Avista Corp (AVA) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2010 Avista Corporation earnings conference call. My name is Stacy and I'll be your conference moderator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference. (Operator Instructions). As a reminder, this conference call is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Jason Lang, Investor Relations Manager. Please proceed.

Thank you, Stacy. Good morning, everyone. Welcome to Avista's first quarter 2010 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 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 Regulation, Kelly Norwood; and the Vice President and Controller and Principal Accounting Officer, Christy Burmeister-Smith.

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 on today's call, please refer to our Form 10-K for 2009, which is available on our website.

To begin this presentation, I'd like to recap the financial results presented in today's press release. For the first quarter of 2010, our consolidated earnings were $0.52 per diluted share compared to $0.57 per diluted share for the first quarter of 2009.

Now I'll turn the discussion over to Scott Morris.

Thanks, Jason, and good morning, everyone. We had a challenging first quarter because our region experienced one of the warmest January to March periods on record, combined with low precipitation and snow pack. This weather pattern reduced our retail lows, hydroelectric generation and net income. Largely due to warmer than normal weather, residential electric use per customer was down 11% and residential natural gas use per customer was down 21%, as compared to the first quarter of 2009. Commercial use per customer decreased 8% for electric and 23% for natural gas.

Even with normal precipitation for the remainder of the year, current conditions lead us to expect below-normal hydro-generation for 2010. However, we are expecting a benefit under the Washington Energy Recovery mechanism for 2010 due to lower wholesale electric and natural gas fuel prices and the amount included in base retail rates. And while we can't control the weather, we will continue to aggressively manage our business and we're still confident about our future.

We continue to execute on our regulatory strategy to recover costs and capital investments in our generation, transmission and distribution infrastructure. We reset general rates in each of our jurisdictions since last August and in March, we filed new general rate cases in Washington and Idaho.

The Washington filing is designed to increase annual base electric revenues by $55.3 million, and increase annual base natural gas revenues by $8.5 million. The Idaho filing is designed to increase annual electric revenues by $32.1 million and increase annual natural gas revenues by $2.6 million. We requested a return on equity of 10.9% in both states. We're planning to file a natural gas general rate case in Oregon by the end of the third quarter.

As I've done in previous quarterly reports, I'd like to provide a brief update on the economy in our service territory. The construction forest products in mining and manufacturing sectors are providing modest job growth and job improvement, but this has been offset by employment declines in retail trade and government. Unemployment rates in March were 10.5% in Spokane, 10% in Coeur d'Alene, Idaho, and 13.6% in Medford, Oregon, compared to the national average of 10.2%. Housing starts in Spokane, Coeur d'Alene and Medford are showing year-over-year increases in permits.

Highway and bridge construction activities continue to grow as stimulus money continues to fund projects. Commercial construction markets remain weak due to rising vacancy rates in retail and office facilities.

We're committed to continue our investments in generation, transmission and distribution systems with a focus on increasing capacity and maintaining or improving reliability.

Utility capital expenditures were $43 million for the first quarter and we expect capital expenditures to be $210 million for 2010 excluding the costs for our projects associated with stimulus funding.

As I mentioned in the previous call, we were selected to negotiate two awards for smart grid projects under the Federal Stimulus Program. With these funds, we plan to install updated equipment and continue to use technology to create system efficiencies and enhance service to our customers.

And although the weather hurt our first quarter results, we are confirming our 2010 earnings guidance with an expectation that we will be at the low end of the range.

We continue to be well positioned for the future, and as evidence of that, the Board -- and the confidence we have in our Company, the Board increased our quarterly dividend by $0.25 per share in February.

And now, I'd like to turn this presentation over to Mark Thies and Mark will provide details on the performance of our business, liquidity, financing activities and earnings guidance.

Thank you, Scott, and good morning, everyone. For the first quarter of 2010, Avista Utilities contributed $0.50 per share compared to $0.56 per share in the first quarter of 2009. The decline in our utility results was partially the result of decreased gross margin primarily due to warmer weather and below-normal hydroelectric generation, partially offset by the implementation of new retail rates in all three of our jurisdictions.

Our power supply costs were higher than the amount included in retail rates due to below-normal hydroelectric generation and higher reliance on power purchases and thermal generation, partially offset by lower wholesale electric and natural gas fuel prices. The decrease in gross margin was partially offset by decreases in other operating expenses and taxes other than income taxes.

In addition to the weather, the decrease in net income was also due to an increase in interest expense. During the first quarter of 2009, we carried higher average balances under our committed credit facility at relatively low interest rates and we refinanced these borrowings in September of last year with the issuance of first-mortgage bonds.

For the first quarter, we absorbed $1.2 million under the Washington Energy Recovery mechanism compared to a benefit of $2.7 million in the first quarter of last year. As Scott mentioned earlier, we expect to be in a benefit position in the ERM by the end of 2010 primarily due to lower wholesale electric and natural gas fuel prices and the amount included in base rates, partially offset by below-normal hydroelectric generation that we've talked about.

For Advantage IQ, their net income attributable to Avista for the first quarter increase compared to last year was earnings of $0.03 per diluted share, and this was primarily due to the acquisition of Ecos last August. Advantage IQ's earnings continue to be moderated by the low -- relatively low short-term interest rate environment and slow organic growth. Advantage IQ's revenues for the first quarter increased 38% as compared to the first quarter of last year and totaled $23.9 million. This increase was primarily due to the acquisition of Ecos in the third quarter of last year.

For the other businesses, we had a $0.01 per share loss for the first quarter which is consistent with the prior year and these are due to losses on long-term venture fund investments.

In March, we amended our accounts receivable facility to extend the termination to March of 2011 from March of 2010 and we reduced this facility to $50 million from $85 million based on our expectations and forecasted liquidity needs. At the end of March, we had a combined $347 million of liquidity available under our $320 million committed line of credit, our $75 million committed line of credit and the $50 million revolving accounts receivable financing facility.

In 2010, we are planning, subject to market conditions, to refund $83.7 million of our pollution control bonds that we repurchased in 2008 and 2009. In addition, we have a sales agency agreement to issue up to 1.25 million shares of our common stock from time to time. We are still planning to issue up to $45 million of common stock in 2010 to maintain our capital structure at an appropriate level. We did not issue any common stock under this agreement during the first quarter of 2010.

As Scott mentioned earlier, we are confirming our 2010 guidance to be in the range of $1.55 to $1.75 per share on the consolidated level and $1.45 to $1.60 per share at Avista Utilities. However, we are expecting to be at the low end of our consolidated and utility earnings guidance range.

In the first quarter, significantly warmer than normal weather reduced our retail [loads] and we are expecting below-normal hydroelectric generation for the year. Partially offsetting these factors are wholesale and electric natural -- and natural gas prices below the amount included in base retail rates, resulting in a net benefit under the Energy Recovery mechanism.

And we continue to aggressively manage our business. We estimate that these factors combined have reduced our 2010 earnings by $0.10 to $0.15 per diluted share from our original expectations. Our outlook for Avista Utilities also assumes, among other variables, normal precipitation and temperatures 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 our other businesses to be between a breakeven and a contribution of $0.02 per diluted share.

I will now turn the call back over to Jason.

Thanks, Mark. And now, we'd like to open this call up for questions.

(Operator Instructions). Your first question comes from the line of Brian Russo with Landenberg Thalman. Please proceed.

Hey, good morning, guys.

Good morning, Brian.

Good morning, Brian.

Could you quantify the positive net ERM position that you're going to be in by the end of the year?

What we've said, Brian, is that we would be in a positive -- we will be, we expect -- and there's an awful lot of factors that impact that. We're still relatively early in the year as hydro has to come off and gas prices, we've become more subject to that as we get into the third quarter and fourth quarter; as hydro goes away, we're more subject to movements in natural gas prices.

So we don't want to put a definitive number out there because there is still some range to that, but we do expect to be within the $4 million debt band on the positive side.

Okay. So -- and just to be clear, there is a seasonality, I guess, of the quarterly impact of the expected net ERM position and it'll be more heavily weighted in that 3Q and 4Q?

No, it is more because of the natural gas prices, and our reliance on natural gas generation in those periods. We do have a higher reliance on that and we saw this last year as well. We started -- last year though we started in a benefit position in the first quarter, but then it dropped quickly in the second and third quarters, and came all the back in the fourth quarter.

We see a similar shape to that shaping up this year, although we did start in a negative position in the first quarter. We expect by the end of the year to be in a positive.

Okay. So on your guidance, you mentioned that mild wealthier, below-normal hydro, and then the prevailing gas and power prices have reduced guidance by $0.10 to $0.15 from your previous expectations. Were you previously expecting to be at the midpoint of your guidance or that you had anticipated a positive ERM, so maybe there was a bias towards the higher end, because if your midpoint is $1.65, $0.10 gets you down to 1.55, but I'm -- and it looks like there might be a little more downside there, given the $0.10 to $0.15 range.

Brian, I think we were -- we issued our guidance. The guidance or the ERM is encompassed in the range, so that's a little bit of a challenge because when you include that, you could be towards the higher end; if you have a negative, you could be towards the lower end.

So that's also why we gave the $0.10 to $0.15. If you take that, you're reasonably -- you're doing the math right and that towards the middle, we get down towards the bottom because we have a $0.10 range on each side of the middle, just specifically with the math. A few cents here and there, we don't change in our guidance. We try to have a reasonable forecast.

So I'm not -- the ERM, we called that out specifically because that encompasses the negative hydro. Recall, all of our hydro runs through our power supply cost, which runs through our ERM. So to the extent we have negative hydro and we expect to be in a positive ERM for the year, we expect to offset that negative hydro with the benefit of lower natural gas prices and lower power prices in the market relative to the rates that we have in our current retail rates, that power supply cost impact. So we're offsetting in our expectations that negative hydro with the ERM -- we are -- and previously, we've stated that the midpoint does not include the ERM.

Okay. So I guess, say, the fuel factor embedded in rates and in the ERM was consistent with prevailing gas prices. Assuming a zero ERM, what would have been the delta on your guidance? It would probably be $0.15 to $0.20, right, not $0.10 to $0.15?

We haven't really gone to put that information out there. There's an awful lot of factors that impact that. That lower hydro, we also have the opportunity to sell a little bit less and the power prices impact that. So we really did this in a combined expectation.

Our primary reason for being down truly is lows. We had, again, as Scott mentioned, one of the mildest first quarters in history and that's hard to overcome primarily from our natural gas business because the natural gas business is first and fourth quarter is where you deliver most of your natural gas. And when you miss the first quarter, that's challenging to overcome. And that's truly the biggest impact to that $0.10 to $0.15 and we've offset that somewhat with managing our business as well as the positive impact we expect from the ERM.

Okay. And just lastly, just more specifically on normalized hydroelectric output, is it somewhere in the lines of about 4.6 million megawatt hours? And then could you give us kind of a sense of what you expect to generate this year, given where the hydro conditions are?

This is Dennis. What we're forecast -- obviously, with the snow pack, as Mark mentioned, and Scott as well, we've gotten off to a pretty lousy start, but given where we sit today and our forecast for the rest of the year, we're projecting about 81% of normal hydro generation.

Okay. That's very helpful. So how does that compare with the water supply levels that get posted to -- is the -- my question, I guess, is can you generate more megawatt hours on a percentage basis despite it being below normal than what's reflected in the water supply basins, right? If your supply basins are, say, 70% of normal, you're still able to generate 81% of your normal?

Yes, that's correct. If you look at the water supply forecasts, they're actually, for our drainages, worse than that, but those current projections are included in our forecasts. And remember that the new water, you start essentially in September, so the reservoirs are full at that point and we're assuming at that point normal precipitation. So beginning in September, we assume normal hydro production going into a new water year. So you put against the situation we've had so far and it pencils out at 81%.

Got you.

In addition to that, we did have a little bit wetter than normal April and as we do this, the other thing that benefits us is we don't spill as much. So we're able to retain what water we do have and that helps Dennis and his group to have that slightly better generation than the hydro results -- than the snow pack.

Yes, I think the important thing to remember is you can look at the runoff forecast and certainly, significant impact in Q1 and Q2, but beginning Q3, all the reservoir systems in the Pacific Northwest will be full generally. So we start a new water year with the assumption of normal water, our normal generation.

Okay. Thank you.

And I'd just like to remind you, as Mark said, that even with the poor hydro, we still are in a benefit position to the ERM and that with embedded in base rates in Washington is $5.61 -- or $5.61 per decatherm. So we do have a good opportunity to continue to perform quite well with our power supply.

Thank you.

Your next question comes from the line of Paul Ridzon with KeyBanc. Please proceed.

Good morning, guys.

Hey, Paul.

Hi, Paul.

You've mentioned $0.10 to $0.15 of headwinds that you kind of felt in the first quarter, but can you kind of divide that out amongst the factors?

No, we really didn't, Paul. What we wanted to say was to give you a sense of where we were, because we were guiding to the low end, we wanted to give you a sense of how much that impact that we did expect. And there are a few things that we talk about and those are still true. We've got the lower margins or lower loads just due to the milder weather, and we've felt that impact, and partially offsetting that is the positive impacts from the ERM and the positive impacts as we continue to manage our business from a cost perspective.

And do you do any analysis of kind of weather normalization of sales and what are you seeing as far as consumption patterns if you try to weather-normalize?

We do look at the weather-normalized and we are closer to normal, but we are slightly down. The economy, as Scott mentioned in his remarks, the economy is still down. So we have seen some slight reduction relative to the economy, but overall on a weather-normalized basis, we're much closer to the prior year than we have been. And it's not the 20% down that we saw for natural gas use primarily, so when we weather-normalize that, we're at a slight decline versus that 20% down.

Okay. Thank you very much.

Thank you, Paul.

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

Good morning.

Good morning, Jim.

Hi, Jim.

You indicated that you're going to be within the $4 million debt band on the ERM this year and would you go through that?

Yes, that's where, I mean, again, we started off in a negative position in the first quarter, as we reported, $1.2 million, but similar to last year, and as Scott mentioned on where the price of natural gas is in our retail rates, we do expect, based on our forecast, to be in a positive position. Last year, we ended up in a positive position and we anticipate that result, or a similar result, this ear, but it will be within that $4 million debt band, just to give you an idea of where it's at.

And what was the ERM benefit last year amount?

$3 million.

Okay. Then on the --

And again, that's Washington, Jim, just to be clear.

Okay, 3 million, Washington, okay. Now, on the Advantage IQ, you made an acquisition. Did the -- without the acquisition, would you have been just flat or directionally, which way would you have been without that acquisition?

Jim, we would have been flat to just a tiny bit positive.

And what --

But with the interest rates where they are, we're not getting the float revenue that we traditionally have gotten. So that's been a little bit of a drag on the business. We continue to see some growth in our core business of bill pay. However, we still are fighting some of the reductions in the retail marketplace with store closings, etc. So the organic growth we traditionally saw in Advantage has continued to lag a little bit.

However, that being said, Jim, as you know that we've got a new management team in place over there, our new CEO is doing an absolute fantastic job. The Ecos business is drawing and has some tremendous upside. We're very optimistic about where this business is going.

We still have some great opportunities to continue to grow this business with other opportunities in mergers and acquisitions, as well as just growing our base businesses. Our opportunities to do consulting services continue to be quite good, so we're very optimistic about this business and think it's well positioned to continue to grow. Once the economy continues to recover, I think Advantage will recover right with it.

You say in the press release you consolidated Spokane Energy. What is Spokane Energy and why did you do it for the first time this time -- this quarter?

Spokane Energy is the company that has a -- handles the capacity sales for us and prior to January 1, it was considered a qualifying special-purpose entity which we didn't have to consolidate. January 1, some new accounting standards came into play that required that it be consolidated. There's no impact on the income statement. There's some gross-up amounts on the balance sheet. There's a good explanation of it in the 10K in Item 7 and then there will be quite a bit more in the 10Q note too this time.

And then did your filing expectation for Oregon get slipped back? You say now at the end of the third quarter, I thought maybe it was earlier in the year.

Yes, Jim, this is Kelly. We had planned to file it before the end of the second quarter. We spent a lot of time putting together Washington, Idaho, so it slipped a month or two. So it'll be sometime this summer.

Thank you very much.

Thanks, Jim.

(Operator Instructions). And at this time, I'd like to turn the presentation back over to Mr. Jason Lang for closing remarks.

I want to thank everyone for joining us today. We certainly appreciate your interest in our Company. Have a great day.

We thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect and have a great day.