Avista Corp (AVA) 2013 Q3 法說會逐字稿

Welcome to the Q3 2013 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 2013 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 Corp. Chairman of the Board, President, and CEO Scott Morris; Senior Vice President and CFO Mark Thies; 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 and our Form 10-K for the second quarter of 2013, both 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 $0.19 per diluted share for the third quarter of 2013, compared to $0.10 for the third quarter of 2012. On a year-to-date basis, our consolidated earnings were $1.32 per diluted share for 2013, compared to $1.06 for 2012. Now, I'll turn the discussion over to Scott.

Well, thank you, Jason. And good morning, everyone. Our third-quarter results were above our expectations, and we continue to experience a good year at both the utility and at Ecova. We are excited about the recent announcement to acquire Alaska Energy and Resource Company, a privately held company based in Juneau, Alaska. We are looking forward to working with their highly skilled and dedicated employees and their management team and being part of the Juneau community.

The planned acquisition has a purchase price of $170 million, less the assumption of net debt. We expect this transaction to close by July 1 of 2014 following the receipt of the necessary regulatory approvals and the satisfaction of other closing conditions. This agreement reflects Avista's strategy to expand and diversify energy assets and to deliver long-term value to the customers and communities, investors that we serve.

The primary subsidiary of the AERC is Alaska Electric Light and Power Company. In 2012, AEL&P had a total rate base of $111 million, providing electric service to approximately 16,000 customers in Juneau. This company is just a great strategic fit for our Company. We are excited to move into the state of Alaska, and what a better place to do it than the state capital.

It's a hydro-based utility, and as you know that is just our sweet spot. It's got some great growth potential. We feel fortunate with both the opportunity to grow just residential, but also they have some good mining load that we are excited to investigate. And I'm very proud of the team; we kept our discipline and we acquired the property at a fair price. So overall, a really good deal for the team.

Turning to our third-quarter results, our earning -- our utility earnings increased due to warmer weather during the third quarter and lower than expected operating costs.

Ecova had a strong third quarter and remains on track to meet our full-year expectations for 2013. We are very pleased with the rebound at Ecova, and it has experienced -- so far in 2013, and we are well positioned for the future.

Based in our year-to-date results and expected fourth-quarter performance, we are confirming our 2013 earnings guidance with the expectation of being near the middle of the range.

We're initiating our 2014 earning guidance, which shows consolidated range of $1.77 to $1.97, an increase of 4% as compared to 2013 guidance. This guidance excludes the impacts of the planned acquisition of AERC. And Mark is going to provide more details on our earnings guidance in just a few minutes.

Utility CapEx was $220 million for the first nine months of 2013. We expect utility CapEx to be about $280 million in 2013. We have increased our planned capital expenditures by $75 million in 2014 and $100 million in 2015. This is to meet an increased demand for utility capital projects. On the regulatory side in August, we filed a general rate case in Oregon requesting an overall 9.5% increase in base rates. The filing is designed to increase annual natural gas rates by $9.5 million. The Oregon commission can take up to 10 months to review the filing and issue a decision.

So now, I'm going to turn this presentation over to Mark.

Thank you, Scott. Good morning, everyone. For the third quarter of 2013, our utility contributed $0.16 per diluted share, compared to $0.13 last year. On a year-to-date basis, utility earnings contributed $1.27 per diluted share, an increase from $1.10 last year. The increase in quarterly and year-to-date utility earnings was primarily due to general rate increases and warmer weather during the second and third quarters. This increase was partially offset by higher operating expenses, depreciation and amortization, and taxes other than income taxes.

In addition, the year-to-date results included the net benefit from the settlement with the Bonneville Power Administration.

In the first nine months of 2013, we recognized a pretax expense of $0.5 million under the energy recovery mechanism in Washington compared to a benefit of $5.9 million in the first nine months of 2012. The Coalstrip outage and higher natural gas fuel prices are expected to move the ERM to a negative position within 50% customer and 50% company sharing bands for 2013.

We also expect the reduction we have seen in our operating expenses compared to our forecast to partially reverse in the fourth quarter due to timing of certain expenditures.

Moving on to Ecova. As Scott said, their earnings for the first nine months increased significantly from 2012, contributing $0.09 per diluted share as compared to $0.02 last year. Ecova's year-to-date revenues increased $17.7 million as compared to 2012 and totaled $133 million. Results for the year to date included the recognition of $2.3 million rebate during the third quarter associated with achieving certain milestones on a five-year contract related to expense and data management services. Ecova's total operating expenses increased $8.4 million for the first nine months and totaled $122 million. The increase reflects an increase in other operating expenses of $6.4 million and an increase in depreciation and amortization $2 million.

The net loss from our other businesses was 4% per diluted share for the first nine months of 2013. The losses were primarily the result of impairment losses recognized during the first and third quarters, increased costs associated with exploring strategic opportunities, and litigation costs related to the previous operations of Avista energy. These losses were partially offset by METALfx's net income.

I'm now going to talk about liquidity and our financing plans. As of September 30, we had $306 million of available liquidity under our $400 million committed line of credit, with $66 million of cash borrowings and $28 million in letters of credit outstanding. In August, we entered into a $90 million term loan agreement with institutional investor that matures in 2016. The net proceeds from this agreement were used to repay a portion of corporate indebtedness in anticipation of $50 million in first mortgage bonds maturing in December.

In the first nine months of 2013, we issued $4 million of common stock without any issuances under our sales agency agreements. We expect to issue an additional $2 million under these plans during the fourth quarter.

Our planned common stock issuances for 2013 have decreased from our previous estimate of $50 million due to our ongoing business requirements and the planned acquisition of AERC.

Moving on to 2014, we expect to issue up to $190 million of long-term debt in 2014, including up to $90 million of debt associated with the rebalancing of the consolidated capital structure at AERC, assuming that transaction goes forward. This amount assumes we're going to refinance the existing net debt outstanding at AEL&P, the primary subsidiary of AERC, and the net debt outstanding at AELP does not include the Snettisham obligation.

We also expect in 2014 to issue up to $145 million of common stock related to the closing of the planned acquisition. Without the planned transaction, Avista Corp. would have required up to $75 million of common stock to maintain an appropriate capital structure.

AEL&P currently has an authorized utility capital structure of 53.8% equity at an authorized return on equity of 12.875%. We expect that AEL&P will maintain this capital structure. The consolidated capital structure of AERC is expected to mirror the capital structure of Avista Corp.

Ecova has $125 million committed line of credit with various financial institutions with an expiration date of July 2017. At September 30, Ecova had $50 million of borrowings outstanding under this agreement based on certain covenant conditions contained in the agreement as of September 30, Ecova could borrow an additional $31.5 million and still be compliant with its covenant. As Scott mentioned, we are confirming our 2013 guidance for consolidated earnings to be in the range of $1.70 to $1.90 per share, with the expectation of being near the middle of that range and this includes the expected negative impact of the ERM. And again the ERM is expected to be in the 50-50 sharing band.

We expect Avista utilities to contribute in the range of $1.64 to $1.78 per diluted share for 2013 and the impact of the ERM and that 50-50 sharing band is primarily due to the effects of the Colstrip generating outage and higher 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 continue to expect Ecova to contribute in the range of $0.10 to $0.14 per diluted share, and we continue to expect the other businesses to be a loss of $0.02 to $0.04 for 2013. We are initiating our 2014 guidance for consolidated earnings to be in the range of $1.77 to $1.97 per diluted share. This range does not include any impacts from the planned acquisition of AERC. We expect that the addition of AERC to Avista Corp. will be slightly negative to earnings and 2014 and that it will contribute positively to earnings in 2015.

We expect Avista Utilities to contribute in the range of $1.68 to $1.82 per diluted share in 2014. As compared to 2013, we expect our utility earnings to be positively impacted by general rate increases, and we expect our earnings to continue to be limited by slow load growth, a delay in the recovery of operating expenses and capital investments, and approximately 2% growth in our operating expenses.

Our range for Avista utilities encompasses expected variability and power supply costs and the application of the ERM to that power supply cost variability. The midpoint of our utility guidance does not include any benefit or expense under the ERM.

In 2014, we expect to be in a benefit position under the ERM within the 75% customer and 25% company sharing band. Our outlook for Avista utilities assumes, among other variables, normal precipitation, temperatures, and hydro. For 2014, we expect Ecova to contribute in the range of $0.12 to $0.16 per diluted share. We expect operating revenues at Ecova to be in the range of $180 million to $200 million, with approximately 53% derived from expense in data management services and 47% from energy management services. We expect approximately one-third of the earnings to occur during the first half of 2014 and two-thirds of the earnings to occur during the second half of the year. We expect our other businesses to be between a loss of $0.01 and a loss of $0.03 per diluted share, which includes increased costs associated with exploring strategic opportunities.

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

Thanks, Mark. John, we would now like to open the call up for questions.

(Operator Instructions) Michael Weinstein, UBS.

Just wondering on the acquisition, so you're not going to include the Snettisham obligation, that $74 million. Is that correct?

Sounds right, it's in that range. I don't know the exact -- yes.

Right, so it sounds like the amount of debt actually being assumed is only about $32 million, coming in at that.

What we said was with the purchase price of $170 million, less net debt, and we expect to issue $145 million of equity. So that's the difference between debt and cash, and our expectation is at the time we expect to close by July 1.

Right, but the equity is about $70 million of that is for the acquisition right? $75 million would have been issued anyway?

Well, that's right but the transaction is 100% equity -- 100%, well, there's some small amount primarily -- equity there's a small amount that's not, but otherwise it's all stock. So it will be a stock issuance, and then we already needed that other amount. It slightly accelerates our $75 million because we were looking at doing that over the second half of the year. So assuming we close the transaction, that will slightly accelerate our equity issuance but not by much.

Got you. And the dilution in 2014, does that include one-time fees? Things like that?

Yes, that's part of it -- that's primarily the reason we have it and a little bit on the equity acceleration is the primary reason we have slight dilution.

Okay, from the accelerated equity. I get it, okay. All right. Let's see, hopefully I won't take too much time here. A lot of people. But also any future equities beyond that? You mentioned that there's going to be more capital spending.

Yes, we expect just with the nature of additional capital projects that we find at our utility and they're really good projects, we believe that that makes sense. So we will -- you know, we give out 2014 guidance, we don't give in the future; but as we continue to expand that, we would look to have maintained that prudent capital structure that we always do. So that would include some additional equity.

Right. What's your ROE in Washington and Idaho? How are you earning right now?

Well, our allowed ROE is 9.8%. We have some structural lag of 70 to 90 basis points. Those are just costs whether they are marketing or different costs that aren't allowed by law or by practice, that's what we have. But our range in our guidance is expected to be from the bottom end about 8.4% ROE and on the top end 9.1% ROE. So we really don't have a significant amount of lag. We will have a little bit of lag in 2014 with -- because, again, we have a [stay-out] in Washington and Idaho and we're not -- we can't have rates increase until 1/1/15, but we still expect to spend the additional $75 million in capital projects because we believe it's the right thing to do to spend that capital to maintain our system.

Okay. Do you guys have any unfavorable foreign exchange at all on hand? Coming in (multiple speakers) side.

We have very little in foreign exchange. You know, we buy some gas in Canada, but we generally try to hedge that forward exchange risk out all the time. So we don't really have significant foreign exchange risk.

And one last question. Are you guys thinking at all about Ecova spin or sale on the back of this deal, some kind of swap of earnings?

Well, Michael, let me just say this. First of all, we're really excited about where Ecova is right now. And we knew that in 2013 we needed to show that the business could get itself back on track. And as a reminder, for 2004 through 2011, this Company performed extremely well with great growth and consistently hit its numbers. We really felt 2012 was a blip, and the team is proving that. And we also see that we're very fortunate that we are on track for 2014 and we're excited about that. So as we've always said, we're going to continue to operate this business extremely well, but we understand for the long-term that we think that it might be in our best interest to think about some other strategic opportunities. So really nothing to report there, but the strategy hasn't changed.

Okay. Thank you very much.

Paul Ridzon, KeyBanc.

Can you -- what happened to the ERM in the third quarter of 2013?

So the third quarter and the fourth quarter is expected to go down. Part of the third quarter was, again, when we announced our second-quarter earnings, Colstrip went down July 1, and that was $6 million to $7 million. It was about $12 million of impact; $4 million went to Idaho, which went through the PCA, the difference through Washington. And we were at the position we were in the ERM, we were slightly in the [7525 band]; we took about 100% of that through the ERM. So that was the big driver from the third quarter's perspective.

In the fourth quarter, it's primarily natural gas prices, and the shift in natural gas prices somewhat a little bit associated with culture but it's hitting. But it's really the change in gas prices and some slight change to hydro. So that's why we go from 0.5 million right now in the negative, and we expect to be in the into the 50-50 sharing band, which that band is $4 million, and then it goes to the next [6] up to [10]. But that -- we expect to be in that 50-50 sharing band. So we know we've lost almost $4 million.

Where were you at the end of 2Q in the ERM?

$4.1 million (multiple speakers) --

Positive?

Yes, in the benefit position. And so really the majority of all that is the impact of Colstrip. The differential is some slight impact to hydro and natural gas prices, primarily natural gas prices.

And what's your outlook for the Colstrip return?

We expect that continues to be expected to be February 1, that hasn't changed.

And no change there, Paul, everything is on track.

And I am a little bit wrapped around the axle around what happened to the equity -- the planned equity issuance. How much equity will existing owners of the Alaskan assets receive?

The expectation at this point is approximately $145 million. It's 100% equity acquisition less net debt. So our estimate at this time is approximately $145 million, will be the purchase price at closing, and we're assuming will close it July 1.

So, given -- excluding this acquisition, you're going to do [$75 million] and you've since raised your CapEx forecast. How do those dovetail?

Oh no, the CapEx forecast -- included in the $75 million, we have our CapEx forecast. We also -- in the release, we had about I don't know we have about $15 million that we're going to get in tax cash this year. It's uncertain intangible property repairs allowance from federal regulations, and we expect to file that this year and get the cash. So that will help fund -- or next year, I'm sorry, 2014 -- to help fund our CapEx. That's why we didn't need as much additional equity.

And what has AEL&P earned historically on an ROE basis?

You can go back in their Form 1's and calculate that. 2012 was a little bit different because they had a sale of power and telephone company and that was in non-operating income that moved their earnings up to $9.1 million. And then in 2011, they made $5.7 million on a net income basis. And in 2012, there was that unusual transaction. That's just from their Form 1.

And are you anticipating any operational synergies here?

No, they really operate as a separate -- they are, electrically, an island; they're not interconnected to anybody. And they've done a terrific job of managing their business, so they have, as Scott mentioned, strong hydro that covers their load -- they're about an 80 megawatt load. And they have strong hydro, but they also have almost 100% effectively diesel backup, and that's because they are not connected -- interconnected to anybody. So to serve their customers, they need to maintain that and they've done that terrifically.

That's one of the things, Paul, we really liked about the business was they were extremely efficient, their management teams really good. When you go up and look at the just the operations, the way they've maintained and operated their system, their construction standards, the way they've maintain their hydro -- all top-notch. And they've done it with -- in a way with the very eye on -- on keeping their costs down. So a good business and, really, we plan on continuing to have them operate as they are.

And is there a CapEx opportunity? Cause any of the hydro -- could you update upgrade any of the hydro?

Yes, there's opportunities, that's some of what we need to consider. There are a couple of opportunities to do some upgrades to some hydro facilities that we will consider in the future as well as continuing to serve some large mining load up there that I know that is currently on diesel. So we will look at those opportunities once it closes and see if there's some way we can grow the business.

And then lastly, can you put any bookends on how accretive you think it could be in 2015?

No. I mean, we're not -- it's not going to be a significant addition, if that's what you're looking, right, less than $0.05. If that's a bookend for you, I guess that is.

That's one side of a bookend. (laughter)

Well, the other side is accretive, so I gave you both sides.

Okay. Thank you very much.

(Operator Instructions) Brian Russo, Ladenburg Thalmann.

I apologize, but I'm still a little confused on the financing of AERC. Can you run through that again?

Sure. So we expect, you know, again, with the $170 million -- the acquisition, just to step back from it, we would expect normally to issue $100 million associated with just our operations and debt on the debt side. So with this recapitalization, we expect $90 million -- an additional $90 million. So there's $90 million on the equity side -- again, it's $75 million dollars is what our expectations were versus $145 million in the transaction. So that would attribute $70 million. The difference is about $10 million in cash.

Okay, so how much are you actually issuing? How much is the equity portion of this overall $170 million --

$145 million.

Enterprise value -- oh, it's $145 million, okay. Okay. And then I think you're going to issue, I think you said, $50 million to recapitalize?

No, no. We're going to issue $145 million of equity upon the close of the transaction. Then we will rebalance the capitalization, because that is 100% equity.

Right.

We're going to -- we expect -- and, again, this may or may not [grow]. In our assumptions, we expect to refinance their existing debt, and that would be up to $90 million including their existing debt.

Okay, got it. All right. Thank you. And there a lockout period with these private -- soon-to-be-private holders of your stock?

No, no.

No lockup. Okay, are there roll-up opportunities with other small privately held Alaska-based utilities that just could be kind of seen as a strategy for you and a platform for growth in Alaska?

Brian, let me just say this. What we want to do is to want to go into Alaska and be great corporate citizens. We want to do the right thing in the capital and really show the state that we are one of the best operating utilities in the country. And we think if we just do what we always do, which is stay focused on providing great service, treating our communities well, our employees well, and making sure we get good returns for our shareholders, that hopefully other communities will see that and we hope that that will help drive other opportunities to the future. But we're just going to keep our eye on the ball and just our normal great job in Juneau that we expect that we always do when we operate a utility.

And it looks like the growth in your O&M is decelerating in 2014. Can you comment on kind of the drivers there?

Well, the biggest driver is really -- as we've seen as our costs have gone up and accelerated the past, it was because of a declining discount rate and declining interest rates that caused our pension expenses to go up. That interest rates have increased in the expectation is that this discount rate will increase and that actually lowers our pension costs. One of the bigger drivers is a lower pension and post-retirement costs. And, again, we continue to manage our costs. We are focused on that. We did the program at the end of last year to reduce some costs and reduce some headcount. That impact continues to roll through our business. We continue to manage effectively, and we're always looking to try to manage our costs in an efficient manner. So those are the primary drivers.

Okay. Thank you very much.

Thanks, Paul -- Brian, sorry.

We have no further questions at this time.

All right, I'd like to thank everyone for joining us today. We certainly appreciate your interest in our Company, and we look forward to seeing most of you at the upcoming EEI conference. Have a great day.

Thank you ladies and gentlemen, this concludes today's conference.