Avista Corp (AVA) 2012 Q4 法說會逐字稿

Welcome to the Avista Corporation fourth-quarter 2012 earnings conference call. My name is Ellen and I will be your operator for today's call. At this time, all participants are in a 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 Jason Lang, Investor Relations Manager. Mr. Lang, you may begin.

Thank you, Ellen. Good morning, everyone. Welcome to Avista's fourth-quarter and fiscal year 2012 earnings conference call. Our earnings were released premarket this morning and the release is available on our website at AvistaCorp.com.

Joining me this morning are Avista Corporation Chairman of the Board and President and CEO, Scott Morris; Senior Vice President and CFO, Mark Theis; 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 10-K for 2011 and our Form 10-Q for the third quarter of 2012, 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 $1.32 per diluted share for 2012 compared to $1.72 for 2011. On a quarterly basis, our consolidated earnings were $0.26 per diluted share for the fourth quarter of 2012 compared to $0.42 for 2011.

Now I will turn the discussion over to Scott Morris.

Thank you, Jason, and good morning, everyone. 2012 was challenging for Avista. Our consolidated earnings decreased significantly from the prior year and were below our expectations, reflecting underperformance in each of our business segments. However, and I would really like to emphasize this, that we believe that we are well-positioned for significant improvement in our 2013 consolidated results.

Today we are confirming our consolidated earnings guidance range of $1.70 to $1.90 per diluted share and on February 8, the Board of Directors raised the quarterly common stock dividend for the 11th consecutive year. The dividend increased by 5% to $0.305 per share and this demonstrates the Board's continued confidence in the financial strength of our Company.

The decrease in our utility earnings was primarily due to warmer weather in the first and fourth quarters, which decreased retail revenues, expenses related to our voluntary severance incentive program, and continued slow load growth. We are taking steps to curtail the growth of our operating costs and we are on track to achieve our initial cost reduction goals for 2013.

We have evaluated operating and maintenance expenses. We've re-prioritized projects and we have implemented a voluntary severance incentive program in the fourth quarter of 2012.

Weaker than expected results from Ecova, our primary unregulated business, and losses from other non-utility businesses further dampened our consolidated results for the year. Ecova had a very difficult year in 2012. Revenues were up in 2012 due to acquisitions. However, operating expenses increased as we added employees and other fixed infrastructure to support anticipated higher revenue growth which did not fully materialize in 2012.

Mark will provide more details on Ecova's results for 2012 in a few minutes. With forecasted revenue growth in process and efficiency improvements, we expect Ecova's performance to improve significantly in 2013.

To maintain service reliability at our utility and meet the energy needs of our customers, we continue to make significant capital investments in generation transmission and distribution systems. Utility CapEx was $271 million for 2012 and we expect utility CapEx to be about $260 million in each of 2013 and 2014.

The Washington Commission approved our multi-party general rate settlement in December and new rates went into effect on January 1. The settlement also provides for rate increases in January of 2014.

This month we reached a settlement in our Idaho general rate case that would provide for an increase in April and additional rate increases effective in October of 2013. The Idaho settlement is subject to approval by the Idaho Commission.

The resolution of the Washington and Idaho general rate cases together with our cost management initiatives currently in place eliminate the majority of regulatory lag we have been experiencing related to utility costs and investments that are recoverable for rate making purposes. In both settlements we've agreed to no further general rate increases prior to January 1 of 2015.

Our service area economy has been recovering slower than the national -- than the nation as a whole and we do expect that this trend is going to continue in 2013.

We are focused on discovering new ways to accelerate growth for Avista within and adjacent to our core utility business. We are planning to spend $2 million to $3 million in 2013 exploring opportunities to develop new markets and ways for customers to use electricity and natural gas for commercial productivity and transportation. We may also make other targeted investments that will help us gain strategic insights to build new growth platforms.

Looking forward, we anticipate long-term earnings growth of 4% to 5%. We expect significant improvement in our 2013 earnings driven by recent rate case settlements, our focus on containing the growth our utility operating costs as well as improved efficiencies and forecasted revenue growth at Ecova.

Now I would like to turn this presentation over to Mark Theis.

Thank you, Scott. Good morning, everyone. For the fourth quarter of 2012, our utility decreased -- their earnings decreased contributing $0.28 in 2012 compared to $0.38 in 2011 per diluted share. This decrease was due in part to the $7.3 million of costs related to our voluntary severance program which reduced earnings by approximately $0.08 per share and we also estimate that utility earnings reduced by $0.10 per diluted share by warmer weather in the fourth quarter. These declines were offset partially by other factors, primarily general rate increases, which increased earnings by $0.08 per diluted share.

For the full year 2012, utility earnings contributed $1.38 a share, a decrease of $0.18 from $1.56 a share in 2011. Our retail loads were lower during the first and fourth quarters of the year as a result of warmer weather and we have estimated that the variation in weather reduced earnings by $0.18 per diluted share in 2012 as compared to 2011. In a normal year we would expect that that increase is about $0.05 to $0.10 a share on a weather-related increase for a normal volatility.

Other factors with the most significant being general rate increases partially offset by increases in operating expenses, depreciation and amortization, and interest expense had a net positive income impact of $0.08 per share in 2012 as compared to 2011.

On Ecova for the fourth quarter, their earnings decreased contributing $0.01 to share as compared to $0.04 a share in 2011. For the full year, Ecova's earnings were $0.03 a share, a significant decrease from $0.16 a share in 2011. Their annual revenues increased $17.8 million in 2012 and totaled $155.7 million. The acquisitions of Prenova and LPB added $22.5 million to operating revenues.

Ecova's growth in expense and data management services was slower than we anticipated and in addition we experienced delayed onboarding of new customers for energy management services and there was a reduction in revenues related to the deconsolidation of a partnership. This combined with increased operating expenses contributed to the net decrease in net income.

The $35.8 million increase in total operating expenses for Ecova reflects increased costs necessary to support ongoing and future business growth as well as to support increased revenue volume attained through the acquisitions. Ecova experienced increases in employee costs, facilities costs, IT costs, and professional fees.

The net loss in our other businesses was $0.03 per diluted share in the fourth quarter and $0.09 for the full year. The $0.09 loss per diluted share and other businesses was due to losses on investments of $0.04 per share, strategic consulting and other corporate costs of $0.04 a share and $0.03 a share related to Avista Energy's litigation costs. This was partially offset by $0.02 a share of earnings from METALfx.

At the end of 2012, we had $312 million of available liquidity under our $400 million committed line of credit with $52 million of cash borrowings and $36 million of letters of credit outstanding. In November of 2012, we issued $80 million of 4.23% first mortgage bonds due in 2047. The total net proceeds from the bonds were used to repay a portion of the borrowings outstanding under our committed line of credit. There are $50 million in first mortgage bonds maturing in 2013 and we expect to issue up to $100 million of long-term debt in the second half of 2013.

We have two sales agency agreements under which at the end of 2012 we had 1.8 million shares of common stock available to be issued. For 2012, we issued $29.1 million of common stock including the issuance of $23.4 million under sales agency agreements. We expect to issue up to $50 million of common stock in 2013 in order to maintain a capital structure at an appropriate level for our business and we expect the majority of the issuances to occur in the second half of the year.

The additional shares are expected to be issued under the sales agency agreement as well as a dividend reinvestment and direct stock purchase plan and employee plans.

Ecova has $125 million committed line of credit with various financial institutions that expires in July of 2017. As of December 31, Ecova had $54 million of borrowings outstanding under this agreement. Based on certain covenant conditions contained in their credit agreement, at the end of 2012, Ecova could borrow an additional $5.6 million and still be compliant with their covenants.

As Scott mentioned, we are confirming 2013 guidance for consolidated earnings to be in the range of $1.70 to $1.90 per diluted share. We expect Avista Utilities to contribute in the range of $1.64 to $1.78 per diluted share for 2013, which is a slight increase from our previous range of $1.62 to $1.76.

We expect 2013 utility earnings to be positively impacted by general rate case increases and we also expect earnings to continue to be limited by slow load growth due to the economy, a 3% to 4% increase in operating costs primarily due to employee-related costs and operating plant maintenance, and that excludes the 2012 cost under the voluntary severance program of $7.3 million.

We have experienced a good start to 2013 with January ahead of our expectations primarily due to colder than normal weather and increased loads, but it is important to note that it's still very early in the year.

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. We are expected to be in a positive benefit under the ERM within the $4 million debt 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 purchase power and natural gas fuel prices.

Our outlook for Avista Utilities assumes among other variables normal precipitation, temperatures, and hydroelectric generation as well as implementation of the Idaho General rate case settlement subject to the approval of the Idaho Commission.

We estimate that we have with respect to earnings volatility to weather approximately $0.05 to $0.10 per share of volatility compared to normal weather in any given year. We estimate that our 2013 utility earnings guidance range encompasses a return on equity range of approximately 8.25% to 9% from the low end of the high end of the range.

As we have previously discussed, we have approximately 70 to 90 basis points of structural lag related to costs that are not recoverable through rates. In addition, we -- past experienced revelatory lag of approximately 60 to 80 basis points related to utility costs and investments that are recoverable through rates. Through our settlements and our cost management initiatives, we believe that we have significantly reduced this lag to approximately 20 to 30 basis points.

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 $170 million to $190 million with approximately 50% derived from expense and data management services, 45% derived from energy management services, and 5% derived from new businesses and new products. We expect approximately one-third of earnings to occur during the first half of 2013 and two-thirds to occur during the second half, due primarily to revenue growth throughout the year and a significant amount of fixed expenses including amortization, depreciation, and interest that occur all throughout the year.

We expect other businesses to contribute a loss of $0.02 to $0.04 per diluted share and this is a reduction from our previous range of breakeven to $0.02 per share primarily due to the cost of exploring opportunities to develop new markets and ways for customers to use electricity and natural gas for commercial productivity and transportation.

I will now turn the call back over to Jason.

Thanks, Mark. Now we would like to open this call up for questions.

(Operator Instructions). Michael Klein, Sidoti & Company.

Good morning, so I just want to fully understand what happened at Ecova and it looks like Prenova and LPB added about $22.5 million to revenue but Ecova's overall revenue increased just about $18 million. So you're saying that organic revenue actually declined during the year. Is that correct?

On the surface, yes. We did have from an accounting perspective the deconsolidation of a partnership that had revenues decrease more than that so we did have slight growth but it's not significant organic revenue growth. It wasn't quite negative but it wasn't significantly positive.

Okay, and going forward in 2013, your sales growth assumption at Ecova, is that driven primarily by Prenova and LPB as well as do you expect more of the organic growth to contribute going forward?

We expect it from all businesses and we really if you look at our revenues for 2012 is $155 million plus and our expectation is $170 million to $190 million in revenue and we expect that to increase across really all three of our areas from both the historical expense and data management services, across the energy management services, and the new products and services. We expect that -- we've looked at our backlog and our pipeline of all of our sales opportunities and we really believe we have an opportunity to make those numbers. That is a greater growth on an annual basis than what we have seen in the past but we did not have the growth because of delays in our -- onboarding our customers in 2012 that we expect we will catch up some in 2013.

Mike, I would just like to add that when we look at where our bookings are for 2013 compared to where our bookings were for 2012 going into the year, we are ahead of schedule compared year-over-year from 2012 to 2013. So we feel more confident in where we are with our earnings growth going into 2013 based on their ability to have already closed some business going into the year.

Okay, just to that point I guess with the majority of business in the back half of the year, what's the typical lead time before you actually book sales in this business? So obviously things are progressing in the first half of the year but it seems like the overall business is more dependent on the back half of the year, so at what point do we feel more comfortable with that?

We will be obviously monitoring that and watching that very closely throughout the year. And the lead time -- a lot of it depends on the type of business you are selling, too. There's certain business with utilities that can take longer to get programs implemented. If it's an expansion, a historic expense and data management client that we get a new customer on, that is a quicker onboarding so it really depends on each component of that backlog and we have it scheduled out and we are not going to go into the granular detail on the call but we've got it scheduled out that early in the year we don't have as much expected new sales from our backlog, but that grows throughout the year and we will be able to report on that as we go through our quarters as how we feel we are doing compared to our expectations.

Okay, and lastly, can you just elaborate a little bit on the $2 million to $3 million that you plan to spend I guess on market development with the electric and gas -- commercial productivity and transportation? Just kind of your overall strategy there and what overall costs could be and the market opportunity that you are looking to expand into.

First of all, Mike, I think the most different thing is that as you know in our service territory that we don't see a lot of just core utility growth because of the economy right now. We are lagging, so instead of just sitting by and just waiting for the economy to recover, we're looking to some other opportunities that are very close to the core. Primarily in the area of transportation we do feel that there's some great opportunities with compressed natural gas. We know that other fleets around the country both from as we know like for example Waste Management has been converting a lot of their garbage trucks to compressed natural gas and we've been able to do that in our service territory. Because of that, we're looking at other opportunities in public fleets as well as other fleets.

In addition to that, there's some opportunities we believe in the LNG markets in the Pacific Northwest that we will continue to explore and there are always some opportunities on the electric side with larger customers. So we're going to continue to mine those opportunities. We have to spend a little bit of money in order to mine those opportunities but we are going to stay focused on looking at those opportunities to grow this business.

Okay, are these opportunities that you currently are participating in now to a smaller extent or are they completely new initiatives for you?

I would say kind of both. I would say that some of them we are already participating in. Some of them are perhaps newer opportunities. So again, it's in areas that we feel that we have the expertise, the knowledge, the background, and we feel very confident as we explore these opportunities that if we do choose to expand into those in a more aggressive manner we will have done our homework and we have got the ability and the expertise in order to deliver on those commitments.

Okay, thank you.

Paul Ridzon, KeyBanc.

Good morning. Just wondering, I guess your level of confidence -- I guess you touched on this a little bit about Ecova having turned and how you were thinking at this point about incremental acquisitions at Ecova. And then switching gears if you could just clear up the language about what you said about the ERM. I missed that, sorry.

Around Ecova, again I think there's some things around Ecova that we feel confident in. We did the acquisitions and let's face it, that some of the expectations that we had for some of the revenue growth with those acquisitions did not materialize in 2012. That's not to say that we don't believe that some of those revenue opportunities aren't going to materialize in 2013. We are already seeing some early evidence of that, so we feel good about that.

Really having the challenging year that we had from expense perspective with Ecova, there's been a renewed commitment around process improvement and looking at their cost basis, so there's a lot of emphasis going on right now about how do we continue to improve efficiencies in that business.

Again, I mentioned, Paul, that we are continuing to look and feel favorably about the bookings that we have already committed ourselves to 2013, which we are ahead of schedule from 2012. So when we add all of that up we do feel committed and confident that Ecova is back on track. It's early, but again -- and we know that we missed in 2012 and this is a prove a year and I think we are -- Mark and I and the entire team recognize that we are giving you this outlook but we know that quarter by quarter we have got to meet our commitments to the market and we plan on doing that. So we feel good about that.

As far as incremental acquisitions are concerned, this is really a year of focus. I'm never going to say that we are not going to do a very targeted focused acquisition that might really add to our product set but that really isn't what our focus is in 2013. Our focus is really to get the business back on track but we will never say we're not going to do an acquisition. There might be opportunities in the market that make a lot of sense for us but I will say that that's not our primary focus at this point.

Thank you. Just the language around the ERM, what's baked in guidance?

Well, the ERM again at the midpoint of our guidance, Paul, we assume zero ERM and our current expectations as we look at our forecast is we expect to be within the debt, within the $4 million debt band in a slight benefit so we are in the benefit position but within the $4 million debt band.

The driver behind that expectation is just snow pack or what's --?

Primarily gas prices compared to the authorized level that we had in our rate settlement in Washington.

Where are we as far as snow pack?

This is Dennis. Currently we are below normal. The water supply forecast for the Clark Fork River April through September currently stands at about 87% of normal. But I guess I would add to that that that -- depending on how the melt comes off or how the water comes off, if it's really warm or a cool spring, it could really impact the amount of generation that we have on that river.

So it's a little early to make too much prediction on how the hydrogeneration will look. Another thing to remember is we still have two months of winter left essentially at the higher elevations, so things can change.

And what's the gas price assumption for rate making purposes?

We don't have that number at this point, so --

Thank you very much.

(Operator Instructions). Brian Russo, Ladenburg Thalmann.

Good morning. Could you just discuss your weather-normalized load growth assumption in 2013 over 2012?

Again from a load growth, what we've said is its approximately 1% in load growth for 2012 and then actually when we file our 10-K next week that's a fairly -- as Scott said, we don't have high expectations of a return of the economy too quickly at this point. We are trying to remain conservative but we do expect approximately 1% load growth in both electric and natural gas. And a similar level on a customer growth, too.

So it is growth. It is load growth and that's again assuming normal weather, that's a weather-adjusted expectation.

Okay, what's the 2014 and 2015 CapEx?

Approximately $260 million in 2014. What we have said is 2013 and 2014 is $260 million.

Okay, for 2015, any reason why there should be much movement on that $260 million?

I wouldn't think there would be significant movement, no.

Okay, and what -- I know it's a small increase but what's driving the $0.02 increase at the utility subsidiary in 2013 guidance?

That's just a refinement of looking at all of the -- we had a settlement of our rate cases. Idaho is still subject to commission approval. We looked all of our costs and we really went through a big process. If you recall last quarter we had a significant effort going on to look at all of our costs and we have done that's by, as Scott mentioned, evaluating our budgets, reprioritizing our projects, and that's just net-net where we came out. We were slightly ahead and we moved a little bit of cost into the evaluation of the other as well. So it was a combination of those factors.

And we added a little bit of cost down in other to evaluate, as Scott mentioned, some opportunities for growth that are close to the core and adjacent to the utility, but not necessarily what we would consider recoverable from our utility customers so we put that down in other.

Okay and just on the corporate initiatives, what type of return on investment should we expect -- a regulated return or something greater than that? And then what's the timing maybe of the payback on the $2 million to $3 million -- or $0.02 to $0.03 of spend this year?

We are really looking to have that to be higher than -- expect that to be higher than a utility return. But those dollars are really a valuation. It's really expense dollars that we are evaluating. To the extent we determine that we have a project, we would expect the return to be greater than a utility return. And we don't -- that will depend on the type of project.

Again we are not looking at doing outside of our knitting. We expect to be pretty close so we wouldn't expect it to be a significant higher but we do expect the risk adjusted return to be better than the utilities.

And we have not put capital associated with this at this point. If we determine through this evaluation that there's projects we can do and we feel there is capital to deploy, we will come out and tell you at that time what we expect and what we expect the returns to be.

Okay, and just the Ecova covenant risk, are we at risk of you breaching those covenants? Do you need that few extra million of liquidity this year?

I don't believe so at all. I think we had a really tough year in 2012 at Ecova and those -- the dollars that were available to borrow is really a historical calculation on EBITDA allows us to have that. As we expect to continue to meet our covenants as we go forward through the year, we expect that actually to improve throughout the year and right now we think we are probably at the bottom. Is there a risk to that? There could be. If they had something that faltered it could go down. But again, we don't believe that's a risk to Ecova at all and that's not a concern to me at all with their financing.

Okay and just on the ERM being in the $4 million debt band, are you assuming normal hydro conditions as of now?

We assumed the hydro conditions as of year-end. So it was pretty close to normal. Might've been slightly off.

Brian, I do want to emphasize, as Dennis said, there are two months left in the winter. So we are at 87%. We can get some snow and then also you get a lot of rain precipitation in kind of the March-April timeframe. So things can really -- are still on track. We wish it was a little higher but we are not by any stretch of the imagination panicking at all.

No, and it's kind of my understanding that at 87% of water supply levels -- can you operate your system at a relatively normal level?

Yes.

Okay, thank you.

We have further questions at this time. I will now turn the call back to Jason Lang for closing remarks.

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

Thank you, ladies and gentlemen. This concludes Avista Corporation's fourth-quarter 2012 earnings conference call. Thank you for participating. You may now disconnect.