Avista Corp (AVA) 2009 Q4 法說會逐字稿

Good day ladies and gentlemen, welcome to the Q4, 2009 Avista Corp. earnings conference call. (Operator Instructions) As a reminder this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Jason Lang, Investor Relations Manager, please proceed sir.

Thanks Steve, good morning everyone, welcome to Avista fourth quarter and fiscal year 2009 earnings conference call. Our earnings were released premarket this morning and the release is available on our website at Avistacorp.com. Joining me this morning are Avista Corp. Chairman of the Board, President and CEO Scott Morris, Senior Vice President and CFO Mark Thies, Senior Vice President and the President of Avista Utilities Dennis Vermillion, Vice President of Finance, Jason Thackston, Vice President of State and Federal Regulations Kelly Norwood and Vice President, Controller and Principal Accounting Officer Christy Burmeister-Smith.

Before we begin, I'd 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 please refer to our Form 10-K for 2008, and Form 10-Q for the period ended September 30, 2009, which are available on our website.

To begin, I'd like to recap the financial results presented in today's press release. For the fourth quarter of 2009 our consolidated earnings were $0.40 per diluted share compared to $0.32 per diluted share for the fourth quarter of 2008. On an annual basis our earnings were $1.58 per diluted share for 2009 compared to $1.36 per diluted share for 2008. Now I'll turn the discussion over to Scott Morris.

Thanks Jason and good morning everyone. We're pleased with our results for 2009 which show considerable improvement over 2008. Based on our strong results and expectations for future growth the Board of Directors increased the common stock dividend by $0.04 to $0.25 per share. This increase is indicative of the Board's confidence in our continued progress towards achieving our goal. I would like to highlight some of our accomplishments in 2009.

We continued to execute on a regulatory strategy to recover costs and capital investments in our generation, transmission and distribution infrastructure. We reset general rates in all of our jurisdictions since the middle of 2009. Even in these challenging times this past year the number of retail customers grew with the net additions of over 2,000 natural gas customers and 1800 electric customers. We also had residential electric load growth offset by reductions in commercial and industrial loads. Our 2009 integrated resource plan shows we are well positioned and long on energy until 2018. We have a green footprint with about 60% of our generation produced from clean hydro power and other renewable resources. We plan to meet Washington state's renewable energy standards until 2016 for the combination of qualified hydroelectric upgrades and the purchase of a small amount of renewable energy credits from 2012 through 2015. Avista was selected to negotiate two awards for smart grid projects under the federal stimulus program. With these funds we will install modern equipment and continue to use technology to create system efficiencies and enhance service to our customers. We continue to strengthen our financial position with the September issuance of $250 million of long-term debt with an interest rate of 5.125%. And the reduction in deferred power cost balances. We have also been able to fund a significant portion of our capital expenditures with cash flows from operations. Our credit ratings improved this past year with a rating upgrade from Fitch and positive rating outlooks from both Moody's and Standard & Poor's and as Advantage IQ we completed the acquisition of Ecos Consulting in August and Jeff Heggedahl was hired as President and Chief Executive Officer in December.

Which were disappointed with the Washington Commissions decision on our general rate case which resulted in increased rates going into effect January 1, of this year. The commission did not allow us to include the cost associated with the power purchase agreement for the Lancaster plant and rates. However the commission decided -- directed us to file for deferred cost associated with the Lancaster plant with a carrying charge for potential recovery in future rate proceedings. This filing was approved by the Washington Utilities and Transportation Commission in February.

Beginning in 2010 we have added the output from Lancaster to the diversified resource mix for our utility operations. It's an outstanding resource for our customers and it is one of the most cost effective and reliable gas fired generating plants in the northwest. New rates went into effect on January 1, 2010, providing some progress in recovering increased costs. The Washington Commission's order provides additional guidance for procedures and documentation that we believe will facilitate improved cost recovery in the future. We will continue to actively manage our capital investments, operating costs while providing reliable, safe service for our customers.

As I've done in the past few quarterly reports I would like to provide a brief update on the economy in our service territory. Cutbacks in the construction force products and mining and manufacture sectors continue to show improvement. But the improvement has been offset by the employment declines in retail trade and government. Overall unemployment rates are moderately above a year ago in our service area. On a more positive note housing starts in Spokane, Coeur d'Alene, Idaho and Medford, Oregon are showing year over year increases in permits but the commercial construction markets remain weak.

We are committed to continue our investment in generation, transmission and distribution systems with a focus on increasing capacity and maintaining or improving reliability. Utility CapEx was $205 million for 2009. We expect capital expenditures to be about $210 million for 2010 excluding costs for projects associated with stimulus funding. As previously reported in 2008 we completed the acquisition of the development rights for a wind generation site. We recently completed an RFP process to evaluate the potential of acquiring renewable resources a few years early by taking advantage of certain federal and state tax incentives. However after detailed analysis we decided to postpone renewable resource acquisitions including construction of a wind generation project until the 2014 to 2015 timeframe.

As I mentioned earlier, in October of 2009 we were selected to negotiate a grant under the American Recovery and Reinvestment Act stimulus funding program for the deployment of smart grid enabling technologies in the Spokane area. The grant will be for $20 million and our contribution will be $22 million will be spent over a three year period. We're working with the Department of Energy to finalize this agreement. In August of this year of 2009 we joined with regional partners led by Vitel to propose a smart grid demonstration project using matching stimulus money from the Department of Energy. The intent of the project is to show how smart grid technology can enhance the safety, reliability and efficiency of energy delivery. In November this project was selected by the DOE for a grant which it will -- which it will negotiate with Avista and the other partners to reach a funding agreement. Our portion of the regional demonstration project is estimated to cost $16 million over the next five years. Overall I'm pleased with the progress we made in 2009 and I believe we are well positioned to continue long-term earnings growth.

Now I'd like to turn this presentation over to Mark Thies, and Mark will provide details on the performance of our businesses, liquidity, financing activity, dividend information and earnings guidance.

Thank you, Scott, and good morning everyone. I would really like to start with a quick comment we had a very strong year in 2009. Avista Utilities contributed $1.58 per share compared to $1.30 per diluted share in 2008 and for the fourth quarter our utility operation contributed $0.43 per diluted share an increase from $0.33 per diluted share in 2008. The improvement in our results for the year was primarily the result of increased gross margin due to the implementation of new retail rates in both Washington and Idaho.

The increase in net income was also due to a decrease in interest expense and income tax expense. The interest expense decreased due primarily to the refinancing of maturing higher cost debt with lower cost long-term debt that Scott mentioned and lower interest cost on short-term borrowings. An adjustment to reconcile our 2008 federal income tax return to the amount included in the financial statements resulted in $3.2 million decrease to income tax expense recorded in the third quarter of 2009. These positive impacts on net income were partially offset by an increase in operating expenses, depreciation and amortization, and taxes other than income taxes. In addition, in 2008 we recorded $5.7 million of interest income, partially offset by $1.4 million of interest expense related to income tax settlements. This was recorded in the third quarter of 2008.

For 2009 our power supply costs were less than the amount included in retail rates because of lower wholesale electric and natural gas fuel prices than the amount included in retail rates. This was partially offset by below normal hydroelectric generation and the impact of an extended outage at our coal strip plant with one of the units out of service until November of 2009. The result was we had a benefit of $3 million under the Washington Energy Recovery mechanism in 2009 compared to an expense of $7.4 million in 2008 which increased gross margin by $10.4 million. We had a benefit of $9.1 million under the Energy Recovery mechanism for the fourth quarter of 2009 compared to a nominal expense in the fourth quarter of 2008. This increase overall electric gross margin and income from operations in the fourth quarter by $9.2 million in 2009 as compared to 2008.

Advantage IQ's net income attributable to Avista for 2009 was lower than 2008 with an earnings contribution of $0.09 per diluted share in 2009 compared to $0.11 in 2008. This was primarily due to an increase in -- a decrease I'm sorry, decrease in interest earnings on funds held for customers, reduced ownership percentage as a result of the Cadence acquisition in July 2008 and amortization of intangible assets related to the Cadence acquisition.

Advantage IQ experienced slower internal growth as well in 2009 as some of its customers were experiencing bankruptcies and store closures in these difficult economic times. The weak economy has also resulted in slower than expected customer growth. Additionally, interest revenue was lower in 2009 due to historic slow short-term interest rate environment that Advantage IQ continues to experience. The decrease in interest revenue was offset by other customer billing services which increased operating revenues for 2009 as compared to 2008. We were very disappointed with the 2009 results in our other businesses with net loss of $0.09 per share. This was primarily the result of $3 million impairment charge on a commercial building. $800,000 of market loss on venture funds and litigation costs related to remaining contracts and previous operations of Avista Energy.

In November, 2009, we entered into a new committed line of credit in the total amount of $75 million with an expiration of April 5, 2011, which coincides with the expiration of our $320 million credit facility. The new committed line replaced a $200 million facility that expired in November of 2009. We reduced the facility based on our forecasted liquidity needs.

In December, 2009, we amended and restated a sales agency agreement to issue up to 1.25 million shares of our common stock from time to time. We are planning to issue up to $45 million of common stock in 2010 to maintain a prudent capital structure. Due to market conditions that reduced the fair value of our pension plan assets in 2008, we contributed $48 million to the pension plan in 2009. In 2009 the fair value of pension assets increased and we expect our contribution for 2010 to be approximately $21 million. As Scott mentioned earlier, last Friday Avista Corps Board declared quarter quarterly dividend of $0.25 per share on the Company's common stock. This is an increase of $0.04 per share or 19% over the previous quarterly dividend. As we have indicated in past calls management intends to recommend that the Board consider gradually increasing the dividend payout ratio to come more in line with the average payout ratio for the utility industry which currently is approximately 60 to 70% of earnings. The decoration of dividends is within the sole discretion of our Board.

We are confirming 2010 guidance for consolidated earnings to be in the range of $1.55 to $1.75 per diluted share. We expect Avista Utilities to contribute in the range of $1.45 to $1.60 per diluted share for 2010. Our range for Avista Utilities encompasses a certain level of variability and power supply costs including the variability of applying the Energy Recovery mechanism and power cost adjustment mechanisms. Our outlook for Avista Utilities also assumes among other variables normal precipitation, temperatures and hydroelectric generation for the remainder of the year. We expect advantage IQ to contribute in the range of $0.10 to 0.13 per diluted share and other businesses to be between a break even and a contribution of $0.02 per diluted share.

Although the recent rate adjustments in Washington, Idaho and Oregon provide progress in the recovery of utility costs we expect to continue to experience regulatory lag in 2010 due to a delay in the recovery of incremental capital investment and increasing operating expenses. We plan to file general rate cases in Washington and Idaho by the end of the first quarter and expect to file a general rate case in Oregon by the end of the second quarter. All to more closely align earned returns with those authorized.

Now I'd like to make a few comments about 2010 weather and the hydroelectric conditions. Our service weather experienced one of the warmest January's on record and the first half of February has been significantly warmer as well. This has a negative impact on natural gas and electric heating loads. Based on precipitation and snow pack conditions it would seem as though hydroelectric conditions would be below normal if this pattern continues. However it is important to note that we still have the second half of February and into April to make up for some of the snow pack shortfall. The timing and rate of runoff are also important factors. While the snow pack is important for spring runoff and early summer hydro generation, overall precipitation is the largest factor in how much hydro electric generation we get on average for the year.

Also our base forecast to power supply costs for 2010 results -- reflects lower costs than those included in base retail rates in Washington which would indicate a benefit to the Company in the energy recovery mechanism under normal operating conditions. Although this isn't the start to 2010 that we would like it is early in the year and we will continue to actively manage our capital investments and operating costs. In summary we are still comfortable with our earnings guidance range. I will now turn the call back over to Jason.

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

(Operator Instructions) And your first question comes from the line of Paul Ridzon with KeyBanc.

Good morning. Where are you on the kind of if you mark what's in rates to what you currently seeing in the market, how far ahead does that put you?

We haven't, there's an awful lot of factors involved in that Paul and we just wanted to put out there that we are currently, our expected cost or our forecasted costs are below those than what are authorized in retail rates that we got authorized in our last rate case. So it is a positive. We aren't saying specifically what that number is. Nor did we say on some of the weather related. There are some negative impacts out there and there are some positive impacts out there. The energy recovery mechanism we expect today is a positive as we see it based on gas prices and forward look today.

What gas price is embedded in your current rate in Washington?

A little over 550.

550. And then with your decision to lien on REX as opposed to building some renewables that's just going to flow through, that will be on a customer bill as opposed to shareholders?

Yes.

Okay, thank you very much.

Thanks Paul.

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

Hi, good morning.

Morning, Brian.

Just could you remind us your dividend policy and the target payout ratio, is that 60, 70% of total consolidated earnings or of your utility earnings?

Consolidated earnings.

Okay. And what type of load growth are you kind of forecasting for the middle of your guidance range in '10?

I think roughly 1 to 1.5%.

Okay. And then just on the roughly $45 million of equity needs, I guess all of it to be accomplished through your sales agency agreement, how do we think about the timing of that issuance in relation to the timing of your Washington rate filing?

We expect to file for Washington and Idaho in the first quarter as we mentioned. We would anticipate -- the existing sales agency agreement Brian is only 1.25 million shares which doesn't get us to $45 million. So we would still have to either come up with a new sales agency agreement or do a small market deal to come up with the balance. But we expect to access the equity over the course of the year and again it's a pretty small amount up to $45 million. So it will really kind of coincide with how we deploy our capital I would imagine.

I guess what I'm trying to get a better understanding of is what's your optimal cap structure that you would look to file for in Washington and as of what test period is that, meaning can you adjust that as you move through the year, with higher equity layer from equity issuances or are you kind of stuck at a particular point in time as it relates to the upcoming Washington filing?

Well, we will expect to maintain a prudent capital structure and file what we file for in Washington, we would expect to if allowed to have a return on that by the commissions we would look to raise that equity. We don't, we don't look at from raising the equity, we don't look at raising our equity to a point that we're going to file. Then if we got disallowed that, we would over equitize the Company, that doesn't make any sense to us. So we would look to raise capital to have a prudent capital structure. If we file for an equity layer within the commissions and they allow that we would raise the equity to get to that equity layer that's allowed by the commissions. Kelly, you have anything to add?

One more comment on that, in Idaho we received a 50% entry layer this last case and 50% in Oregon. We have also seen that if we can demonstrate that's where we're headed that Washington would also give us a higher level of equity. So I think there's some support in all the jurisdictions for a higher level of equity.

Got it, thank you very much.

Thank you Brian.

Your next question comes from the line of James Bellessa with D.A. Davidson & Co.

Morning. When do you file your 10-K

The 26th, of February. So a week from tomorrow.

In your guidance you talk about utility guidance of $1.45 to $1.60 in 2010, you just reported what is almost $1.58 from the utility. Will you go through the potential distractions or subtractions that will get you into your range that you're giving out?

Well, the range the two times that we specifically had when we start with guidance we don't, we don't guide to any positive or negative from the energy recovery mechanism. That's encompassed in the range. But if you include in the guidance we don't have anything there. And, that was approximately $0.04 a share.

How many cents?

$0.04 a share Jim.

Thank you.

$3 million. And in addition we had approximately $3.2 million of tax adjustments to our 2008 return that we recorded in the third quarter 2009 that was about $0.06 a share.

Okay. That explains most of the variance of potential outcomes in the future. Can you tell us a little more about your other businesses, why did you have an impairment on this commercial building and why are you sticking with this other business?

Well, the other businesses, a lot of them are investments we have had for a very long time and we intend to work our way through those as we go through. But we don't want to have a fire sale on any of them and we continue to work our way and manage our way through them. With the commercial building we have other commercial properties that are doing fine and have strong tenancy rates. This particular building in downtown Spokane had a significant reduction in its operations and its business in the fourth quarter and that triggered us to look at, it went to a negative cash flow and that triggered us to look at the relative recovery of that business and we took an impairment of it. We still have about $3 million remaining in that property, so we didn't take a complete write-off, but we did take a significant impairment, about $3.6 million.

Did you say $3.6 million?

I'm sorry? It's about $3.2 million.

Is that a pretax figure, in your press release you said $3.0 million.

It's $0.04 a share Jim.

Okay.

If that helps you.

Thank you very much.

Thank you Jim.

(Operator Instructions) We have a question from the line of Paul Latta with McAdams Wright Ragen.

Good morning, thanks for taking my question.

Morning, Paul.

Can you just maybe clarify on the CapEx number for 2010 excluding the stimulus related items, were the stimulus related items the two that you listed, the two smart meter projects?

Yes, they really aren't just smart meter projects, Paul, they're a whole variety of things that we're doing primarily in our distribution system that increases our ability to both reduce line losses but also increase reliability.

Okay. But it's the $22 million over three years plus the $16 million over five years for your portion, those are the two times that are--?

Yes.

Okay, great. Thanks for taking my question.

Thank you Paul.

And we have a follow up from the line of Brian Russo with Ladenburg Thalmann.

Yes, hi, thank you. Just can you just remind us what the ownership structure is at Advantage IQ and what kind of your strategy is as you look to 2011 given some, potential changes there and what you're seeing just in that market in general to increase your scale and scope?

Yes, the ownership structure is 75% Avista and 25% our partner. We really see 2010 as an area where we really see some opportunities in this marketplace. I think with the excitement around green energy and the opportunities that Advantage not only does from its bill pay, but from its consulting services and where we see the market moving there's some significant opportunities for us in consulting services as well as for us to continue to look at very targeted acquisition opportunities. So we continue to have a very optimistic view of where this business is today, but also where it's going to go in the future given I think it's how well it's positioned in this green energy marketplace.

Right. And at what point during 2011 can your partner put back their ownership to you or is there some sort of like valuation analysis or potential sale of that business that you will contemplate at that point?

Their put option is in July of 2011 and they have another option in 2012. Frankly, we will not use that put as the driver for a monetization event. We will continue to look at it and if they put back to us that's fine. We are so confident in the business that we feel really good about where we are and we will continue to drive value in that business. So again, our acquisition that we did in 2010 of Ecos Consulting has brought an accretive business into the Advantage fold. It really has enhanced our consulting services capability and again it continues to position us quite nicely for the future.

All right, thanks a lot.

Our next question comes from the line of [Matt Thalin] with Talon Capital.

Hi guys. I was just wondering if you could let me know how much if any equity you issued during the quarter?

In the fourth quarter?

Yes.

None.

Okay. Great.

We might have had a minor employee related, I mean no, no equity issuances. If there was any employee plans there might have been some small amounts but there was none issued through that continuous equity program.

Okay. So that will be picked up starting in this year going forward?

Throughout 2010.

Okay. Great, thank you.

Thank you.

This concludes the Q&A portion of today's call. I would like to turn the presentation back over to Mr. 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.

Ladies and gentlemen , that conclusion today's conference, thank you for your participation, you may now disconnect. Good