Avista Corp (AVA) 2011 Q3 法說會逐字稿

Please stand by for real time transcript. The Avista Corporation conference call will begin momentarily. Thank you for standing by for our third quarter conference call will begin shortly. Again, thank you for your patience in standing by.

Good day, ladies and gentlemen, and welcome to the third quarter 2011 Avista Corporation earnings conference call. My name is Latasha and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question and answer session towards the end of this conference. (Operator Instructions).

I would now like to turn the call over to Mr. Jason Lang, Manager of Investor Relations. Please proceed.

Thank you, Latasha, and good morning, everyone. Welcome to Avista's third quarter 2011 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, State and Federal Regulation Kelly Norwood, and the Vice President Controller and Principal Accounting Officer, Christy Burmeister-Smith.

I would 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 that 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 second quarter of 2011. Both 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 $0.18 per diluted share for the third quarter of 2011, compared to $0.22 for the third quarter of 2010. On a year to day basis, our consolidated earnings was $1.30 per diluted share for 2011 compared to $1.20 for 2010. Now I'll turn the discussion over to Scott Morris.

Thank you, Jason, and good morning everyone. Our third quarter results were in line with our expectations and we continue to have a good year. Consistent with our last reporting early August, we're confirming our 2011 earnings guidance with an expectation that we'll be up in the upper half of the range. The weather in 2011 has been cooler than average with precipitation and stream flows well above average. As such, we're having one of the best hydroelectric generation years on record.

Since purchase power and fuel prices have been below the amount included in base rates, the incremental benefits from improved hydroelectric generation is largely passed on to customers under power cost deferral mechanism. The improvement in our results on a year-to-date basis was primarily due to colder weather in the first quarter, and as you'll recall, the first quarter of last year in 2010 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 CapEx was $170 million through September 30th of this year, and we expect capital expenditures to be about $235 million in 2011, and about $250 million each in 2012 and 2013. We recognize the need to improve the recovery of costs capital investments that we are making in our generation, transportation and distribution system. We reached settlements in our Idaho and Washington general rate cases during the third quarter, which we believe provide a fair and reasonable outcome for our customers and shareholders.

In Idaho, new rates went into effect on October 1st with the approval of the general rate case settlement by the Idaho Commission. As agreed to in the settlement, base electric rates for Idaho customers increased by an average of 1.1%, which is designed to increase annual revenues by $2.8 million. Base natural gas rates for Idaho customers increased by an average of 1.6% which is designed to increase annual revenues by $1.1 million.

As part of this settlement, we agreed to not seek to make effective a change of base electric or natural gas rates prior to April 1, 2013 by means of a general rate case filing. This does not preclude us from filing annual rate adjustments such as RPCA and PGA. In Washington, if a settlement is approved by the Washington Commission, new rates will go into effect on January 1st. As agreed to in the settlement, base electric rates for our Washington customers would increase by an average of 4.6%, which is designed to increase annual revenues by $20 million.

Base natural gas rates for our Washington customers would increase by an average of 2.4%, which is designed to increase annual revenues by $3.75 million. The Northwest Energy Coalition, the only party not to sign the settlement agreement, has indicated they plan to pursue a approval of an electric decoupling mechanism in the case. NWEC has also indicated, however, that they do not oppose other terms of the settlement. As part of the settlement agreement, we agreed to not file a general rate case in Washington prior to April 1, 2012.

Economic growth in the region we serve has slowed significantly since it peaked four years ago, yet we continue to experience some customer growth on an annual basis. We have three distinct metropolitan areas in our service areas, Spokane, Coeur D'Alene, and Medford, and we're tracking three separate economic indicators which impact our business. They are employment change, unemployment rates and foreclosure rates. We have observed mixed results during the economic downturn. The September 2011 employment indicators has turned negative in our service areas, except in Medford. Unemployment rates were lower in all three areas, but while foreclosure rates have increased compared to earlier periods. Compared to what's happening across the country, our economy is broadly weaker than the national average. We expect our economy for under-perform compared to the US in 2012.

In October, Advantage IQ changed its name to Ecova, which will combine the Company and it's subsidiary, Eco's under one name and brand. With more than 500 commercial and utility customers, Ecova continues to expand the business from a focus on expense management to delivery of total energy and sustainability management services. We're pleased that Ecova's year-to-date earnings increase 19% as compared to the year prior year period in 2010. Now I'll turn this presentation over to Mark Thies.

Thank you, Scott. Good morning, everyone. For the third quarter of 2011, our utilities operations contributed $0.13 per diluted share compared to $0.16 for the third quarter of last year. As Scott mentioned, our third quarter earnings were inline with our expectations. The primary reason for this decrease in quarterly earnings was expected increases in other operating expenses, depreciation and amortization, and taxes other than income taxes.

In the third quarter of 2011, we increased our estimate of pension plan contributions for 2012 which is tax deductible in the 2011 tax year. This change estimate reduced income tax expense through September 30th by $1.8 million. In the third quarter of 2010, adjustments associated with reconciling the 2009 federal income return to the amount included in financial statements, resulted in decrease income expense of $1.7 million.

On a year-to-date basis, utility earnings contributed $1.18 a share, an increase from $1.10 a share last year, primarily as a result of increase in gross margin. This increase was due to colder weather, as Scott mentioned, which was a result of primarily 2010 being one of the warmest periods in the first quarter. This increase, both electric and natural gas retail loads, power supply costs that were below the amounts in base rates, as well as general rate increases. The increase in gross margin was partially offset by an increase in other operating expenses, depreciation and amortization, and taxes other than income tax. The increases in taxes other than income taxes, reflects higher retail revenue related taxes as well as increased property tax.

As a result of better than expected hydroelectric generation, and purchase power and fuel costs below the amount included in base rates, we recognized a $5.7 million benefit under the energy recovery mechanism in Washington in the nine months ended September 30th. For the nine months ended September 30, 2010, we recognized a benefit as power supply costs were $1 million below the level included base retail rates in Washington.

For the third quarter of 2011, we recognized a benefit of $1 million under the [earn]. For the third quarter of 2010, we had a benefit as power supply costs were $3.8 million below the level included in base rates included in Washington.

As Scott mentioned, Avista's share of Ecova's net income for the third quarter increased as compared to last year, an earnings contribution of $3.5 million compared to $2.9 million in the third quarter of last year. In the third quarter of 2011, we recorded an adjustment for state sales taxes which had a positive impact on net income of $.7 million. Results for the third quarter of 2010 were positively impacted by $.5 million for a business and occupation tax refunds.

On a year-to-date basis, Avista's share of Ecova's net income was $7 million, an increase from $5.9 million last year. Revenues for year-to-date 2011 have increased 22% as compared to last year and totaled $91 million. The increase in revenues was primarily due to a 19% growth in energy management services and 10% growth in expense management, as well as the acquisition of Loyalton, added approximately $6 million in revenues.

Earnings from our other businesses were slightly negative on a year-to-date basis for both 2011 and 2010. Earnings from METALfx increased to $1.1 millionfor 2011 compared to $.6 million for 2010. Losses on investments were $.6 million for 2011 compared to losses of $.8 million for 2010.

I'd like to talk about liquidity now. As of September 30th, we had $288 million of available liquidity under our $400 million committed line of credit with $97 million of cash borrowings and $15 million of letters of credit outstanding. In October of 2011, we entered into a bonds purchase agreement with certain institutional investors in the private placement market, the purpose of issuing $85 million of 4.45% first mortgage bonds due in 2041. The issuance of the Bonds will occur at closing in December. The net proceeds from the sale of the new bonds will be used to repay a portion of borrowings outstanding under our $400 million committed line of credit.

In connection with the pricing of the bonds, we cash settled interest rate swaps and paid a total of $10.6 million. These swap agreements were entered into during the third quarter of 2011. We issued $21.2 million of common stock in the first half of 2011, including $15.8 million under asaved sales agency agreement. That's not the first half, that's through September 30th. We expect to issue up to $25 million of common stock in 2011 and up to $45 million in 2012 to maintain our capital structure at an appropriate level. We currently have approximately 400,000 shares available to be issued under the sales agency agreement.

We contributed $26 million to the pension plan in 2011, with no further contributions planned for the fourth quarter. We haven't changed our outlook though and we expect to contribute approximately $176 million or $44 million per year to the pension plan in the periods 2012-2015. Our estimate of pension plan contributions this period increased significantly during the third quarter of 2011 from the previous estimate of approximately $110 million due to a decline in the fair value of pension plan assets and a decrease in the discount rate used in determining the benefit obligations as of September 30, 2011.

Based on our results for the first nine months of the year and the forecast for the remainder of the year, we are confirming our earnings guidance for 2011 and as Scott said, expect to be in the upper half of our consolidated and utilities earnings guidance range. 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 in 2011.

We are expecting a benefit under the Energy Recovery Mechanism in 2011 within the 90% customer, 10% company sharing band based on actual results for the first nine months of the year 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 load 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 Ecova to contribute at the high end of 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 diluted share. Avista is initiating its 2012 guidance for consolidated earnings to be in the range of $1.65 to $1.85 per share.

We estimate that our 2012 consolidated earnings guidance range encompasses a return on equity range of approximately 8% to 9% from the high end to the low end of the range. We expect Avista utilities to contribute in the range of $1.51 to $1.66 per diluted share for2012.

As compared to 2011, we expect our 2012 utility earnings to be positively impacted by general rate increases. We expect our 2012 utility earnings to continue to be limited by slow load growth due to a weak economy, a delay in recovering operating expenses and capital investments, as well as increased operating costs included pension and other post retirement benefit costs.

Our range for Avista Utilities encompasses expected variability in power supply costs and the application of the ERM to that power supply cost variability. The midpoint of our utility guidance range does not include any benefit or expense under the ERM. Our outlook for Avista Utilities assumes, among other variables, normal precipitation, temperatures, and hydroelectric generation, as well as the implementation of the Washington general rate case settlement on January 1, 2012.

For 2012, we expect Ecova to contribute in the range of $0.16 to $0.19 per diluted share and our other businesses to be between a break even and a slight loss to $0.02 per diluted share.

There are a number of factors that will effect where we'll be in 2012 related to our earnings guidance range, which did increase from 3% from last year's range. These include temperature affects on our retail load, snow pack conditions, natural gas prices, as well as Washington Commission's decision on our rate case settlement. As we move through the December and January period, we'll know more information about some of these factors and would expect to share that information on our February earnings call. I will now turn the call back over to Jason.

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

Thank you. (Operator Instructions). Your first question comes from the line of Paul Ridzon with KeyBanc. Please proceed.

Good morning, guys.

Hi, Paul.

Is it too early to get any read on the snow pack for next year as we were able to do last year?

Yes, it's too early. The sites are out there's but it's way too early to have any sense of where that will be.

And I guess synergies opportunity to do a put at IQ or Ecova came in and went. What's the next event that could happen?

Next to July, Paul, next July of 2012 is the chance to have our minority partner do their put.

And do they have, is it every year they have an opportunity?

That's the last one, 2012.

And what's the cost of natural gas in your Washington settlement?

Again, at this point, we don't have anything with that. It's considered a black box settlement so we really don't have anything we can talk about.

Right, the power slide piece we actually reset what the base would be which is in the settlement, but the components in that were not outlined or agreed to specifically, so it's a black box.

Okay. Thank you very much.

In regards to hydro, though, I do want to say that we are cautiously optimistic because there was a La Nina predicted again for the Pacific Northwest and La Nina's are good for us. That usually indicates above average, a little bit above average, snow pack, but again with it being so early, we're not going take it to the bank, but we're optimistic and encouraged by that weather report.

And we would expect, as I said at the end of my standard remarks, that we'd expect in February to really update you. We'll have a lot or information then.

Good, thanks again.

(Operator Instructions). Your next question comes from the line of Eric Beaumont with Copia Capital. Please proceed.

Good morning, guys.

Hi, Eric.

Hi, Eric.

Hi, Eric.

Just real quick. You're talking for next year about utility ROE of 8% to 9%. In the past you've talked about that you have 75 bits of structural lag, then on timing it you've got maybe another, you know, 50 to 75 depend on things. Given that we've gotten through some of the rate cases, is looking at the low end, where you're talking you might be at 8%, more driven by expectations of weak and negative load growth combined with the pension? I guess historically you guys have closed the lag as well as you could, I guess that 8% just seems a little bit low to me I guess I'm just wondering what's driving that as being the low end for 2012?

Again, the range that we have, Eric, and I'll just remind you,we have the two components we've talked about for lag are 70 to 90 basis points with respect to lag that we don't want to call permanent lag, but lag that we either by practice, or by statute, have not been able to recover, so that is one portion, and then the other which is more of a timing of recovery of expenses in our capital deployment is 60 to 80 basis points. So that's really the two ranges that we've talked about. Those continue to exist as we continue to deploy the capital, as Scott mentioned, the capital in our system that we believe makes sense to run a safe reliable system, and also that we have continued increases expenses including the pension. That gets us to our range.

Our range encompasses the variability around the ERM and some of the variability around load. So to the extent we had negative temperatures, negative weather, weak hydro, a significant spike in gas prices and those items that went against us, that would put us towards the bottom end of the range whereas the upper end of the range would be the other way. If we had stronger hydro, if we had stronger, colder temperatures in the winter time, warmer temperatures in the summer time, where we can increase our load, that would push us more towards the higher end. So, the range, to get to the low end some negative things would have to happen.

Okay, great. I know that the year is not over, but can you remind us where you're trending on ROE this year?

We really haven't stated what that is. I didn't really think about that, I should have.

No, we can follow up, that's fine. Thanks, guys, appreciate your time.

I show no further questions in the queue. I would now like to call back over to Jason Lang for closing remarks.

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

Wait. I would like to add just so we can close off, we can't really talk outside of it, but we're approximately 9% on a consolidated basis for ROE for 2011 on a year-to-date basis September, so just to give you a sense, to answer Eric's question, we are at the higher end of that range for 2011 where we have on a 12-month ended basis. With that, I'll let Jason turn the call off.

Thank you very much, everybody, have a good day.

Thank you for your participation in today's conference. This concludes the presentation and you may all now disconnect. Good day.