qualify the site and look at the wind potential that was there, and that really is what we have acquired at this point is all the work that they have done.

And it has been fully permitted, so we're ready to go.

And Malyn, I think you indicated that you thought the other segment would be about breakeven, although formal guidance is breakeven to a loss of $0.05. What is driving that improvement?

We have really worked at this. It is 0 to 3, Paul, was the guidance. We have really I think worked to clean up the cats and dogs that were out there. We have one really remaining operating business besides Avista Energy which has some payments in and out associated with the maintenance of that business. But the Company, METALfx, which was acquired as one of the Pentzer acquisitions back in the '90s, we have been working to get that business profitable, and indeed, it has been profitable for over 12 months in a row, and we are hopeful in the next year or so of being able to sell it.

So the improvement there, as well as disposing of some other assets that we have had, the venture funds that we invested in again a number of years ago that are legacy investments, actually a couple of them made money this year, and one of them I think lost a little bit. But I'm really pleased that we're at the point where we are pretty much at breakeven in that business. I don't see much variability there on a going forward basis, which I think is very positive.

In the second quarter, IQ showed incremental growth. Did you incur any transaction cost in the second quarter?

We're booking all the transaction costs in July in the third quarter. So that is when you will see that. Really the only negative we have seen in that business is the lower float revenue that we have been getting, which has been significant. And so the fact that we are still seeing an increase in net income I think is very positive. We think that there is some good potential upside there on the float because if we start the Fed raising interest rates, that could be very helpful for this business.

And what was the tenure on the 5.95?

10 years.

I missed how much that was?

$250 million.

Hasan Doza, Luminus Management.

I just had a couple of questions on the hydro situation. Can you guys give us a sense in terms of magnitude like how much can you true-up on the negative side in the next six months? Meaning are you going to be, as you look through the next six months and given that we already have July in the books almost, are you going to be slightly negative, meaningfully negative? Can you help us with a certain level of magnitude?

Yes, I will try to do that because I think that is important obviously to your forecast. If you think about where we are in the ERM, we're into the 9010 sharing at this point. And so before we get any benefit, we have got -- we're at about 14, $15 million to the negative. And so we have got to make up 5 or $6 million, which would flow back 90% to our customer balance before we start to see any bottom-line impact.

I do believe that we're going to be somewhere between that 0 and the high-end of the 50-50 sharing, probably somewhere close to the midpoint in there. But that could change so much based on if you are really close to the 100% level, if you get $1 million of benefit through more hydro, that all flows to the bottom-line.

So we don't see -- we see very little downside because we are in the 9010 sharing, but we see actually quite a bit of potential upside because we could get back into the dead band 50-50 and maybe even into the dollar for dollar range.

So where do I think we're going to end up? Right now our best guess is we're going to be somewhere between 0 and the 9010, probably close to the middle point. But -- and that is based on a very good July that we know we are having. But then we have got five more months to go, and under normal circumstances, normal hydro, normal weather conditions, I think we're going to be around the middle of that 0 to $10 million of excess cost, which puts us in the middle of the 50-50 sharing, if you will.

And I would just add that the fact that natural gas prices have come down in the last three or four weeks also is a good sign for us to get into that middle range.

So we should be thinking about 0 and negative, 5? I mean if you look at the numbers, you are already -- the first $7 million is plus or minus shareholders, so you're looking at between 0 to negative 5 for the whole year?

I would probably put it closer to the negative 5 as to where we think we will be based on our current forecast.

Got it. And on the follow-up to this question, can you help me understand how sensitive is your guidance range to the ERM? What I mean is that, if you take a look at your utility guidance which is between 120 to 140, how much do you have to -- I guess if you, for example, stay at that negative 5 range, what does that imply in that range? Does it imply the midpoint? And if you were to stay below the negative 5, what would it imply in staying above? So I am just trying to get a better understanding how does your current guidance -- is sensitive to the true-up of the ERM from the negative 5.

Well, the good news is that we have some things going the other direction, and that has been helpful to us. Most significantly, the gas loads. We had higher gas loads in the first four months of the year than we were expecting to have. That in and of itself has offset a fairly significant portion of the loss that we expect to absorb in the ERM.

We also are -- and we also have lower depreciation rates as a result of some negotiations we have done with the commissions. And so both of those things are helping us to really feel like we're still pretty close to the middle of the range, and we had some good discussion internally about should we narrow the range. We have needed to leave the range as wide as it is because we still could have a fairly significant amount of variability as a result of where we are in the ERM. We think if we end up with some good strong hydro conditions in the fourth quarter, then we're going to be back to the point where that is going to be dollar for dollar impact to the shareholders and could be a very, very positive thing. Based on where we think we are going to be at this point with a potential for around a $5 million loss in the ERM, I feel pretty good that we're going to be around the midpoint of the range. So there's still quite a bit of variability, but we have got some offsets here is I guess what I'm trying to stress with you.

That is very helpful. I just have one last question. Obviously Starbucks closing a lot of their stores, you guys know it very well given you are in the region. I wanted to get your sense as to what impact the economic slowdown is having on small businesses, and what are the impacts you guys are seeing on the Advantage IQ business, and I just used the Starbucks closing as an example of the impacts that we're reading about. Do you guys have any thoughts you can share?

Sure. From the Advantage IQ perspective, I just had a discussion about that with Stu just last week. While obviously Stu is saying any shutting down any business is not good for Advantage IQ, he was not particularly concerned because they are having enough offsets of other growth areas that the impact should be minimal on Advantage IQ's business going forward. The contracts for Starbucks are extremely competitively priced. So if we lose some stores, it's not going to have major impacts.

As far as our service territory is concerned, our economy usually lags the national economy by anywhere from 12 to 18 months. And we have seen a little bit of a slowdown from our housing perspective and some of that, but we're not seeing a significant amount of trouble in our economy here in our service territory. As a matter-of-fact, manufacturing stays strong. We have got a lot of commodities that are quite high that enter our service territory. Agriculture, wheat, for example, metals or mining. So as a matter-of-fact, in some cases we're quite strong, and we cannot find workers to fill some of those jobs. So we're not in terrible shape.

Eric Beaumont, Copia Capital.

A quick question changing tactics from some of the others, obviously a lot going on in the regulatory calendar. And historically when you have gotten trued up, it has been difficult for you to earn your allowed. Obviously that has been more skewed toward Washington giving the more frequent cases in Idaho. Can you just walk us through your thinking of the timing of one thing hit in place and how realistic earning close to allowed or what you think based on lag is going forward?

I will give that to Kelly Norwood. As you know, we have two cases pending right now. In Idaho we filed in April. We just mentioned today on the call that staff has essentially completed their audit, and they have notified the commission that they are ready to talk settlement and will actually start that tomorrow.

Now if we run the full course, that would be November of this year before we can get an order. But we are hopeful that we will make some progress on settlement discussions.

Now when we complete that case, that is going to reset the base for our PCA, and what we do in our cases is we pro forma in our future salaries, and in Idaho they have been somewhat receptive to also putting in the capital that we spent all the way through the end of '08. Now it remains to be seen where they land on that, but we have made a lot of effort to try to put in all the known future costs that we're going to incur during the period that rates will be in effect. So in these cases we should be set up pretty well to be able to earn closer to our allowed return once rates are put into effect.

The one variable that we have already talked about is natural gas prices and hydro conditions, which obviously will fluctuate depending on what precipitation is.

Obviously in Idaho that seems well. In Washington we have hit a few snags in the past. Are you seeing better traction on getting more up-to-date pro forma capital as well there? And obviously it is not as far along, so we're not sure. But is your expectation that you will have more forward looks for the capital and cost in Washington?

All I can say at this point is that we are hopeful that they will recognize given the dollars that all utilities are spending today on capital that they will recognize that and put that in rates. Otherwise, there just isn't an opportunity to earn return on that.

We have not seen a lot of pushback yet, but again we're pretty early in the game at this point.

Okay. And just for the timing on Washington, can you refresh my memory there?

Yes. We're fairly early, but we have settlement discussions that were in the original procedural schedule which will start August 20. Staff and intervener testimony will be September 12, and if we go the full statutory period, it would be the first of February before we would get an order.

David Thickens, Deephaven.

David asked a couple of or part of my question. But what I would like to do I realize you have not given guidance. But, as we think to '09 and start looking forward, what are the major drivers we should be thinking of other than any potential benefits from your two rate cases that you filed? Can you talk a little bit at all about O&M trends or other drivers we should be incorporating into our thinking?

I think that the biggest issue really is how do we do on our rate cases. Because we are spending a pretty significant amount of capital. If you look at the capital that we are spending after depreciation, we're looking at 5% to 7% kind of increases in ratebase.

And so the question is, how much of that can we get? What kind of lag are we going to experience? If we can get timely rate relief and recognition of that, then one would expect that that would translate to the bottom line.

We are clearly seeing some inflationary impacts in the cost of doing business. Of course, like everybody else, gasoline. Our fleet used $1.2 million more gasoline in the first six months than what we budgeted. And so we're seeing some impacts like that.

But the majority of the inflationary impacts are coming in the cost of copper, steel, transformers, cement, asphalt, the things that we need to use and buy to essentially do the capital projects that we're doing. So the impact really comes longer-term through upward pressure on the capital budget, more so than on the operating budget. And our labor costs are going to be the normal kind of wage increases that are built into our union contracts, are in line with normal inflation. Our other costs, health care costs growing higher than that, but controllable. And so really the area that we're most concerned about is the impact long-term on capital budget.

David, I would just add that we have been able to leverage technology to drive costs out of our business. We have implemented a new website where customers can do pretty much all of their transactions online, and we have been able to continue to flatten or reduce our call center expenses.

We have also installed some mobile dispatching features at our natural gas business that has continued to optimize the use of our gas servicement and increased productivity and drive costs out of that business.

We also have some opportunities to do that on the electric side over the next couple of years. So we have also -- we're installing a new interactive voice system for our customers again to drive more cost out of the system. So we're pretty innovative around ways to leverage technology to continue to streamline our operations. So while maybe we cannot completely offset all of the factors that Malyn has talked about, we're certainly trying to drive costs out of our business to stay as focused on that as possible, while increasing customer service and customer satisfaction. We're not sacrificing that to drive costs out. As a matter of fact, we're doing both, and we're doing it I think quite well.

Okay. Just as maybe another angle, some of the previous questions about trying to reduce the lag, have you had specific conversations with the regulators that have led you to put certain mechanisms into your rate case request, or is this more of a case of your just trying different approaches and seeing what is going to stick?

Kelly again. Let me give you a couple of examples. In Idaho Power's last rate case, they filed what they called half a projected rate year and half was based on actuals. And their objective was to pro forma in the future capital. And I don't know that that was that well received because they were using a budget or projected numbers.

In Washington a couple of years ago Puget proposed what they called a distribution tracker, and they did not receive approval of that. So what we did was step back. We did talk to staff ahead of time in Washington, Idaho and let them know what our approach was and why we were taking that approach. And what we did was, we started with actual numbers during the historical test period 2007, and then we have put in there adjustments based on known capital expenditures and then future capital expenditures based on specific projects. And we think that that is a much more attractive way to go and one that the staff has an audit trail to follow. And I think that is why the initial indication in Idaho anyway is that they may be receptive to that, although we will have settlement discussions here pretty quick. And we think that it has a reasonable chance of getting at least some progress in the state of Washington also.

Paul Patterson, Glenrock Associates.

Really quickly, I'm sorry if I missed this. It sounded like you guys had updated your filing on Monday, and the electric numbers had increased to 47.4, and I think the original number was around $37 million, is that right?

Yes.

I'm somewhat -- I missed, what was it again that caused the increase?

The primary driver was the increase in natural gas costs. When we filed originally in Washington, the cost of natural gas we had in there for Coyote Springs was $7.90 per dekatherm, and what we updated the cost to was $9.05 per dekatherm. And so that is the primary driver in updating the numbers.

Okay. But you're not increasing your request? Did I hear that right or (multiple speakers)

That is correct. What we're doing is increasing the dollars that we think we can justify to show the commission, and we're hopeful that will help us get a result that is closer to the original ask of $36.6 million that we've originally filed.

Okay. And then I guess if I understood you guys correctly, when you add up your guidance by segment, it looks like it is a little -- it does not seem to actually match the consolidated number. Is that because you guys are actually seeing better than normal results in the other segments?

That is a piece of it. I think we tried to look at best guess of probability of the upsides of all of the businesses and the downsides of all of the businesses, and when we look at that, they did not just add up based on the segment guidance. So it comes out a little bit different. I hope that makes sense.

Okay. Well, I will follow-up afterwards I guess.

The other thing is the settlement discussions in Washington, you mentioned the ones in August. There is also I think in the schedule something for October?

That is correct. October 22, there is a scheduled settlement conference.

What is the chances I guess or how would you handicap the possibility of having a settlement before staff files testimony or the other interveners?

At this point it is pretty hard to tell. It is pretty early in the game, so I would not want to guess.

Okay. But it sounded like you guys were feeling a little bit more confident in Idaho? Is that -- did I hear that correctly, or is that just me reading something into it?

Yes, and the reason we say that is because the staff was the one that actually took the initiative to send a letter to the commission stating that they plan to engage in settlement negotiations with Avista. So they took the initiative to do that, and that is positive.

James Bellessa, D.A. Davidson & Co.

Most of my questions were answered, but I do want to check, do you really think you're going to have an ERM benefit in the third quarter? I haven't been guessing that, but there was something said that kind of suggested maybe not.

I believe that we will gain back in the third quarter some of what we lost in the first two quarters.

And the Cadence acquisition said to be $0.01 to $0.02 dilutive, is that all a third-quarter event?

No, that is both third and fourth quarter.

Why is it spread over the two quarters? What happens?

Well, there is more in the third quarter because we will take the transaction costs all in the third quarter. But the Cadence business is not bringing enough net income to offset the dilution.

It is interesting. They are about where Advantage IQ was three or four years ago in terms of their progress as a Company and their profitability. And we think that the acquisition will allow us to make them -- make their business much more profitable in the long-term. But in the short term, it is dilutive to give up 25% of the Company and not have enough earnings coming in from them to offset it.

Steve Gambuzza, Longbow Capital.

When will the wind capacity that you talked about come online?

The 50 megawatts will come online in early 2012. We have to have it online by 2012 to meet the renewable portfolio stand that was set in the state of Washington. That 50 megawatts of capacity will be about 15 average megawatts of energy.

Okay. And could you tell us if there were any unusual trends or any pickup in bad debt expense during the quarter?

No, we have not experienced that.

Paul Ridzon, KeyBanc.

When would you expect a quick decision in Washington?

That should come within the next month, and we have not heard any concerns about that. In fact, the initial indication was that it made sense to them, but we will see.

And then do you -- you have got I guess 2 million shares on your shelf. Do you expect to issue those all by year-end?

That -- we have not made that determination yet. I do think that we will issue a good portion of it, but I don't know that we will issue all of that.

And then lastly, just any update on conservation trends?

Well, a couple of things about it that we have not seen significant price elasticity because obviously we had some rate increase in Washington. But, as a matter of fact, we have seen loads continue to increase on the electric side of our business, primarily because of a lot of the gadgets that homes are incorporating. I mean plasma TVs, computers and other things, so the plug-in load has continued to increase.

And also on the natural gas side, we have seen a little bit of a decrease but not significant. We have stayed fairly aggressive with energy efficiency programs, and we will continue to do that because -- and work with our commissions because it is the right thing to do in this rising price environment. So we think we have got the regulatory model in place that helps us meet our customers' expectations on energy efficiencies but does not impact our investors significantly.

Where does decoupling stand in Washington state?

We have decoupling on the gas side of the business, and it is a pilot program, and we're pleased with how that mechanism has worked on the electric side. At this point I would not -- I don't see any electric decoupling in the immediate horizon, but that's not to say that from a policy perspective the state won't continue to talk about that. I think with renewable portfolio standards, Washington's desire to continue to be green, I think the policy debate will continue, and I think decoupling will become more and more of an item here in the state but probably not for a year or two.

This concludes the question-and-answer portion of today's conference. I will turn the call back to management for any 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 for your participation. You may now disconnect. Have a great day.