Avista Corp (AVA) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2010 Avista Corporation earnings conference call. My name is Keith and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) As a reminder, today's call 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, Keith. Good morning, everyone. Welcome of Avista's third 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, State and Federal Regulation, Kelly Norwood;, and the Vice President, 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, and Form 10-Q for the second quarter of 2010, which are available on our website.

To begin this presentation, I'd like to recap the financial results presented in today's press release. For the third quarter of 2010, our consolidated earnings were $0.22 per diluted share, compared to $0.15 per diluted share for the third quarter of 2009. On a year-to-date basis, our consolidated earnings were $1.20 per diluted share for 2010, compared to $1.18 for 2009.

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

Well, thank you, Jason, and good morning, everyone. We had a strong third quarter and our outlook continues to improve for the full year of 2010, particularly with respect to our utility earnings. We're forecasting lower power supply costs than the amount included in base rates and we have continued to manage our operating expenses.

The improvement in the second and third quarters has partially offset a very challenging first quarter, due to one of the warmest January-to-March periods on record. As such, we are confirming our 2010 earnings guidance, and this is an improvement from our report at the end of the second quarter, when we expected to be in the lower half of the range.

We continue to execute on our regulatory strategy to increase recovery of operating costs and capital investments in our utility business. In September, we filed a natural gas general rate case in Oregon. Effective October 1, new electric and natural gas rates went into effect in Idaho, with approval of our general rate case settlement by the Idaho Commission. And in August, we reached a settlement in the Washington general rate case. This settlement is designed to increase base electric revenues by $29.5 million and base natural gas revenues by $4.6 million.

The settlement is based on an overall rate of return of 7.9% with a common equity ratio of 46.5% and a 10.2% return on equity. If approved by the Washington Commission, new rates would become effective December 1, and we believe that both settlements provide a fair and reasonable outcome for customers and shareholders.

Our economy continues to be challenged. Employment levels throughout our service area remain well below trend, after significant and persistent cutbacks in the construction and forest products sectors. The mining and manufacturing sectors are above the recession lows, but they remain well below pre-recession levels. The job market in Spokane and Coeur d'Alene, slowed later in the cycle than in the United States as a whole, while Medford has become -- has been more in line with the nation. Unemployment rates continue to remain high. The latest data for September indicates an 8.2% unemployment rate in Spokane, a 9.3% in Coeur d'Alene, and 11.4% in Medford, compared to the national average of 9.6%.

The housing markets in Coeur d'Alene and Medford have above national average foreclosure rates and the majority of our housing market is in the Spokane County, and their foreclosure rates are well below the national average. We've also -- we have revised downward our economic outlook for 2011 and, as such, we expect lower load growth in our residential and commercial sectors. This is reflected in our 2011 guidance. We expect employment in Medford, Spokane, and Coeur d'Alene to be stable for the next 12 to 18 months, with a modest recovery to trend beginning in 2012. This is a later economic recovery than we had previously expected.

We're committed to continuing our investment in our utility infrastructure, with a focus on increasing capacity and maintaining or improving reliability. Utility CapEx was $138 million for the first nine months of the year and we expect capital expenditures to be about $210 million for 2010, excluding costs for our projects associated with stimulus funding.

We continue to be very pleased with the results for Advantage IQ. The earnings contribution from this business has grown by over 50% in 2010, as compared to 2009. Advantage IQ is continuing to execute on its strategy to extend the business from a focus on expense management to delivery of energy management services to both the utility and commercial and industrial marketplace. We are initiating our 2011 earnings guidance, which shows improvement over our expected 2010 results. And while we expect to return normal weather conditions, and the impact of general rate cases, our earnings guidance will be limited by weak economic conditions, continued delay in the recovery of our costs, and increased operating and maintenance expenses.

So, now I'm going to turn this presentation over to Mark Thies, and Mark is going to provide you with details on the performance of our businesses, liquidity, financing activities, and detailed earning guidance.

Thank you, Scott, and good morning, everyone. Thanks for joining us this morning. For the third quarter, as Scott said, Avista had a very strong third quarter. Avista Utilities contributed $0.16 per diluted share, compared to $0.13 per diluted share for the third quarter of last year. This increase was primarily due to an increase in gross margin, partially offset by increases in interest expense, other operating expenses, depreciation and amortization, and income taxes.

On a year-to-date basis, our utility operations contributed $1.10 per diluted share, compared to $1.15 in 2009. The decrease was primarily due to increase in interest expense, operating expenses, and depreciation, partially offset by increases in gross margin. During 2009, we carried relatively high balances under our committed line of credit at very low interest rates. We refinanced these borrowings last September with the issuance of first mortgage bonds at historically favorable long-term interest rates. This increased interest expense in 2010, as compared to the prior year.

Adjustments associated with reconciling our federal tax return for 2009 and prior year income tax return, resulted in a decreased income tax expense of $1.7 million for 2010. In September of 2009, we recorded adjustments related to our 2008 federal income tax returns that had a favorable impact to income of $3.2 million.

In the Washington rate case settlement, the parties -- all parties have agreed that deferred net costs associated with the Lancaster Plant will be limited to $6.8 million for 2010 and there will not be any deferrals under the Energy Recovery Mechanism for 2010. The company will either absorb all of the costs and receive all of the benefit from the amount of power supply costs in excess of or below the level in retail rates.

As of the end of September, our power supply costs were approximately $1 million below the level in retail rates. We expect the effects of the settlement for the Lancaster Plant deferrals and the Energy Recovery Mechanism to come close to offsetting each other.

Advantage IQ's net income attributable to Avista for the third quarter and year-to-date increased as compared to last year, with an earnings contribution of $0.05 per diluted share for the quarter and $0.10 per diluted share on a year-to-date basis. The increase was primarily due to the acquisition of Ecos last August. In additional, Advantage IQ had a business and occupation tax refund in the third quarter of 2010. Advantage's earnings continue to be moderated by low short-term interest rates, and slow organic growth due to the economic conditions of the country. Advantage IQ's revenues for the first nine months increased 36% as compared to last year and totaled $74.7 million. The increase in revenues was primarily due to the third quarter acquisition of Ecos.

In our other businesses, we had a $0.01 per share net income from those businesses in the third quarter and, on a year-to-date basis, those are break-even. For liquidity, at the end of September we had combined $335 million of available liquidity under our $320 million committed line of credit, our $75 million committed line of credit, and our $50 million accounts receivable financing facility.

For the fourth quarter of 2010, we are planning, subject to market conditions, to cause a redemption of $83.7 million of our pollution control bonds that we purchased in 2008 and 2009 and refund these with new bond issues. As a holder of the bonds, we would receive all redemption proceeds. We expect to issue up to $45 million of common stock in 2010, and we also expect to issue up to $25 million of common stock in 2011, to maintain our capital structure at an appropriate level. We are party to a sales agency agreement in which we sell shares of our common stock from time to time. In 2010, we sold a total of 1.6 million shares, for a total of $33.3 million through September. As of the end of September, we had 1.5 million shares available to be issued under this agreement.

As Scott mentioned, we are confirming our 2010 consolidated guidance to be in the range of $1.55 to $1.75 per share. This is an improvement from our report at the end of the second quarter in which we expected to be in the lower half of this range. We expect the contribution from Avista Utilities to be in the range of $1.45 to $1.60 per diluted share for 2010.

Our outlook for Avista Utilities assumes among other variables, normal precipitation and temperatures for the remainder of the year, as well as the implementation of the rate case settlement on December 1 in Washington. We continue to expect Advantage IQ to contribute in the range of $0.10 to $0.13 per diluted share for 2010, and although we are not changing our 2010 guidance for the other businesses of between a break-even and a contribution of $0.02, we may experience a slight loss.

I'd now like to talk about the initiation of our 2011 guidance for consolidated earnings, and our range for those are $1.60 to $1.80 per diluted share. We expect Avista Utilities to contribute in the range of $1.47 to $1.62 per diluted share for 2011. As compared to 2010, we expect our 2011 utility earnings to be positively impacted by a return to normal weather conditions and the effects of general rate increases.

We expect our 2011 utility earnings to be negatively impacted by slow load growth due to the economy as Scott mentioned earlier, continued delay in the recovery of operating expenses and capital investments, as well as increased operating and maintenance costs. These increases include a scheduled generation plant major maintenance expense, and pension and medical costs. Our range for Avista Utilities encompasses expected variability in power supply costs, and the application to the Energy Recovery Mechanism to that power supply cost variability.

The midpoint of our guidance range does not include any benefit or expense under the ERM. We are currently expecting a benefit under the ERM in 2011 within the 90% customer/10% company sharing band. It is important to note that the forecast of our position in the ERM can vary significantly due to a variety of factors including the level of hydroelectric generation, and retail loads, as well as changes in purchased power and natural gas fuel prices. Our outlook for Avista Utilities also assumes among other variables, normal precipitation, temperature, and hydroelectric generation, as well as the implementation of the Washington rate case settlement in December.

We expect Advantage IQ to contribute in the range of $0.13 to $0.16 per diluted share for 2011, and other businesses to be between a break-even and a contribution of $0.02 per share.

I will now turn the conference call back over to Jason.

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

(Operator Instructions) Your first question is from the line of James Bellessa, with D.A. Davidson & Company. Please proceed.

Good morning.

Hi, Jim.

Morning, Jim.

How much was this Advantage IQ business and occupation tax refund?

It was less than a penny, Jim.

And then secondly, you talk about, for next year, some scheduled generation plant maintenance, are there any key plants that are going to be out that you can outline for us now?

Jim, this is Dennis. The plant that we're referencing here is one of our Colstrip units in Eastern Montana. It'll be down in Q2 for a planned -- for a scheduled maintenance. It's nothing out of the ordinary. It's just periodic maintenance that needs to be done.

We didn't have such an outage in 2010.

The improvement in earnings for the utility in 2011 versus 2010 is not very great, is this because you are compromising in your rate cases?

No, I don't believe so at all, Jim. I think what's occurred is, as Scott mentioned earlier when he was talking about it, the economy has slowed down. We had anticipated more growth in the economy and our economists looked at it and said, we expected -- previously we had expected that economic recovery to begin later in 2010 and continue through 2011. We now don't expect that to occur until either late 2011 or into 2012.

So, part of that economic slowdown has hurt us. We continue to experience lag as we continue to have an increase in costs. And we continue to deploy capital. We believe that the settlements that we reached with both the Idaho Commission and then the pending settlement in front of the Washington Commission, is reasonable and fair to both shareholders and customers.

And the Oregon case, when should that be settled and you might benefit from a rate increase?

Jim, this is Kelly. That case was just filed. We have a schedule. In the past, we've settled those cases. We'll obviously work toward that if the opportunity is there. But the schedule would carry us out into the July timeframe, if it goes that long, but we would expect some margin in 2011 from that case.

Thank you very much.

Your next question is from the line of Jennifer Sireklove, with McAdams Wright Ragen. Please proceed.

Good morning.

Good morning, Jennifer.

Good morning, Jennifer.

I just want to make sure that I understood the -- your impact on your 2011 guidance. So, if you say that you're expecting a benefit in that 90% range, that would mean that your power supply costs are expected to be greater than $10 million -- more than $10 million above what's already baked into your rates?

No, the other way around. Less, less than what is included in our rates.

Okay.

Again, there's a lot of factors that can impact that, but that's where our current forecast is.

And so, that's actually my next question, I mean to what extent is that based on power and fuel costs that you have already locked in or your expectations of that, how those will evolve going forward?

It's a combination, we hedge over time some portion of our power supply costs, but we also leave some portion of those costs open as we move through the year and through the years as we go on an ongoing basis. We look at it in a three-year cycle. So, part of that is -- it has some existing hedges. Part of it we continue to leave open and some of it we will continue to look at and add to our amounts hedged as we go through the year.

The other part of it is really based on hydro and our hydroelectric forecasts expect normal precipitation and we're just in October right now. So, we don't know where that'll come out, but the impact of hydro also impacts that -- our power supply costs.

Right. So, certainly these things are evolving. I was just trying to get a sense of the magnitude of what is known at this point and what is variable in terms of how this cost will evolve in 2011.

We don't break that down by any percentages of -- as to what's known or what's variable. There is a good portion of it that is variable. You know, a lot of that is if you look at our hydro generation, I mean that's all variable.

Certainly. And so, that would be comparable to years past. There's no more that is known at this point than any year in the past?

No, correct. I believe that's accurate.

Okay. Very good, thank you.

Thank you.

Your next question is from the line of Mike Hahn, with Bryn Mawr Capital. Please proceed.

Hi, good morning. So, I just wanted to confirm, which settlements are in your guidance for the remainder of 2010 and 2011. I know you haven't reached -- or the settlement hasn't been approved in Washington. Is the settlement as it stands right now, is that in your guidance?

This is Kelly, the Idaho settlement was approved and rates were effective October 1. So, that's a known. The Washington settlement that you just talked about, the proposal is for the rates to be effective December 1, and so the assumption in the guidance is that the Washington Commission will approve that and rates would be effective December 1. And obviously, the Commission has to make that decision, but our expectation is that that settlement would be approved and rates would be effective December 1.

Okay, and then -- so then it's also as the settlement stands now in the guidance for next year.

Yes.

Yes.

And then anything that would come up from Oregon, of course, that is not in your guidance.

Not for 2010, but there is a sum in 2011 reflected.

Okay. And how much was the benefit -- just a couple of follow-ups, how much was the benefit from -- how much in earnings came from the Ecos year-over-year and the quarter. You said less than a penny from the tax refund, I just wanted to breakout kind of the core Advantage IQ business performance.

Yes, we don't separate those performances. Included in Advantage IQ's is Ecos and we have not historically separated that out. They are a large percentage of the revenue growth -- our growth is primarily due to that acquisition but we don't split that out.

Okay, and then do you have any comps -- I guess that I was pretty interested in the way you were able to offset the lower natural gas business revenues with the wholesale operations. So, how much of those wholesale operations are ongoing in nature and how much -- in other words if sales rebound again and -- I would assume a lot of that will go away.

Well, what happens is we purchase gas and we have gas in storage and we plan for an expected load amount on the natural gas side. To the extent we had warmer weather and didn't receive that additional load, we were able to sell that natural gas that we had planned for our retail load in the wholesale market. We don't really have a wholesale or non-regulated operations. That's all part of our utility operations. To the extent that we have contracted gas we just have to go and sell that gas.

Okay. And all the optimization opportunities occur within the utility as well.

Yes, and that all goes back to the customers through the PGA.

Okay. And then the only thing I didn't understand in the release was the thermal generation resource optimization. The sales of fuel increased due to an increase in thermal generation resource optimization in 2010. Can you characterize that a little bit?

What happens with that is we purchase fuel to fuel either Coyote Springs or Lancaster and to the extent we don't run those plants and we have that fuel, we don't run those plants because load is down, it's very similar to the natural gas operations where we turn around and then sell that natural gas in the market. And again, to help offset the overall -- to optimize that plant and to improve our recovery for our customers.

Okay. Alright, thank you very much.

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

How much of your $45 million did you say you sold year-to-date?

$33.3 million is the amount of equity that we've issued through September, Paul.

In your Washington settlement, what's the embedded price of natural gas in there?

$5.13.

Is that one of the things that leads you to think you're going to be on the right side of the ERM in 2011?

Yes, as you look at prices going forward, what we've seen thus far is a decline in prices. But as you know, that can change going forward.

Right, great. I think my other questions have been answered. Thank you very much.

Thanks, Paul.

Thanks, Paul.

Your next question is from the line of Eric Beaumont, with Copia Capital. Please proceed.

Morning guys, congratulations on the quarter.

Hi, Eric.

Paul asked my one question on the embedded gas price, the other is what's kind of the expectation for the ERM for the remainder of the year?

With the, again with the proposed settlement we have no deferrals, so what we've said when we announced the settlement was we limited the -- and Kelly can add to this, we limited the amount of our deferrals under Lancaster to $6.8 million and then we were able to keep the difference of having no deferrals under the ERM. And so we anticipate that those two items will largely offset this year and so then on an expected basis if it -- and we expect to be in the 90/10 sharing bands under the historic ERM, so that would allow us to offset the costs related to Lancaster.

Okay, and again, I just want to make sure I'm not confusing 2010 and 2011, because I was -- so the deferrals -- you have the piece for 2010 and then 2011 you also have a piece that you'll be able to use from the Langley?

No, the Lancaster --

The Lancaster, sorry.

-- is done. That's just in rates and we'll earn a return on that but then we return to our historic Energy Recover Mechanism in 2011. And we expect, as we said, to be in the benefit position of the 90% customer/10% company band at this point in time.

And there's going to be somewhat a balance there, obviously the gas price gives you some headroom but the expected weaker economic conditions would give you some of that -- either natural gas or generation fuel optimization based on the load you're looking at and if that weren't to be there then you'd likely have better utility results that are somewhat of a balancing mechanism one way or the other with regards to that. Is that accurate?

Not necessarily. The load -- we have our forecasted load in there and we have the Energy Recovery Mechanism as we have it. So, to the extent we get an improvement in load due to, for example, a colder winter and we have higher loads, we would expect to see improved earnings related to that and that may or may not have a significant impact on the Energy Recovery Mechanism. We don't know where the gas prices will go --

Yes, no, understood. I was --

-- We could have an improvement in our loads. We could have a negative as well. But we could have an improvement due to weather or a faster improving economy.

No, I understood, Mark. I just want to make sure, you know, obviously with the expected ERM benefit next year, the headline -- and you obviously can't project what may or may not happen but obviously it looks like a reasonable adder to the guidance that you put out there and I'm just trying to make sure that it's -- you know, without really seeing gas price go or hydro just being horrendous that there's somewhat of a balancing if you end up with -- or you could just be one side as a positive. I'm just trying to characterize the risks or benefits to that piece.

You know, the risks are as you mentioned them, hydro could move or gas prices could move. We don't control either of those. But the other side, just to be clear, that is independent, largely independent, of our loads, which is more based on the weather and the temperature. So, that could go up or down and we still could have the same expectations with respect to the Energy Recovery Mechanism.

Great, Mark. Thanks a lot and we'll see you in a couple of days.

Okay. Thanks, Eric.

(Operator Instructions) And you have a follow-up from the line of James Bellessa, with D.A. Davidson & Company. Please proceed.

Yes, I'd like to hone in on Advantage IQ for a second. Your guidance calls for this year the earnings to be from $0.10 to $0.13 a share. You've already reported $0.10 for the nine months, so, you're implying that the fourth quarter might be from zero to $0.03. You've just reported a quarter of $0.05 but we were told that maybe up to $0.01 was from this refund. So, you have a $0.04 quarter. Why do you think that the earnings from Advantage IQ will be down in the fourth quarter from the run rate adjusted in the third quarter?

Jim, primarily it's because of a lot of the work that Ecos does is work for utilities and doing energy efficiency programs for utilities across the country and Ecos is able to execute and can do a lot of that work I think a little bit earlier than we expected. So, while Ecos has been able to execute and put a lot of that work in, we don't expect them to continue at the same pace into the fourth quarter.

They did some of the work earlier, so a little bit with Ecos it might be timing. With that being said, we're very pleased with the performance. It's transitioned away from just an expense management company into an energy management company. We're seeing some really nice growth in our consulting services business. Ecos and working with utilities has been a wonderful addition to the business. And again, without having the float that we normally we have, this business is performing quite well and the management team we put in a year ago, is doing a fantastic job of executing on the strategy.

Thank you.

Thanks, Jim.

There are no other questions at this time, so I'd like to turn the call back over to Mr. Jason Lang, for closing comments.

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

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Everyone have a great day.