Avista Corp (AVA) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 Avista Corporation Earnings Conference Call. My name is Lacey, and I'll be your coordinator for today. At this time, all participants are in listen-only mode. Later, we will facilitate a question-and-answer session towards the end of the presentation. (OPERATOR INSTRUCTIONS) As a reminder, this conference 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, Lacey, and good morning, everyone. Welcome to Avista's second quarter 2011 earnings conference call. Our earnings were released pre-market this morning, and the release is available on our website at www.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, State and Federal Regulation, Kelly Norwood; and the Vice President, Controller and Principal Accounting Officer, Christy Burmeister-Smith.

Before I begin, I'd like to remind everyone that some of the statements that will be made today are forward-looking statements that involve assumptions, 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 and Form 10-Q for the first quarter of 2011, which are available on our website.

To begin this presentation, I would like to recap the financial results presented in today's press release. Our consolidated earnings were $0.39 per diluted share for the second quarter of 2011, compared to $0.46 for the second quarter of 2010. On a year-to-date basis, our consolidated earnings were $1.12 per diluted share for 2011 compared to $0.98 for 2010.

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

Thank you, Jason, and good morning, everybody. Our second quarter results were slightly below our expectations due to higher-than-anticipated operating costs. Mark will talk more about the increase in operating costs later.

However, we continue to be on track to have a good year. We're confirming our 2011 earnings guidance with an expectation that we will be in the upper half of the range.

Weather conditions in 2011 have been cooler than average with precipitation, stream flows and resulting hydroelectric generation well above average. And although we're having one of the best hydroelectric generation years on record, the impact on our results is mitigated by low prices in wholesale power markets. In addition, the incremental benefit from improved hydroelectric generation is largely passed on to customers under the Energy Recovery Mechanism as purchased power and fuel prices are below the amount included in base rates.

The improvement in our results on a year-to-date basis was primarily due to colder weather in the first quarter. As you'll recall, the first quarter of last year was one of the warmest January to March periods on record in our service territory.

We remain committed to investing in our utility infrastructure with a focus on increasing generating capacity and maintaining or improving system reliability. Utility capital expenditures were $99 million for the first half of the year and we expect capital expenditures to be about $250 million in 2011.

We recognize the need to improve the recovery of costs in capital investments that we are making in our generation, transmission, and distribution systems. We filed general rate cases in Washington in May and Idaho in July. In Washington, we are requesting rate increases designed to increase annual base electric revenues by $38.3 million and increase annual base natural gas revenues by $6.2 million. Our requests are based on a proposed overall rate of return of 8.23% with a common equity ratio of 48% and a 10.9% return on equity. The process can take up to 11 months for the WTC to issue a decision. In Idaho, we are requesting rate increases designed to increase annual base electric revenues by $9 million and increase annual base natural gas revenues by $1.9 million. Our requests are based on a proposed overall rate of return of 8.49%, a common equity ratio of 50.15%, and a 10.9% return on equity. The process can generally take up to seven months for the IPUC to issue a decision.

Our local economy continues to struggle. Non-farming employment grew slightly in the major metropolitan areas in our service territory over the past 12 months. The unemployment rate declined in June from the year earlier level in Medford, was stable in Spokane, but rose slightly in Coeur D'Alene. Unemployment rates through our service territory have remained above the national average. Although showing modest improvement, the housing market in our service territory remains sluggish.

In June, we entered into a 30-year power purchase agreement to acquire all the power produced by a wind project being developed by Palouse Wind LLC in Whitman County, Washington. It's expected that the wind project will have a name plate capacity of about -- of approximately 100 megawatts and produce approximately 40 average megawatts with deliveries beginning in the second half of 2012. We decided to enter this PPA due in part to recent market changes, reducing the cost of renewable resource projects. The power purchased from Palouse Wind will help to meet our Washington renewable energy requirements, beginning in 2016 as well as provide a new energy resource to serve our system retail load requirement.

Advantage IQ, a leading provider of strategic energy management solutions, continues to show growth. Advantage IQ's strategic acquisitions have broadened the value proposition it brings to its clients. Net income from Advantage IQ increased 20% in the first half 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 utility and commercial industrial market places.

And now I'll turn this presentation over to Mark Thies.

Thanks, Scott. Good morning, everyone. For the second quarter of 2011, our utility operations contributed $0.36 per diluted share compared to $0.43 of the second quarter of last year. As Scott mentioned, the primary reason for this decrease was an increase in operating costs. This included maintenance at our generation plants, both planned and unplanned, as well as increased pension and other post-retirement benefit costs, labor costs, and outside services. Certain cost increases were expected in the second quarter including scheduled major maintenance at Colstrip. However, our operating costs were higher than we anticipated. Partially offsetting the increase in operating costs was an increase in gross margin due to general rate increases and colder weather.

On a year-to-date basis, utility earnings contributed $1.06 per diluted share, an increase from $0.94 last year, primarily due to an increase in gross margin. This was primarily due to colder weather, as Scott mentioned earlier, which increased both electric and natural gas retail loads as compared to the prior year. In addition, power supply costs that were below the amount included in base rates benefited earnings this year.

The increase in gross margin was partially offset by an increase in other operating costs, depreciation and amortization due to the capital that we're deploying in our system, and taxes other than income taxes. The increase in taxes reflects higher retail revenue-related taxes as well as increased property taxes.

As a result of better-than-expected hydroelectric generation, purchased power and fuel costs were below the amount included in base rates and we recognized a $4.7 million benefit under the Energy Recovery Mechanism in Washington in the first half of the year compared to an expense of $2.8 million in the first half of last year. We continue to expect to be in the 90% customer, 10% company sharing band under the ERM by the end of this year.

Avista's share of Advantage IQ net income for the second quarter of 2011 increased as compared to last year with an earnings contribution of $1.8 million compared to $1.5 million in the second quarter of last year. On a year-to-date basis, Avista's share of Advantage IQ net income was $3.5 million, an increase from $3.0 million last year.

Revenues for the first half of 2011 at Advantage IQ increased 20% as compared to last year and totaled $59 million. The increase in revenues was primarily due to a 17% increase in energy management services and 9% increase in expense management. The acquisition of Loyalton, completed at the end of last year, added approximately $4 million of revenues.

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

At June 30th, we had $306 million of available liquidity under our $400 million committed line of credit with $75 million of cash borrowings and $19 million in letters of credit outstanding. We issued $15.9 million of common stock in the first half of 2011, including $12.1 million under a sales agency agreement.

We continue to expect to issue up to $25 million of common stock in 2011, to maintain an appropriate capital structure. We have approximately 500,000 shares available to be issued under our sales agency agreement.

Based on our results for the first half of the year and our forecast for the remainder of the year, as Scott mentioned, we are expecting to be in the upper half of our consolidated and utility guidance range. This is a change from a report at the end of the first quarter, when we expected to be at the high end of that range.

The outlook for Avista Utilities has declined slightly in the second quarter primarily due to higher-than-anticipated operating costs and a cool summer weather that has resulted in lower-than-expected retail loads. 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 to be in a benefit under the Energy Recovery Mechanism in 2011 within the 90% customer, 10% sharing band based on actual results for the first half of the year and our forecast of our position for the remainder of the year. That forecast in the Energy Recovery Mechanism 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 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 for 2011 and other businesses to be between a breakeven and a contribution of $0.02 per diluted share.

Now, I'll turn it back -- turn the call back to Jason.

Thanks, Mark. At this time, we'd like to open this call up for questions.

Thank you. (OPERATOR INSTRUCTIONS) Paul Ridzon with KeyBanc.

IQ had a pretty robust quarter from a net income growth perspective. How much of that was organic versus acquisition-related?

Well, again when you look at Paul, as I was talking, the acquisition added approximately $4 million in revenue of our nearly $60 million in revenue. So, the preponderance of the growth is organic growth with some slight growth. We don't give -- we didn't the actual net income impacts of that revenue growth. But just looking at the straight revenue growth, the amounts were again $4 million related to the Loyalton acquisition of $59 million in total revenues.

Paul, as we make these acquisitions, it really gives us the opportunity to cross sell their products and services to our current suite of clients. So it really gives us a great opportunity to create organic growth once we embed and integrate these businesses into Advantage IQ. So, while there is some -- obviously some acquisition opportunity, it's really to be able to grow that business organically once we embed it. That's the exciting part of the business.

Can you give a little more flavor as to what those revenue synergies could be?

We haven't disclosed any specific details of the individual revenues, Paul.

Thank you.

Michael Klein with Sidoti & Company.

Question with the ERM. You recorded a $4.9 million benefit in Q1 and it appears like there was a slight expense in the current quarter. Is that correct?

Yes, approximately $200,000.

Okay, can you guys kind of explain that a little more, just given their strong hydro conditions and everything that goes into the ERM?

Well there's a number of factors. We had originally anticipated a strong hydro even in that original ERM. And we received it. But as Scott mentioned in his discussion, the pricing that we were getting was much lower than we anticipated in the market. So while we had strong hydro generation, the pricing we were getting for that were low single digits, in some instances got below that on small times. Didn't impact us significantly on the negative side. But overall, our expectations were having higher prices and we didn't see that because the whole region has strong hydro.

Right. Sorry, I jumped on a little late. But can you guys give a little more color into the higher-than-expected operating costs? I don't know if you mentioned that in your prepared remarks.

Well, we did some but -- and we did in the press release. The largest one was our maintenance costs and I'll let Dennis talk about that a little bit.

Yes, we had a planned maintenance outage at Colstrip, Unit No.3, major overhaul of that unit this year. So that was a scheduled outage. Added some costs, substantially more than last year and then we had one of our other facilities, Kettle Falls Generating Station, had some unforced outage -- had an unforced outage that required some increased operating costs there, maintenance costs.

The other costs that we had, the other increases and we identified this when we first came out, a lot of this -- some of this is just timing but as compared to prior years, our pension and other retirement benefit costs were expected to be up and were up in the quarter. We had some additional labor costs as we continue to add jobs to serve our customers and we had also some additional outside service costs.

Okay, are the majority of these costs behind us now in the quarter? Or are they expected to linger on throughout the rest of the year?

Well there are -- with respect to certain outages, yes, our -- I mean we always have maintenance outages. We never know what our planned outages or I mean our unplanned outages are. Those could occur -- we continue to operate very efficiently but we could have certain unplanned outages. The other costs are all in our forecast.

Okay.

When we forecast to be in the upper half of range, all our costs are included in that forecast.

Okay, great. Thanks, guys.

Thank you.

(OPERATOR INSTRUCTIONS) James Bellessa with D.A. Davidson.

The snow pack melt this year may have been tardy. What does this mean for the third quarter for your company?

Well, you're right. This year was an incredible hydro year and if you're a hydro guy, like me, it was a lot of fun to watch. Essentially with the colder weather that we've seen, it pushed off the scheduled -- the normal runoff about a month on our system. So we would expect to have above -- slightly above normal hydro in July and -- or excuse me, August, September. Of course, a new hydro year begins in October.

And Jim with that a reminder that the hydro, all of that hydro benefit does go through the Energy Recovery Mechanism. We have that included in our expectations in that 90/10 expectation for the sharing band.

In terms of temperatures in July and so far in August, how have they been running versus last year or versus normal?

Well, July has been a little bit below normal, Jim, as probably it has been for you in Montana. So the temperatures in July really haven't materialized and the first three or four days of August look pretty good.

Your 10-Q, when will that be filed?

Friday.

Thank you very much.

At this time, I show we have no further questions in queue. I would like to turn the call back over to Jason Lang for any closing remarks.

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

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day, everyone.