Avista Corp (AVA) 2011 Q1 法說會逐字稿

Please stand by for realtime transcript. Good day ladies and gentlemen and welcome to the first-quarter 2011 Avista Corporation earnings conference call. My name is Anne and I will be your coordinator for today's call. As a reminder, this conference is being recorded for replay purposes. At this time all participants are in listen only mode. (Operator Instructions) We will be facilitating a question-and-answer session following the presentation. I would now like to turn the presentation over to Mr. Jason Lang, Investor Relations Manager. Please proceed, sir.

Thank you, Anne. Good morning everyone. Welcome to Avista's first-quarter 2011 earnings conference call. Our earnings were released pre market this morning and the release is available on our website at avistacrop.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 State and Federal Regulation, Kelly Norwood; and the Vice President, Controller and Principle Accounting Officer, Christy Burmeister-Smith.

I'd like to remind everyone 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 2010, which is available on our website.

Now, to begin this presentation I would like to recap the financial results presented in today's press release. Our consolidated earnings were $0.73 per diluted share for the first quarter of 2011. This compares to $0.52 for the first quarter of 2010. Now, I will turn the discussion over to Scott Morris.

Thank you, Jason and good morning everybody. We had a very good first quarter and we are off to a great start for the year. The significant increase in our consolidated earnings was primarily due to an increase in earnings at Avista Utilities due to weather that was significantly colder and wetter than the first quarter of 2010. As you will recall, the first quarter of 2010 was one of the warmest January to March periods on record in our service territory. Weather conditions in the first quarter of 2011 were slightly colder than average with precipitation, snow pack and stream flows well above average. This resulted in a significant increase in retail loads and hydroelectric generation as compared to the prior year, which increased operating revenues and reduced our power supply costs. Retail loads for the first quarter of 2011 were slightly higher than our expectations.

We are pleased that both Moody's and Standard and Poor's recently upgraded our credit ratings. This is another sign of the progress that we have made in strengthening our financial condition. This lowers our current and future interest costs, benefiting both shareholders and customers. We're confirming our 2011 earnings guidance with an expectation that we will be at the high end of the range. However, it is early in the year and there are many variables that can impact our results, such as precipitation, and temperatures for the remainder of the year.

Our improved results were also the result of our regulatory filings to improve the recovery of utility operating costs and capital investments through retail rates. Although our first-quarter results represent a significant improvement over last year, on an annual basis, we are still not earning the return authorized by state regulatory commissions in each jurisdiction due to a continuing lag in the recovery of capital investments and increasing operating costs. We plan to file a general rate case in Washington in second quarter of 2011 and will continue to evaluate rate case plans in Idaho.

I would like to give you a sense of the economic conditions in our service territory at the time. Employment improved in most of our service areas after enduring significant cutbacks in the construction, forest products, mining and manufacturing sectors. Non-farm employment growth for March 2011 compared to March 2010 was 2.3% in Coeur d'Alene, 1.1% in Medford, and only 0.3% in Spokane. Unemployment rates declined in March 2011 from the year earlier levels in Spokane and Medford, but rose slightly in Coeur d'Alene. Unemployment rates throughout our service territory remain above the national average.

We remain committed to investing in our utility infrastructure with a focus on increasing generating capacity and maintaining or improving reliability. Utility CapEx was $50 million for the first quarter of 2011 and we expect capital expenditures to be about $250 million in 2011.

In addition to the capital deployed in our system, in February we issued a request for proposal seeking to acquire up to 35 average megawatts of renewable energy, or as much as 100 megawatts of nameplate wind capacity with deliveries beginning in 2012. We are evaluating proposals received under this RFP. As you may recall, we acquired the development rights for a wind generation site in 2008. And while the RFP does not include the development of this site, we will continue to study this site in preparation for later development.

Advantage IQ, a leading provider of strategic energy management solutions, continues to show long-term growth potential. Advantage IQ's strategic acquisitions including Ecos in 2009, the Loyalton Group in December 2010 and Building Knowledge Networks in January 2011 have broadened the value proposition it brings to its clients. Net income from Advantage IQ increased in the first quarter of 2011 as compared to last year. Advantage IQ will continue 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 industrial marketplaces.

So, now I would like to turn this presentation over Mark Thies and Mark will provide details on the performance of our businesses, liquidity, financing activities and detailed earnings guidance.

Thank you, Scott and good morning everyone. Thanks for joining us this morning. For the first quarter of 2011, our utility operations contributed $0.70 per diluted share, compared to $0.50 per diluted share in the first quarter of last year. Our utility earnings were positively impacted by an increase in gross margin that was primarily due to colder weather, as Scott mentioned earlier, which increased both electric and natural gas retail loads. And also, power supply costs that were below the amount included in base retail rates. In addition, we also had general rate increases in each of our service areas. The increase in gross margin was partially offset by an increase in operating expenses, depreciation and amortization, and taxes other than income taxes.

As a result of the better-than-expected hydroelectric generation and purchase power and fuel costs below what is included in retail rates, we recognized a $4.9 million benefit under the Energy Recovery Mechanism in Washington in the first quarter. Last year we recognized an expense of $1.2 million under the ERM.

Now I would like to make some comments about what our expectations were for the first quarter and how that impacts our forecast for the year. We expected a significant improvement in our utility earnings as compared to last year, due to a return to normal weather and the effects of general rate increases. However, our utility earnings in the first quarter exceeded our expectations by about 10%. Part of this increase was due to higher-than-expected loads and lower-than-expected operating costs. However, about half of the increase was due to the acceleration of the benefit under the Energy Recovery Mechanism and the timing of certain operating costs that will not impact our annual earnings expectations.

Advantage IQ's net income for the first quarter of 2011 increased as compared to last year with an earnings contribution of $1.7 million, compared to $1.4 million in the first quarter of 2010. Revenues for the quarter increased 22% as compared to last year and totaled $29 million. The increase in revenues was primarily due to a 23% growth in the energy management services and a 7% growth in expense management. And the acquisition of Loyalton added $1.8 million to revenues in the first quarter of 2011.

In January 2011, Avista Capital and the other owners of Advantage IQ purchased shares held by one of the previous owners of Cadence Network, which was acquired by Advantage IQ in 2008. Avista Capital's portion of the purchase was $5.6 million and increased our ownership percentage from 75% to 79%.

Earnings from our other businesses were slightly positive for the first quarter compared to a net loss of $0.01 per share last year. The improvement of the results for these businesses was due in part to increased net income at METALfx, as well as net gains on investments in 2011 compared to net losses in 2010.

In February, we entered into a new four-year committed line of credit in the amount of $400 million that replaced our committed lines of credit that were set to expire in April. At quarter end, we had $313 million of available liquidity under our committed line of credit. We are planning, subject to market conditions, to cause the redemption of $83.7 million of pollution control bonds and refunding of them with new bonds issued later this year.

We issued $8.5 million of common stock in the first quarter, including $5.8 million under a sales agency agreement. We expect to issue $25 million of common stock in 2011, including our first-quarter amounts, to maintain our capital structure at an appropriate level. We have about 800,000 shares available to be issued under the sales agency agreement.

Based on our results for the first quarter, which were above our expectations, and our forecast for the remainder of the year, we are expecting to be at the high end of our consolidated and utility guidance range. It is important to note that we are still early in the year. We expect consolidated earnings to be in the range of $1.60 to $1.80 per diluted share for 2011. We expect Avista Utilities to contribute in the range of $1.47 to $1.62 per diluted share for 2011.

We are still expecting a benefit under the Energy Recovery Mechanism in 2011 to be in the 90% customer, 10% Company sharing band based on actual results for the first quarter and our forecast for the remainder of the year. 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 purchase power and natural gas fuel prices. Our outlook for Avista Utilities assumes, among other variables, normal precipitation and temperatures for the remainder of 2011.

We expect Advantage IQ to contribute in the range of $0.13 to $0.16 per diluted share and other businesses to be between a breakeven and a contribution of $0.02 per diluted share for 2011. I will now turn the call back over to Jason.

Thanks, Mark. We would now like to open this call up for your questions.

(Operator Instructions) Paul Ridzon, KeyBanc.

What do you think year-over-year the impact of weather was on a cents per share basis?

Largely the change in our results for the year, Paul, is largely weather. On a weather adjusted basis our loads are pretty close to where we would have expected. So, most of the impact is with respect to weather.

Both from a hydro perspective of improving our hydro generation and that goes through the Energy Recovery Mechanism, and then also the slightly colder temperatures. Again, last year we had a significantly warmer quarter, so we had a much more normal quarter, but it did increase over last year. And that is primarily the reason for our increase in earnings and the utility earnings went up from $0.50 to $0.70.

What do you expect the ERM to look like for the rest of the year on a quarterly basis?

We don't provide quarterly expectations on the ERM, Paul. But we do expect that for the year we will continue to be in the 90% customer band and 10% company band in the favorable position. So, as we continue to get better hydro for the year, the customers get 90% of that benefit.

Rivers are still running strong and there is still 9 feet of snow in the mountains?

That is absolutely correct, Paul. The runoff hasn't really even started yet. We actually have been gaining snow in the last couple of weeks and I can let Dennis tell you a little bit about our snowpack, but it is quite good.

The Clark Fork drainage, at this time, is about 166% of normal snowpack for this time of year. Spokane drainage is 155% of normal. So, quite a bit different from last year.

Too bad you can't bottle some up and save it for next year.

Brian Russo, Ladenburg Thalmann.

Just curious on your guidance and the solid first-quarter performance. If I recall, when you initially conveyed guidance, you already expected to be at the high end of the range due to your fuel factor and costs of generating -- of dispatching your fossil fuel plants later in the year, and I'm just wondering how -- I'm just curious, why are we still in the upper end of the range, even though first quarter was so strong due to not only cold weather and load, but the favorable hydro conditions?

Well Brian, to reiterate again, when we started the year our expectations were at the midpoint of our guidance. We didn't include anything under the ERM and our midpoint was where we expected to be. We did say that we would have some -- we expected to be in the 90%, 10% so that would move us up some.

And again, the customer sharing bands, the first $4 million, the Company gets 100%. Of the next $6 million on the benefit side, the customer gets 75% and the Company gets 25%, which if we got to the 90%, 10% that would be another $1.5 million through that $6 million band. So, that is the benefit we get.

In addition, what we have said in this release and our expectations are, we exceeded our expectations about 10% and we expect about half of that to be benefited. So, we are saying we are at the high end. That is somewhat of an improvement and it is still early. It is just the first quarter.

We still need to get, as Dennis mentioned earlier, we have a lot of snow on the mountains, but it has got to melt reasonably slowly otherwise we just spill. So, we need to have a reasonable melt and continued normal temperatures to see further benefit. And again, a lot of that further benefit, if it's on the hydro side, when we are in the 90%, 10%, 90% of that goes to the customers and they benefit.

So, just to reiterate, you get 100% of the first $4 million, you get 25% of the next $6 million and 10% of anything above that?

Correct.

So, it looks just like based on that, if you are in that 10% sharing, you are up to close to $6 million of pre-tax margin I guess.

Yes, you can do the math. We are, and so whatever you get above that, that's what we get.

And then I think you mentioned earlier that you paid $5.6 million for an incremental 4% stake in Advantage IQ?

Yes.

And then the $25 million of total equity that you have planned through this year, that is all going to be done through your dribble program, correct?

We have a number of options, including that. But that is a relatively small amount. We have sufficient shares with that program, so we would expect that would primarily be the case. Again, it is a small amount. We did about $5.8 million in the first quarter.

And then just lastly, your comments on the regulatory lag. Do you still forecast falling short about 130 to 170 basis points of your allowed ROE, or as we have had several years of annual rate cases you're starting to close that ROE gap?

We do continue to work on that, but as you recall, there is 2 components to that, as you mentioned, 130 to 170. 70 to 90 basis points of that are really costs that we have historically not been able to recover. That -- whether by law or by practice, there is a couple of different things of components there, but that has not changed much, those are still costs that we believe make sense to incur to run the Company, but we are not allowed the recovery through retail rates.

And the other, the 60 to 80 basis points of lag consists of 2 primary causes. The capital that we deploy in growing, maintaining a safe, reliable system, and adding to our capacity through hydro upgrades, that capital we have lag on and we have increasing operating expenses. So, while we are filing rate cases consistently, we are still incurring lag in those ranges.

(Operator Instructions) James Bellessa, Davidson & Co.

In the past on occasions you have talked about the ERM in terms of an EPS benefit or drag. Do you have the same type of expression that you can explain the $4.9 million ERM benefit and the $1.2 million drag last year?

No. They are really different years. And we reset -- with every general rate case, we reset our power supply costs and that is what it is compared to. So, they're not necessarily comparable from a year-over-year. It does have an impact to us, but what we look to is the ERM is an annual calculation.

What we try to state in the quarter where we were, but then in our expectations where we expect to be. And we have been consistent this year, throughout this year, indicating that we believe we will be in the 90%, 10% primarily due to come out right now, strong hydro, but previously low gas prices. And the gas price embedded in our retail rates at this point is $5.13.

What we tried to express, Jim, is not necessarily the cents per share impact, but the impact of where we expect to be relative to the ERM. And we are in a benefit position this year, in 2011, we expect to continue to be there.

I understand that. But to try to describe the $4.9 million benefit that you have just received, how much per share is that? What tax rate do you use would be part of the equation.

Our effective tax rate is around 36% for 2011.

You indicated that you had a net gain of an investment of $0.1 million. What was that related to in the non-regulated other business side?

We have -- some of those investment funds, we had some soft funds and we just recorded some income. So, we had a slight net positive, versus in the past, I think we have reported to you negatives, but we just had a slight net positive in those investment funds in the first quarter.

And what is your picture of these portfolio items going forward? Are you making progress? Do you think they are good investments, you would like to divest yourself of them or what?

I don't think that they are core to our strategy. Our real core strategy is growing the Utility and growing Advantage IQ. We do continue to see improvement at METALfx and that is one of the bright spots of the other. They continue to generate increasing net income and cash flow, but it is not material to the overall Corporation. And those investment funds, to the extent we can exit them in a reasonable fashion, we would look to do so, but we are not -- it doesn't take a tremendous amount of our time.

Jim, remember those are legacy investments that were made in the late 1990s both at METALfx, as well as those investment funds. Mark is correct; we're going to continue to look at opportunities to either divest or get better returns out of both of those investments. And we are pleased with progress that METALfx has been making and obviously our strategy with METALfx is to divest from that business as soon as we feel it is appropriate.

And if Gordon Short, our CEO, keeps making the great progress that he has had, we are thinking that maybe over the next 12 to 24 months there might be a window that we can do that. Those investment funds are being actively looked at and managed by Mark, and looked at to try to get out of those if possible or maintain them depending on our strategies. He's looking at them.

I believe that ReliOn, the fuel cell company that you once owned the majority of, you have still an ownership position and they had an equity raise recently and that you may have participated. Why are you still participating in the equity positions of ReliOn?

We are about a 7% owner of ReliOn, and in the last capital raise we felt it was important to -- it was a very small investment, Jim, and it ensured the fact that we weren't further diluted. And it was an opportunity for us to continue to make sure that we had a defensive mechanism for our 7% investment.

And from what you just previously said, would you be looking to divest that in the next year or year and a half?

With us being a minority shareholder, we would look for an opportunity to do that, but really it's more based on the overall divestiture of all of the owners of that business looking to an exit strategy and monetization strategy.

ReliOn keeps making good progress. They keep -- they just came out with a brand-new product that has driven down their costs. It has been able to increase their sales opportunity. They're going to Europe now, so our hope is with ReliOn that some kind of monetization event will happen in the future.

You are within 3 months of the first put option on -- I believe you could call it a put option -- Advantage IQ. What do you expect will happen?

Well I think this market, Jim, with Advantage IQ, we are excited about it. It continues to increase. There has been significant roll up activity in the space. I cannot speak for our minority owner, so he has got an opportunity to put in 2011 and also to put in 2012 and we are prepared, no matter what he chooses to do, so it's really not something that we are too worried about. We like the space and whatever our partner chooses to do is fine with us.

And did you say earlier you purchased $4.6 million of the stock of Advantage IQ?

It was $5.6 million. It was an additional 4%. We went from 75% to 79% ownership.

One of the minority shareholders was looking to exit, so we wanted to take advantage of that and we are excited about the opportunity. So, our partner and us both bought the commensurate appropriate percentages of the shares and we are happy to do that.

The purchase would imply a market cap of that whole business of $140 million. Do you believe that, that is a reasonable near-term valuation?

No, Jim, we felt that it was a price that we were willing to pay to acquire that interest. The valuation will depend on a number of factors. That was a particular shareholder that wanted to exit and it was a negotiated value that both ourselves and the other party agreed upon. That is really what it was at that time.

And what was the timing? Was that at the end of last year or in the first quarter this year?

It was in the first quarter.

Paul Ridzon, KeyBanc.

Will you enter the RFP with anything from your wind site? I didn't catch that.

What's your question again, Paul, I'm sorry?

Will you respond to the RFP with a self-build for wind?

The RFP was for taking advantage of what we saw was some market opportunities in our service territory and in surrounding service territory for wind projects. This RFP really did not include our self-build option. We still have that option and we will continue to look at an opportunity to build that out to the future.

If you remember, we have got to have some renewables -- qualified renewables online by 2016 and then another tranche by 2020. So, we've got a couple of steps here and this was just an opportunity for us to test the market.

Turbine prices have really decreased over the last 18 months and we felt like this perhaps was a great opportunity for us to add a renewable resource with minimizing rate pressure for our customers. So, that's really what we are investigating.

How are you thinking about and how is the Commission possibly thinking about the sunsetting of the production tax credit in 2012 and uncertainty in Congress around the budget?

That's one of the reasons why we decided to test the RFP, frankly, was that we felt that maybe there were some developers out there that could still get a project built and take advantage of those tax credits that you mentioned. So, that's why we're testing the market.

Is there -- to get to your 2016 RPS, if the production tax rate goes away it is going to be a lot less economic to do that post 2012, right?

Yes, that's correct.

And then with all the strength of the hydro in the region. Does hydro push down the price of natural gas seasonally?

It certainly can. Obviously, the demand for natural gas in the region is much lower during the spring time normally. And certainly this year with the amount of snow and runoff that we expect, you're going to see a lot of --- or most or all of the gas plants shut off. So, supply demand. You should see some impact.

When we look at this though that is an incremental change to overall gas consumption, which is not significant at this time normally anyway. Really where gas consumption starts to go is in the summer peaking season when hydro has runoff. So, to the extent hydro can run longer into July, then you might see more of an impact. We don't typically have significant gas load at this time of year, nor does the region.

Is it safe to say you're going to be well within the 90%, 10% sharing band?

We don't indicate where we will be within that sharing band. We just indicate we will be there.

Brian Russo, Ladenburg Thalmann.

Just to follow-up on the previous renewable-related question. How many megawatts is that RFP for?

It was for 100 megawatts of nameplate and about 35 megawatts of energy.

Ladies and gentlemen, this concludes today's question-and-answer session. I would now like to turn the call back over to Mr. Jason Lang for closing remarks.

Thanks, Anne. I would like to thank everyone for joining us today. We certainly appreciate your interest in our Company. Have a great day.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a good day.