Avista Corp (AVA) 2012 Q3 法說會逐字稿

Welcome to the Avista Corporation Q3 2012 earnings conference call. My name is John and I will be your Operator for today's call. At this time, all participants are in listen only mode. Later we will conduct a question and answer session. Please note that this conference is being recorded.

I will now turn the call over to Mr. Jason Lang. Mr. Lang, you may begin.

Thank you, John, and good morning, everyone. Welcome to Avista's third-quarter 2012 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'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 2011, and our form 10-Q for the second quarter of 2012 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 remain unchanged from those initially reported on our October 23 call. Our consolidated earnings were $0.10 per diluted share for the third quarter of 2012, compared to $0.18 for the third quarter of 2011. On a year to date basis, our consolidated earnings were $1.06 per diluted share for 2012, compared to $1.30 for 2011.

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

Thank you, Jason, and before I start I just want to reach out to all of our folks on the phone that are from the East Coast and, after watching that devastating hurricane hit the East Coast, we -- our thoughts and prayers have certainly been with you, and I hope that you and your family and friends are safe and your property wasn't overly damaged and that you all are on the way to a good recovery. And I know that the industry is working really hard to get all the energy restored on the East Coast, so our thoughts have certainly been with you during this very difficult time.

As we initially reported on our October 23 call, our results for the third quarter and forecast results for the remainder of 2012 are below our expectations. As such, we lowered our consolidated earnings guidance for the year. This was primarily due to weak results at Ecova as well as losses at our other non Utility businesses. We continue to expect our Utility results to be at the lower end of our original guidance for 2012, largely due to retail loads are being lower than we originally anticipated. We're well positioned for the future of our Utility which contributes over 90% of our consolidated earnings. We're implementing certain programs to slow the pace of growth in our operating costs and achieve long term sustainable cost savings. Such measures include evaluating all operating and maintenance activities, re-prioritizing projects, and implementing a voluntary severance program.

At Ecova, revenues are up in 2012 primarily due to acquisitions. We are expecting organic revenue growth of 5% for 2012, compared to organic revenue growth of 13% in 2011. Operating expenses are up due to the addition of employees and other fixed infrastructure to support anticipated higher revenue growth, which did not fully materialize in 2012. Mark is going to provide some more details on Ecova results for 2012 in just a few minutes. To maintain service reliability at our Utility and meet the energy needs of our customers, we continue to make capital investments in generation, transmission, and distribution.

Utility CapEx was $178 million for the first 9 months of 2012 out of a capital budget of $257 million. We expect Utility CapEx to be about $260 million in each of 2013 and 2014. As discussed in our earlier call, we reached a multi party settlement in our Washington general rate case in October, which is pending Washington Commission approval, and we filed electric and natural gas general rate cases in Idaho. We tracked three key economic indicators affecting three district metropolitan areas in our service territory, Spokane, Coeur d'Alene, and Medford. The key indicators are employment change, unemployment rates, and foreclosure rates. On a year-over-year basis, September 2012 employment indicators are positive for all three service areas.

We noted that unemployment rates are lower in all three areas and foreclosure rates have decreased compared to prior periods. Our service area economy has been recovering more slowly than the United States as a whole. And in 2012 we continue to expect economic growth in our service area to be lower as compared to the rest of the nation.

And with that I'll turn the call over to Mark.

Thank you, Scott, and good morning, everyone. For the third quarter of 2012, Utility earnings increased slightly from 2011 contributing $0.13 per diluted share in both periods. On a year to date basis, Utility earnings contributed $1.10 per share, a decrease from $1.18 in 2011. Cooling degree days in Spokane for the first nine months of 2012 were 24% above historical average and were 26% above the comparable period in 2011. Heating degree days in Spokane for the first nine months were close to historical average, but decreased 9% as compared to the first nine months of 2011. For the third quarter of 2012 we recognized a benefit of $0.8 million under the Energy Recovery Mechanism, compared to $1 million for the third quarter of 2011.

For the nine months ended, we recognized a benefit of $5.9 million under the ERM, compared to $5.7 million for the same period in 2011. We continue to expect to benefit under the ERM for the full year within the 90/10 sharing band. This is primarily due to natural gas fuel prices below the amount included in base rates. Ecova's year to date revenues increased $24.5 million as compared to the first nine months of 2011, and totaled $115.7 million. The acquisitions of Prenova and LPB added $18 million to operating revenues for the first nine months of 2012.

Although revenues increased from 2011, organic growth in Ecova's expense and data management services was slower than expected, and there was delayed implementation of new customers in Ecova's energy management services. The $36.5 million increase in total operating expenses for Ecova primarily reflects increased costs necessary to support ongoing and future business growth, as well as to support the increased revenue volume obtained through the acquisitions. Included in the increase was $1.5 million in integration and transaction related costs during the first quarter, and a $4.4 million increase in depreciation and amortization for the first nine months of 2012 due to intangibles and other long lived assets recorded in connection with the acquisitions.

In July, Ecova entered into a new five year $125 million committed line of credit agreement with various financial institutions, replacing its $60 million committed line of credit. As of September 2012, Ecova had $58 million of borrowings outstanding under this agreement. Net loss from other businesses was $2.5 million for the third quarter, and $3.8 million for the nine months ended September 30. The decline in results from other businesses for both periods was primarily due to losses on investments of $3 million, including $1.7 million impairment of our investment in a fuel cell business, and a $0.7 million write off of our investment in a solar energy company.

Also there were increased litigation costs for the remaining contracts in previous operations of Avista energy. Earnings from METALfx were $1.1 million for each of the nine months ended September 30, 2012 and 2011. As of September 30, we had $291 million of available liquidity under our $400 million committed line of credit, with $82 million of cash borrowings, and $27 million in letters of credit outstanding. In August 2012 we entered into two sales agency agreements under which we will be able to sell shares of our common stock from time to time. In the third quarter of 2012, we sold approximately 900,000 shares for a total of $23.7 million.

As of September 30, we had $1.8 million -- 1.8 million shares available to be issued under these programs -- under these agreements. For the first nine months, we have issued $28.7 million of common stock including the issuances under the sales agency agreements. We do not expect to issue any further common stock under such agreements in 2012. However, we do expect to issue up to $50 million of common stock in 2013 in order to maintain our capital structure at an appropriate level for our business, the additional shares expected to be issued under the sales agency agreement, as well as dividend reinvestment and direct stock purchase plan and employee plans.

As we reported on our October 23 call, we have lowered our 2012 consolidated earnings guidance to a range of $1.50 to $1.60 per diluted share. Our expectations for Avista Utilities earnings contribution is a range of $1.51 to $1.58 per diluted share for 2012, which includes a benefit under the Energy Recovery Mechanism within the 90/10 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 and temperatures for the remainder of the year.

Certain programs, including a voluntary severance program, are being implemented at Avista Utilities in 2012 to achieve long term sustainable cost savings. The up front costs of implementing such programs will be recorded in the fourth quarter of 2012 but are not known at this time and are not included in our 2012 earnings guidance. We expect Ecova to contribute in the range of 5.7 -- $0.05 to $0.07 per diluted share in 2012. We expect operating revenues to be in the range of $155 million to $165 million, with approximately 56% derived from expense and data management services, and 44% from energy management services. We expect other businesses to be between a loss of $0.05 to $0.06 per diluted share in 2012.

As we reported in our October 23 call, we initiated 2013 guidance for consolidated earnings to be in the range of $1.70 to $1.90 per diluted share. We estimate that our 2013 consolidated earnings guidance range encompasses a return on equity of approximately 8.25% to 9%. We expect Avista Utilities to contribute in the range of $1.62 to $1.76 per diluted share for 2013. As compared to 2012, we expect our Utility earnings to be positively impacted by general rate increases, and we expect these earnings to continue to be limited by slow load growth due to the economy, the delay in recovery of operating expenses and capital investments, as well as increased operating costs, including pension and other post retirement benefit costs.

As such, we need to implement certain measures to manage our operating costs, and these measures will include evaluating all O&M activities, re-prioritizing projects, and the implementation of a voluntary severance program. Based on our current evaluations, we have identified sufficient opportunities to achieve our expected range. Our range for Avista Utilities encompasses an 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 subject to approval of the Washington Commission on January 1, 2013.

For 2013 we expect Ecova to contribute in the range of $0.10 to $0.14 per diluted share. We expect operating revenues to be in the range of $1.70 -- $170 million to $190 million, with approximately 51% derived from expense and data management services, 45% from energy management services, and 4% from new products. We expect approximately 0.33 of earnings to incur in the first half of 2013, and 0.66 to incur during the second half of the year. We expect other businesses to be between a break even and a loss of $0.02 per diluted share.

So I'll now turn the call back over to Jason.

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

Thank you. We will now begin the question and answer session.

(Operator Instructions)

Brian Russo, Ladenburg.

Good morning.

On the previous call, you guys had guided to roughly 3% to 4% of operating expense growth in '13 over '12. Is that still the trend we should expect?

Yes, that hasn't changed.

Okay, and on that topic, a lot of your other peer utilities, and utilities in general, attempt to match operating expense growth or O&M expense growth with sales growth; or try to maintain it flat to help support the earned returns. And I'm just curious, why are you experiencing this type of operating expense growth? Can you break it down a bit? Is it an aging work force or is it cost inflation? Just want to get a sense of what makes you different from some of your peers.

I don't know significantly -- I can't really comment on how everybody's costs. We have typically suggested that some of the drivers in our costs is, yes, we do have increases in our pension and post-retirement medical costs. A lot of that is primarily due to a discount rate on -- with interest expense -- or interest rates going down. That increases the discount rate on our defined benefit plan and our post-retirement plans, that causes cost increases for us.

We continue to evaluate all the different activities we're doing, and we look at the maintenance projects -- and we have major maintenance projects that we need to continue to do to maintain our facilities -- and we continue to believe that deferring that. Some companies may -- I don't know, I can't speak for other companies -- may choose to defer maintenance on certain of their plants and have expectations that, well, if it doesn't break, we're okay.

We try to be more proactive there, and maintain our plants on a consistent basis to have the strong reliability that we think makes sense for our customers.

And Brian, I would also say that probably a lot of utilities on those major maintenance projects have trackers or some other mechanism where it's not affecting them on an annual basis. And as you know, in Washington, we don't have those kind of trackers, so when we have major maintenance, it affects our own end budgets.

Okay, great.

And the consolidated ROE guidance in '13 of 8.25% to 9% -- is that higher or lower than your Utility earned return? I mean, is the consolidated being helped by Ecova or is it being hurt by Ecova?

Probably slightly down. It's probably -- the Utility is probably slightly higher, but again, the Utility is such a dominant portion of our overall earnings when we look at $0.10 to $0.14 for Ecova guidance versus $1.70 to $1.90, it's so much more Utility. So it really more approximates the Utility. It might be slightly impacted negatively by Ecova, but not significantly, on a complete ROE basis.

Okay, and load growth, still 0.7% in '13 over '12?

Yes, that's it; we're at the bottom end of our expectations and, yes, it's approximately 0.7%.

Okay, and then lastly on the ERM, I understand that the guidance for '13 assumes a midpoint of zero. And I'm just wondering -- assuming hydro, normal hydro conditions next year, and given where fuel -- gas prices are now, arguably in a trough, and the recent reset of your fuel costs. I mean it's less likely for you guys to benefit on the up side, excluding any favorable hydro conditions?

I don't know, gas prices can go up or down. I don't think we want to -- we have it forecast at, again, at the midpoint with no expectation. If gas prices rise, yes, that does cause some pressure on us. If gas prices decline over the course of time, and depending on hydro comes off -- all those factors, those are just common risk force that we always have, Brian, and we have them still.

I wouldn't want to comment -- as we look forward, if gas prices do go up, that can negatively impact us, yes. And if they come down slightly or stabilize, then it doesn't hurt us. And a lot of it -- and the hydro, as you know, we always have that risk, whether it's going to be a good hydro year or a bad hydro year; so in a bad hydro year that's negative.

And Brian, we'll have a better insight in February, and obviously in May. So as we get more information, we'll certainly share with you our insights, and how we think the ERM's going to turn out. We've done that in the past, and we'll continue to do that as we get better information.

Could you share with us what gas price is embedded in the fuel factor currently -- or for 2013? Or does it get updated again?

Brian, this is Kelly.

We obviously did update recently in the rate case for the most recent estimates of fuel prices for 2013. I don't have that number here in front of me.

All right, thank you.

Michael Klein, Sidoti & Company.

Good morning.

The lower usage at certain industrial customers that you cited in the press release -- is it fair to characterize the local environment as getting worse? Or are things just staying relatively flat and not showing much of an improvement?

I would say, Mike, it's staying relatively flat; and again, those two large industrials, one was a mining issue that had to do with safety violations and we expect that load to be coming back and it's not fully back but it's coming back. And another was a large plant that had some problems with some motors and equipment that is now trying to get that resolved and should have it resolved by --

It already is.

It already is resolved, Dennis just said. So, it's primarily just due to an economy that has not quite recovered yet.

Okay, okay.

And at Ecova, with the guidance -- the new products that you're estimating will constitute about 4% of 2013 sales. What exactly are these new products? And is the margin profile closer to the energy management business?

The main new product is one we're calling Real Estate Owned, and it's a business that we're working with Fannie and Freddie on, as you know, and other banks. There's a lot of foreclosures that happen across the country, and we're working with them to help manage their real estate issues around that. Also, the expense and data management platforms and performance that we're trying to bring into play are also another product that we're working on. And yes, as far as a margin is concerned, there is recurring revenue around those.

It's similar to expense and data management. It's really a bill processing or a processing service that we provide for forced closure in the housing industry. So it's more similar to our expense and data management.

So it's not a one time consulting issue; it's a recurring revenue business.

Okay, so on the margin profile, it's towards the legacy businesses that has had a historical lower margin. Is that correct?

That's what we would expect, yes.

Okay. Lastly, on the Utility CapEx of about $260 million in 2013 and 2014 -- how much is -- how much does your routine maintenance CapEx typically run? I'm just trying to see how much could be delayed as you explore opportunities to re-prioritize projects and delay costs here, or postpone costs?

Well, Mike, what we've done is we've -- that's included in our expectations. We look at all of our projects, and those projects end up being significantly more than what we have. And we have a process that narrows that down to a level that includes projects that we think need to be made from a capital perspective on maintenance of our facilities. And so the $268 million really is our estimation of what should be done to maintain the quality of our system, and a lot of it is programmatic. Some of it is growth capital. I know we have low growth amounts from an overall perspective, but some of those dollars -- 10% to 15% of our CapEx -- is growth capital for new customers.

And the rest is system capital that we believe needs to be made. And really, if we changed it, given where interest rates go, if you moved out a significant amount, let's say $50 million of capital, it really doesn't have a significant impact to earnings on a current basis, because our capital is very long-lived capital, and we have historically had very good success in getting capital additions in to our rate base as we go. It's not an issue there, but it's just long-lived assets and low interest rates, it doesn't have that big of impact on earnings. So we believe that in the current rate environment, it is prudent to continue to deploy that capital for our system.

Okay, thanks a lot., I'll hop back in the queue.

(Operator Instructions)

Jim von Riesemann, UBS.

Morning.

Hey, question -- circling back to this equity comment you made before, can you just refresh our memories as to how much you had under this continuous equity offering program at the end of the Q2, and then give me those numbers again?

Well, we issued in the -- in the third quarter we came out and said that we -- I'm just looking for the number for what we had issued. The difference is what we had in Q2, I don't have the number right here in front of me, I'll --

What I'm trying to get at is, how much of this $50 million that you said that you need next year is a delay from what you might have cleaned up in the fourth quarter versus incremental?

Oh, about $10 million to $15 million, Jim. We decided at this point that we're going to not issue in the fourth quarter and we just added about $10 million to $15 million into 2013. And that's incorporated and included in the $50 million.

That includes the $5 million or so from normal internal plans, right?

Yes.

And then a second question is -- turning now to acting like a fixed income analyst, but can you talk a little bit about cash from operations outlook? I know you've given some earnings guidance and some color around that, but can you talk about CFO in '13 and '14, and what you're seeing?

Well, again, we continue to -- what I've said is, we continue to grow our rate base. I've looked at it, we have strong cash from operations. I don't have the 10-Q in front of me, but we issue that every year. We support most of our capital budget through our cash from operations, and then really we have to fund our dividend and any other contributions for subsidiary capital through raising capital. So our cash flow from operations for 2012 for the nine months ended is approximately $257 million, and we'll file our 10-Q later this week. But it's about $257 million in 2012, compared to $240 million in 2011 for the nine months ended.

So again, we have very strong cash flow from our operations that really supports most of our CapEx. And then we have to fund our dividend and any other, again, contributions to subsidiaries.

How do you think about the dividend and the dividend profile going forward, Scott? And what are you recommending to the Board these days?

Again, our philosophy has always been we're going to pay the industry average, which is around 60% to 70% of a dividend payout ratio. We're about smack dab in the middle there right now, and I expect the Board to continue with that philosophy going forward, Jim.

Okay, great. Thanks, see you in Arizona.

Timothy Yee, KeyBanc.

Good morning guys. Just a few questions on Ecova. So, you mentioned this year that the growth rate now is 5%, versus your prior estimate at about 13% for next year. And in the press release I think you mentioned back to double digit growth? Is there a target for that? Or is that above or below the 13% you had expected this year?

We'll look about 10%. I guess if you look at double digits, on our prior call someone said that could be 10% to 99%. Well, it's -- we're looking at 10% growth for organic growth. And we think that's good solid organic growth for that business.

Okay, and then could you explain the timing of the Ecova earnings? The one-third in the first half, and the two-thirds in the second half?

We just looked at -- again, a lot of it is managing for the legacy business, the expense and data management business -- that's managing Utility spend primarily. So they also have lease and telecom and other products, but it's primarily Utility spend. Well, that tends to be more heavily weighted to the second half of the year. So you get a winter quarter in the fourth quarter, and a good strong summer quarter in the third quarter, there's more energy spend and more opportunity to manage bills there. And then also, with the higher energy spend, there's more opportunity in our building management and realtime building management to generate savings in those businesses when you have higher energy spend quarters.

So it just is more heavily weighted, and we haven't previously given the seasonality; we thought that it made sense to do that, because we didn't want to get to six months and have it look like, oh gee, we're only at about a third of what we expect for the year and have concerns again. That is what we expect, and that's just a normal seasonality for this business.

Great, okay.

And then, last question -- on the October call, Scott, I think you mentioned that you were continuing to look for ways to get value out of Ecova, possibly sale or future IPO. Has the thinking there changed on the business, versus continuing to grow it organically?

No.

No?

No.

So, when was the original thinking of possibly monetizing it?

Well, we've always talked about in terms of evaluating who is the best parent for this business long term, and how do we create the most shareholder value with Ecova? And that's really never changed. We've always been thinking about that and the idea of whether we eventually do an IPO or a sale is something that we've always contemplated and we'll continue to do so when we feel the timing is right.

Okay. Thank you very much.

We have no further questions at this time. Mr. Lang, do you have any closing remarks?

Yes, we appreciate your time this morning, and thank you for your interest in our Company. Have a great day.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for the participating, you may now disconnect.