Avista Corp (AVA) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and we could to the second quarter 2009 Avista Corporation earnings conference call. My name is Lauren and I will be your coordinator for today. (Operator Instructions). I would like to turn the call over to Mr. Jason Lang, Manager of Investor Relations.

Thank you, Lauren, and good morning, everyone. Welcome to Avista second quarter 2009 earnings conference call. Our earnings release premarket this morning, the release is available on our website at avistacorp.com. Joining me this morning are Avista Corporation, Chairman of the Board, President and CEO Scott Morris; Senior Vice President and CFO Mark Thies; Vice President of Finance Jason Thackston; Vice President State and Federal Regulation Kelly Norwood; and Vice President Controller and Principal Accounting Officer Christy Burmeister-Smith.

Before we begin, I'd like to remind you some of the statements made today are forward-looking statements involve risk and uncertainties that are subject to change. For reference to the various factors which could cause results to differ materially from those discussing in today's call, I would direct you to our Form 10-K for 2008 and Form 10-Q for the period ended March 31, 2009, which is available on our website. To begin this presentation, I would like to recap financial results presented in today's press release. For the second quarter of 2009, our consolidated net income was $0.47 per diluted share compare to net income of $0.44 per diluted share for the second quarter of 2008. On a year-to-date basis earnings were $1.04 per diluted share compared to $0.91per diluted share for the first half of 2008.

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

Thank you, Jason and good morning, everyone. We're please with our second quarter and year-to-date 2009 results. Given the favorable results to date and those we expect for the remainder of the year, we are tightening our consolidated earnings guidance range for 2009, increasing our utility earnings guidance. The improved results reflect progress made towards the timely recovery of cost and capital investments. The improved results also reflect lower interest costs due to refinancing, maturing higher cost debt with lower cost long-term debt and lower interest costs on our short-term borrowing. These improvements were partially offset by absorbing $6.8 million under the ERM during the second quarter of 2009. Mark will discuss this in detail later in the call. We expect continued improvement in our results due to approved generate case settlement in Idaho effective August 1, 2009.

As agree to in the settlement, base electric rates for Idaho customers increased by an average of 5.7%, which is designed to increase annual revenues by $12.5 million. Offsetting the base electric rate increase was an overall 4.2% decrease in the current gas cost adjustment surcharge, which is designed to decrease annual revenues by $9.3 million. Base natural gas rates for our Idaho customer increased by an average of 2.1%, which is designed to increase annual revenues by $1.9 million. Offsetting the natural gas rate increase for residential customers was an equivalent purchase gas adjustment decrease of 2.1%. The overall PGA decrease resulted in a $2 million decrease in annual revenue. These purchase gas adjustments are designed to pass through changes in natural gas cost to our customer with no change in gross margin or net income. Additionally in June 2009, we filed a generate rate case in Oregon, requesting an increase in natural gas rates for our Oregon customers of 11.6%, designed to increase annual gas service revenues by $14.2 million. Our request is based on a proposed rate of return on rate base of 8.96%, with a common equity ratio of 51.5%, 11% return on equity. The OPUC generally has up to ten months to review a general rate case filing.

Also, we continue to work through Washington general case that was filed in January 2009. Staff public council intervene testimony will be file in August 2009 and we expect to have a decision on the case by year end. In June 2009, we received a new 50-year operating license for the Federal Energy Regulatory Commission for the five hydroelectric projects that make up the Spokane River project. After nearly a decade of work, the completion of the re-licensing process allows us to continue generating renewable energy and working with stakeholders as we implement conditions of the license. I would like to comment about the economy in our service territory. We're observing declines in employment throughout our service area due to cutbacks in construction, forest products, mining and manufacturing sectors. Unemployment rates are much higher than a year ago in eastern Washington, northern Idaho and southern Oregon. The housing market in Coeur d' Alene and Bedford has continue to deteriorate whereas the housing market in Spokane remains stable.

During the first half of the 2009, we have seen a slight decrease in customer growth as compared to December 2008. By year-end we expect customer growth to be slower as compared to 2008. For the first six month of 2009, our capital expenditures were approximately $88 million. Our capital expenditures are expected to be $210 million for the full year of 2009. We are actively pursuing the identification of projects that could be funded under the American Recovery and Reinvestment Act. At this time we plan to apply to the SmartGrid Investment Grant program and for participation in a SmartGrid Demonstration project. The SmartGrid Investment Grant application will propose a 50% cost share for the deployment of SmartGrid- enabling technology in the Spokane area. Total project costs are estimated to be about $40 million, which we spend over a three-year period. The SmartGrid Demonstration project will partner with other regional utilities and propose a 50% cost share for a group of projects. Our portion of the regional demonstration project is about $16 million. The SmartGrid Demonstration project will spend the funds over about a five-year period.

Additionally, we will submit a proposal to the State of Washington Department of Commerce for funding under the State Energy program which obtains funding from the American Recovery and Reinvestment Act. We plan to apply for $2 million in State Energy program funding to support a proposed home and business energy efficiency program.

Now I would like to turn this presentation over to Mark Thies and Mark will provide details on the performance of Avista utilities, liquidity, financing activities, review of Advantage IQ, the other businesses, dividend information and earnings guidance.

Good morning, everyone. Thank you, Scott. As Scott said, there's a lot to talk about and really good information to talk about in this quarter. Avista Utilities contributed $0.46 per diluted share for second quarter of 2009, compared to $0.41 per diluted share for second quarter of 2008. On a year-to-date basis our utility operations contributed $1.02 per dilute shared, an increase from $0.85 per diluted share in 2008. This increase was primarily the result of increased gross margin due to implementation of new rates in both Washington and Idaho. We absorbed $6.8 million of expense under the Washington Energy Recovery Mechanism in the second quarter of 2009, compared to $4 million number in the second quarter of 2008. This decreased electric gross margin by $2.8 million in the second quarter of '09 compare to second quarter of 2008. Lower wholesale electric prices received for surplus hydroelectric generation contributed to the $6.8 million absorbed under the ERM during the second quarter.

Additionally, during scheduled maintenance in late March, turbines at Unit 4 of the Colstrip plant of which we are 15% owner were found to be in need of repair and these repairs are expected to extend that planned outage of Unit 4 from late May until mid-November of 2009. The extended outage also negatively impacted power supply costs reported under the ERM during the second quarter of 2009. We have covered substantially all our positions with purchases in the market for Coalstrip through mid-November. We absorbed $4.1 million of expense in the first half of 2009 under the ERM and that compares to absorbing $7.4 million in 2008 in the first half of 2008. This increase electric gross margin by $3.3 million in the first six months of 2009 as compared to 2008.

The quarterly impact of the cost absorbed or benefit received under the ERM varies depending on hydroelectric generation, thermal generation and market prices for both electric, power, and natural gas as well as our customers' usage. In quarters where we are a net seller of whole sale power and that is typically the second quarter when our hydro is running strong, market prices lower than prices included in rates negatively impacts the ERM. In quarters where we are net purchaser, market prices lower than the amount included in rates result in a beneficial impact under the ERM. Avista typically relies more heavily on thermal generation during the third and fourth quarters of the year and is a net purchaser of wholesale electric power and natural gas for thermal generation. Therefore, we expect to be in a benefit position under the ERM within the 75% customers, 25% companies sharing band by the end of 2009 due to lower wholesale electric and natural gas prices than the amount include in retail rates. This is partially offset by the negative impact from the extended outage at the Colstrip plant.

Utility revenues for the first six months of 2009 decreased $58 million as the result primarily of decreases in natural gas revenues of $77.1 million, partially offset by increased electric revenues of $18.9 million. The decrease in natural gas revenues primarily the result of decrease wholesale revenues of $64.7 million due to decreased prices offset slightly by increased volumes in a decrease in retail natural gas revenues to $13.7 million. The increase in electric revenues was primarily due to increased retail revenues of $35.1 million, related to the implementation of new retail rates in both Washington and Idaho, offset partially by a decrease in wholesale revenue of $17.6 million, due to a decrease in prices partially offset by increased sales volumes.

Resource costs for Avista utilities decreased $86 million in the first half of 2009 compared to first half of 2008, due to decreases in natural gas resource costs of $80.1 million. The decrease in national gas resource costs primarily reflects a decrease in the price of natural gas purchases. Our utility and other operating expenses increased $11 million for the first half of 2009 compare to 2008, and this was primarily due to $3.4 million increase in operations and maintenance expense at our generation facilities as well as a $5 million increase in pension and other postretirement benefit costs. Interest expense decreased due to the effect of refinancing maturing higher cost debt with lower cost long-term debt and lower interest cost on our short-term borrowing.

As of June 30, 2009, we had a combined $265.3 million of available liquidity under our $320 million committed line of credit, our $200 million committed line of credit and our $85 million revolving accounts receivable sales facility. We anticipate issuing long-term debt during 2009 to reduce the balances outstanding under our committed line of credit. We continue to make progress in strengthening our financial health. This progress was recognized recently by credit rating agency Fitch who up graded our corporate credit rating to investment grade in May 2009 as well as upgrading certain other components of our debt.

Additionally, just recently in August, Moody's upgrade our senior secured debt rating one notch to BAA 1 from BAA 2. Although, we're please with these accomplishments it's important to note we are the lower end of investment grade category and will continue to work toward improving our credit ratings. We have a sales agency agreement to issue up to 2 million shares of common stock from time to time and in 2008, we issued 750,000 shares. We continue to evaluate issuing common stock in future periods, however, we are not currently planning to issue any common stock for the remainder of 2009, other than for some compensatory plans and direct stock purchase for the dividend reinvestment plan. Due to market conditions and the decline in the fair value of pension assets, we are planning to contribute $48 million to the pension plan in 2009, of which, $32 million was contributed during the first half of 2009. Our annual contribution represents a significant increase to the $28 million we contributed in 2008.

Now I would like to talk a little bit about Advantage IQ. Advantage IQ's net income attributable to Avista Corporation in the first half was lower than the first half of 2008. This was primarily due to a decrease in interest earnings on funds held for customers due to significantly lower interest rates and reduced ownership percentage in the business as a result of the acquisition of Cadence Network effective July 2, 2008, and the amortization of intangible assets related to that acquisition. During the first half of 2009, total revenues increased 42% from service revenues that increased 58%, partially offset by 76% decrease in interest revenue. First half of 2009, revenues increases include revenue as a result of the acquisition of Cadence in 2008. In the first half of 2009, advantage managed bills totaled $8.7 billion, an increase of $1.8 billion or 26% as compare to the first half of 2008. The acquisition of Cadence Network added $2 billion in managed bills for the first half of 2009. During the full year of 2009, Advantage IQ is expecting slower internal growth than had been expected as some of it customers are experiencing bankruptcies and store closures in these tough economic times. The weak economy has also resulted also in slower-than-expected customer growth. Additionally, interest revenue is expected to be lower for the full year of 2009, due to the continued -- expected continue historic low short-term interest rate environment and that Advantage IQ is currently experiencing and is expected to experience throughout 2009.

In the first half of 2009, we absorbed market losses on adventure fund investments due to overall economic conditions as well as an accrual of $0.3 million of an environmental liability. These were the primary drivers in the net loss attributable to Avista Corporation of $1.5 million in our other business. As we have indicate in past calls, management intends to recommend that the board consider gradually increase the dividend ratio to be more in line with the average for utility industry which currently is approximately 60% to 70% of earnings. The Board raised, recently raised quarterly dividend 17% from $0.18 to $0.21 per share on a quarterly basis in May 2009. The board continues to consider the levels of dividends on a regular basis, taking into account numerous factors including financial results, business strategies, economics, and competitive conditions. The declaration of dividends is in the sole discretion of the board. As Scott mentioned earlier, we are raising the lower end of our 2009 guidance for consolidated earnings from $1.40 to $1.45 per diluted share. The increase in the lower end results in a revised range of $1.45 to $1.60 per diluted share from a range of $1.40 to $1.60 per diluted share.

Our 2009 guidance for Avista Utilities is being raised to $1.40 to $1.50 per dilute shared from a range of $1.30 to $1.45 per diluted share, reflected an expected benefit under the ERM and decreased interest cost. Our outlook for Avista Utilities assumes, among other variables, normal precipitation, temperature, hydroelectric generation for the remainder of the year and it also considers the negative impacts of the ERM related to the extended maintenance outage at Colstrip through mid-November. Our guidance for Advantage IQ is being revise downward to a range of $0.09 to $0.11 per diluted share from a range from $0.12 to $0.14 per dilute shared, reflecting decreased interest earnings on funds held for customers due to lower interest rates as well as a weak economy impacting earnings as a result of customer store closures, and bankruptcies, additionally, the weak economy result in slower-than-expected customer growth. The other businesses are being revised downward from between a loss to, between a loss of $0.04 and $0.01 per dilute share from a loss of $0.02 and a contribution of $0.01, primarily reflecting the lost on long-term (inaudible) investments as well as accrual of environmental liability.

Now I'll turn the call back over to Jason.

Thanks, Mark. Now we will open this call up for questions.

(Operator Instructions). Your first question comes from the line of Brian Russo with Ladenburg Thalmann.

Hi, good morning.

Hi, good morning.

Would just talk a little bit more about the ERM -- you absorbed 6.8 million in Q 2 but you expect that to be made back in the second half of '09? I guess it's favorable hydroconditions -- is that accurate?

No, it's not really the as a result of favorable hydroconditions, part of the absorption was we did have good hydro in the first half of the year, we had normal hydro. And we were in a positive position, if you recall, under the ERM of $2.7 million at the of the first quarter and now a negative $4.1 million at the end of second, that's a $6.8 million. We were selling hydro, that strong hydro at much lower market prices than what are included in retail rates so we had good strong hydro but the market place were significantly lower. As we look forward in the ERM, we become a net purchaser in the third and fourth quarters and rely on thermal generation as hydro has primarily run off so we are purchasing that power and have done some of that already in the market as we do that in an ongoing basis. We have purchased some of that at much lower prices because power prices in the market, as we see for third and fourth quarters, much lower than rates.

Okay. What load growth are you assuming at the utility in your guidance?

We continue, Brian, to forecast 1% growth, roughly.

Okay. And that's consistent with that what you forecasted the last quarter?

Yes.

Yes.

Okay. Now, what if growth slows? does that impact your ability to offset the negative ERM position if you have less load, you have excess power which gets sold into markets at below prices below what is embedded in rates?

We expect that to be pretty small. We don't expect to have a significant reduction in load. As Scott mentioned, our economy has had some challenges, primarily in the timber and mining industry and some from the housing industry slowdowns. but we don't expect that to significantly impact us related to the ERM.

Okay.

(inaudible) -- significantly residential and commercial, commercially focused and we are not dependent as other utilities are on large industrial loads. If we continue to see some -- the economy, you know, decrease and get worse, we're not extremely concerned about losing large industrial log, which will really -- would be the big impacts.

Sure. I guess and weather in July has been in your favor?

It has been a warm July.

Sure. Okay. My convection question is -- the Oregon gas rate case? It seemed like a rather large base rate increase and I'm just curious if you could elaborate on that.

This is Kelly Norwood. It was larger than prior cases we filed and as we look back we have invested quite a bit in new plants in Oregon to basically upgrade the transportation system. So it primarily driven by investment, which we think is pretty straightforward investment.

Okay. And then on Advantage IQ, I heard you correctly, first half you managed $8.7 billion of bills?

Yes.

Yes.

Okay. And -- $1.8 billion, was that Cadence's contribution?

Roughly.

$2 billion is Cadence's.

Excluding Cadence, would you have experienced an increase or decrease in bills processed?

We would have experienced a decrease of approximately $200 million.

Okay.

Pricing related because the power bills -- some of the energy bills we have experienced, if there are some lower wholesale prices in the market, that can come down some.

Both electric in gas.

Both electric and gas.

Understood. Thank you.

(Operator Instructions). And your next question comes from Paul Ridzon with Keybanc.

Good morning, how are you?

Good morning, Paul.

What do you anticipate the impact from the Colstrip outage to be on the O&M side?

On the O&M side, very small. Nothing significant. The real impact for us is primarily on the replacement power. And that's all included in our expectations and in our forecast of the guidance.

And you don't have any transmission revenues out of Colstrip, do you?

Kelly, that transmission is used to transport the power from Colstrip to our system.

Okay.

Transmission revenues.

And you said you're going be in the 25, 75 sharing part of the ERM, that's $4 million to $6 million?

That would be from the $4 million to $10 million band.

Okay.

Your next question come from the line of Timothy Eng with Keybanc.

Morning.

Looks like his line is disconnected. Your next question come from the line of Patrick McGlinchey with Sidoti & Company.

Good morning. A couple of question on the transmission project here. Could you go again the timeline and there are riders that will include in your rate base? And is this kind of the tip of the ice berg or more transmission projects out there you can work on? Or is this kind of it for the time being?

Patrick, which transmission project are you referring to?

Okay. I'm sorry. The Spokane SmartGrid. I'm sorry. The fund that you are asking for there and the timeline there.

Patrick, they're primarily our distribution system, not on our transmission system.

Okay. Okay.

And it's really applying for some of the SmartGrid funds that came out of the Obama Administration and again they're $40 million project, $20 million by the government and $20 million by us. It's a way to really focus on smarting up our distribution grid in Spokane and then the opportunity to original demonstration project, to do more of, I would say, from inside the customer's home all the way back to the substation. A couple of really good opportunities for us to make some investments but also be able to really understand the impact of SmartGrid.

All right, great. That's helpful. Thanks. Thanks for the clarification there.

Your next question come from the line of Brian Russo with Ladenburg Thalmann.

Hi, just a couple of follow-ups. The replacement power that you locked into offset the decreased output from Colstrip 4, are you actually, is that power that you purchased priced lower than what's in rate and is part of the ability to recoup some of the ERM costs

It's included in the total evaluation of ERM so the specific prices, we have look into the forward market and made purchases in that market for power and it is included when we do the calculation of overall with respect to the ERM. Each individual purchase ended up lower than retail rates, I can't tell you specifically but or all basis we expect to be in the benefit position of the ERM in the 75, 25 and purchasing power forward with respect to the Colstrip outage.

I'm sorry if I missed this earlier, but the smart grid distribution system you just referenced -- you know, when would that begin and when do you think that would be included in rates or, you know, rate base?

Again, Brian, I think what we expect we'll hear by this fall and I would say that it's important -- we're not concerned about it being included in rates and again, it's one side of $20 million investment or one project, 16 for another. We have over $200 million capital budget. And that's over a five-year period for those investments. I think the real story here is the fact that we're engaged in SmartGrid and looking at it from a very effective and smart and opportunistic way. And again, we're being able to get $0.50 on the dollar for these types of investments. I don't think there's really much of a risk from that perspective.

Okay. Thank you.

Your next question come from the line of Paul Ridzon from Keybanc.

How does the replacement power cost compare with your embedded cost out of Colstrip?

They were much higher than the embedded cost of running Colstrip. We expected to incur $10 million of power supply cost throughout the outage, throughout the next, from the second quarter on we expect to incur $10 million of higher cost relative to running Colstrip. Colstrips are effective and efficient resources but that is included in our expectations of the ERM.

Absent the Colstrip outage, you would have broken through the $10 million on the ERM?

Yes.

Yes.

Yes, we would have.

Thank you.

And there are currently no further questions in cue. I will turn the call over to Jason Lang for closing remarks.

Thank you all for joining us today. We appreciate your interest in our company. Have a great day.

Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a good day.