Avista Corp (AVA) 2011 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the fourth-quarter 2011 Avista Corporation earnings conference call. My name is Keith and I will be your operator for today. At this time all participants are in a listen-only mode. Later on, we will have a question-and-answer session. (Operator Instructions) As a reminder today's conference is being recorded for replay purposes. And I would now like to turn the conference over to your host for today, Mr. Jason Lang, Investor Relations Manager. Please go ahead Sir.

Thanks Keith and good morning everyone. Welcome to Avista's fourth-quarter and fiscal year 2011 earnings conference call. Our earnings were released pre-market this morning, and a 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 which could cause actual results to differ materially from those discussed in today's call, please refer to our form 10K for 2010 and form 10-Q for the third quarter of 2011, which are available on our website. To begin this presentation, I'd like to recap the financial results presented in today's press release. Our consolidated earnings were $1.72 per diluted share for 2011, compared to $1.65 for 2010. On a quarterly basis, our consolidated earnings were $0.42 per diluted share for the fourth quarter of 2011, compared to $0.45 for the fourth quarter of 2010. Now, I will turn the discussion over to Scott Morris.

Thank you, Jason and good morning everyone. Avista had a solid year in 2011 with our consolidated earnings per share in the upper half of our guidance range. The improvement reflects higher earnings at Avista Utilities and Ecova, our primary unregulated subsidiary, and at decrease in a net loss from our other businesses. Above normal snowpack last winter and accrual in Wet Spring produced excellent river runoff conditions in 2011. This resulted in one of the best hydroelectric generation years on record. The improvement in our 2011 utility results was primarily due to colder weather in the first quarter as well as general rate increases.

As you recall, the first quarter of 2010 was one of the warmest January to March periods on record in our service territory. To maintain service reliability and meet the energy needs of our customers, we expect to continue to make significant capital investments in generation transmission and distribution systems. Utility CapEx was $240 million for 2011, and we expect capital expenditures to be about $250 million in each of 2012 and 2013. The timely recovery of capital investments in operating costs remains one of our biggest challenges. We reached settlements in our Idaho and Washington general rate cases during 2011, which we believe provided a reasonable outcome for our customers and our shareholders.

In Idaho, new rates went into effect on October 1. As part of the settlement, we agreed not to seek a change in base electric or natural gas rates that would become effective prior to April 1, 2013 by means of a general rate-case filing. Based on this agreement and knowing that rate cases in Idaho can take up to seven months to complete, we are planning to file a general rate case in Idaho in the second half of 2012. In Washington, the settlement was approved by the Washington Commission in December and new rates into effect on January 1. As agreed to in the settlement, base electric rates for our Washington customers increased by an average of 4.6%, which is designed to increase annual revenues by $20 million. Base natural gas rates for our Washington customers increased by an average of 2.4% which is designed to increase annual revenues by about $4 million. As part of the settlement agreement, we agreed not to file a general rate case in Washington prior to April 1, 2012. And we are planning to file a general rate case in Washington in the second quarter of 2012.

Economic growth in the region we serve has slowed significantly since its peaked five years ago. Yet, we continue to experience customer growth. We have three distinct Metropolitan areas in our service areas -- Spokane, Coeur d'Alene, Idaho and Portland, Oregon. And we're tracking three separate economic indicators which impact our business. They are employment change, unemployment rates, and foreclosure rates. The December 2011 employment indicators are negative except for Medford. We've noted that unemployment rates are lower in all three areas and foreclosure rates have decreased compared to earlier periods. Compared to the rest of the country, our economy is probably weaker than the national average, and we expect our economy to under-perform compared to the US in 2012.

Ecova continues to expand its business from a focus on expense management to delivery of total energy and sustainability management services. In November, Ecova completed the acquisition of Purnova, an Atlanta-based energy management company. And in January, the acquisition of LPB Energy Management, a Dallas-based energy management company was completed. A total net cash paid for these acquisitions was approximately $80 million. While we do not expect these acquisitions to have an impact on 2012 earnings, they increase Ecova's market share and they allow Ecova to offer its clients a broader range of services, leading to potential future earnings growth. We are pleased that Ecova's earnings per share contribution increased 22% as compared to 2010.

On February 3, the Board of Directors raised the quarterly common stock dividend by 5% to $0.29 per share. The dividend increase marks the 10th consecutive year the Board has raised the dividend for our shareholders. And I believe it demonstrates the Board's confidence in the financial strength of our company. Now I'll turn this presentation over to Mark Thies.

Thank you, Scott and good morning everyone. For 2011 utility earnings contributed $1.56 per diluted share, an increase of $0.01 from $1.55 last year, primarily as a result of increased gross margin. Net income from our utility operations increased $4.2 million in 2011 as compared to 2010. An increase in earnings per share contribution was limited by dilution from common stock issuances. Our utility earnings for 2011 were positively impacted by an increase in gross margins, primarily due to higher retail loads caused by colder weather in during the first quarter and power supply costs below the amount included in base retail 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 taxes. For the fourth quarter of 2011, our utility operations contributed $0.38 per diluted share compared to $0.45 in 2010. The decrease in the quarterly net income was primarily due to a decrease in gross margins as well as an increase in depreciation and amortization, and taxes other than income taxes. The decrease in gross margin was primarily due to the timing of the recognition of the energy recovery mechanism in Washington. As we recognize most of the benefit under the ERM in the first nine months of 2011 and in the fourth quarter of 2011, we recognize just $0.7 million under the energy recovery mechanism.

As part of the rate case settlement -- in 2010 there were no deferrals under the ERM and allowable costs for the Lancaster plant were limited to $6.8 million. But during the fourth quarter of 2010, our power supply costs were $8.4 million below the level included in base retail rates in Washington. As a result of better than expected hydroelectric generation and purchase power and natural gas fuel costs below the amount included in base rates, we recognized a $6.4 million of benefit under the energy recovery mechanism in Washington in 2011. For 2010, our power supply costs were $7.1 million below the level included in base rates in Washington.

Avista's share of Ecova net income for 2011 increased as compared to last year, as Scott mentioned, with an earnings contribution of $9.7 million compared to $7.4 million in the prior year. On a quarterly basis, Avista's share of Ecova's net income was $2.7 million for the fourth quarter, an increase from $1.5 million last year. Revenues for 2011 increased $35.8 million as compared to last year and totaled $138 million. Ecova's organic revenue growth was approximately 13% from 2010 to 2011. In December of 2011, Ecova expanded its committed line of credit to $60 million from $40 million. Ecova may further expand this facility in 2012. There were $35 million of borrowings outstanding under Ecova's credit agreement at December 31.

The $80 million of total net cash paid for the November 2011 acquisition of Purnova and the January 2012 acquisition of LPB Energy Management was funded by Ecova through borrowings under its committed credit agreement, a $20 million equity fusion from certain existing shareholders and available cash. Earnings from our other businesses were slightly negative for 2011, but the positive side --earnings from METALfx, a manufacturing business in California was $1.4 million up from the $0.8 million in 2010. Our losses on investments were $0.5 million in '11 compared to $3.3 million in 2010. And the loss for 2010 included a $2.2 million impairment of our investment in the fuel cell business.

As of December 31, we had $310 million of available liquidity under our $400 million committed line of credit with $61 million of cash borrowings and $29 million of letters of credit outstanding. In December, this facility was amended to extend the expiration date to February 2017 and to improve the pricing terms. You will recall, we first entered into this agreement in February of 2011. In December 2011, we also issued $85 million of 4.45% first mortgage bonds due in 2041 with certain institutional investors in a private placement market. The net proceeds from the sale of bonds were used to repay a portion of borrowings outstanding under our $400 million credit agreement. We expect to issue up to $100 million of long-term debt in 2012. Also in 2011, we issued $26.5 million of common stock, including $19.5 million under our sales agency agreement.

We expect to issue up to $45 million of common stock in 2012 to maintain an appropriate capital structure. We have about 200,000 shares available to be issued under the current sales agency agreement, and we expect to expand this agreement for a significant portion of our 2012 common stock issuances. We contributed $26 million to our pension plan, and the pension plan funding deficit increased significantly in 2011, primarily due to a decrease in the discount rate used in determining the benefit obligation. We expect to contribute a total of $176 million or $44 million per year to the pension plan in the period 2012 through 2015.

We are confirming our 2012 guidance for consolidated earnings to be the range of $1.65 to $1.85 per diluted share. We expect Avista Utilities to contribute in the range of $1.51 to $1.66 per diluted share for 2012. We expect our 2012 utility earnings to be positively impacted by the general rate increases, and we expect them to be limited by slow-load growth due to weak economy, as Scott mentioned, a delay in the recovery of capital investment and operating expenses, as well as increased operating costs, including pensions and other post retirement benefit costs. Our range for Avista utilities encompasses expected variability in power supply costs in the application of the ERM to that variability.

The midpoint of our utility guidance range does not include any benefit or expense under the ERM. However, we are expecting a benefit under the ERM in 2012 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 purchase power and natural gas fuel prices. Our outlook for Avista utilities assumes, among other variables, normal precipitation, temperatures in hydroelectric generation. For 2012, we expect to Ecova to contribute in the range of $0.16-$0.19 per diluted share and other businesses to be between a break-even and a loss of $0.02 per diluted share. I will now turn the call back over to Jason.

Thanks Mark. Keith at this time would like to open the call up for questions.

(Operator Instructions)

Paul Ridzon, KeyBanc.

Can we imply from your commentary about your 90/10 band that you would expect to be in the upper half of the utility earnings?

I think what we say is that we expect to be in the 90/10. And remember the sharing band. The first one's $4 million/100% company. The next band is the 75/25 is $6 million. So the Company would get $1.5 million and the customers would get $4.5 million. And above that is the 90/10. So if the look at that you can imply that we would make $5.5 million. And then you can calculate where that puts us in our range.

You issue $100 million of LTD -- long-term debt -- in '12? What is the use of that?

Once again, the fund -- we continue to have expectations of about $250 million of CapEx. And so if you look at it, we are going to have an appropriate balance sheet. We are investing in utility plants. So we aggregate that on our short-term facility for some time, but then we go out and issue long-term debt to turn that debt out. And so this is just a normal course to help fund our CapEx.

That truly is new money? It is not going to be to retire out of that long-term debt?

No, the only long-term debt -- we have one small piece, about $7 million, that is retiring in 2012. So it is really money to fund our CapEx.

And then, lastly, it looks like you changed the way you recognize revenues at Ecova. Is that 13% revenue growth, apples to apples?

No. That's why we said the 13% is the organic, because we were up. The revenue growth was $35 million-plus on $100 million. And I'm rounding little bit there -- was $102 million. So you would have thought that the revenue growth was 35%, but we had a couple of things -- we had the acquisition of Loyalton. We had one month of the acquisition of Prenova. We had the acquisition of Loyalton in the prior year. And then we had the accounting change that grossed up the revenues and the expenses -- really not an impact to the bottom line. So we wanted to make sure that we were specific on the organic growth, which is still strong -- double-digit organic growth we feel really positive about. And that's why we said the organic growth was 13% -- to show you the specific growth in the Business year-over-year.

And the accounting changes -- was that $9.2 million?

Yes.

Brian Russo, Ladenburg Thalmann.

Just to clarify on the guidance -- if you are assuming you're going to be in the 90/10 ERM, that would imply $0.06 to $0.07 of upside, relative to the midpoint of your utility guidance. Is there a bias to the upper end of that guidance? Or are there operating cost pressures that are partially, if not all, mitigating the positive ERM as it stands today?

No. What we say is, the midpoint of our guidance includes zero ERM. So generally, when we provide our guidance, unless we tell you directionally where we are going to be, we generally look more towards the middle in our guidance. And the middle, having zero ERM, you would then add the expectation of where we expect to be in the ERM. I don't think we are looking at it to offset other pressures. We would need to tell you what those other pressures are.

So you are implying you are at the high end of your utility guidance, all else equal?

I don't say that. I just say -- here's what it is, and then you add it on.

Okay.

But it is semantics.

The recent Ecova acquisitions of $80 million in cash, and then $20 million of equity infusion. Does that change Avista's net ownership of Ecova? Or is that steady at 79.2% or something?

It's steady, Brian. No change.

What type of sales growth should we assume this year?

Again, for Ecova or for the utility?

For the utility.

Utility, again -- as Scott mentioned, we expect it to be a continued weak economy. And what we have said is, we may grow about a 1% growth rate and customers. So we are still growing. But it is not significant. It is about 1% on both natural gas and electric.

And are you able to quantify what the fuel factor is, embedded in rates that allows you to benefit under the ERM, primarily in the fourth quarter or the second half of the year when you run your fossil fuel generation more?

Hello -- this is Kelly Norwood.

I do not have the specific numbers. But I can tell you that following the conclusion of the Washington rate case, natural gas prices continued to decline. And that's a large part of what's driven us to the positive side of the ERM.

And what can we assume is an appropriate cap structure for you guys, given the debt that you are raising in '12, as well as the additional equity? Is 46% a good equity rate layer? Or should it be more like 48%?

As it goes over time -- in that range is probably accurate. I don't know. It depends on the timing of when we raise our number, when we raise the equity throughout the year. So the average may be to the lower end, but the ending could be higher, because we're raising it throughout the year. So just depends on, are you doing average equity? We're probably in that range of 46% to 48%.

And then, lastly, how would you characterize the current water supply levels or Hydro expectations for this year?

This is Dennis.

As of Monday, the Northwest River Forecast Center had both the Clark Fork and the Spokane Rivers forecasted at about 91%. That is a forecast of water supply for the April through September timeframe. So, nothing like last year, but still reasonably okay.

(Operator Instructions)

Michael Klein, Sidoti.

Can you just clarify? You got a $6.4 million benefit of the ERM, and there was $12.9 million deferred for future benefit? What exactly is that deferred amount?

This is Kelly Norwood.

During 2011, we had a benefit under the ERM for shareholders. But anything beyond the $10 million -- actually $4.5 million of the difference between $4 million and $10 million, 75% gets deferred for customers. And anything beyond $10 million, 90% gets deferred for customers. And we set aside roughly $12.5 million during 2011. So that is on our balance sheet. And at some point that will be passed back to Washington customers.

I just want to make sure -- when we look at 2012 earnings at Ecova -- so the only additions from where we ended the year are going to be Prenova and LPB Energy? Is that correct?

Those were two acquisitions. We made Prenova in November and LPB in January of this year.

Right. When we look at what was included in earnings when we ended in the fourth quarter, versus what is to be expected on top of that in 2012 -- those are the two additions?

Yes, but we have said with both of those additions, we don't expect them to add to 2012 earnings just because of initial costs of the transaction and the integration of those companies. But we do expect them to allow us to have continued growth beyond that, in 2013 and beyond. We also expect to continue our organic growth, though, at that Business.

And can you just characterize in the guidance -- flat to a loss of $0.02 in the other businesses? Can you just characterize why that might be down for the year?

Some of those funds have had slight losses over the last several years. So we're just not going to come out with -- we have to put over a little bit of a range out there. And we've got some certain corporate overhead, certain costs that don't run through our utility that get charged down there. So we always start off the year with a slight negative. But then METALfx continues to do a great job in growing their company and growing their earnings. So for me, a couple of cents -- it is not a big deal. So we just have that range.

Eric Beaumont, Copia Capital.

I appreciate you giving all the information. When you say you going to be in the upper end in the ERM -- I know this feels like [ask] over here but let's just make sure. With Hydro being at 91% -- that may not push their gas prices going down help, and obviously, you have a presumption that's having a little bit extra because you're talking about lower customer demand. So you will have a little bit extra for the sale. If we think through -- if things get stronger, you have that natural buoy there. As long as Hydro doesn't worsen significantly or gas prices do not spike, you have that natural balancing in there? Is that fair?

No, not necessarily. Having 90% Hydro from a water basis or a snowpack basis -- we can still have normal Hydro. A lot of it really depends on how it melts off. And that is every year. So if it gets hotter than blazes early and it all melts off early, that could be a bad or poor Hydro year. On the other hand, like last year, in 2011, a long cool Spring and a slow melt, as Scott said, we had one of the best hydroelectric years ever. So somewhere in between is normal.

But we can still have normal Hydro with the snowpack levels as they are. From a load perspective, we include in our estimates where the forecast of load is. So that lower growth, that 1% customer growth in the economy, really does not -- it is incorporated into our expectations. Any change -- if we have lower load, then that would negatively impact us. And gas prices -- as they have stayed low, that is a positive impact. If they go up, that is a negative impact. So I don't think it is as much the economy. It is changes to what our estimates are.

There are no other questions. I'd like to turn our conference back over to Mr. Lang for closing comments.

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 that concludes today's conference. Thank you for joining us. Have a great rest of the day. Goodbye.