Avista Corp (AVA) 2013 Q1 法說會逐字稿

Welcome to the Q1 2013 earnings conference call. My name is Christine, 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, Manager of Investor Relations. You may begin.

Thank you, Christine, and good morning, everyone. Welcome to Avista's first-quarter 2013 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 which could cause actual results to differ materially from those discussed in today's call, please refer to our Form 10-K for 2012, which is 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 $0.71 per diluted share for the first quarter of 2013 compared to $0.65 for the first quarter of 2012. Now, I will turn the discussion over to Scott Morris.

Thank you, Jason, and good morning, everyone. I am pleased to report that we are off to a good start in 2013. Our consolidated earnings were above our expectations, reflecting improved performance in our utility operations and at Ecova. The increase in our utility earnings over our expectations was due to lower operating costs. Additionally, we will continue to focus on opportunities to manage our operating costs throughout the remainder of this year and forward. Ecova had a solid first quarter and is on track for the year. It had increased revenues resulting from demand from new services and increased volumes in expense and data management services and energy management services.

At this time we are confirming our consolidated earnings guidance range of $1.70 to $1.90 per diluted share for 2013. To maintain service reliability at our utility and meet the energy needs of our customers, we continue to invest significantly in our generation, transmission, and distribution systems. Utility CapEx was $71 million for the first quarter of 2013, and we expect utility CapEx to be about $260 million annually in 2013, '14, and '15. Based on current snow pack levels and recent precipitation, we expect normal hydroelectric generation for the year. Also, net power supply costs, including natural gas fuel prices, are below the level included in base rates, all of which benefits both customers and shareholders. The Idaho Commission approved our multi-party general rate case settlement in March, with new base rates that went into effect on April 1, and additional rate increases that will become effective on October 1. So now, I would like to turn this presentation over to Mark Thies.

Thank you, Scott. Good morning, everyone. For the first quarter of 2013, utility earnings increased, contributing $0.71 per diluted share as compared to $0.67 last year. The increase was due to a $7.1 million increase in gross margin, which was primarily the result of general rate increases in Washington initiated on January 1. The increase in gross margin was partially offset by higher depreciation and amortization, and taxes other than income taxes. For the first quarter of 2013, we recognized a pretax benefit of $3.1 million under the Energy Recovery Mechanism in Washington, compared to $4.2 million in the first quarter of 2012.

For the first quarter of this year, Ecova's earnings increased from 2012, contributing $0.02 per diluted share as compared to a loss of $0.01 last year. Ecova's quarterly revenues increased $5.4 million compared to the first quarter of 2012 and totaled $42.4 million. Total operating expenses at Ecova increased $0.9 million for the first quarter. The increase in operating expenses primarily reflects an increase in depreciation and amortization of $700,000 due to intangibles recorded in connection with the LPB acquisition last year, and an increase in other operating expense of $0.2 million. The net loss from our other businesses was $0.02 per diluted share in the first quarter of 2013. This primarily resulted from an impairment loss, increased costs associated with strategic -- exploring strategic opportunities, and litigation costs related to the previous operations of Avista Energy. These losses were partially offset by METALfx's net income.

As of March 31, we had $335 million of available liquidity under our $400 million committed line of credit, with $52 million of cash borrowings outstanding and $13 million in letters of credit. In the first quarter of 2013 we issued $1.1 million of common stock without any issuances under our sales agency agreements. In 2013 we expect to issue up to $50 million of common stock and up to $100 million of long-term debt in order to maintain our capital structure at an appropriate level for our business. The majority of the issuances are expected to occur in the second half of the year. Ecova has a $125 million committed line of credit with various financial institutions, with an expiration of July 2017. At the end of the first quarter, Ecova had $54 million of borrowings outstanding under this agreement. And based on certain covenant conditions in their agreement, as of March 31 Ecova could borrow an additional $11.6 million and still be compliant with its covenants.

As Scott mentioned, we are off to a good start, and we are confirming our consolidated guidance to be in the range of $1.70 to $1.90 per diluted share. We expect Avista Utilities to contribute in range of $1.64 to $1.78 per diluted share for 2013. We expect our 2013 earnings to be positively impacted by general rate increases. However, we expect earnings to continue to be limited by slow load growth due to the economy, as well as a 3% to 4% increase in operating costs, excluding 2012 costs under the voluntary incentive plan. 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 now expecting to be in a benefit position under the ERM within the $4 million to $10 million band, which is shared 75% with customers and 25% with the Company. 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 lever 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, and hydroelectric generation for the remainder of the year.

For 2013, we expect Ecova to contribute in the range of $0.10 to $0.14 per diluted share, and we expect operating revenues to be in the range of $1.70 to $1.90, with approximately 50% derived from expense and data management services, 45% from energy management services, and 5% from new products -- or new services. We expect approximately one-third of earnings to occur in the first half of 2013, and two-thirds to occur in the second half of this year. We expect the other businesses to contribute a loss of $0.02 to $0.04 per diluted share, and this expectation includes costs of exploring new -- exploring opportunities to develop new markets or ways for customers to use electricity and natural gas for commercial productivity and transportation. I'll now to the call back over to Jason.

Thanks, Mark. Christine, we'd now like to open the call up for questions.

(Operator Instructions)

Paul Ridzon, KeyBanc.

Could you just repeat what you said about where you expect to be in the ERM? I missed that.

We expect to be in the benefit position, in the band of $4 million to $10 million, which is shared 75% with customers and 25% for the Company.

Is that --?

Because it changed from last -- when we had it in the prior announced in the quarter, we expected to be within the $4 million -- the original $4 million debt band. So this is an improvement from there for the Company.

Okay. Great. At Ecova, of the significant revenue pick-up from new services -- can you just dive a little deeper as to what is going on there?

The primary new service we have is a real estate-owned, we call it, business, in which we work with processors of mortgages. And we are able to turn on and turn off service and provide other services in that foreclosed market -- or foreclosed housing market. And that is going to make up the bulk of our 5%. And that is consistent with what we have seen in the first quarter.

Okay. Thank you very much.

Thanks, Paul.

Michael Klein, Sidoti and Company.

Real quickly, can you just touch upon the $12 million revenue from BPA? What was that associated with?

This is Kelly Norwood. We had a settlement agreement with the Bonneville Power Administration, which we had been negotiating with them to sign an agreement with them in late 2012. FERC approved that settlement agreement in February of this year, and the result of that was - provided about $12 million of revenue to the Company. Of course, we filed with the Idaho Commission and the Washington Commissions to address the distribution of that between the Company and customers. And for Idaho in the last settlement, the agreement was 90% would go back to customers. So in the first quarter, we have got $4.1 million is Idaho share. 10% of that was retained by the Company in the first quarter of this year.

In Washington, we filed a petition in April asking the Commission to approve the accounting treatment for that. What we have proposed is for Avista to keep the $7.6 million Washington share. And then we have also proposed in connection with that that we would absorb the Reardon investment of $2.6 million. So the net benefit to the Company would be $5 million, and that would be recorded in Q2. But also a part of that filing, we would set aside $2.1 million of the 2013 Bonneville revenue, and that would be set aside and rebated to customers in the future. So all of that, if the Washington Commission approves it, would be recorded in the second quarter.

Okay. Sorry, a couple moving pieces there. So is it a $5 million benefit you would record in the second quarter, or --?

Yes, there would be a $5 million benefit in the second quarter. And then as we progress through the year, we would set aside $2.1 million Washington share that would be rebated. That $2.1 million would normally flow through the ERM, and so depending on where you're at in the debt band sharing band, that would impact who would get that money, whether it is customers or the shareholder.

Sure. Okay. Thank you. Looking bigger picture now, around Ecova, and I understand that earnings are primarily a second-half event, but can you just talk about what you are seeing now in the first half of the year versus your expectations, and how the business is tracking? And I apologize if you have already answered this question. I have been jumping around a bit.

I would just say that, as we said before, that we expect it is a two-thirds/one-third split. Ecova is on track. They have focused. We like where our revenues are. We like where our sales are. We also like the fact that they have been very focused on business process improvement and then continuing to be disciplined with their cost structure. They are right where we think they should be.

Okay. With operating expenses, do you see the ability to extract more costs from the business model, or is this a run rate to expect going forward?

I think that is something that they consistently look at. They are, as Scott mentioned, looking at business process improvement. That is an ongoing process with them. Some of it with the operating expenses, as you expect to have when we give the range of $170 million to $190 million in revenues, and when you look at the first quarter revenues, if you did that on a times four basis, $42 million, you're going to get to the very low end of that. So we do expect our revenues to increase over the year from the first-quarter levels. With that, you can have some increase in operating expenses as you deliver the services. But we do expect them to continue to manage their services, as they always do, and we always expect that, both at Ecova and at the Utility. We do that at the Utility, as well.

Okay. Thank you.

Brian Russo, Ladenburg Thalmann.

Just maybe if you could talk a little bit more about the ERM balance, the new assumption versus the prior assumption. Because hydro conditions are normal, like you said, and we have seen gas prices rise rather significantly in 2013. And I'm just curious, where is the dynamic there that enables you to retain an even greater benefit?

Again, what we look at is, is we have our detail models that plot out everything over the course of when -- the timing of when hydro comes off, what our expectations are on a monthly basis, what market prices are out in the market, can we fuel or un-fuel our plants, depending. So if gas prices go up, if there's enough margin there, we can fuel or un-fuel our plants, and that helps benefit -- to offset the costs -- of our power supply costs. And that, as we move into the 75%/25% debt band, benefits both the shareholders and the customers. That is just -- it is what we forecast on a detailed basis over the course of the remainder of the year. And it has a lot of different implications, so to the extent [sparks reds] move out, we have an ability to capture some of that value and provide that back to both the Company and the customers through the ERM.

That is where our forecast is today. That said, that can change, Brian. If things move in the future, if hydro comes off, it is still early, right? If hydro comes off differently because of the shape of the melt, that can change things. And if gas prices move away when hydro is off, that can also affect things. But right now where we stand, we believe we have improved, based on our -- on what we see going forward.

Okay. The utility earnings guidance for '13, the midpoint assumes no ERM. Does that imply you are at the higher end of utility guidance as of now?

It implies that where we are with respect to the ERM, there would be a benefit to that in the guidance. I'm not going to say to the high end exactly, but we are above the midpoint, because the midpoint has got zero in there. Those calculations you can make. Again, $0 million to $4 million is the debt band. We keep that, and then plus we are in the 75%/25%. I don't tell you where we are within that $4 million to $10 million. So, you will have to make an assumption yourself.

Okay. The ROE range in 2013 of 8.25%, 9%, average 8.6%. Is that like the new level of lag that we should be assuming going forward, or do you have levers to pull to improve upon that?

For one thing, we are in a stay-out in Washington and Idaho until 1/1/15. We continue to look at trying to manage our costs, but also managing our business. We have to run a safe, reliable electric and gas system, so we look at all of that as we go forward. The 8.25% to the 9% is where we are for '13 in the utility guidance range, and when we come out with '14, we will tell you where that is at. But until then, I think what we are trying to say is, we have made progress. We used to say, 70 to 90 basis points was structural. That still exists. And then we used to say 60 to 80 basis points was timing. We have made some really good progress on that. We are probably down to 20 or 30 basis points now [on nine].

We still have some timing lag, because we are deploying capital, and our costs are going up somewhat. We try to manage that. We do have step adjustments in each of our rate cases, though, that help offset that. We haven't given '14 guidance, but we do have a 1/1/14 adjustment in Washington in that rate case settlement, and then an October adjustment in our Idaho settlement, October of this year. So that will help us manage through that lag.

Okay, great. And then I thought I read in the press release electric usage per customer is down. I'm just curious if you can comment on that, and then maybe give us a sense of how load growth is tracking relative to your forecast, or what is in rates, et cetera?

Again, we've said over our forecast that at the low end over periods, 0.7% to a little over 1% to 1.5%, and we're at the low end of that. We expect to be at the low end of that. Our retail loads were down slightly in the first quarter, our industrial loads. So really, commercial and residential were down slightly. Industrial were up slightly, but remember, we had some operational challenges in the prior year that -- that's largely fixed out. Primarily a mine -- the mine was out, and now they're coming back. I don't think there is anything that I would say is structurally off. It was just a slight decrease in the first quarter.

All right. Thank you very much.

(Operator Instructions)

Julien Dumoulin-Smith, UBS.

First question here, some thought to resource additions. Broadly speaking, obviously, there's some resources on the table in that market of the country. I'd be curious; to the extent that you are looking for your IRP process, et cetera, do you think that you could look at any potential near-term acquisitions to address longer-term resource needs?

I think as we do -- and we're going to do our resource plan. We will have another one that will come out this fall, August or September, and we always look at that. But we are in great shape for where we are. Would we look at anything that came out of the market? Sure, we look when assets come up, but they have to make a tremendous amount of sense for us, because we are not resource short. When we look at that, what we have found is when bidders come in, that they bid those assets up. And we're not competitive, because we're not going to overpay for an asset. We do not need to.

Julien, also, we are very focused on continuing to upgrade and maintain our hydro systems, so we put a significant amount of capital in our resources on the Clark Fork. We're finished with that. But now we're looking at our hydro facilities on the Spokane River, and we are currently looking at opportunities to upgrade some of those dams. And it will give us a little bit of extra incremental hydro. But as you look at our integrated resource plan, we are long generation to the end of this decade, so we will be very prudent and wise in anything we do around adding new resources.

Secondly, on the less traditional investment side, you've obviously alluded over time to various different avenues. At what point do you think you will make more of a definitive statement -- here's the direction we intend to go, or is that the way this is going to work?

I think as we -- we're gathering information, we're looking at a lot of different opportunities. When we have something that we feel is announceable, or more specific, we will come out and talk about that. But right now, we are doing an evaluation of a lot of different opportunities. And none of them are signed contracts, so we are looking at this as an opportunity we think makes sense to do this evaluation. We don't have a set timetable, but I would say in the next 6 to 18 months, we will have something over the course of that time that we'd talk about.

Great. Looking back at the quarter here, just to be very specific about it, looking at the BPA revenues, is that a first quarter, or a second quarter? How are the revenues recognized in your earnings, just to be very clear about that?

The revenues -- this is Kelly. The revenues came in in the first quarter, but we deferred the Washington piece and set it -- actually deferred all of it and set it aside, except for 10% of the Idaho share, so let's back up. Of the roughly $12 million, $4 million is Idaho and $8 million is Washington. In Idaho, all the revenue came in, but $400,000, which is 10% of the Idaho, actually went to earnings, pre-tax. In Washington, all of it's set aside, pending the Commission's decision in Washington on what we do with that. So that will be -- or should be a second quarter item, in terms of --.

Reflected in your earnings?

That is correct.

So then, Julien, the difference, the 90% in Idaho went to customers. That is deferred back to customers.

That's right.

Right. Great, excellent. Then perhaps just a last question here. Ecova, obviously, on people's minds. How are you looking at the first quarter's success, specifically bookings, year on year, relative to plan? If you could firm up with some more statistics, if you do not mind?

We don't -- we haven't specifically come out with bookings or pipelines or any details there. We talk about revenues. And we are on track; we're slightly ahead of where we expected to be. We feel good about that. But recognize we are going to have a little bit of caution, in that one-third of the earnings comes in the first half of the year; two-thirds comes the second half. We feel -- as Scott mentioned, we feel we are right on track with what we are doing, and our revenue growth was positive.

A couple of the areas, Julien, that we talked about last year that had lagged are back on track. Specifically, Mark mentioned the REO business, real estate-owned business. And also we are pleased with how our utility energy efficiency business is recovering, and doing well, and is back on track, as well. Because of that and the continued solid performance of our base business, we are right where we expect to be.

Excellent. Well, thank you very much for the time.

Michael Worms, BMO.

Can you give us an update, remind us of what the uplift is from the rate increases that you expect to come forward in October, I believe, from Idaho, was it? And there was another one that would support or help the earnings going forward into 2014.

Yes. This is Kelly. In October of this year, '13, we will have a $7.8 million electric rate increase and a $1.3 million natural gas rate increase. And then, 1/1/14 in Washington, we'll have a $14 million electric rate increase and a $1.4 million natural gas increase.

Great. And that is the extent of the incremental rate increases expected for 2014?

That is correct.

Thank you very much.

Paul Ridzon, KeyBanc.

Can we assume the BPA -- the Washington piece of the BPA is baked into your guidance?

No, that's -- again, we have to look at that from a perspective of that is not approved yet. We don't put -- we're not going to put that into our expectations in overall guidance until we get that approved.

So that is potentially $8 million of revenue upside?

No. Keep in mind on the Bonneville and Washington, if it is approved, we would keep $7.6 million of the Bonneville, minus the $2.6 million of Reardon, so that would be $5 million. But we're also setting aside $2.1 million this year for the new revenue, so you would have a net of potentially $3 million, if it is approved by the Commission.

Okay. Thank you very much.

We have no further questions at this time. I will now turn the call back over to Jason Lang.

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

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